MAZAGON DOCK LTD.,MUMBAI vs. ASST. COMMISSIONER OF INCOME TAX, CIR 6(3), MUMBAI

The assessee is engaged in the business of Warships, Off-shore Platform, shipping repairs and general engineering.

We shall take up the appeals filed by the revenue for the assessment years 2007-08 and 2008-09. For both the years, the revenue is aggrieved by the decision of ld. CIT(A) in deleting the addition made under section 43B of the Income Tax Act, 1961.

We heard the parties and perused the record on this issue. The assessee entered into a contract with M/s Armarous of France for transfer of technical knowhow as well as supply of material/ services etc. for manufacturing of Scorpene Class-Sub-marines. As per the terms of agreement, the liability to pay service tax was placed upon the assessee as service receiver. The AO noticed in AY 2007-08 that the assessee had provided service tax liability of Rs.104.45 crores in its books of account. But it had actually paid a sum of Rs.101.21 crores only. Hence, the AO disallowed the difference of amount of Rs.2.93 crores u/s 43B of the Act. Besides the above, the AO noticed that a sum of Rs.22.91 crores was disallowed in the immediately preceding year i.e. in assessment year 2006- 07 on the ground that the assessee has paid service tax in advance before availing the corresponding services, i.e., the AO took the view that the service tax paid in advance cannot be allowed as deduction and accordingly disallowed the claim of rs.22.91 crores in AY 2006-07. The assessee had challenged the same by filing the appeal before the ld. CIT(A). Since the disallowance made in the assessment year 2006-07 was disputed by the assessee by filing appeal, the AO, as a protective measure, added the same in the assessment year 2007-08 also.

The ld. CIT(A) deleted both the additions and hence the revenue has filed this appeal before us. 6. The ld. DR submitted that the ld.CIT(A) allowed the claim of the assessee for deduction of Rs.22.91 croes in assessment year 2006-07 by holding that service tax liability shall be allowable as deduction on payment basis. Though the revenue challenged the said decision by filing the appeal before the Tribunal, yet the revenue has withdrawn the appeal later. The ld. DR submitted that, in effect, service tax is deductible in the 4 5 03 3 / M/ 2 01 1 an d si x a p p ea ls year in which the payment was made. The ld D.R submitted that the assessee has debited the sum of Rs.22.91 crores in the profit and loss account relating to AY 2007-08 also and the same has to be disallowed, since the said amount of Rs.22.91 crores was already allowed by Ld CIT(A) in AY 2006-07. With regard to the balance amount of Rs.2.93 crores, the ld. DR submitted that the same is required to be disallowed u/s 43B of the Act, since the assessee did not pay the same before the close of the year.

We heard the ld.A.R on this issue and perused the record. There is no dispute with regard to the fact that the assessee had claimed a sum of Rs.22.91 crores on payment basis in the assessment year 2006-07 and the same was allowed by Ld CIT(A) in that year. From the submissions made before the ld.CIT(A), it is noticed that the assessee has debited the amount of Rs.22.91 crores to the profit and loss account pertaining to the assessment year under consideration also. Since the amount of Rs.22.91 crores has been allowed in the assessment year 2006-07 and dispute relating to the same has attained the finality, the assessee is precluded from claiming the same again in the assessment year 2007-08. Accordingly, we are of the view that the AO was justified in disallowing the same in the year under consideration. Accordingly, we set aside the order of ld.CIT(A) passed on the issue relating to Rs.22.91 crores and direct the AO to add the same on substantive basis.

With regard to the balance amount of Rs.2.93 crores added by the AO, we notice that the ld. CIT(A) has restored the matter to the file of the AO for considering the same afresh in the light of decision rendered by him in the assessment year 2006-07. Since the matter has been restored to the file of the AO for fresh consideration, we do not deem it necessary to interfere with his order on this issue.

In the assessment year 2008-09, the revenue is contesting the decision of ld. CIT(A) in directing the AO to allow the service tax amount of Rs.17.34 crores claimed by the assessee on payment basis. We notice that the ld. CIT(A) has restored the matter to the file of the AO with a direction to examine the same afresh in the light of the decision rendered by him in the assessment year 2006-07. Hence, we decline to interfere with the order of ld. CIT(A) in this year also as the AO has been directed to examine the issue afresh.

We shall now take up the appeals filed by the assessee. The first common issue urged in the appeals filed by the assessee for AY 2004-05 and 2007-08 relates to the disallowance made u/s 14A of the Act. The Ld A.R submitted that the assessee herein is a public sector undertaking and it had made investment in a company named M/s Goa Shipyard Limited (GSL). The GSL was a subsidiary of the assessee company till the year 1992-93 and the investment made by the assessee till the year 1992-93 is continued during the years under consideration also. The Ld A.R submitted that the entire dividend income was received by the assessee from GSL only and further the assessee did not incur any expenditure in earning the said dividend income. Accordingly he submitted that the tax authorities were not justified in computing the disallowance u/s 14A as a proportion of dividend income over the total income. 11. The Ld A.R further submitted that the investment made in subsidiary companies will not attract disallowance u/s 14A of the Act as held by the co-ordinate bench of Mumbai ITAT in the case of Garware Wall Ropes Ltd Vs. ACIT (2014)(65 SOT 86). He further submitted that the Hon’ble Bombay High Court has held in the case reported in 339 ITR 632 that the disallowance u/s 14A is not called for when the assessee did not incur any expenditure at all.

The Ld A.R further submitted that the assessing officer himself has restricted the disallowance to 0.5% of the investment in AY 2009-10 and 2012-13.

On the contrary, the Ld D.R submitted that the assessee did not maintain separate accounts relating to dividend income and hence the AO was constrained to allocate a portion of expenditure incurred by the assessee to the dividend income. However, the Ld CIT(A) has restricted the disallowance to 5% of the dividend income by following the decision rendered by the Co-ordinate benches of Tribunal in the case of Godrej Agrovet Ltd Vs. CIT (Order dated 17-09-2010 – 2010 TIOL 616 Mum-ITAT and others). Accordingly he submitted that the order of Ld CIT(A) should be upheld. 14. We heard rival contentions on this issue. There is no dispute with regard to the fact that the assessee has brought forward the investment that was originally made in the year 1992-93 and earlier years. Thus, there is no change in the investment portfolio of the assessee during the year under consideration either by purchase of new shares or by disposal of the existing shares. The assessee has held the shares in only one company and has, thus, received dividend from one company only. The assessment years under consideration, being 2004-05 and 2007-08, the provisions of Rule 8D shall not be applicable as per the decision of Hon’ble Bombay High Court in the case of Godrej Boyce Manufacturing Ltd (328 ITR 81). Hence the disallowance u/s 14A has to be computed on a reasonable basis during these years as held in the above said case decided by Hon’ble Bombay High Court.

The Ld A.R has pointed out that the assessing officer himself has disallowed a sum calculated at 0.5% of the investments made in shares u/s 14A of the Act in AY 2009-10 and 2012-13. The Ld A.R has also furnished the relevant assessment orders to substantiate his submissions. The disallowance computed at 0.5% works out to about Rs.3.00 lakhs. Considering the fact that the assessee has made investment in one company only, that the investment was made long back, that the assessee has received dividend from that company only, we are of the view that the disallowance computed at 0.5% of the investment value of shares is reasonable, in the facts and circumstances of the case. Accordingly, we set aside the order of Ld CIT(A) on this issue passed for AY 2004-05 and 2007-08 and direct the AO to compute the disallowance at 0.5% of the value of investment in these two years also.

The next common issue contested in the appeals filed by the assessee for AY 2004-05 and 2007-08 relate to the disallowance of prior period expenses. We heard the parties on this issue. The assessee had declared prior period income as well as prior period expenses in the accounts relating to both the years referred above. The assessee had netted off the prior period income against prior period expenses and the net amount alone was disallowed by the assessee while computing the total income. However, the assessing officer did not agree with the netting off and accordingly the enhanced the disallowance to the extent of prior period expenses. The Ld CIT(A) also confirmed the same. 17. It is a well settled proposition of law that the income relating to one year cannot be assessee in any other year. Under the same principle, the expenditure relating to one year cannot be claimed in any other year. Both the principles shall have exception, if it is expressly provided in the Act. Hence, we are of the view that the tax authorities are not justified in 8 5 03 3 / M/ 2 01 1 an d si x a p p ea ls disallowing entire amount of prior period expenses, while assessing the entire amount of prior period income, without bringing support of any of the provisions of the Act. Accordingly, we are of the view that the assessee was justified in computing the disallowance by netting off the prior period income against the prior period expenditure. We further notice that the assessee has offered net income in assessment year 2007- 08, i.e., the prior period income was more than the period expenditure.

In view of the foregoing, we set aside the order of Ld CIT(A) in both the years and direct the AO to accept the disallowance/computation made by the assessee in this regard.

The next common issue urged by the assessee in the appeals filed for AY 2007-08 to 2010-11 is the addition made u/s 145A of the Act in respect of MODVAT amount. The Ld A.R submitted that the assessee has followed exclusive method of accounting the MODVAT, where as the assessing officer has, by following sec. 145A of the Act, has made addition of the MODVAT relating to closing stock only. He submitted that sec. 145A of the Act requires the adjustment should be made in respect of purchases and sales also. He further submitted that the profit of the assessee would not change, even if the inclusive method of accounting is followed. He further submitted that the assessing officer has included the amount of deposits kept with Port authorities, but the same would not fall under the category of tax, duty, cess or fee specified in sec. 145A of the Act.

We heard ld D.R on this issue. When a specific query was asked to ld A.R as to whether the assessee has prepared financial statements both under inclusive method and exclusive method to demonstrate that there was no change in the profit under both the methods, the ld A.R submitted that the assessee may be provided with an opportunity to furnish such kind of statement. Under the accounting principles, both inclusive and 9 5 03 3 / M/ 2 01 1 an d si x a p p ea ls exclusive method of accounting for tax, duties etc., are acceptable methods and they do not affect the profitability of the assessee. The assessee has followed exclusive method, where as the provisions of sec. 145A mandates that the inclusive method of accounting the tax, duties etc., should be followed. In such a situation, in our view, the assessee should have prepared financial statements under inclusive method also and should have satisfied the assessing officer that the profitability shown by it would turn out to be the same under inclusive method also. In the instant case, the assessee has failed to do so. Hence, in the interest of natural justice, we are of the view that the assessee should be provided with one more opportunity to demonstrate the same.

It was brought to our notice that the assessing officer has included the deposits made with Port Trust also for computing the disallowance u/s 145A of the Act. The contention of the assessee is that the deposit made with the Port trust will not fall under the category of tax, duty, cess or fee mentioned in sec. 145A of the Act. Prima facie, there is merit in the contentions of the assessee, since the payment should arise on account of any law as per the Explanation given in sec. 145A of the Act.

In view of the above, we set aside the order passed by Ld CIT(A) on this issue in assessment years 2007-08 to 2010-11 and restore them to the file of the AO with the direction to examine the same afresh in all the four years under consideration, by duly considering the information and explanations furnished by the assessee. With regard to the deposit made with Port Trust, we make it clear that the same is not includible in the computation made u/s 145A of the Act, if it does not fall in the category of tax, duty, cess or fee levied under any law. Hence, the same shall be liable to included in the adjustments made u/s 145A of the Act, only if it is shown that the payment was made under authority of any law. Further, if 10 5 03 3 / M/ 2 01 1 an d si x a p p ea ls the deposit so made is refundable to the assessee, then also the question of including the same u/s 145A does not arise. The AO is directed to re- examine this issue in the light of discussions made supra. 23. In assessment year 2007-08, the assessee has raised one more ground relating to non-granting of TDS. At the time of hearing, the ld.AR did not press the same and hence the same is dismissed as not pressed.