DCIT, CIR-10, KOLKATA, KOLKATA vs. M/S VESUVIUS INDIA LTD., KOLKATA

In Ground No. 1, the Revenue has challenged the action of the ld. CIT(Appeals) in allowing the claim of the assessee for deduction on account of provision for leave encashment of Rs.18,10,000/- while computing the total income of the assessee as per the normal provision of the Act as well as in computing Book Profit under section 115JA. ./2008 Assessment year: 1998-1999 Page 2 of 8

The assesese in the present case is a Company, which is engaged in the business of manufacturing of Refractories. The return of income for the year under consideration was filed by it on 31.03.2000 declaring total income of Rs.3,31,76,624/- on the basis of book profit as per the provisions of section 115JA. In the Profit & Loss Account filed along with the said return, a sum of Rs.18,10,000/- was debited by the assessee on account of Provision for Leave Encashment. According to the Assessing Officer, the said provision made by the assessee was for unascertained liability and accordingly the same was disallowed by him. On appeal, the ld. CIT(Appeals) allowed the claim of the assessee for deduction on account of provisions for leave encashment by relying on the decision of the Hon’ble Supreme Court in the case of CIT –vs.- Bharat Earth Movers reported in 245 ITR 428, wherein it was held that if a business liability has definitely arisen in the relevant year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. It was held that what should be certain is the incurring of the liability, which is capable of being estimated with reasonable certainty though the actual quantification may not be possible.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. D.R. has contended that even though the provision for leave encashment is allowable as deduction in principle as per the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers (supra), it is required to be seen as to whether such provision is made on some reasonable and scientific basis. The ld. counsel for the assessee, on the other hand, has contended that even though the provision for leave encashment made by the assessee is not based on any actuarial valuation, the same is made on scientific basis. Keeping in view the submissions made by both the sides, we uphold the impugned order of the ld. CIT(Appeals) on this issue in ./2008 Assessment year: 1998-1999 Page 3 of 8 principle but restore the matter to the file of the Assessing Officer for the limited purpose of verifying as to whether the provision for leave encashment is made by the assessee on some reasonable and scientific basis. Ground No. 1 of the Revenue’s appeal is accordingly treated as partly allowed for statistical purposes.

In Ground No. 2, the revenue has challenged the action of the ld. CIT(Appeals) in allowing the amount of toolings consumed by the assessee during the year under consideration.

During the year under consideration, the expenditure of Rs.1,35,98,000/- was incurred by the assessee on account of purchase of tooling and the same was entirely claimed as deduction being revenue expenditure. In the assessments completed in the case of the assesese for A.Ys. 1995-96, 1996-97 and 1997-98, deduction in respect of expenditure incurred on purchase of toolings was allowed by the Assessing Officer on the basis of amortisation over a period of 36 months. Following the said view, the claim of the assessee for deduction of Rs.1,35,98,000/- was restricted by the Assessing Officer to Rs.86,16,000/-. On appeal, the ld. CIT(Appeals) followed the decision of the Tribunal rendered in assessee’s own case for A.Ys. 1995-96, 1996-97 and 1997-98 and directed the Assessing Officer to allow the expenditure claimed by the assessee on this issue on the basis of tooling actually consumed during the year under consideration. At the time of hearing before us, the ld. representatives of both the sides have agreed that this issue is squarely covered by the decision of the Tribunal in assessee’s own case for earlier years, i.e. A.Ys. 1995-96, 1996-97 and 1997-98 and respectfully following the same, we uphold the impugned order of the ld. CIT(Appeals) directing the Assessing Officer to allow the expenditure incurred by the assessee on tooling on the basis of actual consumption. Ground No. 2 is accordingly dismissed. ./2008 Assessment year: 1998-1999 Page 4 of 8

In Ground No. 3, the Revenue has challenged the action of the ld. CIT(Appeals) in allowing the claim of the assessee for deduction on account of provision for doubtful debts amounting to Rs.14,48,000/- while computing the book profit under section 115JA.

The provision for doubtful debts amounting to Rs.14,48,000/- debited to the Profit and Loss Account was not added back by the assessee while computing the book profit under section 115JA on the ground that the said provision was not created against any liability and the same, therefore, was outside the purview of clause (c) of Explanation to section 115JA(2). The Assessing Officer, however, added the said provision by relying on clause (c) of Explanation to section 115JA(2). On appeal, the ld. CIT(Appeals) deleted the addition made by the Assessing Officer on this issue by relying on the decision of the Kolkata Special Bench of ITAT in the case of JCIT –vs.- Usha Martin Industries Limited reported in 288 ITR (AT) 63 (SB)(KOL.), wherein it was held that the provision made for bad and doubtful debts being in the nature of diminution in the value of assets, clause (c) of Explanation to section 115JA(2) would not be applicable.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the decision of the Special Bench of ITAT in the case of Usha Martin Industries Limited (supra) has been nullified by the Finance (No. 2) Act, 2009, whereby clause (g) has been inserted in Explanation to section 115JA with retrospective effect of 01.04.1998 thereby making the amount or amounts set aside as provision for diminution in the value of any asset liable to be added back while computing the book profit under section 115JA. At the time of hearing before us, the ld. counsel for the assessee, ./2008 Assessment year: 1998-1999 Page 5 of 8 however, has raised a new contention that the amount in question although termed as provision for bad and doubtful debts, actually represents debts written off by the assessee from its books of account and the same, therefore, cannot be added while computing the book profit under section 115JA. The ld. D.R. has contended that this new stand taken by the ld. counsel for the assesese 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 assesese also has no objection for sending back for such verification by the Assessing Officer, we restore this issue to the file of the Assessing Officer for verifying the new contention raised by the assessee and to decide the issue accordingly. Ground No. 3 is accordingly treated as allowed for statistical purposes.

In Ground No. 4, the Revenue has challenged the action of the ld. CIT(Appeals) in allowing interest on share application money amounting to Rs.1,33,25,109/- as deduction while computing book profit under section 115JA of the Act.

During the previous year relevant to A.Y. 1994-95, the assessee- company had received interest of Rs.1,33,25,109/- on share application money. The same, however, was not offered to tax in that year on the basis of certain judicial pronouncements prevalent at the relevant time. Subsequently, keeping in view the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Limited –vs.- CIT reported in 227 ITR 172, the assessee offered the interest on share application to tax under the Voluntary Disclosure of the Income Scheme (VDIS). As per the provisions of section 68 of the Finance Act, 1997 read with CBDT Instruction No. 754 dated 10.06.1997, the amount of such interest offered under VDIS was credited by the assessee-company to its Profit & Loss Account for the year ended on 31.03.1998. For the purpose ./2008 Assessment year: 1998-1999 Page 6 of 8 of computing the book profit under section 115JA, the assessee, however, reduced the said amount on the ground that the same having been already offered to tax under VDIS, 1997, it could not be considered in computing book profit under section 115JA. This claim of the assessee was not found acceptable by the Assessing Officer. According to him, the amounts to be reduced while computing book profit under section 115JA were specifically mentioned in the Clause (i) to Clause (ix) of Explanation to Section 115JA and since the amount of interest in question offered by the assessee under VDIS was not covered therein, the assessee was not entitled to reduce the same while computing the book profit under section 115JA.

On appeal, the ld. CIT(Appeals) allowed the claim of the assessee mainly on the ground that the interest on share application money having been already taxed in A.Y. 1994-95 under VDIS, the same could not be taxed again in the year under consideration in the form of book profit under section 115JA.

The ld. D.R. submitted that even though the interest on share application was offered to tax by the asseessee in A.Y. 1994-95 under VDIS, the same having been credited to the Profit & Loss Account for the year under consideration and there being no deduction allowable for the same under any clause of Explanation to Section 115JA(2), the assessee was not entitled to claim deduction on account of such interest while computing the book profit under section 115JA. He contended that the ld. CIT(Appeals), however, overlooked this vital aspect while allowing the claim of the assessee on this issue.

The ld. counsel for the assessee, on the other hand, relied on the relevant provisions of the Finance Act, 1997 dealing with VDIS and ./2008 Assessment year: 1998-1999 Page 7 of 8 pointed out that as per section 68 of the Finance Act, 1997, the amount of income disclosed voluntarily cannot be included in the total income of the declarant assessee for any assessment year under the Income Tax Act. He also invited our attention to the copy of certificate issued by the concerned CIT under section 68(2) of the VDIS, 1997 to show that the declaration filed by the assessee under VDIS offering interest on share application to tax in A.Y. 1994-95 was duly accepted. He contended that the declaration under VDIS having been accepted by the Department and the interest on share application having been taxed in the hands of the assessee for A.Y. 1994-95 under VDIS, the same could not be included in the total income of the assessee for any assessment year under the Income Tax Act as per this specific provision contained in section 68 of the Finance Act, 1997 and since the provisions of section 115JA also talk about total income of the assessee chargeable to tax for the relevant previous year, the interest income offered under VDIS for A.Y. 1994-95 cannot be included in the book profit for the year under consideration as computed under section 115JA.

We have considered the rival submissions and also perused the relevant material available on record. It is not in dispute that the interest on share application was offered by the assessee as income voluntarily for A.Y. 1994-95 under VDIS, 1997 and the declaration filed offering such income under VDIS was duly accepted by the Department. As per the provisions of section 68 of the Finance Act, 1997, the amount of income voluntarily disclosed under VDIS shall not be included in the total income of the declarant assessee for any assessment year under the Income Tax Act and since the said provisions are overriding as a result of non- obstante clause contained in section 64 of the Finance Act, 1997, we find merit in the contention of the ld. counsel for the assessee that the interest on share application voluntarily disclosed as income by the assessee under VDIS for A.Y. 1994-95 could not be included in the total income of the assessee for the year under consideration even for the ./2008 Assessment year: 1998-1999 Page 8 of 8 purpose of computing book profit under section 115JA of the Income Tax Act, whereby an amount equal to 30% of the book profit is deemed to be the total income of the assessee chargeable to tax for the relevant previous year. We, therefore, find no infirmity in the order of the ld. CIT(Appeals) deleting the interest on share application while computing book profit under section 115JA and upholding the same, we dismiss Ground No. 4 of the Revenue’s appeal.

In the result, the appeal of the Revenue is treated as partly allowed for statistical purposes.