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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri N.V. Vasudevan
Date of concluding the hearing : October 27 , 2016 Date of pronouncing the order : December 02, 2016
O R D E R Per Shri P.M. Jagtap, A.M.: These two appeals filed by the assessee are directed against two separate orders both dated 06.07.2009 passed by the ld. Commissioner of Income Tax (Appeals)-VI, Kolkata for assessment years 2004-05 and 2005-06 and since the issues involved therein are common, the same have been heard together and are being disposed of by a single consolidated order.
First we shall take up the appeal of the assessee for A.Y. 2004-05 being Ground No. 1 of which involves the issue relating to the addition of Rs.35,74,793/- made by the Assessing Officer and confirmed by the d. CIT(Appeals) under section 41(1) on account of the amount transferred by the assessee from Capital Reserve to Profit & Loss Account. & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 2 of 13
The assessee in the present case is a Company, which is engaged in the business of manufacturing of Cement. In the financial year 1996-97, the Financial Institutions had waived the interest due from the assessee- company pursuant to the Revival or Rehabilitation Scheme sanctioned by BIFR in August, 1996. The said interest included an amount of Rs.646.78 lakhs, which had been capitalized in the earlier years since the same was related to the construction period. The assessee-company had transferred the said amount of Rs.646.78 lakhs to the Capital Reserve in F.Y. 1996-97. The amount so transferred then was reversed in the subsequent years by crediting the same to the Profit & Loss Account of the subsequent years equivalent to depreciation charged over the remaining life of respective assets on which interest was charged and capitalized in earlier years. During the year, such amount to the extent of Rs.35,74,793/- was transferred by the assessee from the Capital Reserve Account and credited to the Profit & Loss Account. In the computation of the total income, the said amount was claimed to be exempt by the assessee in terms of a Revival Scheme approved by BIFR, whereby the Income Tax Department was asked to allow the relief in terms of section 41(1) of the Income Tax Act, 1961 in respect of all waivers agreed by Financial Institutions, Cement Corporation of India and other creditors. The Assessing Officer, however, noted that such relief was allowed by the BIFR subject to the condition that the assessee-company has to apply to the CBDT for consideration of relaxation for grant of exemption under section 41(1) in respect of waiver of interest agreed by lenders. In this regard, it was submitted by the assessee-company that it had already applied to CBDT for such relaxation/exemption on 03.08.2001 itself but no order was passed by the CBDT. The Assessing Officer, however, found that there was a failure on the part of the assessee to pursue the matter with the CBDT and keeping in view the same as well as in the absence of any specific order passed by the CBDT, the benefit in terms of section 41(1) was disallowed by him and the amount of Rs.35,74,793/- was added by him to the total income of the assessee. & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 3 of 13
The addition of Rs.35,74,793/- made by the Assessing Officer on account of the amount transferred from Capital Reserve to Profit & Loss Account was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and since the submission made by the assessee in support of its case on this issue was not found acceptable by him, the ld. CIT(Appeals) proceeded to confirm the addition made by the Assessing Officer on this issue for the following reason given in his impugned order:- “I have gone through the submissions of the appellant and the various documents filed me. As seen from 159 CTR (St) 148. order dated 161h February. 2000; CBDT passed order u/s.119(2)(a): where it directs that: wherever the order of BIFR in an approved scheme of reconstruction/rehabilitation- (i) directs that the reliefs be allowed under the Income Tax Act, 1961, the effect to such orders be given immediately; (ii) recommends that the reliefs under the Income Tax Act, 1961 may be considered by the Central Government the relief is to be allowed to the assessee if during course of the proceedings before the BIFR. the views of the Income tax department has been considered by the BIFR. However, if the orders of the BIFR has been passed without making Income Tax Department a party or without giving a chance to the Income Tax Department to submit its views, the effect of BIFR recommendations is to be given only after the recommendations of the BIFR are considered by the CBDT.
As seen from the order of BIFR in case No. 502/94 CBDT is to consider allowing DSCL to carry forward all its accumulated losses in DSCL for further period of 8 years and to grant exemption under Section 41(1} of Income Tax Act 1961 in respect of waivers agreed by Financial Institutions, CCI and other creditors. It is seen here that the order of the BIFR has been passed without making Income Tax department a party or without giving a chance to the I.T. Department to submit its views. Under these circumstances, the effect of BIFR recommendations is to be given effect only after the recommendations of the BIFR are considered by CBDT. As a consequence, the appellant applied to CBDT, to grant exemption from the provisions of section 41(1). However, the appellant could not get any order from CBDT. In view of the above, I fully agree with the action of the AO. The ground of appeal is dismissed”.
& 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 4 of 13
The ld. counsel for the assessee, at the outset, invited our attention to the relevant portion of the Implementation Schedule annexed to the BIFR order to point out that the CBDT was to grant the exemption under section 41(1) of the Income Tax Act, 1961 in respect of waiver agreed by Financial Institutions, Cement Corporation of India and other creditors and was to consider allowing carry forward of all the accumulated losses in the case of the assessee for a further period of eight years. He contended that the approval of CBDT thus was not required to be obtained by the assessee for claiming exemption under section 41(1) and such approval as per the Implementation Scheme/Schedule of BIFR was required only for carry forward of its accumulation losses for a further period of eight years. He submitted that the assessee-company, however, still applied for the relief given in terms of section 41(1) to the CBDT on 06.06.1997 itself but despite the reminder sent in August, 2001 did not get any order from CBDT. He also referred to the relevant portion of the BIFR Sanctioned Scheme at page no. 30 of the paper book to point out that the Scheme framed by BIFR was at the consent of all the parties concerned including CBDT. He contended that no separate approval of CBDT, therefore, was required for the assessee to claim the benefit under section 41(1) and the denial of such benefit by the authorities below for want of the CBDT approval is not justified.
The ld. D.R., on the other hand, contended that all the submissions now made on behalf of the assessee have already been considered by the ld. CIT(Appeals) while denying the claim of the assessee for benefit under section 41(1) vide his impugned order and therefore, nothing is left to be considered which can go in favour of the assessee on this issue.
We have considered the rival submissions and also perused the relevant material available on record. It is observed that as per the Implementation Schedule of the Sanctioned Scheme of BIFR, the & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 5 of 13 Government of India-CBDT as one of the parties concerned was assigned to accomplish the following task:- Task to be accomplished Compliance schedule To consider allowing the DCSL to Within ten weeks from receipt of carry forward all its accumulated application from the Company. losses in DCSL for a further period of eight years To grant exemption under section - As above - 41(1) of Income Tax Act, 1961 in respect of waivers agreed by FIs, CCI and other creditors.
The CBDT thus was to grant exemption under section 41(1) to the assessee within ten weeks from the receipt of application and although such application was made by the assessee on 06.06.1997 itself and further reminder was also sent on 3rd August, 2001, no order granting such exemption was apparently issued by the CBDT. As rightly pointed out by the assessee in this regard, the CBDT was to grant such exemption as per the BIFR order and there was no such discretion given to the CBDT to consider and grant the relief as it was done specifically for allowing benefit in terms of carry forward of all accumulated losses of the assessee-company for a further period of eight years. Moreover, as specifically mentioned in Clause 8.1 of the Sanctioned Scheme of BIFR, all the parties concerned including CBDT had given their consent for the Scheme finally sanctioned by BIFR and keeping in view the same as well as the specific contents of the Implementation Schedule, we are of the view that the authorities below were not justified in denying the benefit to the assessee in terms of section 41(1) as given by BIFR in terms of the Sanctioned Scheme. In that view of the matter, we delete the addition made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on this issue and allow Ground No.1 of the assessee’s appeal.
The issue involved in Ground No.2 of the assessee’s appeal relates to the disallowance made by the Assessing Officer and confirmed by the & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 6 of 13 ld. CIT(Appeals) on account of depreciation on critical spares and the grounds raised by the assessee on this issue read as under:- “2(a). That on the facts and in the circumstances of the case, the ld. CIT(A) erred in confirming the disallowance of depreciation on critical spares of Rs.11,25,490/-.
2(b). That on the facts and in the circumstances of the case and without prejudice to Ground No. 2(a) taken hereinabove, the ld. CIT(Appeals) erred in not allowing critical spares purchased during the year of Rs.19,91,820/- as revenue expenditure”.
During the year under consideration, the assessee-company had capitalized the critical spares required for its various machineries and claimed depreciation thereon amounting to Rs.11,25,490/-. During the course of assessment proceedings, the claim of the assessee for such depreciation was examined by the Assessing Officer and on such examination he recorded his findings as under:- “(i) The I.T. Rules does not specify any rate of depreciation on spares.
(ii) Earlier the spares were included in stores and spares a/c and only the consumed amount were charged as revenue.
(iii) Change in accounting standard cannot change the character of any particular item or its utility to business”.
On the basis of the above findings as well as keeping in view the stand taken on a similar issue in assessee’s own case for the earlier years, the Assessing Officer disallowed the claim of the assessee for depreciation on critical spares. He held that the assessee for income-tax purpose has to follow the method of accounting consistently and should claim the deduction on account of spares on consumption basis. In the absence of specific data/details in this regard, he assumed that the value of spares actually used has already been claimed by the assessee as deduction and nothing further is required to be allowed as deduction. & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 7 of 13 10. The disallowance made by the Assessing Officer on account of its claim for depreciation on critical spares was challenged by the assessee in the appeal filed before the ld. CIT(Appeal) and since the submissions made by the assessee in support of its case on this issue was not found acceptable by him, the ld. CIT(Appeals) proceeded to confirm the disallowance made by the Assessing Officer on account of assessee’s claim for depreciation on critical spares for the following reasons given in his impugned order:- “I have gone through the submissions of the appellant. As seen from AS 10 issued by the council of ICAI for fixed assets provides as follows: "Stand by equipment and servicing equipment are normally capitalized Machinery spares are usually charged to the profit and loss statement as and when consumed. However, If such spares can be used only in connection with an item of fixed assets and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systemic basis over a period not exceeding the useful life of the principal item".
The council of ICAI has also issued Accounting Standards Interpretation (ASI) 2 for the purpose of elucidating as to the machinery spares which are covered under the Accounting Standards (AS) 2 and (AS) 10 and what Should be the accounting for machinery spares under the respective standards In this context, it may be pertinent to note the following -
1) Whether to capitalize a machinery spare under AS 10 or not will depend on the facts and circumstances of each case. However, the machinery types of the following types should be capitalized being of the nature of capital spares/insurance spares.
(i) Machinery spares which are specific to a particular item of fixed asset, i.e. they can be used only in connection with a particular item of fixed asset and -
(ii) Their use is expected to be irregular.
2) Machinery spares of the nature of capital spares/ insurance spares should be capitalized separately at the time of their purchase, whether procured at the time of purchase of the fixed asset concerned or subsequently. The total cost of such capital spares/insurance spares should & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 8 of 13 be allocated on a systematic basis over a period not exceeding the useful life of the principal item, Le. the fixed asset to which they relate.
Following the (ASI) 2, AR was asked to produce the details of the machinery spares specific to a particular item of fixed asset and also to prove whether their use is irregular. The A.R. was also asked to substantiate its claim, by showing instances to prove the use of spaces its irregular i.e. any instance, they were put to use in the earlier years because of sudden failure of spares. The Ld. A.R produced only the list of such spares assessment year wise. The AR could not explain or prove that they are emergency spares. Going by the description given by the appellant, none of these spares qualify to be emergency spares/capital spares as discussed under AS 10. The appellant could not explain that these spares are specific to a particular item of fixed assets. The Ld. AR. was on!y describing the spares with relation to Cement Mill 1 and Cement Mill 2. It is also not explained proved that their use is expected to be irregular. The Gear box units, Control Diaphragm Bearing bush, Starter Coil for motor [AY. 03-04]. 1250 KW Motor 6.6 KV (Asstt. Year 04-05), are separate spares of general use by themselves and cannot be treated/categorized as emergency/critical spares of a fixed asset. In my view they are not related to any fixed asset. The Ld. AR. also could not explain that they belong to any fixed asset. In view of this, it is difficult to accept the contention of the appellant that the spares in issue were emergency spares. The main drive motor i.e. 1250 KW Motor 6.6. KV cannot be an emergency space relating to any fixed assets. In my opinion, the appellant did not satisfy the condition of accounting standards Interpretation (ASI) 2 as discussed earlier. Hence the grounds of appeal are dismissed”.
We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the conditions for capitalizing the relevant spares claimed to be critical and claiming depreciation thereon are not satisfied by the assessee in the present case, inasmuch as, it has failed to prove either before the authorities below or even before us that the said spares were meant specifically for a particular item of fixed asset and their use is expected to be irregular. In this regard, only the list of spares was furnished by the assessee and as rightly pointed out by the ld. CIT(Appeals) from the & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 9 of 13 description given therein, the said spares were of general use which could not be treated /categorized as emergency/critical spares of any fixed asset. As mentioned by the Assessing Officer in the assessment order, such spares were included by the assessee-company itself in the Stores and Spares Account in the earlier years and the same were claimed as revenue expenditure on consumption basis. No explanation whatsoever has been offered on behalf of the assessee for changing this method of accounting followed in the earlier years. On the other hand, the assessee in Ground No. 2(b) has raised an alternative claim that the deduction on account of the spares claimed to be critical be allowed as revenue expenditure. As noted by the Assessing Officer, the specific data/details in this regard were not furnished by the assessee and in the absence of the same, he proceeded to assume that the amount in question was already claimed by the assessee in the consumption of stores and spares. We are unable to approve this approach of the Assessing Officer. In our opinion, the factual position as to whether the value of critical spares was included by the assessee in the consumption of stores and spares is verifiable from the relevant record and the Assessing Officer should have come to a specific finding by carrying out such verification instead of making any assumption. We, therefore, accept the alternative claim of the assessee and direct the Assessing Officer to allow the expenditure incurred by the assessee on critical spares on actual consumption basis after verifying the relevant record. The matter is accordingly restored to the file of the Assessing Officer for deciding the same afresh after giving the assessee proper and sufficient opportunity of being heard. Ground No. 2(a) of the assessee’s appeal is accordingly dismissed, while Ground No. 2(b) is treated as allowed for statistical purposes.
In Ground No. 3 of its appeal for A.Y. 2004-05, the assessee- company has challenged the action of the authorities below in not excluding the amount of Rs.35,74,793/- transferred from Capital Reserve to Profit & Loss Account in computing book profit under section 115JB of the Act. & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 10 of 13
While computing the book profit of the assesese-company under section 115JB of the Act, the sum of Rs.35,74,793/- equivalent to depreciation charge transferred from Capital Reserve and credited to the Profit & Loss Account was included by the Assessing Officer. On appeal, the ld. CIT(Appeals) upheld the action of the Assessing Officer by observing that the amount in question transferred from Capital Reserve could not be reduced from the book profit as per Explanation (1) below Section 115JB(2) since the said reserve was not created by debiting the Profit & Loss Account and it was created prior to 01.04.1997.
We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The adjustments that are permissible while computing the book profit under section 115JB, are enumerated in Explanation (1) below sub-section (2) of section 115JB and clause (i) of the said Explanation, which is relevant in the present context, reads as under:- “(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be”.
The Net Profit as shown in the Profit & Loss Account for the relevant previous year thus is liable to be reduced as per Clause (i) of Explanation (1) to section 115JB by the amount withdrawn from any reserve or provision, if any such amount is credited to the Profit & Loss Account. However, if the relevant reserve is created before the 1st day of April, 1997 otherwise than by way of debit to the Profit & Loss Account, such reduction is not to be allowed as per the adjustment permissible in terms of Clause (i) of Explanation (1) to Section 115JB. In the present case, the relevant Capital Reserve was created by the assessee-comp.any before the & 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 11 of 13 1st day of April, 1997 otherwise than by way of debit to the Profit & Loss Account as per the specific finding recorded by the ld. CIT(Appeals) in his impugned order and there is nothing brought on record on behalf of the assessee to rebut or controvert the said finding. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) upholding the action of the Assessing Officer in not reducing the amount of Rs.35,74,793/- withdrawn by the assessee from the Capital Reserve and credited to the Profit & Loss Account as the said Capital Reserve was created by the assessee before the 1st day of April, 1997 otherwise than by way of debit to the Profit & Loss Account. Ground No. 3 of the assessee’s appeal for A.Y. 2004-05 is accordingly dismissed.
Grounds No. 4 & 5 raised by the assessee in its appeal for A.Y. 2004- 05 are not pressed by the ld. counsel for the assessee at the time of hearing before us. The same are accordingly dismissed as not pressed.
Now we take up the appeal of the assessee for A.Y. 2005-06 being in which the following grounds are raised by the assessee:- “(1) That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified in confirming the action of the A.O. of not allowing the claim of Rs.35,74,793/- on account of amount transferred from capital reserve to Profit & Loss account as not taxable u/s 41(1).
2(a). That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the disallowance of depreciation on critical spares of Rs.11,25,490/-.
2(b). That on the facts and in the circumstances of the case and without prejudice to Ground No. 2(a) taken here-in- above, the Ld. CIT(Appeals) erred in confirming the action of the A.O. of not allowing critical spares purchased during the year of Rs.6,10,532/ - as revenue expenditure.
& 1693/KOL./2009 Assessment Years: 2004-2005 & 2005-2006 Page 12 of 13 (3). That on the facts and in the circumstances of the case the Ld. CIT(Appeals) grossly erred in confirming the non exclusion of the amount transferred from capital reserve to Profit & Loss account of Rs.35,74,793/- in computing Book Profit under section 115JB of the Act.
(4). That on the facts and in the circumstances of the case the Ld. CIT(Appeals) was not justified in confirming the levy of interest u/s. 234B and 234C on the tax computed on Book Profit under section 115JB of the Act.
(5). That the appellant craves leave to add, amend, modify, rescind, supplement or alter any grounds as stated here-in- above either before or at the time of hearing of the appeal”.
After considering the rival submissions and perused the relevant material available on record, it is observed that the issues raised by the assessee in Grounds No. 1 to 3 of its appeal for A.Y. 2005-06 are similar to that of A.Y. 2004-05, which has already been disposed of by us. Following our conclusion drawn in A.Y. 2004-05, we allow Ground No. 1 of the assessee’s appeal and dismiss Grounds No. 2(a) and 3. Ground No. 2(b) is treated as allowed for statistical purposes while Grounds No. 4 & 5 are dismissed as not pressed.
In the result, both the appeals of the assessee are partly allowed. Order pronounced in the open Court on December 02, 2016.