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Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: Shri N.V.Vasusdevan & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
These are cross-appeals by assessee and Revenue against common order of Commissioner of Income Tax (Appeals)-XXXII, Kolkata dated 28.01.2009. Assessment was framed by JCIT, Range-12, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.12.2007 for assessment year 2005-06.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 2 Shri Harakamal Chakraborty, Ld. Authorized Representative appearing on behalf of assessee and Shri Rajat Subhra Biswas, Ld. Departmental Representative appearing on behalf of Revenue.
Both the appeals are heard together and are being disposed of by way of this common order for the sake of convenience. First we take up assessee’s appeal ITA No.581/Kol/2009 AY 05-06. 3. Grounds raised by assessee together with additional grounds are reproduced below:- “A On assessment u/s 115JB 1. For that the CIT(A) erred in dismissing the additional ground of appeal no. 3 of the appellant that it was not liable to pay any tax under section 115JB. 2. For that the CIT(A) erred in rejecting the ground of appeal no. 16 of the appellant hat in the event the provision for deferred tax was not allowed as a deduction for determining the book profit, then the amount of deferred tax assets that was included in the brought forward loss be also excluded for determining the brought forward loss for the purpose of clause (iii) of the Explanation to sub-section (2) of section 115JB. 3. For that while granting relief in respect of ground of appeal no. 17 the CIT(A) erred in directing the AO to reduce the dividend income of Rs.18,81,89,000/- by the expenditure directed to be disallowed under section 14A red with rule 8D. 4. For that the provisions of section 234B and 234C have no application in case of computation of income under section 115JB.
B. On assessment under the normal provisions of the Income-tax Act. 5. For that the CIT(A) erred in holding that deferred revenue expenses amounting to Rs.154.64 million were not deductible in computing income under the Income-tax Act. 6. For that the CIT(A) erred in dismissed the alternative ground that the deferred revenue expenses amounting to Rs.154.64 million were required to be included in the actual cost of the assets for allowing depreciation under section 32 of the Income-tax Act. 7. For that the CIT(A) erred in upholding the disallowance of the payment of Rs.90.36 million made to WBIDC as unsubstantiated. 8. For that the CIT(A) erred in holding that the provisions of section 14A and rule 8D were applicable in respect of the dividend of Rs.18,91,89,000/- and in directing the AO to calculate the disallowance under section 14A as per rule 8D. Additional Grounds of appeal
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 3
For that in any event the provisions of section 234B and 234C are not attracted in a case where there was no liability to pay any advance tax under section 208 on any of the due dates for payment of the advance tax installments and that there is retrospective amendment of the low long after the close of the financial year imposing liability for tax.
During the course of hearing before us, Ld. AR of assessee did not press for grounds No. 1 and 4 and same stand dismissed as not pressed.
The first issue raised in ground no. 2 by the assessee is that ld. CIT(A) erred in confirming the order of the AO by adding the deferred tax liability of Rs. 243.670 lacs in book profit but not excluding the amount of deferred tax assets included brought forward loss.
5.1 During the year under consideration, AO while computing the book profit under the MAT provisions of the Act, has added the deferred tax liability on account of following reasons :
5.2 The AO treated the deferred tax liability as unascertained liabilities. The AO also observed that deferred tax is nothing but income tax which arises due to timing difference. It is the difference between the taxable income and accounting income that originate in one period in the form of deferred tax assets or deferred tax liability but the same can be reversed in one or more subsequent periods.
5.3 The deferred tax is nothing but income tax. The Act does not differentiate between current income tax and deferred income tax. Therefore the same was added for the working of book profit. 5.4 The claim of the assessee for excluding the deferred tax assets embodied in the brought forward loss while working out the MAT liability was also disregarded on the ground that the matter is sub judice with the higher authorities of the same assessee for the other assessment year. So the plea of the assessee cannot be accepted.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 4 6. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who dismissed the appeal of the assessee by observing that the amount of deferred tax liability is to be added back in terms of clause (h) of Explanation 1 to Sec. 115 JB of the Act which states that ‘the amount of deferred tax and provision therefor’. The Ld CIT(A) also held that the deferred tax liability is nothing but unascertained liability. The relevant extract of his order reproduced as under:- “ The A.O in its order has very clearly brought out the relevant extract of the observation of Hon'ble Apex Court in this judgment in J.K. Industries Ltd. Vs. UOI which is reproduced hereunder:-
‘To sum up deferred tax is nothing but accrual of tax out of divergence between account profit and tax audit. This difference arises on to counts namely, different treatment of items of revenue / expenses as per profit and loss account and as per tax liability. It also arises difference between revenue/expense as per P & L a/c and the corresponding amount considered for tax purpose e.g. depreciation.’
Hon'ble Apex Court in its said judgment has definitely held that the (AS- 22) requires in the same judgment the Hon'ble Apex Court has held that is nothing but accrual of tax out of divergence between accounting profit and tax profit and as such the same cannot be held as an allowable adjustment as per provision of sec. 115JB. Even otherwise an amendment has been brought in sec. 115JB by Finance Act 2008 w.r.e.f 01.08.2001. vide this amendment, a new clause(f) is introduced in Explanation 1 to section 115JB by which ‘the amount of deferred tax and the provision therefore; if debited to the profits and loss account, the net profit as shown in the profit and loss account should be increased by that amount for the purposes of determining ‘book profits’ under that section. Hence, the action of the AO in this regard is confirmed. The assessee’s other contention raised in ground No. 15 does not have any locus standi in the eyes of law since the fact remains that the amount of deferred tax is on account of divergence between account profit and tax profit and as such not an item for which adjustment is allowed as per the provisions of section 115B irrespective of its certainty/uncertainty of accrual. Hence this ground of assessee stands dismissed.”
The plea of the assessee that the amount of deferred tax assets embodied in the brought forward loss should be excluded while working out the MAT
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 5 liability was rejected by the ld. CIT(A) on the ground that the provisions of the Act are very clear as mentioned in sub-clause (iii) of explanation to section 115JB. It states that “LOSS BROGHT FORWARD OR UNABSORBED DEPRECIATION WHICHEVER IS LESS AS PER BOOKS”. So brought forward loss means loss as reflected in the profit/loss account.
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. AR has filed a paper book which is running in pages from 1 to 286 and also supplementary paper running in pages 1 to 33 along with the case compilation book of various courts from pages 1 to 196 respectively. Ld. AR stated that Sec. 115JB of the Act stipulates that c/f loss or unabsorbed depreciation whichever is less is deductible from the current year’s book profits, for the financial year 2004-05 (AY 2005-06), the assessee reduced Rs.212.80 crores from the book profit of that year being the c/f loss as on 31.03.2004 which was lower than the c/f unabsorbed depreciation of Rs.386.76 crores. However, the said loss of 212.80 crores was computed after taking into account credit of Rs.333.20 crores on account of deferred tax assets as it was the understanding of the assessee that deferred tax assets and deferred tax liabilities formed part of the book profits. The assessee had also informed the Assessing Officer vide letter dated 27.12.2007 as to how the said amount of Rs.212.80 crores was determined. On the other hand, Ld. DR vehemently relied on the orders of Authorities Below.
7.1 From the aforesaid discussion, we find that the AO has disallowed the deferred tax liability while working out the profit under the provisions of MAT. The AO treated the liability as unascertained liability. The AO also held that deferred tax is nothing but the income tax only therefore the same was disallowed and added in the working of MAT under section 115JB of the Act.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 6 The assessee has taken the alternate plea before the AO and ld. CIT(A) that the brought forward loss contains the amount of deferred tax assets and which should be excluded while working out the MAT liability. But the AO disregarded the plea of the assessee on the ground that the matter is sub judice with the higher authorities of the same assessee for the other assessment year. The same plea of the assessee was also rejected by the ld. CIT(A) on the ground that the provisions of the Act are very clear as mentioned in sub-clause (iii) of explanation to section 115JB which states that “LOSS BROGHT FORWARD OR UNABSORBED DEPRECIATION WHICHEVER IS LESS AS PER BOOKS”. So brought forward loss means loss as reflected in the profit/loss account. We find from the provisions of the Act and various judicial pronouncement that for the levy of the tax under the provisions of MAT the assessee has to work out the profit in the manner as prescribed in explanation 1 to section 115JB(2) of the Act. As per the provisions of the Act the manner for working out the profit cannot be altered as per the requirement of the assessee. The relevant provision of the law is reproduced below : 115JB.(1) (2) Explanation [1].- For the purposes of this section, , “book receipt” profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a)--- (b)--- ----------- (h) the amount of deferred tax and the provision therefor, ------- if any amount referred to in clause (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account, and as a reduced by,-]]] ---- [(iii) the amount of loss brought forward or not so the depreciation whichever is less as per books of account.
From the plain reading of the provisions of this section 115JB of the Act, it is clear that the amount of loss brought forward or unabsorbed depreciation
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 7 whichever is less as per books will be reduced from the amount of book profit. So in the instant case the plea of the assessee that the amount of the deferred tax assets included in the brought forward loss should be excluded from the said amount is not tenable. We are also relying in the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. and Kinetic Motor Co. Ltd. v. DCIT [2002] 262 ITR 330 (Bom) held that the AO does not have the jurisdiction to go beyond the net profit shown in the audited Profit and Loss Account which was accepted by shareholders and filed with Registrar of Companies, except to the extent provided in explanation to Sec. 115JB of the Act. The accounts of the taxpayer were duly certified by the auditors and the same was accepted by shareholders in the Annual General Meeting which was filed with Registrar of Companies and as per the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) and Hon'ble Bombay High Court in the case of Kinetic Motor Co. Ltd. the AO cannot make any adjustments to the book profits of the taxpayer once it was certified by the auditors. Accordingly, in our considered view, we find no infirmity in the order of the ld. CIT(A), hence this ground of appeal of the assessee is dismissed
Next issue raised by assessee by way of ground no. 3 is that ld. CIT(A) erred in not allowing the expenditure disallowed u/s 14A of the Act while reducing the dividend income for the MAT.
8.1 The AO has not allowed the deduction of the dividend income while working out the liability under the MAT but the ld. CIT(A) reversed the order of the AO. However, Ld. CIT(A) directed the AO to reduce the expenditure from the dividend income which have been disallowed under section 14A of the Act.
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 8 9. We have heard rival contentions and perused the materials available on record. Before us Ld. AR submitted that the aforesaid direction is ultra vires of the Act. As per Sec. 14A(1), it applies to total income computed under Chapter IV of the Income Tax Act whereas income under section 115JB is computed under Chapter XIIB of the Income Tax Act. Consequently Rule 8D which is notified under section 14A is also inapplicable to income determined under section 115JB. In any case, Rule 8D of the Income-tax Rules came into force from 24.03.2008 and hence was not in force during the relevant assessment year. Rule 8D will take effect from assessment year 2008-09. This has been decided by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai vs DCIT (2010) 328 ITR 81 (Bom).On the other hand the ld. DR vehemently relied on the orders of authorities below.
We find in terms of clause (f) to explanation 1 of section 115JB of the Act that any expenditure incurred in relation to the income to which the provisions of section 10 applies then the book profit will accordingly be reduced by the said expenditure. The relevant extract of the provision is reproduced below. 115JB.(1) (2) Explanation [1].- For the purposes of this section, , “book receipt” profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a)--- (b)--- ----------- (f) the amount or amounts of expenditure to any income to which section 10 (other than-------------apply ---------- (h) the amount of deferred tax and the provision therefor, ------- From the plain reading of the provisions of this section 115JB of the Act, it is clear that the expenditure incurred in relation to dividend income then the book profit as per section 115JB will stand increased by that amount. However the assessee submitted that the Rule 8D of the IT Rules, 1962 came in force from 24.03.2008 so disallowance under section 14A is not applicable for the year under consideration. However we disagree with the view of ld. AR in
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 9 terms of the provisions of section 115JB of the Act which are self explanatory. Accordingly in our considered view we find no infirmity in the decision of the ld. CIT(A), hence this ground of appeal of the assessee is dismissed.
Next issue raised by assessee by way of additional ground no. 1 is that provisions of Section 234B and 234C of the Act have no application in case there was no liability to pay any advance tax under section 208 but the liability arose as a result of the retrospective amendment of the law.
The assessee for the year under consideration was liable to pay tax under the provisions of MAT under section 115JB of the Act. The book profit as specified under section 115JB of the Act was increased due to the retrospective amendment under the statute i.e. clause (h) & (i) to explanation 1 of section 115JB(2) of the Act by the Finance Act 2008 w.r.e.f. 1-4-2001 AND by the Finance Act 2009 w.r.e.f. 1-4-2001 towards ‘the amount of deferred tax and the provision therefore’ and ‘provisions for diminution in the value of assets’ respectively. As a result the interest under section 234B and 234C of the Act was levied for the short payment of advance tax.
At the outset, we find that the issue is squarely covered in favour of the assessee in terms of Hon’ble jurisdictional High Court in the case of Emami Ltd. Vs. CIT (2011) 337 ITR 470 (Cal). The head note of the order reads as under : “Interest under ss. 234B and 234C – Chargeability – Retrospective amendment of law- There was no liability of the assessee to make payment of the advance tax on the last day of the financial year i.e. 31st march, 2001 when its book profit was nil according to s. 115JB – Provision of s. 115JB having been amended by the Finance Act, 2002, with retrospective effect from 1st April, 2001, the assessee cannot be held defaulter of payment of advance tax – Where on the last date of the financial year preceding the relevant assessment year, the assessee had no liability to Assessment Year advance tax, he cannot be asked to pay interest in term of s. 234B and s. 234C for default in making payment of tax in advance which was physically impossible.”
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 10 As the issue is already covered by the decision of Hon'ble jurisdictional High Court in favour of assessee, we accordingly direct the AO not to charge any interest under section 234B & 234C of the Act on account of retrospective amendment in clause (h) & (i) to explanation 1 of section 115JB of the Act. Hence we allow this ground of appeal of the assessee.
The next issue raised in ground no 5 & 6 by the assessee in this appeal is that Ld. CIT(A) has erred in confirming the order of A.O by disallowing the deferred revenue expenses for Rs. 15.46 crores.
Before coming to the specific issue let us understand the background of the case. The assessee has incurred several expenses prior to the commencement of commercial production from the assessment year 1985-86 to 2001-02. The commercial production started w.e.f. 01/08/2001. Expenses incurred prior to the commencement of business are Rs.805.65 million. As per the policy followed by the assessee these expenses were to be written off over a period of five years beginning from the assessment year 2002-03 and ending in the assessment year 2007-08. Accordingly the deferred revenue expenses were claimed in the following manner: S.No Assessment Year Amount 1. 2002-03 10,30,83,570/- 2. 2003-04 15,46,25,355/- 3. 2004-05 15,46,25,355/- 4. 2005-06 15,46,25,355/- 5. 2006-07 15,46,25,355/- 6. 2007-08 5,15,41,785/-
From the above facts, we find that assessee has claimed deferred revenue expenses in earlier years as well but the same was not disputed by the Revenue. However, for the year under consideration the A.O. has disallowed the deferred revenue expenditure for an amount of Rs. 15.46 crores.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 11 The assessee during the year has claimed deferred revenue expenditure for an amount of Rs. 15.46 crores under section 37 of the Act. The AO during the assessment proceedings sought the clarification as to why this expense should be allowed. On being questioned by the AO about the allowability of deferred revenue expenditure, the assessee submitted that the deferred revenue expenditures are on account of amortization of miscellaneous expenses that were incurred prior to the start of the commercial production. The assessee submitted that the deferred revenue expenditures were claimed in terms of guidance notes issued by the ICAI. As per the guidance note the good corporate practice recognizes the need to write off these expenses to profit & Loss account within a period of 3-5 years after the commencement of commercial production. In consonance with the above accounting practice, the assessee has been amortizing the said preliminary cost over five years. The assessee also relied on the decision of the Supreme Court in CIT vs up State Industrial Investment Corporation (1997) 225 ITR 703 and Challapalli Sugar Limited vs CIT (1975) 98 ITR 167.The assessee also submitted that these deferred revenue expenditure pertains to the assessment years starting from AY 1985-86 to 2001-02. However, the AO has disregarded the claim of the assessee by considering that the amount of amortized expenses and its allowability needs to be determined as per the provisions of the Act. There is no provision under the Act for claiming the deferred revenue expenditure. All the deferred revenue expenditures are revenue in nature and should have been claimed in the year of its incurrence. Accordingly, the A.O. has disallowed the deferred revenue expenditure and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before the Ld. CIT(A). Before Ld. CIT(A) assessee has claimed the deferred revenue expenditure as per the Guidance Note issued by ICAI on expenditure incurred during construction period. The assessee has amortized this deferred revenue expenditure amounting to Rs. 805.65 million for a period over five years after the
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 12 commencement of commercial production on 01.08.2001. The same has been allowed by the A.O. in earlier years. Ld. AR claimed that if this deferred revenue expenses cannot be claimed as an expense u/s 37 then assessee should be allowed to capitalize this expense and same is deductible u/s 32.
However, Ld. CIT(A) observed that the assessee itself accepts that these are the expenses not pertaining to the assessment year under consideration. These expenses have been incurred in earlier years. As per the income tax provision, there is no concept as deferred revenue expenditure. Any expense can either be revenue or capital in nature. Contention of assessee that expenses should be allowed u/s 32 is also not tenable as no capital asset has come into existence.
Being aggrieved by this order of Ld CIT(A) assessee is in second appeal before us.
The ld. AR before us submitted that there were indirect expenses incurred prior to the commencement of commercial production of the assessee factory on 01.08.2001 and as per the guidance note of the institute of Chartered Accountants of India on treatment of expenses during the construction period, the same were treated as deferred revenue expenses and charged to profit and loss account @ 1/5 p.a. over five years. The learned AR also relied on the decision of Hon’ble Supreme Court in case of CIT vs. UP State Industrial Investment Corporation (1997) 225 ITR 703 and Challapali Sugar Limited v. CIT (1975) 98 ITR 167 the accounting principles are to be followed for determination of income under the income tax Act and hence the amount of deferred revenue expenses charged in the profit and loss account is allowable u/s 37 of the Act. Both AO and the CIT(A) have rejected the same in all the three assessment years on the ground that IT Act recognizes only capital and revenue expenses and not deferred revenue expenses. But they have not substantiated the same with reference to any provisions in the
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 13 Income Tax Act or any judgment. Ld. AR has relied on the citation of the Tribunal decision in case of Virtual Soft Systems Vs. ACIT [2010] 38 SOT 412(Delhi) where it was held that Guidance notes issued is binding and revenue cannot reject it easily. He further relied on the jurisdictional High Court in case of India Steamship Co. Ltd. Vs. Joint Commissioner of Income Tax & ors. (2005)194 CTR (Cal) 386; Eq: (2005) 275 ITR 155 (Cal) has denied the claim of the Revenue that there is no concept of deferred revenue expenditure in the act and assessee can claim the deduction of the amount incurred before the commencement of commercial production over a number of years. Hon’ble Supreme Court in case of Madras Industrial Investment Corporation Limited vs. CIT [1997] 225 ITR 802 (SC) has also upheld the principle of deferred revenue expenses. The ld. AR also pleaded that the deferred revenue expenses can also be allowed to be capitalized under section 32 of the Act.
From the aforesaid discussion, we find that the assessee has incurred expenses prior to the commencement of business and classified as deferred revenue expenditure. The assessee started claiming those expenses after the commencement of business 1/5th over the period of 5 years. However, the lower authorities disallowed the same on the ground that there is no provision under the Act to claim the deferred revenue expenses. From the facts of the case we observe that the AO is not skeptical about the genuineness of the expenses incurred. The whole amount of Rs. 154.64 million has been incurred in connection of business prior to the commencement of commercial production. Any expense incurred in connection to the business is an allowable expenditure. From the above explained citations of the cases denying the non existence of deferred revenue expenditure term in the act is not reasonable and tenable. In our considered view, all the expenses incurred prior to the commencement of production should be capitalized with the fixed assets of the assessee and depreciation should be allowed thereon accordingly as per law. In this connection, we are relying in the decision of
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 14 Hon'ble Supreme Court in the case of Challapalli Sugars Ltd v. CIT (1975) 98 ITR 167 (SC) where the head notes is as reproduced:- “As the expression “actual cost” has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plan, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure.
We are also relying in the guidance note issued by the Institute of Chartered Accountant of India on treatment of expenditure during construction period where it was recommended that the indirect expenditure incurred during the construction period should be capitalized as part of indirect construction cost to the extent to which the expenditure is indirectly related to construction or if incidental thereto. An illustrative list of such possible items of expenditure which would qualify for inclusion for the purpose of capitalization has been provided including the following:- “(a) Expenditure on employees who are either assigned to construction work or to supervision over construction work including salaries, provident fund and other benefits, staff welfare expenses, etc. (b) Expenditure on technical and other consultants. © General administrative and office expenditure which is indirectly related or incidental to construction, including, as may be appropriate, stationery and printing, rent, rates and taxes, postage and telegrams, travel and conveyance etc. (d) Appropriate insurance charges. (e) Appropriate expenditures on maintenance and operation of vehicles. (f) Appropriate expenditures in connection with temporary structures and service facilities built or acquired specially for the purpose of construction (see paragraphs 9.4 and 9.5 of this Note). (g) Preliminary project expenditure to the extent to which it is capitalized as part of the construction cost (see paragraph 3 of this Note).
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 15 (h) Financial expenses including interest and other similar charges (see paragraph 4 of the Note). (i) Depreciation on fixed assets as well as on temporary structure and other facilities used during the period of construction (see paragraph 9.4 and 9.5 of this Note). (j) Expenses on test runs (see paragraph 11 of this Note). (k) Expenses on land grading and leveling (see paragraph 96 of this Note).
Taking a consistent view by the decision of Hon’ble Supreme Court and reliance in the aforesaid guidance note we reverse the orders of authorities below. Hence, this ground of the assessee is allowed.
Next issue raised by the assessee by way of additional ground no. 7 is that the ld. CIT(A) erred in confirming the order of AO by disallowing the payment of Rs.90.36 million to WBIDC on account of consultancy expenses.
The assessee has claimed an expenditure for an amount of Rs. 9037.60 lacs which was paid to WBIDC on account of consulting services being provided in relation to financial matters like financial restructuring undertaken, Initial Public Offer from October 2004. The AO during the assessment proceedings observed that WBIDC is a person specified u/s 40A(2)(b) i.e. person having substantial interest in the assessee company. Accordingly the AO asked the assessee to furnish the complete details of the payment like services rendered, basis of payments, copy of the agreement, supporting documents etc. The assessee could not substantiate the expenditure except the memo of charge as an evidence of the transaction. Hence the AO made the addition to the total income of the assessee.
20 Aggrieved, assessee preferred an appeal to ld. CIT(A) where the assessee submitted that as per the provisions of section of section 40A(2)(a) if the AO is not satisfied he can disallow the expenditure to the tune of the amount in excess of the fair market value of that goods or services provided
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 16 by the party having substantial interest in the assessee. Further the payment can also be disallowed by the AO if it is not made in connection of the business or profession of the assessee. But here the AO has not disputed on the reasonableness of amount of the payment or regarding the incurrence of expense wholly and exclusively for the business or profession. It means that the AO is satisfied that this amount of expense is exclusively for the business and profession then, it should be allowed u/s 37(1) of the Act. The ld. CIT(A) has observed that section 40 A(2)(b) of the Act becomes applicable only when the reasonableness, relevance and reason of such expenditure incurred for the business is proved by the assessee. Here assessee was not able to produce any such evidence in support of its claim of this expenditure as well as for the genuineness of this payment. Failure to produce the documents required by the AO invoked him to add this expenditure to the income of the assessee. In the numerous decisions i.e. Dey’s Medical Stores Mfg. (P) Ltd. v CIT (1986)162 ITR 630 (Cal) and CIT v Transport Corporation of India Ltd (2002) 256 ITR 701 (AP) the Courts have held that mere payment by itself will not entitle the assessee to deduct this expenditure unless the same is proved to be paid for commercial considerations. The burden of proof is always upon the assessee. The ld. CIT(A) has also relied in the following decisions : 1. Ramanand Sagar Vs. Deputy CIT (2002) 256 ITR 134 – The Hon’ble court held that just debiting will not make that expense allowable. Assessee furnished Xerox copies of bills and vouchers. In this case AO was not satisfied with the justification of the assessee and hence disallowed this expense. It was held by the High Court that disallowance made by the AO. was held to be order. 2. Malayala Manorama Co. Ltd Vs. CIT (2006) 284 ITR 69 It was held that while computing the income chargeable under the head Profit and gains from business and profession only those expenditure which are incurred wholly and exclusively for the purpose of business and profession alone shall be allowed.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 17 In view of above, Ld. CIT(A) held that assessee could not provide any supporting documents in support of this claim regarding the genuineness and the quantum of expenditure. Accordingly the ld. CIT(A) upheld the action of AO.
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. AR argued that there is no any ambiguity regarding the amount expensed of as well as same has been expensed off wholly and exclusively for business or profession hence it should be allowed as an expense. From the aforesaid discussion we understand that the consultancy charges paid by the assessee was disallowed by the AO on the ground that assessee failed to furnish supporting evidence. Besides the AO also observed that the payment was made to the specified person in terms of section 40A(2)(a) of the Act. The learned CIT(A) also confirmed the order of AO by observing that it was the duty of the assessee to make available the supporting evidence at the time of assessment. However from the records we find that WBIDC is a state level financial institution and engaged in providing equity capital and project financing to industrial units being set up in the state of West Bengal. We further find that the payment has been made to the government organization and the AO has not exercised his power under section 133(6) of the Act for the clarification by issuing show cause notice to the party before making the disallowance. We also find that the order of the AO is silent about the deduction of TDS from the payment of the consultancy charges to the party. Accordingly in the interest of Justice and fair play we’re inclined to the restore this file to the AO for fresh adjudication as per law after giving opportunity to the assessee. We also direct the AO to issue show cause notice to WBIDC under section 133(6) of the Act for the necessary details and
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 18 clarification as required under the provisions of law. In view of the above this ground of appeal of the assessee is allowed for statistical purpose.
The next issue raised by the assessee is regarding the disallowance made by the AO under section 14A as per Rule 8D.
During the year the assessee has earned dividend income amounting to Rs. 18,91,89,000/- from the Investment made in HPL Cogeneration Ltd. which has been claimed as exempted income under sec 10(34). AO observed that the assessee has not added back the relevant expenditure for earning this exempted income. The assessee was asked to furnish the details as to why the proportionate management expenditure should not be added back to the income of the assessee. Ld. AR submitted that as per Sec. 14A of the Act all those expenses are disallowed which are directly attributable to earn this dividend income. No management expense is directly incurred by the assessee to earn this dividend income. Assessee stake in that company is very less in the company and it is just an investor in that company. However the AO outrightly rejected the submission of the assessee on the reasoning that certain amount of expenditure must have been incurred like administration expenses, establishment expense etc. to earn this exempted income and so disallowed @ 5% of total dividend income i.e. Rs.94,59,450/-.
Aggrieved, assessee preferred an appeal before Ld. CIT(A). Before Ld. CIT(A) Ld. AR has given explained sec 14A that as per this section only those expenses are disallowed which are directly identifiable to be incurred to earn that exempted income. Here assessee is holding only a minor stake that too only in one company. The assessee also submitted that it was held in ITAT Mumbai Bench in ITA No.8057/Mum/03, ITA No. 1372/Del/2005, ITA No.183/Del/2005 and ITA No.2048/Del/2005 that Rule 8D read with section 14A of the act will be applicable in case of all pending proceedings as on
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 19 24.03.2008 including appeals. However the ld. CIT(A) disregarded the claim of the assessee and upheld the order of the AO.
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. AR submitted that under section 14A(1) disallowance can be made only in respect of “expenditure incurred.” Here the assessee has not incurred any expenditure in relation to dividend income. Hence Provision of section 14A do not apply at all. Assessee has relied on citation of the following cases: 1.CIT vs. Hero Cycles Ltd [ 323 ITR 518]- P&H High Court 2. Maxopp Investment Limited vs. CIT [(2012)347 ITR 272 (Delhi High Court)] 3. CIT vs. Torrent Power Ltd. [2014] 363 ITR 474 (Gujarat High Court)
It was held that Rule 8D was not applicable in the AY 2005-06 to 2007- 08.Rule 8D came into existence from 24.03.2008 and hence it was not applicable for the assessment year under consideration. In this support Ld.AR has relied on the judgement of Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd.Mumbai Vs. DCIT [(2010) 328 ITR 81 (Bom)] On the other hand, Ld. DR vehemently relied on the orders of authorities Below. On perusal of appellate order, we find that direction has been issued to Assessing Officer for making disallowance in terms of provision of Sec. 14A r.w.s. 8D of the IT Rules, 1962. However we understand that the Rule 8D of the IT Rules came into effect from 24.03.2008 and the instant case before us is for AY 2005-06. Therefore, the provisions of Rule 8D of the IT Rules is not applicable in assessee’s present case. We further find that prior to insertion of Rule 8D of the IT Rules various courts have held that the disallowance in terms of provision of Sec. 14A of the Act should be restricted @ 1% of dividend income. On the other hand the ld. DR vehemently supported the
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 20 order of authorities below. However we disagree with the order of the lower authorities and put our reliance in GA No. 3019 of 2012 in ITAT No. 243 of 2012 of Hon'ble jurisdictional High Court in the case of CIT v. M/s R.R.Sen & Brothers (P) Ltd., where the Hon'ble court has held: “The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere. The appeal is dismissed.”
In this view of the matter, we reverse the orders of authorities below and directed the Assessing Officer to make disallowance @ 1% of dividend income. Accordingly, this ground of assessee’s appeal is allowed in part.
In the result, assessee’s appeal is partly allowed for statistical purpose. Coming to Revenue’s appeal in ITA No. 587/Kol/2009 AY 05-06. 27. Grounds raised by Revenue are as under:- “1. On the facts and circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs.1,20,90,000/- arisen as a result of revaluation of sundry creditors which is notional loss and contingent in nature. 2. On the facts and circumstances of the case, the Ld. CIT(A) is not justified in deleting the amount of Rs.13,55,80,000 on a/c of expenses claimed on freight. 3. On the facts and circumstances of the case,, Ld. CIT(A) has erred in deleting the addition of Rs.1240 Million accepting the change of accounting method as bonafide. 4.On the facts and circumstances of the case,, Ld. CIT(A) was not justified in accepting revised return, the accounts of which was not laid before the AGM of the assessee Company. 5. On the facts and circumstances of the case, the Ld. CIT(A) is not justified in deleting the addition of Rs.21.619 Million made in the computation of book profit on a/c of doubtful advances and doubtful debts.”
The issue raised by Revenue in ground number 1 in this appeal is that learned CIT(A) erred in deleting the addition made by the AO for Rs.1,20,90,000/- on account of year end adjustment in loss on foreign exchange account due to revaluation of sundry creditors and SBI MMD
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 21 account. The assessee has debited the profit and loss account by an amount of Rs.1,20,90,000/- on account of difference arising from the foreign exchange in the value of sundry creditors account and MMD SBI account. The above said difference was recorded on the last day of the financial year while preparing the financial statements. The AO observed that it is a notional loss and represents contingent liabilities which have not been actually incurred by the assessee. Therefore the same was disallowed by the AO and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to learned CIT(A) where it was submitted that the assessee is following mercantile system of accounting. The difference on account of foreign exchange in the value of sundry creditors and SBI MMD account at the end of financial year was recorded in the profit and loss account in terms of accounting standard 11 issued by the Institute of Chartered Accountants of India. The assessee has also relied in the decision of Hon’ble Supreme Court in the case of Shri Sajjan Kumar Mills Limited versus Commissioner of income tax where it was held that the provisions in the accounts on account of difference in foreign exchange should be made by the company following mercantile system of accounting which are having effect on liabilities and as a result on the quantum of profits. It is well settled that pre-existing liabilities should be adjusted in the light of foreign exchange under mercantile system of accounting. The claim of the assessee cannot be denied merely on the ground that it is just a provision and no amount has been paid. Accordingly the learned CIT(A) has deleted the addition made by the AO by observing as under:- “the appellant’s contention in this regard is found to be acceptable, since the AR of the assessee vide his letter dt. 15.01.2009 has confirmed that the sundry creditors under this account were on revenue account and not on capital account. Since, it is submitted that such exchange fluctuation has arisen on account of normal business transactions of material procurement etc., it is an allowable deduction u/s. 37(1). I agree with the contention of the appellant and hence this ground is allowed.”
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 22 Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently supported the order of AO and on the other hand the learned AR relied on the order of Ld CIT(A) and filed a paper book which running from pages 1 to 97. From the aforesaid discussion, we find that the AO treated the difference arising on account of foreign exchange in the value of sundry creditors as notional loss and contingent liability which the assessee has not incurred so it was disallowed. However we strongly disagree with the view of the AO on the ground that this year and adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. The relevant extract of accounting standard 11 is reproduced below:- “3.6 The Accounting Standards (A) 11, the Effects of changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004. Relevant extract of the Accounting Standard is reproduced as follows:- ‘9. A foreign currency transactions should be recorded on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transactions. 10… 11 (a) At each balance sheet date foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g. where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should b reported in the reporting currency at the amount which is likely to be realized from, or required to disburse, such item at the balance sheet date: 11(b)…. 11(c)… 12. Cash receivables and payables are examples of monetary items….
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 23
Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise…”
At this juncture we also wish to reproduce the provisions of section 145 of the Act which reads as under:- “3.4 As per section 145 of the Act, ‘(1) Income chargeable under the head “Profits and gains of business or profession” or “income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.”
We also find support from the decision of Hon’ble Delhi High Court in the case of CIT vs Woodward Governor India Private Limited [2007] 294 ITR 451 (Del) where it was held that:- “We affirm the decision of the Income-tax Appellate Tribunal in Oil and natural Gas Corporation Ltd. V. Deputy CIT (Asstt.) [2003] 261 ITR (AT) 1 (Delhi) which rightly follows the settled position as explained in the judgment of the Hon'ble Supreme Court which we have referred to. We, therefore, reject the submission of the Appellant in these appeals that the increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year is notional or contingent and, therefore, cannot be allowed as a deduction.”
From the aforesaid discussion we find no reason to interfere in the order of Ld CIT(A) and accordingly we uphold. Hence this ground of Revenue’s appeal is dismissed.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 24 The 2nd issue raised by Revenue in ground number 2 in this appeal is 32. that learned CIT(A) erred in deleting the addition made by the AO for Rs.13,55,80,000/- on account of freight expenses.
During the year assessee has claimed net freight expenses incurred in connection with domestic, export of the goods and freight on stock transfer. The assessee has also recovered part of the freight charges from the customers incurred in connection with the sales. However the AO observed that expenses incurred on freight was more than the recovery made by the assessee from the customers. The AO also found that the claim of the assessee towards such freight expenses was also disallowed in the AYs 2003-04 and 2004-05, so the AO accordingly disallowed the claim of the assessee for freight expenses and added to the total income of the assessee.
Aggrieved, assessee is in appeal preferred an appeal to Ld CIT(A) where it was demonstrated that when the goods are sold to customers on delivery basis then the assessee recovers freight charges from the customers as per the agreement but in some of the cases the freight charges are not recovered in full due to the competition in the market. Besides, assessee recovered the freight charges from the customers as per the agreed amount but on many occasions the assessee had borne more amount of freight charges over and above the amount agreed due to damages/detention charges, price increased due to increase in fuel cost. Moreover, the freight charges on the stock transfer from factories to depots are to be incurred by the assessee alone. The assessee submitted that for the earlier AYs 2003–04 and 2004–05 the freight charges were shown as receivable in the balance sheet of the respective years so the question of disallowance of freight expenses does not arise. However, in the instant case the freight expenses have been debited in the profit and loss account and nothing has been shown in the balance sheet as receivable. Finally, assessee prayed that these expenses are incurred in connection with the business only and are eligible for
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 25 deduction while computing the income under the head of “business”. Accordingly the learned CIT(A) has deleted the addition made by the AO by observing as under:- “This ground of the appellant is against disallowance of expenses of freight of Rs.13,55,80,000/-. The appellant during the relevant previous year has debited to the P & L a/c Rs.135.58 million under the heading ‘freight charges’. Out of the said amount 46.99 million represents the element of freight cost in excess of recovery and 86.59 million representing freight charges on stock transfer which is not for any recovery or otherwise. The AO has disallowed the freight expenses on the ground that the freight charges is receivables of the appellant and in the nature of balance sheet item and hence the said disallowance was made. The AO has not disputed that these expenses were incurred by the appellant. The freight charges short received from customers can be for various reasons and the AO was not justified in disallowing the same only for the reason that they were recoverable from the customers. Such expenditure since has been incurred for the purposes of assessee’s business is clearly an allowable item and as far as freight charges on stock transfer is concerned this is definitely expenditure incurred for business irrespective of the act that the same is recoverable or not from the customers, I find force in assessee’s contentions in this regard, hence, this ground of the appellant is allowed.”
Being aggrieved by this order of the learned CIT(A) Revenue is in appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently supported the order of AO and left the issue to the discretion of the Bench whereas Ld AR relied the order of Ld CIT(A). From the aforesaid rival materials, we find that the AO has disallowed the freight expenses on the ground that assessee has made short recovery from the customers and similar addition was made in the earlier assessment year. However, the AO has not disputed the quantum of expenses incurred by the assessee on freight. From the submission of Ld. AR we find that out of the total disallowance made by the AO towards freight expenses, a sum of Rs. 86,59,000/- was incurred on the stock transfer by the assessee from the factory to the depots. In our view, the question of disallowance of freight expenses in connection with the stock transfer does not arise. This freight expense has direct connection with the business of the assessee. For other
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 26 freight expenses, the reason given by the AO for the disallowance is not tenable as the AO has not pointed out any reasonable reasons for the same. There is no doubt that the assessee had made short recovery from the customers but the reasons for the same were duly explained by the assessee. Accordingly the Ld. CIT(A) has given the relief to the assessee and on this point of view Ld. DR has not brought anything on record contrary to the findings of the Ld CIT(A). In view of above, we find no infirmity in the order of Ld CIT(A) and we uphold the same. Hence, this ground of Revenue’s appeal is dismissed.
The third issue raised by Revenue in ground number 3 is that Ld. CIT(A) erred in deleting the addition made by the AO for Rs.124 crores on account of claimant in accounting method.
The assessee was entitled for custom duty benefit under the target plus scheme on the basis of export turnover in accordance with paragraph 3.7 of the foreign trade policy. The assessee in the earlier years was used to recognized custom duty benefit under the target plus scheme in the books of accounts on the basis of completion of export. However, the assessee from the year under consideration changed its accounting policy to recognize the custom duty benefit under the target plus scheme on the basis of receipt of license from the Director General of Foreign Trade. As a result of change the profit of the assessee came down by the above stated amount for the year under consideration but the same was shown in the subsequent year. However the AO disregarded the change in the accounting policy on the ground that the benefit under target plus scheme is a available to the assessee on the basis of incremental growth of the export. For the year under consideration, there was an incremental growth in the exports of the assessee therefore the assessee was entitled for the benefit of custom duty. Accordingly the AO held that the income on account of custom duty is available immediately when the assessee achieves the incremental growth in the export
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 27 business. Therefore, the AO disallowed the claim of the assessee and added the custom duty benefit to the total income of the assessee.
Aggrieved, assessee preferred an appeal to Ld CIT(A). Before Ld. CIT(A) assessee submitted that it is well settled law that the accounting policy for genuine cause and based on bona fide purpose can be changed if followed on year to year basis. The assessee in the submission relied on various judicial decisions and AS 9 issued by the Institute of Chartered Cccountants of India. Accordingly, Ld CIT(A) deleted the addition made by the AO.
Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently supported the order of AO whereas Ld AR drew our attention on page no. 79 of the paper book where the notification for the custom benefit under target plus scheme is placed. The relevant notification reads as under:- “exemption on goods imported into India against a Duty Credit Certificate issued under the Target Plus Scheme. – In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts goods when imported into India against a duty credit certificate issued under the Target Plus Scheme in accordance with paragraph 3.7 of the Foreign Trade policy (hereinafter referred to as the said certificate) from, - (a) The whole of the duty of customs leviable thereon under the First Schedule to the customs Tariff Act 1975 (51 of 1975); and (b) The whole of the additional duty leviable thereon under section 3 of the said Customs Tariff Act,- subject to the following conditions, namely:- (1) That the benefit under this notification shall be available only in respect of duty credit certificate issued under the said Scheme to a Star Export House on the basis of incremental growth in FOB value of exports made during the financial year 2003-04; (2) That the said certificate has been issued to a Star Export House by the licensing authority and it is produced before the proper officer of customs at the time of clearance for debit of the duties leviable on the goods, but for this exemption:
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 28
Provided that exemption from du9ty shall not be admissible if thee is insufficient credit in the said certificate for debiting the duties leviable on the goods, but for this exemption; (3) That the said certificate and goods imported against it shall not be transferred or sold;
From the aforesaid, it is amply clear that the duty benefit under the scheme was available to the assessee only on receipt of this certificate issued by the Director-General of foreign trade. Prior to the year, assessee was recognizing the income on the completion of export but that really does not entitle the assessee for the duty exemption unless the certificate is received by the assessee. In view of above, we find no infirmity in the order of Ld CIT(A). Hence this ground of appeal of the Revenue is dismissed.
The 4th issue raised by Revenue in this appeal is that ld. CIT(A) erred in 40. accepting the revised return in spite of the fact known to him that the accounts have not been approved in the AGM of the company.
At the outset the ld. AR drew our attention on page number 14 of the supplementary paper book where necessary papers were placed regarding the adoption of financial statements submitted with the revised income tax return. Proof of filing the audited financial statements with the Ministry of corporate affairs were also placed on page number 1 to 13 of the supplementary paper book. The financial statements duly audited along with audit report by the auditor of the company were placed from page 16 to 24 of the supplementary paper book. In view of above we do not find any reason to interfere in the order of learned CIT(A). Hence this ground of appeal of Revenue is dismissed
5th issue raised by Revenue in this appeal is that the learned CIT(A) 42. erred in deleting the addition made by AO for Rs. 21.619 million in the computation of book profit on account of doubtful advances and debts.
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 29 43. During the course of assessment proceedings, assessee has debited its profit and loss account by creating the provision for doubtful advance and doubtful debts for the above stated amount in the books of accounts. The assessee for computing its book profit u/s 115JB has not added back the above said provision created for doubtful advance and doubtful debts on the ground that the same is not in the nature of provision for unascertained liabilities. However, the AO disregarded the claim of the assessee by stating that provisions has been provided on account of unseen but anticipated loss of the company and is therefore clearly is in the nature of un-ascertain liability. The AO accordingly held that the provision for doubtful advances and debts should be added in the book profit for the purpose of MAT.
Aggrieved, assessee preferred an appeal to Ld CIT (A) who has deleted the addition made by the AO by observing that provision of doubtful debts and doubtful advances stands on different footings from other provisions. In the instant case, the provision as stated above does not the present any liability. Accordingly Ld. CIT(A) deleted the addition. Being aggrieved by this order of Ld CIT(A) is in appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. DR supported the order of AO whereas Ld AR supported the order of learned CIT(A). From the aforesaid discussion, we find that AO has treated the provision created against the doubtful debts and advances as the provision for unascertained liability. Therefore for computing the book profit under the provisions of MAT deduction for such provisions was disallowed and added to the book profit. However in our considered view the provision for Sec. 115JB speaks for the provisions created for unascertained liabilities therefore we disagree with the view of the AO. In this connection, we are putting our reliance in the decision of Hon’ble Apex Court in the case of CIT vs. HCL Comnet Systems and Services Ltd (2007) 305 ITR 409 where it was held as under:-
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 30 “As stated above, the said Explanation has provide six items, i.e., Item Nos (a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with Item No. (c) which refers to the provision for bad and doubtful debt. The provision for bad and doubtful debt can be added back to the net profit only if Item (c) stands attracted. Item (C) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertain liabilities. The assessee’s case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract item (c) of the Explanation to Sec. 115JA. In our view, Item (c) is not attracted. There are two types of “debt”. A debt is payable by the assessee is where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case “debt” under consideration is “debt receivable” by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the resent case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the AO was not justified in adding back the provision for doubtful debts of Rs.92,5,187/- under clause (c) of the Explanation to Section 115JA of the 1961 Act.”
In view of above, we have no hesitation to uphold the order of Ld CIT(A). Hence this ground of appeal of the Revenue is dismissed. 46. In the result, Revenue’s appeal is dismissed.
In combined result, assessee’s appeal is partly allowed for statistical purpose and that of Revenue’s appeal is dismissed. Order pronounced in the open court 13/04/2016
Sd/- Sd/- (N.V.Vasudevan) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata,
*Dkp �दनांकः- 13/04/2016 कोलकाता ।
ITA No.581 & 587/Kol/2009 A.Y. 2005-06 Haldia Petrochemicals Ltd. V. JCIT, Rng-12 Kol. Page 31 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक/Assessee-M/s Haldia Petrochemicals Ltd., 1, Auckland Place, Kolkata-17 2. राज�व/Revenue-JCIT, Range-12, 3, Govt. Place (West), Kolkata-700 001 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।