NHPC LTD.,FARIDABAD vs. ACIT, FARIDABAD

per clause (i) to Explanation 1. Therefore Ld AO initiated action u/s 154 of the act and made

addition to the book profit of the assessee on account of provision for bad and doubtful debts

by applying that clause (i) holding that the amounts set aside as provision for diminution in

value of the assets covers this item of expenditure debited and is required to be added.

Assessee carried the matter before CIT (A) and argued that order u/s 154 is invalid. Ld. CIT

(A) upheld the action of AO holding that rectification is because of retrospective amendment

and this amendment was not available when CIT (A) decided the issue and further the original

addition was under clause (c) of the explanation of Section 115JB and now rectification is

made by applying clause (i) of explanation (1) to section 115JB of the Act. Therefore assessee

is in appeal before us on this count. Further while deciding the issue CIT (A) has held that

interest u/s 234B of the Act is not payable by the assessee as the tax liability has arisen on it

because of retrospective amendment to the Income tax act and assessee could not have

visualized the amendment in past and therefore assessee could not be asked to pay interest u/s

234B of the act. Against this the revenue is in appeal for two years. Admittedly in third year

ld AO himself did not charge any interest u/s 234B of the Act.

A Y Amount of Amount of Relevant Relevant Whether Whether provision of bad interest charged para of order para of order interest revenue is debts u/s 234B of the of AO of CIT (A) is in appeal act where deleting the charged against the provision of addition of u/s 234B same bad and bad and of the doubtful doubt full act by debts added debts AO and back for deleted 115JB by CIT computation (A) 2004-05 8,76,59,179/- Rs. 76,52,089/- Para 5 page Para no 9 Yes Yes no 7 of assessment order 2005-06 Rs. 8,95,79,008/- Rs. 56,07,261/- Para no 3 Para No 10 Yes Yes page no 2 of the 2

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assessment order 2006-07 Rs 7,32,97,524/ Nil Para no 3 Para No 9 No N.A. page no 2 of the assessment order

ITA Nos. 433 to 435/Del/2013 for AYs 2004-05 to 2006-07(Assessee) 4. Firstly, we take up the appeal of the assessee, wherein the assessee has challenged the order of CIT (A) on identical grounds. For the sake of convenience, the grounds of appeal raised by the assessee in assessment year 2004-05 are as under: GROUNDS OF APPEAL RAISED BY THE ASSESSEE i. On the facts and circumstances of the case, the order passed by the ld. Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts. ii. On the fact and circumstances of the case, the ld. CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the order passed by the ld. Assessing Officer under Section 154 of the Act is bad as the same has been passed by the Assessing Officer without having proper jurisdiction. iii. On the facts and circumstances of the case, the ld. CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the order passed by the ld. Assessing Officer under Section 154 of the Act is bad in law and liable to be quashed as the same is barred by limitation. iv. On the facts and circumstances of the case, the ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer in charging interest of Rs. 3,11,509/- under Section 234D of the Act. v. On the facts and circumstances of the case, the ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer withdrawing interest of Rs. 10,78,208/- under section 244A of the Act. vi. On the facts and circumstances of the case, the ld. CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the Assessing Officer has erred both on facts and in law in charging interest despite an amount of Rs. 11,40,99,330/- being pending for refund for the assessment year under consideration. vii. That the appellant craves leave to add, amend or alter any of the grounds of appeal.

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 Section 115JB of the Act. Accordingly, learned Assessing Officer had made an addition of Rs. 8,76,59,179/- being provisions made for doubtful debts. 6. Learned Authorized Representative contended before us that in the original assessment order passed on 28.12.2006 by the Assessing Officer has already made addition of this amount while working out book profit tax vide para no. 5 of that order. He took us to the relevant page of the assessment order and submitted that during the year, the assessee has made a provision for doubtful debts created during the year at Rs. 28,28,14,257/- and also has retain back the provision of doubtful debts amounting to Rs. 19,51,55,078/-. He further took us to the order of the Commissioner of Income Tax (Appeals) wherein Commissioner of Income Tax (Appeals) has adjudicated on this issue vide his order dated 25.04.2008 at para nos. 9.3 to 9.5 of his order. The learned Commissioner of Income Tax (Appeals) has deleted this addition. Therefore, the contention of the learned Authorized Representative was that the order of the Assessing Officer has got merged with the order of Commissioner of Income Tax(Appeals) and according to the provisions of section 154(1A), there is a bar for making any rectification by AO. Therefore he submitted that the order passed u/s 154 of the Act Cannot be passed by him but by CIT(A) only. 7. Learned Departmental Representative, on the other hand, submitted that AO has initiated the action u/s 154 of the Act only because of retrospective amendment in the law and, therefore, it has been validly initiated. We have carefully considered the rival contentions. The object of section 154(1) of the act 8. is to rectify any mistake apparent from the record. The revenue authority has got power to rectify any mistake apparent on the record and amend any order passed by it under the provisions of the Act. In doing so, certain constraints have been placed on the authority of AO in the matter of rectification which are contained in section 154(1A) of the act as under :- “(1A) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in 4

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.”

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Department treated the concealed purchases on the basis of parcha Nos. 4, 5, 6 and 7 relating to zeera. The Sales-tax Officer was of the view that parcha Nos. 4, 5, 6 and 7 established that the assessee had made purchases from different parties and those purchases have not been disclosed in the account books. These parchas related to concealed or suppressed purchases of zeera. However, ultimately the Additional Judge (Revision) as well as High Court in the sales tax matter recorded a finding that parcha Nos. 4, 5, 6 and 7 did not conclusively prove to have been purchases of the assessee firm. The judgment of the High Court was available and was placed before the Appellate Assistant Commissioner during the course of hearing of the appeal before him by the assessee. The Appellate Assistant Commissioner in the light of the judgment of the High Court and finding of the Additional Judge (Revision) recorded in sales tax proceedings directed the ITO to apply a rate of 3.2 per cent on the enhanced turnover of Rs. 1,90,000. The order of the AAC has been quoted in extenso above. Therefore, the matter of determination of the total income of the assessee on account of parcha Nos. 4, 5, 6 and 7 found in the survey by the sales tax authorities was very much under consideration of the Appellate Assistant Commissioner. Even if while computing the total income, the ITO on account of some omission did not include the income of zeera amounting to Rs. 17,612 as mentioned in para 3 of the assessment order, the matter with regard to the turnover of zeera and the income generated from the turnover of zeera was very much in dispute and was subject-matter of appeal before the AAC. Therefore, the learned Standing Counsel is not correct in his submission that the undisclosed income of zeera as deducted by the ITO on the basis of parcha Nos. 4 and 5 was not the matter, which was not considered and decided by the AAC in appeal. The words „any matter‟ are of wide amplitude and are co-related with the subject-matter of appeal. It was not disputed and could not possibly be disputed by the department that the income generated from undisclosed sales of zeera was not the subject-matter of the appeal. 11. Coming to the judgment of the Kerala High Court given in the case of CIT v. K.P. Subbarama Sastrigal [1993] 203 ITR 342, we find that the Kerala High Court did not agree with the decision of the Allahabad High Court in J.K. Synthetics Ltd. v. Addl. CIT [1976] 105 ITR 344 . It preferred to follow the judgment of Gujarat High Court, which is slightly different. This Court in the case of J.K. Synthetics Ltd. (supra) has relied upon a judgment of Supreme Court in CIT v. Amrit Lal Bhogi Lal & Co. [1958] 34 ITR 130 . The Supreme Court in that case has held that there can be no doubt that if an appeal is provided against an order passed by the Tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the Tribunal, it is obvious that it is the appellate decision that is effective and can be in force. In law the position would be just the same even if the appellate decision merely confirms the decision of the Tribunal. As a result of confirmation or affirmance of the decision of the Tribunal by the appellate authority, the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement. But if an order is specifically non-appealable it would remain in operation although an appeal in the same proceeding has been taken and decided. 12. It may be noted here that section 251 of the Act confirms the appellate jurisdiction upon the Appellate Assistant Commissioner and under clause (a) of sub-section (1) of section 251 it has been provided that in an appeal against an order of assessment the Appellate Assistant Commissioner may enhance the assessment. The appellate powers of the Appellate Assistant Commissioner are as wide and as extensive as those of Assessing Officer, barring that the Appellate Assistant Commissioner cannot go outside the record and so he cannot discover new source of income, which are not disclosed either in the return of the assessee or in the assessment order as pointed out by the Supreme Court in CIT v. Shapporgi Pallongai Mistry [1962] 43 ITR 891. 13. Thus it is apparent that the Appellate Authority can look into and adjudicate upon findings recorded by the Income-tax Officer not only against the assessee, which may expressly be the subject-matter of the appeal but also those which have gone in favour of the assessee and which may not have been challenged by the assessee. In the present case, the entire assessment order qua the undisclosed turnover of zeera was the subject-matter of appeal before the Appellate Assistant Commissioner and as such the original assessment order stands merged with the order of the Appellate Assistant Commissioner and it was not open for the ITO to initiate the proceedings under section 154 of the Act. The test is whether or not the order of the ITO on a particular point was the subject-matter of appeal before the Appellate Assistant Commissioner. 14. The Kerala High Court in the case of K.P. Subbarama Sastrigal ( supra) on which strong reliance was placed by the learned Standing Counsel, we find that even in the said ruling it has been mentioned that the order of the assessment made by the ITO merges in the order of 6

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 Appellate Assistant Commissioner only insofar as it relates to the item considered and decided by the Appellate Assistant Commissioner. In view of our finding that in the present case the question of undisclosed purchases of zeera is concerned, it was considered and decided by the Appellate Assistant Commissioner and, therefore, the assessment order made by the ITO merges in the order of the Appellate Assistant Commissioner.”

Here in this case it is evident that whether the provisions of bad and doubtful debts 11. shall be added back to the book profit of the assessee or not for payment of taxes u/s 115JB of the act has been considered by the AO while framing assessment u/s 143(3) and decided by CIT (A) in appeal before him. Therefore „the matter‟ here is whether the provisions of bad and doubtful debt are required to be added to work out book profit tax or not. It is also not the issue that the provision for bad and doubt full debts is covered under clause (c) or Clause (i) of the explanation (1) of section 115JB of the Act. Further the matter that provision of bad and doubtful debts shall be added back to the book profit or not has been decided by the CIT (A). Therefore reading of section 154(1A) would only mean that the power to rectify the mistake in the order should not be in relation to the issues considered and decided in the said order with AO but with the authority passing appeal order. It is an admitted fact that the learned Assessing Officer has made addition on account of the provisions for doubtful debts debited in the profit and loss account of the assessee for the purpose of working out profit tax under the provisions of Section 115JB of the Act as under:- “5 The assessee had computed book profit u/s 115 JB at Rs.2,42,21,60,970/- in the original return filed. The figure of book profit was enhanced u/s 154 on 28.01.2005 subsequent to decision of Hon'ble Authority, for Advance Ruling whereby 'advance against depreciation' amounting to Rs.1,38,34,00,000/- was added to book profit and the book profit liable for MAT was determined at Rs. 4,22,55,60,970/-. This was later on revised to Rs. 3,74,06,15,970/- u/s 154 on 16-02-2006. While further examining the computation of book profit, it was noticed that following provisions, through added back in computing the taxable income under the head 'income from business and profession' under chapter IV D of the I.T. Act, were not considered for addition while computing book profit: (i) Provision for Gratuity Rs.11,77,03,897/- (ii) Provision for Leave Encashment Rs. 8,35,81,430/- (iii) Provision for post retirement medical scheme Rs. 4,17,03,884/- (iv) Provision for doubtful debts created during the year Rs. 28,28,14,257/- 7

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 Rs. 52,58,03,468/- Less: Provisions for Doubtful Debts written back/ adjusted Balance, Rs. 19,51,55,078/- Balance Rs. 33,06.48,390/- 5.1 The assessee was accordingly required to show cause. By two separate replies it has been contended as under: 1. That the above provisions are created in accordance with accounting principles and standards; 2. That the valuation of liabilities is based on compilation of various details and by adopting actuarial valuation thereof; 3. That liabilities are 'ascertained‟ in view of meaning of word 'ascertain' in the Webster-II New Reverside University Dictionary and discusses in Bharat Earth Movers (112 Taxman 61); 4. That provisions for doubtful debts are not liabilities much less unascertained liabilities and; 5. That Profit &. Loss A/c prepared in accordance with Schedule VI of balance cannot be disturbed in view of ratio of case of Appollo Tyre Ltd., (255 ITR 273), Shri Sajjan Mills Ltd. (156 ITR 589). 5.2 The main argument, in the repertoire of defenses, traces the meanings of terms „liabilities‟ and 'provisions'. Since the issue in hand is intimately connected with accounting principles in general, it would be appropriate to examine here the Tax Laws, Accounting Standards and Conventions and also the philosophy behind MAT provisions before addressing the various limbs of above contentions. 5.3 The bane of accounting principles is that they discount the natural optimism of business by giving such optimism a cost, if not the pessimisms of accountant and in the process provide for every conceivable expenditure keeping in line with the convention of off 'conservatism' to rule out any window dressing to lure the gullible. On the other hand, the obdurate tax laws would not permit any claim, which has a tinge of uncertainly attached to it, and it is paradoxical that the two are expected to be complementary and supplementary to each other. So where do the two' meet? Nowhere! The judicial history is replete with pronouncements that accounting practices cannot override any provision of the Act (Tuticorin Alkali Chemicals & Fertilizers, Ltd, vs. CIT (1997) 227 ITR 172 (SC) and that mode of book entries is generally not conclusive with regard to the true nature of transactions; CIT Vs. India Discount Co. Ltd. (75 ITR 191 (SC); Chowringhee Sales, Bureau (P) Ltd Vs. CIT (1973) 87 ITR 542 (SC), State Bank of India Vs. CIT (1986) 157 ITR 67 (SC). In this backdrop, how the „book profit' of an accountant is different from that of a taxman? The legislature while for MAT was fully aware of the considerations, which influence an accountant‟s casting of statement of affairs as well as ingenuity of human nature to devise ways to circumvent the law. Therefore, in adopting accountant's book profit, it attached some riders to block its understatement (Clauses a to f of Explanation) and also loosened strings so as to ensure the bounties and benedictions to spheres targeted under the normal provision are not undone Clause (i) to (vii) of Explanation. The additions and reductions of these adjustments are very critical for reaching 'at „MAT Profit‟. The guiding forces for achieving this delicate balance are the legislative behind MAT, (to tax zero tax paying prosperous companies), the 'low MAT ' vis-a-vis normal tax rate (only partially offsetting the operation of normal giving fillip to investments without postponing current accretions to exchequer in entirety) and allowing credit for MAT payment in future (to be just and fair by not taxing the same 8

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 income twice). All these factors when combined with 'the non-obstante' clause make the provisions of section 115JB a self contained code which in turn also implies that the provisions have to be given strict interpretation to ensure compliance on the dotted lines. 5.4. As stated above the bedrock of the defense put forward hangs around the dentity of terms 'provisions' and 'liabilities'. Are the terms to be under stood u/s 115JB in the same sense as in the accounting domain or differently in view of above discussions ? And if not, then what is the true nature of these terms? The problem of 'true identity' is not unique to the accounting and taxation laws. In all the facets of life, the whole world is coping up with this 'identity crisis'. The same person can be without contradiction a father and a son or more of such contrasting identities at the same time. The 'Pluto' can be a planet or simply an 'asteroid no 134340'. At the other end of this identity spectrum is the 'unity1. The whole universe is a 'unified field, where everything is interwoven and is just a different manifestation of the same cosmic energy, In spite of this common source of origin, most of the things retain district identities except when, like that of conjoined Siamese twins, identities so merge into each other that differentiation and separation are difficult, the accounting world is no different in this respect. Accumulated tosses can become 'asset' and profits and gains are married into a family with surname 'liability'. Thus there can be so much difference without any apparent one. Such indeed is the state of the issue thrown up by the above contentions. It is argued that 'provision for gratuity, leave encashment etc. are not provisions for un-ascertained liabilities whereas in respect of provisions of doubtful debts, it is argued that it is not a liability at all. The I.T. Act does not define the terms and reliance is placed on their definitions in Accountancy and Company Law. A brief discussion here would be helpful: 5.5 Provision: - The Company Act Part III of Schedule- VI of Company Act, defines provisions as, (l)(a)_ The expression provision shall subject to sub clause (2) of this clause mean "any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; (b) The expression 'reserve' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability:" And in the same breath for the purposes of above sub-clause it defines 'liability to Include alt liabilities in respect of expenditure contracted for and all disputed or contingent liabilities. (2) "The schedule, however, qualifies the above meanings of terms' Provisions & Reserve as under: , "Where " (a) Any amount written off or retained by way of providing for depreciation, diminution in value of assets or retained by way of providing for any known liability; or (b) Any amount retained by way of providing for any known liability

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 Is in excess of the amount which in the opinion of the directors is reasonably necessary for the purposes, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision.” 5.6 The above discussion broadly conceptualize following inter relationship between 'Provision and 'Reserve', 1. Provision and reserves both are tools to set apart certain amounts out of profits. Their basic job is same -ear marking funds for a cause; 2. While both are ear makings, the provision is meant for consumption (to meet an incurred or expected liability), the reserve is meant to strengthen inner resources for investments or distributing largesse in the form of bonus shares etc to shareholders; 3. The extents of earmarking in all circumstances are at the best , reasonable estimation only. 4. There is a thin line separating provisions from reserves and many a time, when provision is in excess of actual requirements, the same is also considered as hidden reserve. Provision for contingencies are sometimes described as inner reserves, where the expected contingency is exceptional or abnormal or secret reserves are often built up by providing for excess depreciation, having' assets undervalued, allowing undistributed surplus in the hands of the subsidiary companies; and 5. Under the Companies Act, provisions and Reserves have been defined • in a complementary manner with reference to the expired assets, which is treated as a provision and not a reserve. , 5.7 Where does the provision for doubtful debts stand in the midst of above discussion? Is it in substance, a provision or a reserve? It has been informed that debts due from beneficiaries are being contested before arbitrators. This means the debits are still realizable. Though this might be tainting the debt, yet it cannot be said that the debt has become bad or certainty of badness has ensued. Had that been the case the claim of bad debt would have arisen. Any provision therefore, in excess of actual liability incurred can only be described as "reserves". It can be argued that in terms of the definition of provision and reserve in the companies act, decision to this effect is the prerogative of the directors. Yes certainly, but only under the Company Act, The various clauses of Explanation below subsection 2 of section 115JB" duly empower this office to examine the true nature of the claims. The title 'provision' in the absence of actual write off of debt or certainty thereof is in the character of reserves keeping in view the subtle difference between provisions and reserves, as discussed above. Thus the provision for doubtful debt would be eligible for addition under clause (b) to Explanation below u/s. 115JB which reads as "the amount carried to any reserve by whatever name called." The amount set apart might have been labeled as 'provision', but being a 'reserve' in essence squarely falls within the mischief of this explanation and, therefore, is liable to be added back. 5.8 Without prejudice to what is 'discussed above, even if it be presumed that provisions for 'doubtful debts' is a provision, can it be said that the decline does not lead to creation of any liability. It is contended that any fall in the value of debtors appearing on the 'asset side' does not lead to creation of any liability. But what is a liability? In the guidance note of ICAI, liability is defined as „all claims‟ involving financial obligations' which in other words means 'out flow of funds'. The contention that decrease in the value of debts or for that matter any asset does not lead to creation of any liability is basically flawed. Both assets 10

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 and liabilities are two sides of the same coin - one representing sources of funds and the other application thereof - and are necessary corollaries of the system of Double Entry System of Book Keeping. Any change in one side has to be necessarily followed up by changes on the other side too. Any consumption or loss of an asset -decrease, decay or loss - unaccompanied by increase in revenue would definitely involve out flow of funds in the form of decrease in capital or increase in liabilities. 5.9 There is another reason also for taking this view. As stated above, liability can be of capital or of revenue nature. But what the Act or Accounting Principles allow while computing 'Net Profit' is only liability of revenue nature. The claim of capital nature, ascertained or unascertained, is not permitted to be reduced by the Accounting Principles themselves. If the contention of assessee is accepted, and the phrase 'unascertained liability' is applied in literal and restricted sense, it may lead to unintended results-ascertained liabilities of capital nature would also have to be disallowed. Moreover what is allowed to be reduced is claim of expenses or losses and not the liability accruing on account thereof. Thus, when the section 115JB says 'unascertained liability', it really means 'unascertained liabilities on account of losses or expenses'. A word is a skin of a living thought and may vary greatly in content and color according to the context in which it is used. And in Explanation (c), the living thought of the Legislature is 'unascertained liabilities on account of revenue expenses and losses". And expenses and losses could also occur on account of movement in asset side, which reflects application of funds, and that movement would automatically be reflected on the liabilities or the credit side, representing flow of funds. Assigning any other meaning to the term 'liability‟ would be going of context and also against the spirit of the legislation 5.10 There is legislative support also for taking this view. If the contention of the assessee that 'provision for doubtful debts' is a provision and not reserve, is accepted, then the decline in the value cannot be anything but 'liability'. The Companies Act, defines provision for anticipated diminution in value of assets and increase in liabilities in one breath. No distinction of asset and liabilities is apparent because both are different sides of the same coin. The Part-t of schedule-VI of Companies Act lays down the form of balance sheet. In both the horizontal and vertical forms, 'provisions' are classed under the head liabilities' and are clubbed together with current liabilities and various types of provisions are described as under:- “Provisions: (i) Provision for taxation. (ii) Proposed dividends. (iii) For contingencies. (iv) For provident fund scheme. (v) For insurance, pension and similar staff benefit schemes. (vi) Other provisions." The above classification and grouping sufficiently indicates that 'provisions for doubtful debts' is a kind of liability only. 5.11 Coming to the last limb of the contention that even if this 'provision1 be a provision for a liability, it is on, account of ascertained liability. The word 'ascertained' in context of tax laws connotes two things - certainly of happening and it's amenability to quantification. If either of the two ingredients is absent, 11

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 the liability cannot be called as an 'ascertained' one. In the case under consideration, the event, sustenance of loss on account of bad debt, or incurrence of liability on account of payment of Gratuity etc. have not taken place on 31.03.2004 and it is not certain whether the same will at all happen, since the arbitrators may issue the award in the favour of assessee and assessee may not have to pay leave encashment etc, due to happening of certain events beyond its control. Therefore it cannot be said that the liabilities have crystallized and become 'ascertained'. Moreover the conduct of the assessee in adding back these provisions in the normal computation is an adequate indicator of the true nature of these claims. It may be relevant to mention here that in assessment year 2002-03 Id. CIT (A) has confirmed the addition made to book profit on account of the above provisions. Therefore the amount of above provisions are added back to the figure of book profit u/s 115JB. I am satisfied that assessee has furnished inaccurate particulars of its income. Therefore penalty proceeding u/s 271(1)(c) initiated separately. (Disallowance : Rs.33,06,48,390/-)

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06

Whereas, the above mentioned provision is made in the books in compliance with the accounting principles and as mandated by other Statues towards anticipated losses. As such these items may not fall u/s 115JB(2). This view is supported by the decision of the Calcutta Tribunal in case of Sutlej Cotton Mills Limited Vs. ACIT (45/TD22.) "That provisions for doubtful debts and obsolete & surplus stores are against the assets of the assessee and not against the any liability and that the value of the assets have been reduced to the extent of the provision made. Provision of such nature have not been covered even under section 115JB". The above subject has been discussed in detail in the following judgments:- In case of N.W. Exports Ltd. Vs. ACIT (2004) 86 TTJ (Mumbai) 274 that 'Book Profit‟ has been defined in Sec. 115J to mean the net profit as shown in the P & A a/c for the relevant previous year in accordance with the provisions of part and II and III of Sen. VI of the Companies Act, 1956. As adjusted by the amounts maintained under Explanation of sub sect/on (IA) of Sec. 115J. One such adjustment specified in Cl. (C) of the Explanation is that the amount or amount or amount set aside to provision made for meeting liabilities other than ascertained liabilities is to be added back to "Book Profit' to determined the deemed total income under section 115J. The provision made for diminution in value of investment and for doubtful loans cannot be covered by the said CL (C) in as much as such provision are in respect of an asset and not for unascertained or contingent liabilities. A provision made for diminution in value of an asset can never be equated with provisions for a contingent liability. Now, the amount to be added back to the book profit figures as per CL. (C.) of Explanation to sub-section (IA) of section 115J is the amount set aside to provisions made for meeting liabilities other than ascertained liability. According, both the provisions cannot be added back for the purpose of determined "Book Profit" under section 115J. Similar, view was expressed in the case of Usha Martin Industries Ltd. Vs. Joint Commissioner of Income Tax (2003) 81 TTJ (Cal) 518, that Explanation to section 115 J(2) is only for provision with respect to liabilities & that too unascertained liabilities said clause does not cover provision made for diminution in value of assets. Therefore, the provision for doubtful debts could not be added back to the net profit as per P&L a/c by invoking (C) of Explanation to section 115J(2). In the case of Commissioner of Income Tax Vs. EICHER Ltd. 205 CTR (Del) 469 it has been held as under: “Provision for bad and doubtful debts made by the assessee being a provision for an ascertained liability, clause (C) of Explanation to 115JA is not applicable and therefore, book profit could not be increased by the amount of provision for Bad and Doubtful Debts.” Similarly in case of CIT Vs. HCL Comnet Systems and Services Ltd.(292 ITR 299) Delhi it was held: "Provision for Bad and Doubtful debts is to be treated as on ascertained Liability and therefore, it cannot be included in the Book Profit under Section 115JA." It is requested to please delete the above additions as the same is uncalled for and against the expressed provisions of Section 115JB of Income Tax Act", 9.4 I have carefully considered the submissions of the Id. AR and perused the order of assessment. It is found from the assessment order that the AO has at length developed a thesis or theory of "provisions", which is not found to be relevant for the obvious interpretation of the provisions of bad I'd doubtful debts, which have been held by various judicial pronouncements o be an ascertained liability and not otherwise, as held to be so by the Assessing Officer in so many words relied upon by him in his assessment order. Apart from the learned Tribunal's decision in the case of 13

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 National Fertilizers Vs Addl.CIT, Range-V (Supra) relied upon by the Id. ARs, the following decisions clearly point out that the provisions of bad and doubtful debts is a provision for diminution in the value of asset i.e. debt, and therefore, it cannot be a provision of liability as no liability would be fastened on the appellant if a debt is not recovered. So, the provision of bad and doubtful debts is not to be adjusted 115JB of the I.T.Act, in view of the following judgments: (i) Mahatrashtra State Electricity Board Vs JCIT 82 ITD 422 (Mum.) (ii) ACIT Vs J.G.Vaccum Flask 83 ITD 242 (Pune) (iii) CIT Vs H.J. Foregings (P) Ltd. 251 ITR 15 (Ban.) (iv) Steel Authority of India Ltd. Vs DCIT 76 ITD 69 (DelhI)(TM). v) JCIT Vs Usha Martin Inds. Ltd. (2006) 105 TTJ (Cal.)(SB) 543. 5 Keeping in view the above discussions, the disallowance of provision of bad and doubtful debts made by the AO u/s 115JB is not sustained and therefore, it stands deleted.”

:9. In the case of India Tin Industries P. Ltd. [1987] 166 ITR 454 their Lordships of the Karnataka High Court came to hold that sub-section (1A) of section 154 specifically provides that any matter which has not been considered and decided in any proceeding by way of appeal or revision, may be amended by the authority passing such an order in exercise of its power under section 154(1). Their Lordships further came to hold that the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by an inferior Tribunal and the other by a superior Tribunal passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject matter of the appeal. The order of assessment made by the Income-tax Officer merges in the order of the Commissioner in so far as it 14

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 relates to items considered and decided by the Commissioner. That part of the order of assessment, which relates to items not forming the subject-matter of the appellate order and left untouched does not merge in the order of the Commissioner. Even after an appeal from an order of assessment is decided by the Commissioner, a mistake in that part of the order of assessment which was not the subject-matter of the appeal and was thereafter left untouched by the Commissioner, can be rectified by the Income-tax Officer. 10. On consideration of the aforesaid judgments relied upon by learned standing counsel for the Revenue, it is clear that the aforesaid judicial pronouncements laid down the principle that the doctrine of merger does come to play in so far as items considered and decided by the Commissioner or in a case where a particular item is dealt with by the appellate/ revisional authority. Therefore, in order to adjudicate the present lis, it is incumbent upon us to first determine as to whether the issues/items sought to be rectified under section 154 are matters which were dealt with or considered and decided by the appellate authority or not, since the answer to the said question would be determinative as to whether the Income-tax Officer possessed necessary authority under section 154 to initiate such a proceeding or not ? 11. On a perusal of the impugned order under section 154 (annexure 1), it would be apparent that the rectification was made of two aspects, i.e., nonlevy of interest under section 234B and the alleged excess deduction allowed on account of depreciation. 12. In so far as the first aspect, i.e., non-levy of interest under section 234B is concerned, on a perusal of the said provision, it appears that an assessee who fails to pay advance tax, less than 90 per cent. of the assessed tax shall be liable to pay simple interest at the rate of one per cent. per month for the shortfall. The said provision provides various Explanations. In Explanation 1, it is stipulated that the term "assessed tax" means the tax on the total income determined under sub-section (1) of section 143 on regular assessment. In the present case, originally, an order under section 143(1) was passed against the assessee in which the assessee's return was accepted and certain amount was found to be refundable. Thereafter, exercising power under section 143(3), a regular assessment took place enhancing the assessed tax determined to be payable by the assessee. Explanation 3 provides that in Explanation 1 and in sub-section (3) "tax on the total income determined under sub-section (1) of section 143" shall not include the additional Income-tax, if any, payable under section 143. Therefore, in view of the aforesaid Explanation, it is clear that the present petitioner assessee was not originally liable for any interest under section 234B under the orders passed against it under section 143(1). Thereafter, when the regular assessment under section 143(3) was initiated and the income of the assessee was enhanced and "additional Income-tax" became payable, no question of levy of interest for "non-payment of advanced tax" could arise. This is obviously so since such determination of additional income-tax was the consequence of regular assessment and determination of additional Income-tax payable. This aspect is also purely academic since the additions effected by the Income-tax Officer were ultimately deleted by the Commissioner of Income-tax (Appeals) in appeal. Therefore, in our view no question of payment of interest under section 234B arises in the present case and non-charging of the same in the present case cannot be accepted as a "mistake capable of rectification" by initiating a proceeding under section 154 of the Income-tax Act. 13. In so far as the second issue is concerned, i.e., excess deduction allowed on account of depreciation, on a perusal of the original order of assessment under section 143(3) (annexure 5) clearly indicates that the Assessing Officer at that stage had, in fact, applied his judicial mind and "disallowed depreciation". Against the said order, the assessee carried an appeal in which an issue was raised regarding disallowance of depreciation. That issue was dealt with by the Commissioner in the appellate order by rejecting the same. Therefore, in so far as depreciation is concerned, it is clear that the appellate order merged with the original order under section 143(3) and since the issue regarding depreciation 15

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 formed a part of the subject-matter of the appellate order and therefore, the doctrine of merger would apply in so far as depreciation is concerned. 14. Placing reliance on the two judgments referred to above, it would be clear that permitting the Assessing Officer to exercise power under section 154 in the matters which have already been carried in appeal, would lead to judicial anarchy. If the Revenue in any manner was dissatisfied, it was open to it to challenge the same in the second appeal before the Tribunal. In the absence of any challenge permitting the Assessing Officer to vary or review or revise his own order under a plea of correcting the mistake as contemplated under section 154 is to in effect allow him to override or overreach the order passed by the higher authorities in appeal or revision. This is clearly not the intention of legislation of section 154(1A) of the Income-tax Act. We are of the view that the scope of section 154(1A) remains limited to the "mistakes apparent from records". Such mistakes cannot and do not include powers to revise or review/reappraise one's earlier order. We are of the view that in the present case, exercise of power under section 154 in so far as "depreciation" is concerned, is also without jurisdiction.

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 under Section 154 of the Act by the Assessing Officer is invalid as per the provisions of Section 154 (1A) of the Act. Identically, we also held so in the appeal of the assessee for assessment years 2005-06 and 2006-07 and allow the appeal of the assessee partly. 19. In the result all these three appeals are allowed partly. ITA Nos. 422/Del/2013 & 423/Del/2013 for AYs 2004-05 & 2005-06 20. The Revenue has also preferred an appeal, for assessment year 2004-05 and 2005-06 vide appeal nos. 422 & 423/Del/2013 raising following grounds :- 1) Whether the ld. CIT(A) was right in law in deleting the interest amounting to Rs. 76,52,089/- charged u/s 234B of the Act, since charging of interest u/s 234-B is consequential in nature 2) Whether the ld. CIT(A) was right in law in deleting the interest amounting to Rs. 76,52,089/- charged u/s 234B of the Act consequent to the addition made in pursuant to the amended provisions of section 115JB of the Act. 3) That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal.

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 of the I.T. Act can be levied. Though several items have to be calculated while computing book profit and in terms of explanation to section 115JB of the I.T. Act, that explanation has been brought on the statute book and with retrospective effect from 1st April, 2001, therefore, this calculation of the tribunal is erroneous in law. 12. However, Mr. Kaka, learned senior counsel invited our attention to section 234B of the I.T. Act to submit that this is provision to recover interest for default in payment of advance tax. It directs payment of simple interest and in terms of this provision provided any assessee who is liable to pay advance tax under section 208 has failed to pay such tax or where the advance tax paid is less than 90% of the assessed tax. Thus, this is a provision whereunder interest could be recovered wherein advance tax for the assessment year fails to take note of the amendment to the Income Tax Act which is brought in subsequently. When the Parliament stepped into to amend the Act though with retrospective effect but in 2008, then, there is no default in payment of advance tax for the assessment year 2006-07. The computation of income based on which the advance tax was paid was in tune with the law prevailing on the date on which tax was due and payable. Any further addition in the income by way of amended provisions and which were incorporated subsequently, therefore, does not attract payment of interest as there is no default. 13. Mr. Kaka also invited our attention to section 115JB and particularly, insertion of clause (h) in Explanation (1). That clause reads as under : "(h) The amount of deferred tax and the provision therefor." 14. This clause has been substituted by Finance Act, 2008 with restrospective effect from 1st April, 2001. Prior to the same it read as under : '4. Substituted for the portion beginning with the words "if any amount referred" and ending with the words "as reduced by " by the Finance Act, 2008, w.r.e.f. 1.4.2001." Prior to its substitution, read as under : "If any amount referred to in clauses (a) to (g), is debited to the Profit and Loss account, and as reduced by....' 15. The Tribunal in this regard noted rival contentions and the admitted facts. It also relied upon and followed the judgment of Hon'ble Calcutta High Court in Emami Ltd. v. CIT[2011] 337 ITR 470/200 Taxman 326/12 taxmann.com 64. 16. In paragraph 13 of the Tribunal's impugned order the relevant portion from Calcutta High Court's judgment has been extracted. The Calcutta High Court, therefore, found that the provisions would indicate that they are mandatory. There is no scope for waiving of the provision. However, in order to attract the provisions contained in section 234B and 234C of the Act, it must be established that the assessee had the liability to pay advance tax as provided under sections 207 and 208 of the I.T. Act within the time prescribed under section 211 of that Act. Noting the rival contentions, the Calcutta High Court proceeded to hold that the last date of relevant financial year was 31st March, 2001 and on that date, admittedly, the appellant before it had no liability to pay any amount of advance tax in accordance with the then law prevailing in the country. Consequently, the appellant paid no advance tax and submitted its regular returns on 31st October 2001, within the time fixed by law wherein it declared its total income and the book profit both as Nil. The amendment to section

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 115JB by virtue of Finance Act, 2002 and which was referred to in the Calcutta High Court judgment has retrospective effect from 1st April, 2001. 17. In the present case, what the assessee has pointed out is that some of the amounts included in the book profits as per Explanation (h) to section 115JB were brought in by the Finance Act, 2008 with retrospective effect from 1st April, 2001. The assessee cannot be held to be liable for failing to make a provision for payment of advance tax which was not possible on the last date as per the law then prevailing. Thus, clause (h) which is reproduced above having been brought in with retrospective effect but by Finance Act 2008, the advance tax computation by the assessee for the year 2006-07 cannot be faulted and it cannot be said that the assessee is in default and therefore, there is any liability to pay interest in terms of section 234B of the Income Tax Act, 1961. 18. In the case of Star India (P.) Ltd. v. CCE[2006] 280 ITR 321/150 Taxman 128 the Hon'ble Supreme Court held that the service of "broadcasting" was made a taxable service with effect from July 16, 2001, by the Finance Act, 2001. The appellant disputed its liability to make any payment for service tax on the ground that it did not broadcast. The Commissioner, however, held against the appellant. The matter was carried before the Commissioner of Income Tax (Appeals) and during pendency of appeal the Finance Act, 2001 was amended by the Finance Act, 2002. The effect of amendment, inter alia, was to make an agent, such as the appellant, before the Supreme Court, liable to pay service tax as broadcaster. 19. The Supreme Court noted that the Appellants' appeal pending before the Commissioner was rejected by him on the basis of this amendment. The tribunal also maintained this order and that part of the order passed by the Commissioner was not challenged in appeal. However, the appellant was aggrieved by the fact that the tribunal held it liable to pay interest on the amount which it was required to pay by reason of the 2002 amendment. The assessee contended that once the amendment was brought in, pending the appeal, there was no question of applying section 234B or any analogus provision and payment of interest. It is in that regard that the Hon'ble Supreme Court held as under : "7. In any event, it is clear from the language of the validation clause, as quoted by us earlier, that the liability was extended not by way of clarification but by way of amendment to the Finance Act with retrospective effect. It is well established that while it is permissible for the Legislature to retrospectively legislate, such, retrospectivity is normally not permissible to create an offence retrospectively. There were clearly judgments, decrees or orders of courts and Tribunals or other authorities, which required to be neutralised by the validation clause. We can only assume that the judgments, decree or orders, etc., had, in fact, held that persons situate like the appellants were not liable as service providers. This is also clear from the Explanation to the valuation section which says that no act or acts on the part of any person shall be punishable as an offence which would not have been so punishable if the section had not come into force. 8. The liability to pay interest would only arise on default and is really in the nature of a quasi-punishment. Such liability

N H PC Limited V ACIT ITA No 433,434& 435/Del/2013 AY 2004-05 to 2006-07 ACIT V NHPC LIMITED ITA No 422 & 423/Del/2014 A Y 2004-05 & 2005-06 although created retrospectively could not entail the punishment of payment of interest with retrospective effect." 20. The Supreme Court held that the liability to pay interest would only arise on default and is really in the nature of a quasi punishment. The liability to tax although credited retrospectively could not entail the punishment of payment of interest with retrospective effect. It is this principle which has been laid down which is followed by the Calcutta High Court. It is that principle relied upon by the Calcutta High Court which has been applied by the Tribunal to the facts and circumstances of the present case. We do not think that the assessee before us can be called upon to pay interest in terms of section 234B, once the explanation was introduced or brought in with retrospective effect but by Finance Act, 2008. Then, there was no liability to pay interest in terms of this provision. That was because the assessee cannot be termed as defaulter in payment of advance tax. The advance tax computation on the basis of the unamended (sic) provision therefore could not have been entertained. 21. We do not see any broader or wider question arising for our determination as the view taken even on this question is neither perverse or neither vitiated by any error of law apparent on the face of the record.”