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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri N.V. Vasudevan
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 1 of 11 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA ‘C’ BENCH, KOLKATA
Before Shri P.M. Jagtap, Accountant Member and Shri N.V. Vasudevan, Judicial Member
I.T.A. No. 834/KOL/ 2010 Assessment Year: 2006-2007 & I.T.A. No. 1639/KOL/ 2010 Assessment Year: 2007-2008 The West Bengal Power Development Corporation Limited,...........Appellant Bidyut Unnayan Bhawan, Plot-3/C, LA-Block, Sector-III, Salt Lake, Kolkata-700 098 [PAN: AABCT 3027 C]
-Vs.- Assistant Commissioner of Income Tax,........................................Respondent Circle-5, Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, 8 th Floor, Kolkata-700 069
Appearances by: Shri B.C. Jain, A.R., for the assessee
Shri G. Mallikarjuna, CIT, D.R. and Shri Rajat Kumar Kuereel, JCIT, Sr. D.R., for the Department
Date of concluding the hearing : October 20, 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 passed by the ld. Commissioner of Income Tax (Appeals)- VI, Kolkata for assessment years 2006-07 and 2007-08 and since the issues involved therein are common, the same have been heard together and are being disposed of by a consolidated order for the sake of convenience.
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 2 of 11 2. First we shall take up the appeal of the assessee for A.Y. 2006-07 being ITA No. 834/KOL/2010, which is directed against the order of the ld. Commissioner of Income Tax (Appeals)-VI, Kolkata dated 19.02.2010.
The issue involved in Ground No. 1 of this appeal relates to the disallowance of Rs.2,35,74,819/- and Rs.1,94,13,061/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of prior period depreciation of BTPS and STPS respectively.
The assessee in the present case is a Public Sector Undertaking, which is engaged in the business of generation of electricity. The return of income for the year under consideration, i.e. A.Y. 2006-07 was filed by it on 18.11.2006 declaring total income at ‘NIL’. In the audit report filed along with the said return, the following note was given by the auditor of the assessee-company:- “The value of capital work-in-progress with respect to BTPS and STPS amounting to Rs.10,22,26,532/- & Rs.8,25,38,523/- respectively, made over to the company from capital WBSEB on 1st April, 2001 has been capitalized during the year 2005-06 with retrospective effect from the year 2001-02. In absence of relevant records and requisite documents of actual completion date, the work is deemed to have been completed as on 1st April, 2001 and the depreciation thereon has been charged in the books of accounts from the year 2002-03. As a result, the current year’s depreciation includes depreciation for the period 2002-03 to 2004-5 amounting to Rs.2,35,74,819/- for BTPS and Rs.1,94,13,061/- for STPS. This treatment is not in compliance with the accounting standard 10 issued by the ICAI”.
Since the assessee was following mercantile system of accounting, it was called upon by the Assessing Officer to explain as to why the prior period depreciation in respect of BTPS and STPS should not be disallowed. In reply, it was submitted by the assessee that Bandel Thermal Power Station (BTPS) and Santaldih Thermal Power Station (STPS) were made over to it by the Department of Power, Government of West Bengal with effect from 1st April, 2001 and the purchase consideration for the same
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 3 of 11 was subsequently accorded by the Government of West Bengal only on 14.01.2005. It was submitted that after getting the Government directives the value of the asset lying in capital working progress was transferred to fixed assets with effect from 1st April, 2001 and accordingly depreciation was charged from 01.04.2001. This contention of the assessee was not found acceptable by the Assessing Officer. According to him, the assessee was following mercantile system of accounting and therefore, prior period depreciation was not allowable as deduction in the current year. Accordingly, the claim of the assessee for prior period depreciation for BTPS and STPS was disallowed by the Assessing Officer.
The disallowance made by the Assessing Officer on account of prior period depreciation was challenged by the assessee in the appeal filed before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), the submissions made before the Assessing Officer on this issue were reiterated on behalf of the assessee. The same, however, did not find favour with the ld. CIT(Appeals) who proceeded to confirm the disallowance made by the Assessing Officer on account of prior period depreciation observing that there was no justification for claiming the earlier years’ depreciation in the year under consideration without matching income.
We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As pointed out by the ld. counsel for the assessee from the computation of total income given on page no. 1 of the paper book, the depreciation for the purpose of income-tax was claimed by the assessee as per the relevant provisions of the Act and the prior period depreciation in respect of BTPS and STPS was claimed only for the purpose of Companies Act. He has contended that the relevant auditor’s remark about prior period depreciation claimed by the assessee was based on depreciation schedule prepared by the assessee under the Companies Act and since no such prior period depreciation was claimed by the assessee while computing its total
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 4 of 11 income under the Income Tax Act, the disallowance of the same as made by the Assessing Officer and confirmed by the ld. CIT(Appeals) is not justified. The ld. D.R., on the other hand, has contended that this new stand taken on behalf of the assessee for the first time before the Tribunal requires verification by the Assessing Officer. We find merit in this contention of the ld. D.R. and since the ld. counsel for the assessee has also not raised any objection in this regard, we restore this issue to the file of the Assessing Officer for deciding the same afresh after verifying the claim of the assessee that no prior period depreciation in respect of BTPS and STPS was actually claimed by it while computing the total income for the purpose of income-tax. Ground No. 1 of the assessee’s appeal is accordingly treated as allowed for statistical purposes.
The common issue involved in Grounds No. 2 & 3 relates to the disallowance of Rs.47,93,00,000/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee’s claim for write-off of Boiler materials by treating the same as a capital loss.
In the Notes on Accounts filed by the assessee along with its return of income, it was mentioned by the auditor that the Company has written off Rs.47.93 crores during the year against old erected/available boiler materials of erstwhile Unit Nos. 1 & 2 of Bk TPP against opening balance of Rs.54.78 crores as on 1st April, 2005 keeping 10% salvage value pending final assessment of the realizable value of the materials. Keeping in view this note given by the auditor, the assessee was called upon by the Assessing Officer to explain as to why the amount written off should not be disallowed by treating the same as a capital loss. In reply, it was submitted by the assessee that the Government of West Bengal initially had decided to implement the project through Soviet Assistance but due to global disintegration, this financial tie-up was not materialised. Inspite of various pursuation from 1987 to 1992, the Corporation could not finalise any financial tie-up. At last, the proposal for implementation of the Project was posed to Government of India for grant as External Aid
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 5 of 11 Project funded by OECF, Japan, but the condition for granting of such loan by OECF was that the Project should be “Green Field Project”. Keeping in view this condition, it was decided by the Corporation to forego the expenditure already incurred on account of erection of boiler and the Board after considering the issue in detail accorded its approval for write off of Rs.47.93 crores in the accounts. It was contended on behalf of the assessee that the erection of Boiler did not amount to starting of a new business but the same being expansion or extension of business already inexistence, the write off of expenses incurred on such erection was allowable as deduction being revenue expenditure. In support of this contention, reliance was placed by the assessee on the decision of the Hon’ble Calcutta High Court in the case of Kesoram Industries & Cotton Mills Limited [196 ITR 845]. The contention of the assessee was not found acceptable by the Assessing Officer. He held that in case of Kesoram Industries & Cotton Mills Limited (supra) cited by the assessee, the facts involved were different, inasmuch as, the assessee had written off old erected boiler materials of Rs.47.93 crores by debiting the relevant expenditure under the head “miscellaneous expenses”. He held that the discarding of a Plant was a loss incurred on capital account and the same, therefore, was not allowable as revenue expenditure. Accordingly, the deduction of Rs.47.93 crores claimed by the assessee on this count was disallowed by the Assessing Officer.
The disallowance made by the Assessing Officer on account of its claim for deduction on account of write off of Boiler materials was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and the submissions made before the Assessing Officer on this issue were reiterated on behalf of the assessee before the ld. CIT(Appeals). The ld. CIT(Appeals), however, did not find merit in the said submissions and proceeded to confirm the disallowance made by the Assessing Officer on this issue by observing that the write off of Boiler materials was in the nature of capital loss.
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 6 of 11 10. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. counsel for the assessee has contended that this issue is squarely covered in favour of the assessee by the decision of the Hon’ble Calcutta High Court in the case of M/s. Binani Cement Limited –vs.- CIT (Income Tax Appeal No. 265 of 2009 dated 23.03.2015), wherein it was held that when construction/acquisition of new facility is abandoned at the work-in- progress stage, the expenditure does not result in an enduring nature and such expenditure, when the same is written off, has to be allowed under section 37 of the Income Tax Act, 1961. The ld. D.R., on the other hand, has contended that the facts involved in the case of the assessee are materially different from the facts involved in the case of M/s. Binani Cement Limited, inasmuch as, the boiler erected by the assessee was not a new facility and it was a case of discarding or abandoning of the old Boiler, as pointed out by the Assessing Officer in the assessment order. The ld. counsel for the assessee has contended that even in the case of the assessee, a new Boiler was being erected and the finding given by the Assessing Officer that it was a case of discarding of an old Boiler, is factually incorrect. He has urged that this matter may be sent back to the Assessing Officer for deciding the same afresh after verifying the relevant facts. Accordingly, the impugned order of the ld. CIT(Appeals) on this issue is set aside and the matter is restored to the file of the Assessing Officer for deciding the same afresh in the light of the decision of the Hon’ble Jurisdictional High Court in the case of Binani Cement Limited (supra) after verifying the claim of the assessee that there was no discarding of old Boiler already in existence but it was a case of new Boiler under erection, which was shown by the assessee as work-in- progress. Grounds No. 2 & 3 of the assessee’s appeal are accordingly treated as allowed for statistical purposes.
Now we take up the appeal of the assessee for A.Y. 2007-08 being ITA No. 1639/KOL/2010, which is directed against the order of the ld. Commissioner of Income Tax (Appeals)-VI, Kolkata dated 11.03.2010.
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 7 of 11
As regards Ground No. 1 raised by the assessee in this appeal, it is observed that the issue involved therein relating to the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of prior period depreciation in respect of KTPS and BTPS is similar to the one involved in Ground No. 1 of the assessee’s appeal for A.Y. 2006-07, which has already been decided by us in the foregoing portion of this order. Since the all the material facts of the case as involved in the year under consideration, i.e. A.Y. 2007-08 are similar to that of A.Y. 2006-07, we follow our conclusion drawn in A.Y. 2006-07 and restore the issue to the file of the Assessing Officer for deciding the same afresh as per the same direction as given in A.Y. 2006-07. Ground No. 1 of the assessee’s appeal for A.Y. 2007-08 is accordingly treated as allowed for statistical purposes.
The issue involved in Ground No. 2 of the assessee’s appeal for A.Y. 2007-08 relates to the disallowance of Rs.2,51,45,218/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of disallowance of provision made for bad debt on account of lease rental of BOBR Wagon.
In the Profit & Loss Account for the year under consideration, a sum of Rs.2,51,45,218/- was debited by the assessee on account of provision for BOBR Wagon under the head “miscellaneous expenditure”. During the course of assessment proceedings, the assessee was called upon by the Assessing Officer to explain the nature of the said provision as well as the allowability of the same under the Income Tax Act. In reply, the following submission was made by the assessee:- “WBPDCL has entered into an agreement with Railways for supply of 190 nos. BOBR Wagon for smooth transportation of coal in different power stations. Accordingly, above mentioned quantity of wagon was supplied to railways. While acknowledging the cost, the railway authority has considered the basis procurement price paid by us at actual. As per policy of the railway pay
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 8 of 11 lease rental charges on the basis of the last tender price of the wagon procurement by Indian Railway during the period or actual procurement price comes to Rs.18,61,498/- but railway authority has acknowledged the cost price only Rs.15,58,000/-. So, there is a difference in the basic cost price ab initio.
We lodged the claim to the railway as per our actual price for manufacturing of the wagon including ST, ET, IDC, pre-commissioning expenses, etc. which comes to Rs.18,61,498/- per wagon. But Indian Railway denied to accept the claim lodged at higher price, as such, we have no other alternative but to revise the entry by making provision to the extent of not acknowledged and debiting the interest receivables. So, only the realizable portion of Rs. 4,42,54,990/- has been considered for revenue recognition as per Accounting Standard 9 issued by the Institute of Chartered Accountant of India. Recognition of revenue requires that revenue is measurable and that of the time of sale or rendered the service, it would not be unreasonable to expect ultimate collection. As such, the uncertain portion of collection is reverse back on the plea that there is a doubt of recovery”.
The above submission made by the assessee was not found acceptable by the Assessing Officer. According to him, the assessee was following mercantile system of accounting by which every income as well as expenditure incurred/accrued or earned was required to be taken into account while working of the profits. He held that since the assessee had received rental of Rs.6,94,00,208/- for BOBR Wagon, which was duly credited in its Profit & Loss Account, the provision made for disputed rental income of Rs.2,51,45,218/- was not allowable as deduction. Accordingly, the provision for BOBR Wagons as made by the assessee was disallowed by him.
The disallowance made by the Assessing Officer on account of provision for BOBR Wagon was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and the following submission was made on behalf of the assessee before the ld. CIT(Appeals) in support of its case on this issue:-
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 9 of 11 “Provision for Bad debt on Lease Rental of BOBR Wagon of Rs.2,51,45,218/- (a) Ld. ACIT erred in considering that the assessee has received rental of Rs.6,94,00,208/- for BORB Wagon which has been duly credited in the Profit and Loss Account. But the facts remain that the assessee has actually received Rs.4,42,54,992/- and the remaining amount is not considered as recoverable by the Railway Authority.
b) The Supreme Court in the case of CIT vs. HCL Comnet System & Services Limited [2008J 305 ITR 409 had held that bad & doubtful debts should be viewed as a diminution in the value of an asset, rather than as provision towards an 'Unascertained liability'. Such a provision is not a provision for liability because even if the debt is not recovered, no liability can be fastened on the assessee.
c) The Supreme Court has also pointed out that where the books of account are duly certified as having been maintained in accordance with the Companies Act, the Assessing Officer has jurisdiction only to make such adjustments as provided in the Explanation to section 115JA.
d) Where a provision for doubtful debts is an ascertained liability or not has been disputed widely in the past. Notably, the Madras High Court rendered a decision in March 2000 in the case of Dy. CIT vs. Beardsell Ltd. (2000) 244 ITR 256 holding that the provision for bad debts cannot be termed as an ascertained liability, and therefore needs to be added back to the net profits for arriving at the book profit subject to MAT. However, distinguishing this decision, the Special bench of Kolkata ITAT rendered a decision in October 2006 in the case of Jt. CIT vs. Usha Martin Industries Ltd. (2007) 104 ITD 249 it held that the provision for bad debt is not a liability, per se, as no liability would be fastened upon the tax-payer even if the underlying debt is not recovered. It, therefore, concluded that the question whether the provision is an ascertained or unascertained liability does not arise.
(e) The controversy continued till September 2008 when the Supreme Court in the case of CIT vs HCL Comnet Systems & Services Limited [2008] 305 ITR 409 affirmed the view purported in Usha Martin's case allowing the deductibility of provision for doubtful debts. The Supreme Court has, in fact, held that the provision for doubtful debts is akin to the provision for diminution in value of assets.
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 10 of 11 (f) For that the Ld. ACIT erred in considering that bad debt is allowable as deduction u/s. 36(1 )(VII) only if it is written off as irrevocable in the books of the assessee is the previous year in which the claim for deduction is made. The nomenclature of provision for BORB Wagon is a technical term and it simply means money due becomes bad debts or writing off. The writing off bad debt, without charging the same in the profit and loss account is not written off at all. CIT-vs- Hotel Ambassador (2002) 121 Taxman 437 (Ker). Though no particular form or manner of writing off a debt is prescribed, a debt may be written off as irrevocable in the individual account of the debtor.
(g) For that the Ld. Assessing Officer erred in considering that the provision for BOBR Wagon does not fall either under any of the clause no.(a) to (f) of Section 115JB of Income Tax Act 1961 how the book profit will be added to that extent of Rs2,51,45,218/- the same addition should deserve to be deleted and corresponding imposition of MAT on that part is also deserved to be deleted”.
The above submission made by the assessee did not find favour with the ld. CIT(Appeals). He held that the bad debt was allowable as deduction under section 36(1)(vii) only if it was written off as recoverable in the books of the assessee and since this condition was not satisfied in the case of the assessee, the provision for bad debt was rightly disallowed by the Assessing Officer.
We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. counsel for the assessee has submitted that the assessee had received only Rs.4,42,54,990/- on account of rent for BOBR Wagon and not Rs.6,94,00,208/- as assumed by the Assessing Officer. He has contended that the balance amount of Rs.2,51,45,218/- was in dispute as the same was not accepted by the Railways and since the recovery of the same was very much doubtful, the assessee had written off the said amount as irrecoverable. The ld. D.R., on the other hand, has contended that these contentions now made by the ld. counsel for the assessee are contrary to the findings recorded by the Assessing Officer as well as by the ld. CIT(Appeals) while deciding this issue against the assessee. He has
I.T.A. No. 834 & 1639/KOL./2010 Assessment Years: 2006-2007 & 2007-2008 Page 11 of 11 contended that the same, therefore, require verification by the Assessing Officer as the aspect as to whether the amount in question provided by the assessee as bad debt on account of BOBR Wagon rent was written off in the books of account or not is a crucial aspect to decide this issue. We find merit in this contention of the ld. D.R. Accordingly, the impugned order of the ld. CIT(Appeals) on this issue is set aside and the matter is restored to the file of the Assessing Officer for deciding the same afresh after verifying the claim of the assessee that the amount in question was never received by it from Railways and the same was written off in the books of account as irrecoverable. Ground No. 2 of the assessee’s appeal for A.Y. 2007-08 is accordingly treated as allowed for statistical purposes.
In the result, both the appeals of the assessee are treated as allowed for statistical purposes. Order pronounced in the open Court on December 02, 2016.
Sd/- Sd/- (N.V. Vasudevan) (P.M. Jagtap) Judicial Member Accountant Member Kolkata, the 2nd day of December, 2016 Copies to : (1) The West Bengal Power Development Corporation Limited, Bidyut Unnayan Bhawan, Plot-3/C, LA-Block, Sector-III, Salt Lake, Kolkata-700 098 (2) Assistant Commissioner of Income Tax, Circle-5, Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, 8 th Floor, Kolkata-700 069 (3) Commissioner of Income Tax(Appeals)-VI, Kolkata; (4) Commissioner of Income Tax- , Kolkata, (5) The Departmental Representative (6) Guard File By order
Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.