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Income Tax Appellate Tribunal, ‘A’ BENCH LUCKNOW
Before: HON’BLE SHRI G. D. PADMAHSHALI & SHRI SUBHASH MALGURIA
IN THE INCOME TAX APPELLATE TRIBUNAL, ‘A’ BENCH LUCKNOW BEFORE HON’BLE SHRI G. D. PADMAHSHALI, ACCOUNTANT MEMBER AND SHRI SUBHASH MALGURIA, JUDICIAL MEMBER आयकर अपील सं. / ITA No.261/LKW/2020 निर्धारण वर्ा / Assessment Year : 2007-08 The Income Tax Officer Ward-6(1), Lucknow . . . . . . . अपीलार्थी / Appellant
बिधम / V/s. U.P. State Mineral Development Crop. Ltd. Iind Floor, Pragati Kendra, Kapoorthala Commercial Complex, Aliganj, Lucknow. . . . . . . . प्रत्यर्थी / Respondent द्वधरध / Appearances Assessee by : None for the Assessee Revenue by : Smt. Namita Pandey [‘Ld. DR’] सुनवाई की तारीख / Date of conclusive Hearing : 27/06/2024 घोषणा की तारीख / Date of Pronouncement : 04/07/2024 आदेश / ORDER Per G. D. Padmahshali, AM; The instant Revenue’s appeal challenges the first appellate DIN-less Order dt. 28/06/2020 passed u/s 250 of the Income Tax Act [in brief ‘the Act’] by the Ld. Commissioner of Income Tax Appeals-2, Lucknow [in brief ‘CIT(A)’] which in turn unbuttoned order of rectification dt. 29/03/2014 passed u/s 154 of the Act by the Income Tax Officer, Ward-6(1), Lucknow [in brief ‘AO’]
The case was called twice, none appeared at the bequest of the assessee. Adverting to letter dt. 26/06/2024 the Ld. DR Mr SK Sharma reiterated the contents thereof and prayed for adjournment which reads as; ‘in this case, AO has sought more time to trace the copy of RAP objection, which is being traced in
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 various relevant offices (mail received from AO is enclosed herewith). In the interest of justice, it is requested that the hearing in this case may kindly be adjourned for any other regular date due, as deemed appropriate. . . .’.
We are mindful to the fact that the instant appeal was filed way-back in the year 2020 and was adjourned from time-time for various reasons thus came witnessing sixteenth hearing today. While going through order-sheet entries it ostensibly revealed that, this case on equi-reasons was formerly sought to be adjourned by the Revenue on 09/05/2023, 31/05/2023, 12/07/2023 & 18/10/2023 but there is hardly any progress till today. Having considered the order-sheet entries, content of email reply dt. 15/01/2024 received from Ld. AO, subject matter of dispute, and lastly the reasons founded for adjournment could hardly inspire any confidence to us, in the event we deem it fit to reject the adjournment and proceed to adjudicate the matter in the absence of respondent ex-parte u/r 25 of ITAT-Rules, 1963 on merits with the able assistance from the Revenue. Ordered & proceeded accordingly.
We have heard the Revenue and subject to rule 18 of the ITAT-Rules, 1963 perused the material placed on records and considered the facts in the light of settled legal position and note that, the respondent assessee is a state-owned corporation engaged in the business of carrying out mineral based activities in the state of Uttar Pradesh. The return of loss ₹2,55,26,557/- filed by the assessee for the year under consideration was selected for scrutiny by a statutory notice dt. 29/09/2008 issued u/s 143(2) of the Act. While framing the regular assessment u/s
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 143(3) of the Act, the Ld. AO made two additions owning disallowance viz; (1) ₹1,83,48,720/ provision of interest on loans obtained from Government and (2) ₹7,11,998/- towards depreciation claimed as per Company Law. Post assessment owning to Revenue Audit Objection [in brief ‘RAO’] the Ld. AO invoked his rectification jurisdiction by notice u/s 154 of the Act and called upon the assessee to show cause as to why ‘provision for loss in investment’ claimed in the return not to be disallowed and rectified the assessment accordingly. In the absence of effective representation, an amount of ₹70,95,000/- representing provision for loss in investment was disallowed and added to total income/loss by an order of rectification dt. 29/03/2014. The assessee challenged the rectification in appeal before the Ld. CIT(A). Finding force in the merits of the case, the Ld. CIT(A) stuck-down the rectification holding that the subject matter of ‘provision for loss in investment’ is a debatable point & mistake not apparent on face of the record hence cannot be rectified u/s154 of the Act. Against the first appellate adjudication the Revenue came in instant appeal challenging the action of Ld. CIT(A) on following grounds; 1. That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 70.95,000/- made by the A.O. without appreciating the fact that mistake pointed out by the RAP is a mistake apparent from record as the provision for loss in investments was not allowable and the same was rightly disallowed us 154 of the Income Tax Act, 1961.
That the Ld. CIT(A) has erred in law and on facts in not appreciating the fact that the provision for loss in investments claimed by the assessee was not a debatable point of law.
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 3. That though the tax effect is below the monetary limit, appeal is filed because of the issue raised by the Revenue Audit Party.
That the appellant craves leave to amend any one or more of the grounds of appeal stated above as and when need for doing so may arise. 5. The ground number 3 & 4 do not call for & require any adjudication. The first & second ground of appeal requiring adjudication collective agitates that, the disallowance of ‘provision’ is not a debatable issue and not disallowing such provision for loss in investment while assessing the income is a mistake apparent on record hence is rectifiable u/s 154 of the Act. The present challenge thus seeks to answer twin questions viz; (1) as to whether disallowance of ‘provision for loss in investment’ is a debatable issue? And (2) as to whether non-disallowance of such provision is apparent on the face of the record so has to fall within the ambit of section 154 of the Act?
Before we procced to fetch answer to former twin questions, we note that, there is much less dispute over that; (a) the assessee is maintaining its books of accounts on mercantile/accrual basis and thus all income & expenses are booked as when they are incurred irrespective of actual receipt or payment thereof, (b) the assessee holds certain investments and the provision for loss in investment was debited to profit & loss account and claimed in the return of income accordingly (c) such provision however remained to be disallowed while framing the original assessment (d) the assessee was given reasonable opportunity before the impugned rectification was carried out u/s 154 of the Act by the Ld. AO.
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 7. A provision simply is a charge created against the revenue or capital obligation incurred by an assessee. The provision for expenses is a common accounting practice that involves setting aside an estimated amount revenue obligation incurred by an assessee in conducting its business. The question of provision arises only when mercantile system of accounting is followed or employed and not otherwise. To our mindfulness there are three categories of it such as; (a) provisions for expenses (b) provisions for depreciation and (c) regulatory provisions. The list of first category of provisions is long & endless because in principle any incurred expenses (manufacturing, trading, direct & indirect etc.) can be the subject of a provisions, which are otherwise deductible as expenses under the provision of the Act. Secondly, the provisions for depreciation. Depreciation is decrease, decline, diminishing or reduction or shrinkage in the value of assets due to either usage or normal ware tare or efflux of time etc. The section 32 of the Act specifically entitles an assessee to a claim depreciation on assets (block of assets) for which a provision in the books of account may be made. Needless to state, allowance of depreciation on block of assets is mandatory irrespective of creation of provision or claim in the return. Lastly, the regulatory provisions which either originate from applicable corporate, security, business & other regulatory laws etc., or from accounting/reporting standards which mandates the creation of provisions for diminishing in the value of assets, investment, losses and liabilities as the case may be. These regulatory provisions are expressly instituted by either the regulatory laws or the mandatory accounting & reporting standards etc. as applicable to an assessee.
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 8. All provisions created in books not necessarily be deductible under the Act and all deductible provisions need not required to be accounted in books as well. The provisions for expenses created/made against unascertained liability is not deductible under the Act, whereas the depreciation is deductible without the need any provision in the books. In view of section 43B of the Act certain expenses though provided in the books are subjected to actual payment to qualify for deduction.
The actual deductibility of any provisions under the Act in general rolls upon four conditional wheels and these quadruplicate conditions are; (i) the provision must relate to any revenue expenses which is specifically deductible/allowable u/c IV-D of the Act or otherwise it must possess all the cumulative characters of section 37(1) of the Act. (ii) the expenses against which provision is made must clearly be specified and must therefore be valued/estimated with sufficient approximation according to the applicable accounting/reporting rules or standards (iii) the provisional charge must sprung from current year’s operation/events. That is to say, a provision of expenses relating to an event/obligation occurring prior or after the previous year is not deductible. In simple terms provisions must represent obligation incurred by an assessee for the year under consideration and lastly (d) the provisions must pass through Profit & Loss Account [in brief ‘P&L’] i.e., provision must be the one which is debited to P&L account expense or charge against the income of the current financial year (previous year) relevant to assessment year.
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 10. The investments by and large nature are capital assets held for earning income by way of interest, dividend, rentals, capital appreciation and for such other non-financial benefit including management, control and business arrangement etc. All capital assets are investment but not all investment partake the character of block of asset for the purpose of depreciation under the Act. The provisions of corporate laws through accounting standards mandates the creation of provision for loss or diminish in the value of investment and provisions against the impairment of certain capital assets, however, no portion of such provision created against/for loss or diminish in the value of investment or no portion of impairment of capital assets is entitled for deduction under the Act.
Keeping in mind the aforestated discussion, we shall now deal with the impugned item of provision for loss in investment. Firstly, the impugned item is not a revenue obligation incurred for the year under consideration and therefore finds no place in the list of deductions enumerated u/c IV-D of the Act. Secondly, since the investment by and large is capital in nature but not falling within the ambit of block of asset as defined by section 2(11) of the Act so does also not entitle for deduction in the form of depreciation. And lastly, impugned item not an expenditure deductible under general deduction 37(1) of the Act for the vanilla reasons that such provision fails to pass the litmus test prescribed therein. Once it so then there is no provision in the law conferring any discretion to tax authorities to allow deduction. On the contrary, impugned item calls for disallowance in- limine without requiring any examination.
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08 12. By application of stricter interpretation of law in view of the ratio laid down by the Hon’ble Supreme Court in ‘CoC Vs Dilip Kumar & Co’ reported in [2018, 9 SCC 1 (SC)], the impugned item ‘provision for loss in investment’ representing portion of investment held by the assessee being not falling any of the deduction enumerated u/c IV-D of the Act and further not eligible for deduction u/s 37(1) of the Act does not in our considered view is debatable under the Act. Hence there is much less reason to countenanced the view of Ld. first appellate authority.
Now coming to the second question, it shall suffice to state that the impugned item i.e. ‘provision for loss in investment’ was appearing glaringly on the face of financial statement which travelled to computation of income. The Ld. AO however lost sight of impugned item while framing the assessment u/s 143(3) of the Act. The audit objection notified the mistake of allowing the impugned item which was obvious & patent and not something which can be established by a long-drawn process of reasoning on points on which there may be two opinions. In the event after following the due process & according reasonable opportunity to the assessee, Ld. AO reversed the impugned allowance by an order passed u/s 154 of the Act.
In the event of effective failure on the part of assessee to dislodge the authority and jurisdiction of Ld. AO, the impugned rectification was carried out.
It is well settled law that any item of allowance/deduction or disallowance which requires no examination or verification of facts falls within the ambit of
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ITO Vs U.P. State Mineral Development Crop. Ltd. ITA No.261/LKW/2020 AY:2007-08
‘mistake apparent on record’ for the purpose of section 154 of the Act. The obvious mistake glaring or appearing on the face of the record and requiring no examination or verification whatsoever by long-drawn process can be rectified in view of the ratio laid down by the Hon’ble Apex Court in ‘TS Balram (ITO) Vs M/s Volkart Bros.’ [1971, 82 ITR 40 (SC)].
Without multiplying the authority on the issue, in view of the former judicial precedents we find no fault in reversing the inadvertent allowance of impugned item ‘provision for loss in investment’ by way of rectification u/s 154 of the Act by the Ld. AO. In view thereof the impugned order tearing down the rectification cannot continue to stand; thus, set-aside and the order of rectification is restored. The grounds of appeal accordingly stands adjudicated.
The appeal of the Revenue in result stands ALLOWED. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Thursday, 04th day of July, 2024
-S/d- -S/d- SUBHASH MALGURIA G. D. PADMAHSHALI JUDICIAL MEMBER ACCOUNTANT MEMBER Lucknow ; दिनाांक / Dated : 04th day of July, 2024 आदेश की प्रनिनलनप अग्रेनर्ि / Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The CIT(A)-NFAC, Delhi (India) 4. The Concerned CIT 5. DR, ITAT, Bench ‘A’, Lucknow 6. गार्डफ़ाइल / Guard File. आिेशानुसार / By Order, वररष्ठ दनजी सदिव / Sr. Private Secretary आयकर अपीलीय न्यायादिकरण, पुणे / ITAT, Lucknow
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