2014-TIOL-405-ITAT-CUTTACK
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH, CUTTACK
BENCH, CUTTACK
ITA No.160/CTK/2013
Assessment Year: 2006-07
Assessment Year: 2006-07
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE -2(1), BHUBANESWAR
CIRCLE -2(1), BHUBANESWAR
Vs
INDIAN METALS AND FERROW ALLOYS LTD
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
CO No.27/CTK/2013
Assessment Year: 2006-07
ITA No.160/CTK/2013
Assessment Year: 2006-07
ITA No.160/CTK/2013
INDIAN METALS AND FERROW ALLOYS LTD
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE -2(1), BHUBANESWAR
CIRCLE -2(1), BHUBANESWAR
P K Bansal, AM And D T Garasia, JM
Date of Hearing: May 1, 2014
Date of Decision: June 6, 2014
Date of Decision: June 6, 2014
Appellant Rep by: P K Dash, DR
Respondent Rep by: Sachit Jally, AR
Respondent Rep by: Sachit Jally, AR
Income Tax - Sections 32(2), 35DD, 37(1), 147 & 148.
Keywords: reopening, reassessment, escapement of income, carry forward of unabsorbed depreciation, business expenditure, disallowance, compensation paid for de-rating of the shares, revenue expenditure, capital expenditure.
Whether unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 would be carried forward to the succeeding years and set off against the profits and gains of subsequent years, without any limit - Whether where the assessing officer had made the addition in respect of the income for which reasons for escapement of assessment were recorded by him and the additions were deleted by the CIT(A), the action of the assessing officer would become illegal if adds any other income chargeable to tax which had escaped assessment and which came to his notice subsequently, in the course of the proceedings u/s 147 - Whether the expenditure incurred by assessee for compensating the lenders as they agreed to take the shares of the merging company at a higher price than what was proposed by them in their structured settlement would amount to capital expenditure.
Keywords: reopening, reassessment, escapement of income, carry forward of unabsorbed depreciation, business expenditure, disallowance, compensation paid for de-rating of the shares, revenue expenditure, capital expenditure.
Whether unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 would be carried forward to the succeeding years and set off against the profits and gains of subsequent years, without any limit - Whether where the assessing officer had made the addition in respect of the income for which reasons for escapement of assessment were recorded by him and the additions were deleted by the CIT(A), the action of the assessing officer would become illegal if adds any other income chargeable to tax which had escaped assessment and which came to his notice subsequently, in the course of the proceedings u/s 147 - Whether the expenditure incurred by assessee for compensating the lenders as they agreed to take the shares of the merging company at a higher price than what was proposed by them in their structured settlement would amount to capital expenditure.
A) The assessee claimed unabsorbed depreciation relating to Indian Charge Chrome Ltd which was amalgamated with the assessee company. The Assessing Officer examined the claim for carry forward and set off and was of the view that after the amendment of section 32(2) w.e.f. 1.4.1997 the assessee was entitled to carry forward and set off unabsorbed depreciation for a particular year only for a total period of eight assessment years subsequent to the assessment year to which the unabsorbed depreciation relates. This provision existed till assessment year 2001-02. The assessing officer after examining the details was of the view during the original assessment that depreciation relating to the assessment year 1990-91 and 1992-93 got lapsed and could not be carried forward beyond assessment year 2001-02. Assessing Officer allowed carry forward of balance depreciation.
In appeal, CIT(A) directed Assessing Officer to allow unabsorbed depreciation for assessment year 1990-91 to 1992-93 as disallowance of same was not in accordance with the law.
The revenue went in appeal before the ITAT. In the mean time the Assessing Officer by issuing the notice u/s 148, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating had lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remained unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forward only upto the end of the assessment year 2005-06. Revenue was of the view that unabsorbed depreciation relating to the assessment year 1993-94 to 1997-98 got lapsed before assessment year 2006-07 and the carry forward of unabsorbed depreciation was reduced. The tribunal restored the issue to the file of the CIT(A) in the light of the finding of the assessing officer in the re-assessment order. The assessee filed appeal before CIT(A) against the order of the Assessing Officer. CIT(A) disposed off both the appeals by common order and decided the issue in favour of the assessee with regard to entire amount of unabsorbed depreciation.
B) During the course of the re-assessment proceeding, the assessing officer noticed that the assessee had claimed expenditure on account of compensation paid to lenders for de-rating of the shares as revenue expenditure. The assessee was asked to explain. The assessee explained that ICCL merged with IMFA and as per the agreement ICCL entered into with its lender i.e six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt in the year 2003. One of the conditions of the said settlement was that ICCL should merge with its promoter company IMFA and ICCL should de-rate its existing capital by 95%. The share holders of ICCL did not accept the proposal of de-rating and therefore, lenders were requested to reduce the de-rating from 95% to 50% through ICCL and a request was made to IDBI. The lender accepted the proposal but demanded a sum of Rs. 74,174,113/- as compensation towards loss being suffered due to such changes in the de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The AO was of the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also held that the expenditure was not a result of amalgamation therefore, this was not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The Assessing Officer thus rejected the claim.
In appeal, CIT(A) confirmed the order of the Assessing Officer by observing that the impugned compensation was paid as a precondition for debt restructuring and more particularly for the consortium agreeing upon the de-rating percentage at 50% instead of 95%. Since this is not at all an expenditure relatable to amalgamation, there was no question of amortization of expenditure either.
Assessee contended that it had to incur expenditure as compensation paid to the financial institution for making necessary amendment in the structured settlement proposal to de-rate ICCL's existing shares by 50%. As agreed, the compensation of Rs. 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA treated the expenditure on compensation against reduction of de-rating amounting to Rs. 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. Assessee could not filed the copy of the settlement arrived at between ICCL and lenders. Alternately, it was contended that since the expenditure was related to the amalgamation, therefore, the assessee be allowed deduction as per the provisions of section 35DD. It was also contended that once the action of the CIT(A) deleting the disallowance made by the assessing officer in respect of carry forward and set off of unabsorbed depreciation was confirmed, there remain no addition on the basis of reasons recorded by the assessing officer for initiating action u/s 147.
Revenue contended that deletion of the addition by the Appellate Authority does not mean that no addition was made by the assessing officer.
Having heard the parties, the tribunal held that,
A) ++ In our view the impugned issue taken by the revenue in its grounds of appeal is duly covered by the decision of Gujarat High Court in the aforesaid case in which Gujarat High Court has held as under :-
In appeal, CIT(A) directed Assessing Officer to allow unabsorbed depreciation for assessment year 1990-91 to 1992-93 as disallowance of same was not in accordance with the law.
The revenue went in appeal before the ITAT. In the mean time the Assessing Officer by issuing the notice u/s 148, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating had lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remained unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forward only upto the end of the assessment year 2005-06. Revenue was of the view that unabsorbed depreciation relating to the assessment year 1993-94 to 1997-98 got lapsed before assessment year 2006-07 and the carry forward of unabsorbed depreciation was reduced. The tribunal restored the issue to the file of the CIT(A) in the light of the finding of the assessing officer in the re-assessment order. The assessee filed appeal before CIT(A) against the order of the Assessing Officer. CIT(A) disposed off both the appeals by common order and decided the issue in favour of the assessee with regard to entire amount of unabsorbed depreciation.
B) During the course of the re-assessment proceeding, the assessing officer noticed that the assessee had claimed expenditure on account of compensation paid to lenders for de-rating of the shares as revenue expenditure. The assessee was asked to explain. The assessee explained that ICCL merged with IMFA and as per the agreement ICCL entered into with its lender i.e six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt in the year 2003. One of the conditions of the said settlement was that ICCL should merge with its promoter company IMFA and ICCL should de-rate its existing capital by 95%. The share holders of ICCL did not accept the proposal of de-rating and therefore, lenders were requested to reduce the de-rating from 95% to 50% through ICCL and a request was made to IDBI. The lender accepted the proposal but demanded a sum of Rs. 74,174,113/- as compensation towards loss being suffered due to such changes in the de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The AO was of the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also held that the expenditure was not a result of amalgamation therefore, this was not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The Assessing Officer thus rejected the claim.
In appeal, CIT(A) confirmed the order of the Assessing Officer by observing that the impugned compensation was paid as a precondition for debt restructuring and more particularly for the consortium agreeing upon the de-rating percentage at 50% instead of 95%. Since this is not at all an expenditure relatable to amalgamation, there was no question of amortization of expenditure either.
Assessee contended that it had to incur expenditure as compensation paid to the financial institution for making necessary amendment in the structured settlement proposal to de-rate ICCL's existing shares by 50%. As agreed, the compensation of Rs. 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA treated the expenditure on compensation against reduction of de-rating amounting to Rs. 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. Assessee could not filed the copy of the settlement arrived at between ICCL and lenders. Alternately, it was contended that since the expenditure was related to the amalgamation, therefore, the assessee be allowed deduction as per the provisions of section 35DD. It was also contended that once the action of the CIT(A) deleting the disallowance made by the assessing officer in respect of carry forward and set off of unabsorbed depreciation was confirmed, there remain no addition on the basis of reasons recorded by the assessing officer for initiating action u/s 147.
Revenue contended that deletion of the addition by the Appellate Authority does not mean that no addition was made by the assessing officer.
Having heard the parties, the tribunal held that,
A) ++ In our view the impugned issue taken by the revenue in its grounds of appeal is duly covered by the decision of Gujarat High Court in the aforesaid case in which Gujarat High Court has held as under :-
".Prior to the Finance Act No.2 of 1996, the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the assessment year 1997-98. CBDT Circular No. 762, dated 18-2-1998 in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. [Para 31]
So, the unabsorbed depreciation allowance of assessment year 1996-97 would be added to the allowance of assessment year 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from assessment year 1997-98. [Para 32]The provision of section 32(2) was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. [Para 34]The said CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and, accordingly, the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. This amendment has become applicable from assessment year 2002-03 and subsequent years meaning that only unabsorbed depreciation available to an assessee on 1st day of April, 2002 (assessment year 2002-03) will be dealt within accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 3292) as it stood before the said amendment. If the intention of the Legislature has been to allow the unabsorbed depreciation allowance worked out in assessment year 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001, it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence, a purposive and harmonious interpretation has to be taken keeping in view the purpose of amendment of section 32(2). While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of section by the clear words used in section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under section 32(2, in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32(2) shall be mandatory. Therefore, the provisions of section 32(2) as amended by the Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the time it is set off against the profits and gains of subsequent years. [Para 37]
Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which deductible in the first place from the income of the business to which it relates. If such depreciation amount is in excess than the amount of the profits of that business, then such excess should be adjusted against the profits and gains from any other business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next year. Where there is current depreciation for such succeeding year, the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from assessment year 1997-98 up to the assessment year 2001-02 got clarified forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. [Para 38]"
++ No contrary decision was brought to our knowledge by the D.R except relying on the order of Assessing Officer. The SLP against the said order has been dismissed by Supreme Court. We noted that Gujarat High Court while deciding the issue in General Motors (I) Pvt. Ltd vs DCIT has not noticed its earlier decision in Devesh Metcast Ltd vs JCIT, 338 ITR 130 (Guj) and that of Madras High Court in the case of Commissioner of Income-tax vs RPIL Signalling Systems Ltd. 328 ITR 283 (Mad) which had taken a contrary view. Since SLP has been dismissed against the decision of Gujarat High Court in the case of General Motors (I) Pvt Ltd we are bound to follow the same. This is also a settled law that if there is contrary decisions of different High Courts and there is no decision of the jurisdiction High Court, the view favourable to the subject has to be taken. In respect of ground relating to violation of Rule 46A, the D.R could not explain what fresh evidence has been filed by the assessee before the CIT(A). We therefore, dismiss all the ground taken by the revenue;
B) ++ The assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236 = 2010-TIOL-907-HC-MUM-IT. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact High Court deleted the additions which were made in respect of the issues other than the issues in respect of which proceedings u/s 147 were initiated. In the impugned case, the addition for the unabsorbed depreciation was duly made along with disallowance for compensation paid to the lenders for de-rating of the shares on account of arriving of the settlement for long term borrowing of the company which got merged with the assessee company, by the assessing officer. The reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation. The disallowance of unabsorbed depreciation was deleted by the Appellate Authority that does not mean no addition was made by the assessing officer on the basis of the reason to believe recorded by him. The section 147 of the Income Tax Act talks of assessing officer not of the appellate authority. These decisions in our opinion are not applicable to the facts of the case. In our opinion, there is no illegality in this case as per the provision of section 147 of the Income Tax Act. We accordingly dismiss this technical plea of the A.R;
++ ICCL had borrowed money from its lenders i.e. with six bankers and two financial institutions. The ICCL was not able to make the payment or to fulfil its commitment towards the re-payment of the long term debt. Therefore a debt restructuring plan for ICCI was approved and the terms lenders had suggested in 2003 for derating of existing equity shares of ICCL by 95%, and to convert part of debt by lenders into ICCL equity. Subsequently as per the assessee the derating was done @50% and for that compensation was paid to the financial institutions otherwise they would have not agreed for reduction of de-rating. In our opinion, if the shares are de-rated by 95%, the lenders would have got more shares on conversion of loan in to equity. Once the de-rating is reduced, the natural consequence is that the lenders got less shares in ICCL on conversion of the loan into equity. This means that the lenders will be getting the share on conversion of loan into equity at settlement at a higher price. The company therefore, would have compensated the lender so that they may arrive at a settlement. This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to Rs. 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred cannot be regarded for facilitating the business of the assessee or liquidating the recurring claims as contended by the ld. A.R. The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003. The expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation. This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value. The compensation so paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal. The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile share holder of ICCL. Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital. Therefore, the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee.
B) ++ The assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236 = 2010-TIOL-907-HC-MUM-IT. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact High Court deleted the additions which were made in respect of the issues other than the issues in respect of which proceedings u/s 147 were initiated. In the impugned case, the addition for the unabsorbed depreciation was duly made along with disallowance for compensation paid to the lenders for de-rating of the shares on account of arriving of the settlement for long term borrowing of the company which got merged with the assessee company, by the assessing officer. The reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation. The disallowance of unabsorbed depreciation was deleted by the Appellate Authority that does not mean no addition was made by the assessing officer on the basis of the reason to believe recorded by him. The section 147 of the Income Tax Act talks of assessing officer not of the appellate authority. These decisions in our opinion are not applicable to the facts of the case. In our opinion, there is no illegality in this case as per the provision of section 147 of the Income Tax Act. We accordingly dismiss this technical plea of the A.R;
++ ICCL had borrowed money from its lenders i.e. with six bankers and two financial institutions. The ICCL was not able to make the payment or to fulfil its commitment towards the re-payment of the long term debt. Therefore a debt restructuring plan for ICCI was approved and the terms lenders had suggested in 2003 for derating of existing equity shares of ICCL by 95%, and to convert part of debt by lenders into ICCL equity. Subsequently as per the assessee the derating was done @50% and for that compensation was paid to the financial institutions otherwise they would have not agreed for reduction of de-rating. In our opinion, if the shares are de-rated by 95%, the lenders would have got more shares on conversion of loan in to equity. Once the de-rating is reduced, the natural consequence is that the lenders got less shares in ICCL on conversion of the loan into equity. This means that the lenders will be getting the share on conversion of loan into equity at settlement at a higher price. The company therefore, would have compensated the lender so that they may arrive at a settlement. This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to Rs. 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred cannot be regarded for facilitating the business of the assessee or liquidating the recurring claims as contended by the ld. A.R. The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003. The expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation. This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value. The compensation so paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal. The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile share holder of ICCL. Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital. Therefore, the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee.
Revenue's appeal dismissed; Assessee's C.O dismissed
Case followed:
General Motors Ltd, 354 ITR 244 (Guj)
ORDER
Per: P K Bansal:
This appeal as well as cross objection have been filed against the order of CIT(A), Bhubaneswar passed u/s 143(3) dated 17.12.2012. In the appeal, the revenue has taken the following effective grounds of appeal :-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have disallowed the entire unabsorbed depreciation pertaining to assessment years 1990-91 to 1997-98 aggregating to Rs.42578.02 lakh for the purpose of carry forward in view of the provisions of Sec.32(2) of the I.T. Act which were effective from 01.04.97 to 31.03.02 before the same were amended by Finance Act 2001 w.e.f. 01.04.02 and to that extent the Ld. CIT(A) should have rectified the order of the AO by enhancing the disallowance made by the A.O.2. On the facts and in the circumstances of the case, Ld. CIT(A) has not correctly appreciated the import of the provisions of Sec.32(2) as they existed from 01.04.97 to 31.03.02 and has also not followed the decision of the Hon'ble ITAT, Spl. Bench 'E' Mumbai in the case of DCIT Vs Times Guarantee Ltd reported in - 2010-TIOL-340-ITAT-MUM-SB, 131 TTJ 257 in which the same issue was examined in detail.3. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in accepting the contention of the assessee without giving the AO a reasonable opportunity in violation of Rule 46A."
2. In the C.O. the assessee has taken as many as eleven grounds of appeal. Ground no. 1 to 7 since not pressed therefore, stands dismissed as not pressed. Now there remains following grounds survived:-
"8. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Rs.7.41 crores incurred in connection with de-rating of shares without appreciating that neither the said item of income formed part of the reasons recorded by the assessing officer for initiating re-assessment proceedings under section 147/148 of the Act, nor was such expenditure connected with the issue of deduction for unabsorbed depreciation on the basis of which reassessment proceedings had been initiated.9. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Rs.7.41 crores incurred in connection with de-rating of shares without appreciating that even in terms of Explanation 3 to section 147 of the Act roving and fishing enquiries are not permitted and that only those items of income which are connected with and come to the notice of the assessing officer after initiating the re-assessment proceedings can be brought to tax under section 147 of the Act.10. Without prejudice, that the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Rs.7.41crores incurred and claimed by the respondent in connection with de-rating of shares without appreciating that such expenditure was on revenue account and incurred wholly and exclusively towards business of the appellant.11. Without further prejudice, that the CIT(A) erred on facts and in law in not allowing amortization of expenses incurred in connection with de-rating of shares under section 35DD of the Act."
3. The only issue involved in the grounds taken by the revenue relate to the carry forward and set of the unabsorbed depreciation for the assessment year 1991 to 1997-98. The brief facts relating to this issue are that the Assessing Officer noticed that the assessee claimed unabsorbed depreciation relating to Indian Charge Chrome Ltd which was amalgamated with the assessee company amounting to Rs. 502,15,46,000/- w.e.f. 01.04.2005. The Assessing Officer examined the claim for carry forward and set off and was of the view that after the amendment of section 32(2) w.e.f. 1.4.1997 the assessee was entitled to carry forward and set off unabsorbed depreciation for a particular year only for a total period of eight assessment years subsequent to the assessment year to which the unabsorbed depreciation relates.This provision existed till assessment year 2001-02. The assessing officer after examining the details was of the view during the original assessment that depreciation relating to the assessment year 1990-91 and 1992-93 got lapsed and could not be carried forward beyond assessment year 2001-02. The total depreciation so lapsed was Rs.182,74,22,000/-and therefore he allowed carry forward of balance depreciation amounting to Rs.319,41,24,000/-. When the matter went before the CIT(A) the CIT(A) took the view that the denial of the benefit of carry forward of unabsorbed depreciation relating the assessment year 1990-91 to 1992-93 was not in accordance with the law and accordingly directed the assessing officer to allow unabsorbed depreciation of Rs. 182,74,22,000/- relating to these years for the purpose of carry forward. The revenue went in appeal before the ITAT on 29.11.2010. In the mean time the Assessing Officer by issuing the notice u/s 148 dated 28.10.2010, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating to Rs. 42578.02 lakh has lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remains unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forward only upto the end of the assessment year 2005-06. In view of provision to section 32(2) as it exists prior to assessment year 1997-98. Thus revenue was of the view that the sum of Rs. 24304 lakh has been deemed to have escaped assessment within meaning of Explanation 2 of section 147 and subsequently assessing officer after considering the objections and submissions of the assessee took the view vide order dated 15.4.2011 that the unabsorbed depreciation amounting to Rs 243,03,80,000/- relating to the assessment year 1993-94 to 1997-98 got lapsed before assessment year 2006-07 and reduced the carry forward of unabsorbed depreciation to Rs.1,85,55,39,761/- lakh. The tribunal vide its order dated 16.12.2011 restored the issue to the file of the CIT(A) in the light of the finding of the assessing officer in the re-assessment order. The assessee went in appeal before the CIT(A) on 13.5.2011 against the order of the assessing officer dated 15.4.2011. CIT(A) disposed off both the appeals against the original assessment and re-assessment by common order dated 17.12.2012 by taking the decision on the entire amount of unabsorbed depreciation amounting to Rs. 502,15,46,000/- for the unabsorbed depreciation and took the view in favour of the assessee relying on the decision of Hon'ble Gujarat High Court in the case of General Motors Ltd, 354 ITR 244 (Guj).
4. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below and the case law cited before us. We have also gone through the circular no. 762 dated 18.2.1998 as well as circular no.14 of 2001. We have also gone through the decision of General Motors Pvt. Ltd vs CIT, 354 ITR 244. In our view the impugned issue taken by the revenue in its grounds of appeal is duly covered by the decision of Hon'ble Gujarat High Court in the aforesaid case in which Hon'ble Gujarat High Court has held as under :-
".Prior to the Finance Act No.2 of 1996, the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the assessment year 1997-98. CBDT Circular No. 762, dated 18-2-1998 in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. [Para 31]So, the unabsorbed depreciation allowance of assessment year 1996-97 would be added to the allowance of assessment year 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from assessment year 1997-98. [Para 32]The provision of section 32(2) was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. [Para 34]The said CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and, accordingly, the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. This amendment has become applicable from assessment year 2002-03 and subsequent years meaning that only unabsorbed depreciation available to an assessee on 1st day of April, 2002 (assessment year 2002-03) will be dealt within accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 3292) as it stood before the said amendment. If the intention of the Legislature has been to allow the unabsorbed depreciation allowance worked out in assessment year 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001, it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence, a purposive and harmonious interpretation has to be taken keeping in view the purpose of amendment of section 32(2). While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of section by the clear words used in section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under section 32(2, in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32(2) shall be mandatory. Therefore, the provisions of section 32(2) as amended by the Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the time it is set off against the profits and gains of subsequent years. [Para 37]Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which deductible in the first place from the income of the business to which it relates. If such depreciation amount is in excess than the amount of the profits of that business, then such excess should be adjusted against the profits and gains from any other business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next year. Where there is current depreciation for such succeeding year, the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from assessment year 1997-98 up to the assessment year 2001-02 got clarified forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. [Para 38]"
No contrary decision was brought to our knowledge by the ld. D.R except relying on the order of Assessing Officer. The SLP against the said order has been dismissed by Hon'ble Supreme Court. We noted that Gujarat High Court while deciding the issue in General Motors (I) Pvt. Ltd vs DCIT has not noticed its earlier decision in Devesh Metcast Ltd vs JCIT, 338 ITR 130 (Guj) and that of Madras High Court in the case of Commissioner of Income-tax vs RPIL Signalling Systems Ltd. 328 ITR 283 (Mad) which had taken a contrary view. Since SLP has been dismissed against the decision of Gujarat High Court in the case of General Motors (I) Pvt Ltd we are bound to follow the same. This is also a settled law that if there is contrary decisions of different High Courts and there is no decision of the jurisdiction High Court, the view favourable to the subject has to be taken. In respect of ground relating to violation of Rule 46A, the ld. D.R could not explain what fresh evidence has been filed by the assessee before the CIT(A). We therefore, dismiss all the ground taken by the revenue.
5. In the C.O the ground nos. 8 to 11 relate to the issue relating to the claim of the deduction amounting to Rs.7.41 crores incurred by paying the compensation for de-rating of the shares. The brief facts of this issue are that during the course of the re-assessment proceeding, the assessing officer noticed that the assessee has claimed a sum of Rs. 741,74,113/- as revenue expenditure on account of compensation paid to lenders for de-rating of the shares. The assessee was asked to explain. The assessee explained that ICCL merge with IMFA w.e.f. 1.4.2005. As per the agreement ICCL entered into with its lender i.e six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt in the year 2003. One of the conditions of the said settlement was that ICCL should merge with its promoter company IMFA and ICCL should de-rate its existing capital by 95%. The share holders of ICCL did not accept the proposal of de-rating and therefore, lenders were requested to reduce the de-rating from 95% to 50% through ICCL and a request was made to IDBI vide letter dated 19.8.2005. The lender accepted the proposal but demanded a sum of Rs. 74,174,113/- as compensation towards loss being suffered due to such changes in the de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The assessing officer took the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also told that the expenditure was not as a result of amalgamation therefore, this is not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The assessing officer thus rejected the claim. The assessee went in appeal before the CIT(A), CIT(A) after considering the submission of the assessee confirmed the order of the assessing officer by observing as under :-
"11. As regards the compensation pertaining to the reduction of de-rating from 90% to 50%, it is clearly relatable to the restricting/modification of share capital of M/s. ICCL. On one hand the lending consortium accepted that the share capital in the company should be de-rated by 50% instead of the original proposed 95%, on the other hand for doing so the consortium demanded and got compensation amount of Rs.7,41,74,113/-. The benefit which accrued to M/s.ICCL-IMFA (amalgamated company) was a direct easing reduction in loan amount payable to the lending consortium and / or the period of payment. In other words, the compensation was paid for funds facilitation. Directly or indirectly, payment of such compensation did not have any beneficial impact on the trading activity which was otherwise being carried on either by M/s. IMFA or M/s. ICCL. This compensation definitely does not have any connection with "remove of obstacles" for smooth conduct of business.11.1. I have gone through all the citations of cases contained in para-4.0 to 4.2 in the paper book submitted by the appellant (page 30 to 37). In my humble observation, not a single case pertains to funds facilitation or payment on account of variation in face value of share capital.12. In view of my foregoing discussions, I confirm the action of the AO holding that the impugned compensation was paid as a precondition for debt restructuring and more particularly for the consortium agreeing upon the de-rating percentage at 50% instead of 95%. Since this is not at all an expenditure relatable to amalgamation (in fact amalgamation and de-rating were 2 individual conditions for debt restructuring), there is no question of amortization of expenditure either."
6. The ld. A.R in this regard contended before us that the assessee has to incur an expenditure of Rs. 7,41,74,113/- as compensation paid to the financial institution for making necessary amendment in the structured settlement proposal to de-rate ICCL's existing shares by 50%. It was submitted that ICCL had entered into an agreement with its lenders i.e. with six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt during the year 2003. One of the conditions in the said settlement was that ICCL should merge with its promoters company IMFA and ICCL should derated its existing share capital by 95%. The share holders of ICCL did not accept the proposed de-rating and requested the lenders to reduce the de-rating from 95% to 50% through ICCL. The ICCL made a request to the IDBI. As agreed, the compensation of Rs. 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA (ICCL since merged with effect from 1, April 2005) treated the expenditure on compensation against reduction of de-rating amounting to Rs. 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. The expenditure has wrongly been treated by the revenue as capital expenditure. The expenditure has been incurred for the furtherance of the business of the assessee. The expenditure is of not enduring nature. The expenditure is closely related to the business and therefore, it has to be viewed as an integral part of the conduct of the business. Reliance was placed on the following decisions :-
"1. Empire Jute Co. Ltd vs CIT [1980] 124 ITR 1 (SC) = 2002-TIOL-238-SC-IT2. CIT vs Shantilal P. Ltd. [1983] 144 ITR 57 (SC)3. CIT vs Desiccant Rotors International Pvt. Ltd. [2012] 347 ITR 32 (Del) = 2011-TIOL-517-HC-DEL-IT.4. CIT vs Karamchand Premchand Pvt. Ltd. [1993] 200 ITR 281 (Guj).5. Asst. CIT vs W.S.Industries (India) Ltd. [2011] 128 ITD 98 = 2009-TIOL-725-ITAT-MAD."
7. The ld. A.R could not filed the copy of the settlement arrived at between ICCL and lenders. Alternately, it was contended that since the expenditure is related to the amalgamation, therefore, the assessee be allowed deduction as per the provisions of section 35DD.
7.1 The ld. A.R also taken a technical objection that once the action of the CIT(A) deleting the disallowance made by the assessing officer in respect of carry forward and set off of unabsorbed depreciation is confirmed, there will remain no addition on the basis of reasons recorded by the assessing officer for initiating action u/s 147. The assessing officer will not be able to make any other addition as the word used in section 147 is 'and'. In this regard reliance was placed on the following decisions :-
1. Ranbaxy Laboratories Ltd vs CIT, 336 ITR 136 (Del) = 2011-TIOL-356-HC- DEL -IT2. CIT vs Jet Airways (I) Ltd, 331 ITR 236 (Mum) = 2010-TIOL-907-HC-MUM-IT.
8. The ld. D.R on the other hand vehemently contended that deletion of the addition by the Appellate Authority does not mean that no addition was made by the assessing officer. The decision of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT (Supra) and that of CIT vs Jet Airways (I) Ltd are the cases where no addition was made by the assessing officer on the basis of the reasons recorded. The addition was made in respect of other income for which reasons were not recorded. On the issue of payment of the compensation for the de-rating of the share of ICCL, reliance was placed on the decision of CIT(A). It was also argued that the provision of section 35DD were not applicable as this expense is not related to the amalgamation.
9. We heard the rival submission and carefully considered the same along with the orders of tax authorities below. So far the technical issue relating to the power of the assessing officer in respect of addition made by disallowing compensation paid to the lenders for de-rating is concerned, we noted that in this case the assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT (supra) and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236 = 2010-TIOL-907-HC-MUM-IT. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact Hon'ble High Court deleted the additions which were made in respect of the issues other than the issues in respect of which proceedings u/s 147 were initiated. In the impugned case, the addition for the unabsorbed depreciation was duly made along with disallowance for compensation paid to the lenders for de-rating of the shares on account of arriving of the settlement for long term borrowing of the company which got merged with the assessee company, by the assessing officer. The reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation. The disallowance of unabsorbed depreciation was deleted by the Appellate Authority that does not mean no addition was made by the assessing officer on the basis of the reason to believe recorded by him. The section 147 of the Income Tax Act talks of assessing officer not of the appellate authority. These decisions in our opinion are not applicable to the facts of the case. In our opinion, there is no illegality in this case as per the provision of section 147 of the Income Tax Act. We accordingly dismiss this technical plea of the ld. A.R.
10. Now, we will deal with the plea of the ld. A.R whether the expenditure incurred by ICCL which got amalgamated in the assessee in respect of compensation paid to the lenders against the reduction of the de-rating. This is an undisputed fact that ICCL had borrowed money from its lenders i.e. with six bankers and two financial institutions. The ICCL was not able to make the payment or to fulfil its commitment towards the re-payment of the long term debt. Therefore a debt restructuring plan for ICCI was approved and the terms lenders had suggested in 2003 for derating of existing equity shares of ICCL by 95%, and to convert part of debt by lenders into ICCL equity. Subsequently as per the assessee the derating was done @50% and for that compensation was paid to the financial institutions otherwise they would have not agreed for reduction of de-rating. In our opinion, if the shares are de-rated by 95%, the lenders would have got more shares on conversion of loan in to equity. Once the de-rating is reduced, the natural consequence is that the lenders got less shares in ICCL on conversion of the loan into equity. This means that the lenders will be getting the share on conversion of loan into equity at settlement at a higher price. The company therefore, would have compensated the lender so that they may arrive at a settlement. This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to Rs. 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred cannot be regarded for facilitating the business of the assessee or liquidating the recurring claims as contended by the ld. A.R. The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003. The expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation. This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value. The compensation so paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal. The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile share holder of ICCL. Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital. Therefore, the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee.
11. We have gone through the case laws as relied on by ld. A.R. The decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd (supra) in our opinion will not assist the assessee as the issue involved in that case does not relate for paying the compensation to the lender on conversion of the long term debt into equity share at a higher value as has been expected by the lender. The expenditure so incurred is not for facilitating the day-to-day trading operations of the assessee company and enabling the management and conduct of the assessee company's business to be carried on more efficiently. The decision of Hon'ble Supreme Court in the case of CIT vs Shantilal Pvt. Ltd (supra) deals with the award of compensation by an arbitration award on a dispute between the parties. The question involved relate to whether the loss suffered by the assessee was a loss incurred in a speculative transaction. Thus, this decision will not apply to the facts of the case. The decision of Delhi High Court in CIT vs Desiccant Rotors International Pvt. Ltd (supra) will also not apply with the facts of the case as the amount was paid for settlement of suit for infringement of patent. The issue was whether the amount so paid is penalty or business expenditure. In the case of CIT vs Karamchand Premchand Pvt. Ltd. [1993] 200 ITR 281 (Guj) the issue relate to the payment made for securing or augmenting electrical power supply whether it is a revenue expenditure or capital expenditure. The Hon'ble Court took the view that the expenditure has been incurred for profit making apparatus and due to its profit making structure can be operated with greater productivity therefore, payment will take the character of revenue expenditure. The compensation in the case of the assessee has not been made for profit apparatus or for increase in production but for compensating the share capital. This decision therefore is not applicable in the case of the assessee. We have also persued the case of Chennai bench in the case of ACIT vs WS Industries, 128 ITD 98 = 2009-TIOL-725-ITAT-MAD. This decision relate to the claim made by the assessee for discharging the corporate guarantee given for its subsidiary company under the settlement with the banks by affecting one time settlement. This decision has not to deal with the compensation paid on capital account. Thus this decision is also not applicable to the facts of the case before us. We therefore, dismiss the ground nos. 8 to 11.
12. In the result, both the appeal filed by the revenue as well as C.O filed by the assessee are dismissed.
13. Order pronounced in pursuance of Rule 34(4) of ITAT Rules, 1963 by putting on notice board of the Bench at Cuttack on 6.6.2014.
Regards,
Pawan Singla , LLB
M. No. 9825829075
To It_law_reported@yahoogroups.com
Today at 2:16 AM
2014-TIOL-405-ITAT-CUTTACK
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH, CUTTACK
BENCH, CUTTACK
ITA No.160/CTK/2013
Assessment Year: 2006-07
Assessment Year: 2006-07
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE -2(1), BHUBANESWAR
CIRCLE -2(1), BHUBANESWAR
Vs
INDIAN METALS AND FERROW ALLOYS LTD
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
CO No.27/CTK/2013
Assessment Year: 2006-07
ITA No.160/CTK/2013
Assessment Year: 2006-07
ITA No.160/CTK/2013
INDIAN METALS AND FERROW ALLOYS LTD
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
BOMIKHAL, RASULGARH,
BHUBANESWAR-751010
PAN NO:AAAC14818F
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE -2(1), BHUBANESWAR
CIRCLE -2(1), BHUBANESWAR
P K Bansal, AM And D T Garasia, JM
Date of Hearing: May 1, 2014
Date of Decision: June 6, 2014
Date of Decision: June 6, 2014
Appellant Rep by: P K Dash, DR
Respondent Rep by: Sachit Jally, AR
Respondent Rep by: Sachit Jally, AR
Income Tax - Sections 32(2), 35DD, 37(1), 147 & 148.
Keywords: reopening, reassessment, escapement of income, carry forward of unabsorbed depreciation, business expenditure, disallowance, compensation paid for de-rating of the shares, revenue expenditure, capital expenditure.
Whether unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 would be carried forward to the succeeding years and set off against the profits and gains of subsequent years, without any limit - Whether where the assessing officer had made the addition in respect of the income for which reasons for escapement of assessment were recorded by him and the additions were deleted by the CIT(A), the action of the assessing officer would become illegal if adds any other income chargeable to tax which had escaped assessment and which came to his notice subsequently, in the course of the proceedings u/s 147 - Whether the expenditure incurred by assessee for compensating the lenders as they agreed to take the shares of the merging company at a higher price than what was proposed by them in their structured settlement would amount to capital expenditure.
Keywords: reopening, reassessment, escapement of income, carry forward of unabsorbed depreciation, business expenditure, disallowance, compensation paid for de-rating of the shares, revenue expenditure, capital expenditure.
Whether unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 would be carried forward to the succeeding years and set off against the profits and gains of subsequent years, without any limit - Whether where the assessing officer had made the addition in respect of the income for which reasons for escapement of assessment were recorded by him and the additions were deleted by the CIT(A), the action of the assessing officer would become illegal if adds any other income chargeable to tax which had escaped assessment and which came to his notice subsequently, in the course of the proceedings u/s 147 - Whether the expenditure incurred by assessee for compensating the lenders as they agreed to take the shares of the merging company at a higher price than what was proposed by them in their structured settlement would amount to capital expenditure.
A) The assessee claimed unabsorbed depreciation relating to Indian Charge Chrome Ltd which was amalgamated with the assessee company. The Assessing Officer examined the claim for carry forward and set off and was of the view that after the amendment of section 32(2) w.e.f. 1.4.1997 the assessee was entitled to carry forward and set off unabsorbed depreciation for a particular year only for a total period of eight assessment years subsequent to the assessment year to which the unabsorbed depreciation relates. This provision existed till assessment year 2001-02. The assessing officer after examining the details was of the view during the original assessment that depreciation relating to the assessment year 1990-91 and 1992-93 got lapsed and could not be carried forward beyond assessment year 2001-02. Assessing Officer allowed carry forward of balance depreciation.
In appeal, CIT(A) directed Assessing Officer to allow unabsorbed depreciation for assessment year 1990-91 to 1992-93 as disallowance of same was not in accordance with the law.
The revenue went in appeal before the ITAT. In the mean time the Assessing Officer by issuing the notice u/s 148, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating had lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remained unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forward only upto the end of the assessment year 2005-06. Revenue was of the view that unabsorbed depreciation relating to the assessment year 1993-94 to 1997-98 got lapsed before assessment year 2006-07 and the carry forward of unabsorbed depreciation was reduced. The tribunal restored the issue to the file of the CIT(A) in the light of the finding of the assessing officer in the re-assessment order. The assessee filed appeal before CIT(A) against the order of the Assessing Officer. CIT(A) disposed off both the appeals by common order and decided the issue in favour of the assessee with regard to entire amount of unabsorbed depreciation.
B) During the course of the re-assessment proceeding, the assessing officer noticed that the assessee had claimed expenditure on account of compensation paid to lenders for de-rating of the shares as revenue expenditure. The assessee was asked to explain. The assessee explained that ICCL merged with IMFA and as per the agreement ICCL entered into with its lender i.e six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt in the year 2003. One of the conditions of the said settlement was that ICCL should merge with its promoter company IMFA and ICCL should de-rate its existing capital by 95%. The share holders of ICCL did not accept the proposal of de-rating and therefore, lenders were requested to reduce the de-rating from 95% to 50% through ICCL and a request was made to IDBI. The lender accepted the proposal but demanded a sum of Rs. 74,174,113/- as compensation towards loss being suffered due to such changes in the de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The AO was of the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also held that the expenditure was not a result of amalgamation therefore, this was not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The Assessing Officer thus rejected the claim.
In appeal, CIT(A) confirmed the order of the Assessing Officer by observing that the impugned compensation was paid as a precondition for debt restructuring and more particularly for the consortium agreeing upon the de-rating percentage at 50% instead of 95%. Since this is not at all an expenditure relatable to amalgamation, there was no question of amortization of expenditure either.
Assessee contended that it had to incur expenditure as compensation paid to the financial institution for making necessary amendment in the structured settlement proposal to de-rate ICCL's existing shares by 50%. As agreed, the compensation of Rs. 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA treated the expenditure on compensation against reduction of de-rating amounting to Rs. 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. Assessee could not filed the copy of the settlement arrived at between ICCL and lenders. Alternately, it was contended that since the expenditure was related to the amalgamation, therefore, the assessee be allowed deduction as per the provisions of section 35DD. It was also contended that once the action of the CIT(A) deleting the disallowance made by the assessing officer in respect of carry forward and set off of unabsorbed depreciation was confirmed, there remain no addition on the basis of reasons recorded by the assessing officer for initiating action u/s 147.
Revenue contended that deletion of the addition by the Appellate Authority does not mean that no addition was made by the assessing officer.
Having heard the parties, the tribunal held that,
A) ++ In our view the impugned issue taken by the revenue in its grounds of appeal is duly covered by the decision of Gujarat High Court in the aforesaid case in which Gujarat High Court has held as under :-
In appeal, CIT(A) directed Assessing Officer to allow unabsorbed depreciation for assessment year 1990-91 to 1992-93 as disallowance of same was not in accordance with the law.
The revenue went in appeal before the ITAT. In the mean time the Assessing Officer by issuing the notice u/s 148, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating had lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remained unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forward only upto the end of the assessment year 2005-06. Revenue was of the view that unabsorbed depreciation relating to the assessment year 1993-94 to 1997-98 got lapsed before assessment year 2006-07 and the carry forward of unabsorbed depreciation was reduced. The tribunal restored the issue to the file of the CIT(A) in the light of the finding of the assessing officer in the re-assessment order. The assessee filed appeal before CIT(A) against the order of the Assessing Officer. CIT(A) disposed off both the appeals by common order and decided the issue in favour of the assessee with regard to entire amount of unabsorbed depreciation.
B) During the course of the re-assessment proceeding, the assessing officer noticed that the assessee had claimed expenditure on account of compensation paid to lenders for de-rating of the shares as revenue expenditure. The assessee was asked to explain. The assessee explained that ICCL merged with IMFA and as per the agreement ICCL entered into with its lender i.e six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt in the year 2003. One of the conditions of the said settlement was that ICCL should merge with its promoter company IMFA and ICCL should de-rate its existing capital by 95%. The share holders of ICCL did not accept the proposal of de-rating and therefore, lenders were requested to reduce the de-rating from 95% to 50% through ICCL and a request was made to IDBI. The lender accepted the proposal but demanded a sum of Rs. 74,174,113/- as compensation towards loss being suffered due to such changes in the de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The AO was of the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also held that the expenditure was not a result of amalgamation therefore, this was not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The Assessing Officer thus rejected the claim.
In appeal, CIT(A) confirmed the order of the Assessing Officer by observing that the impugned compensation was paid as a precondition for debt restructuring and more particularly for the consortium agreeing upon the de-rating percentage at 50% instead of 95%. Since this is not at all an expenditure relatable to amalgamation, there was no question of amortization of expenditure either.
Assessee contended that it had to incur expenditure as compensation paid to the financial institution for making necessary amendment in the structured settlement proposal to de-rate ICCL's existing shares by 50%. As agreed, the compensation of Rs. 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA treated the expenditure on compensation against reduction of de-rating amounting to Rs. 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. Assessee could not filed the copy of the settlement arrived at between ICCL and lenders. Alternately, it was contended that since the expenditure was related to the amalgamation, therefore, the assessee be allowed deduction as per the provisions of section 35DD. It was also contended that once the action of the CIT(A) deleting the disallowance made by the assessing officer in respect of carry forward and set off of unabsorbed depreciation was confirmed, there remain no addition on the basis of reasons recorded by the assessing officer for initiating action u/s 147.
Revenue contended that deletion of the addition by the Appellate Authority does not mean that no addition was made by the assessing officer.
Having heard the parties, the tribunal held that,
A) ++ In our view the impugned issue taken by the revenue in its grounds of appeal is duly covered by the decision of Gujarat High Court in the aforesaid case in which Gujarat High Court has held as under :-
".Prior to the Finance Act No.2 of 1996, the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the assessment year 1997-98. CBDT Circular No. 762, dated 18-2-1998 in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. [Para 31]
So, the unabsorbed depreciation allowance of assessment year 1996-97 would be added to the allowance of assessment year 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from assessment year 1997-98. [Para 32]The provision of section 32(2) was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. [Para 34]The said CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and, accordingly, the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. This amendment has become applicable from assessment year 2002-03 and subsequent years meaning that only unabsorbed depreciation available to an assessee on 1st day of April, 2002 (assessment year 2002-03) will be dealt within accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 3292) as it stood before the said amendment. If the intention of the Legislature has been to allow the unabsorbed depreciation allowance worked out in assessment year 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001, it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence, a purposive and harmonious interpretation has to be taken keeping in view the purpose of amendment of section 32(2). While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of section by the clear words used in section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under section 32(2, in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32(2) shall be mandatory. Therefore, the provisions of section 32(2) as amended by the Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the time it is set off against the profits and gains of subsequent years. [Para 37]
Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which deductible in the first place from the income of the business to which it relates. If such depreciation amount is in excess than the amount of the profits of that business, then such excess should be adjusted against the profits and gains from any other business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next year. Where there is current depreciation for such succeeding year, the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from assessment year 1997-98 up to the assessment year 2001-02 got clarified forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. [Para 38]"
++ No contrary decision was brought to our knowledge by the D.R except relying on the order of Assessing Officer. The SLP against the said order has been dismissed by Supreme Court. We noted that Gujarat High Court while deciding the issue in General Motors (I) Pvt. Ltd vs DCIT has not noticed its earlier decision in Devesh Metcast Ltd vs JCIT, 338 ITR 130 (Guj) and that of Madras High Court in the case of Commissioner of Income-tax vs RPIL Signalling Systems Ltd. 328 ITR 283 (Mad) which had taken a contrary view. Since SLP has been dismissed against the decision of Gujarat High Court in the case of General Motors (I) Pvt Ltd we are bound to follow the same. This is also a settled law that if there is contrary decisions of different High Courts and there is no decision of the jurisdiction High Court, the view favourable to the subject has to be taken. In respect of ground relating to violation of Rule 46A, the D.R could not explain what fresh evidence has been filed by the assessee before the CIT(A). We therefore, dismiss all the ground taken by the revenue;
B) ++ The assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236 = 2010-TIOL-907-HC-MUM-IT. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact High Court deleted the additions which were made in respect of the issues other than the issues in respect of which proceedings u/s 147 were initiated. In the impugned case, the addition for the unabsorbed depreciation was duly made along with disallowance for compensation paid to the lenders for de-rating of the shares on account of arriving of the settlement for long term borrowing of the company which got merged with the assessee company, by the assessing officer. The reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation. The disallowance of unabsorbed depreciation was deleted by the Appellate Authority that does not mean no addition was made by the assessing officer on the basis of the reason to believe recorded by him. The section 147 of the Income Tax Act talks of assessing officer not of the appellate authority. These decisions in our opinion are not applicable to the facts of the case. In our opinion, there is no illegality in this case as per the provision of section 147 of the Income Tax Act. We accordingly dismiss this technical plea of the A.R;
++ ICCL had borrowed money from its lenders i.e. with six bankers and two financial institutions. The ICCL was not able to make the payment or to fulfil its commitment towards the re-payment of the long term debt. Therefore a debt restructuring plan for ICCI was approved and the terms lenders had suggested in 2003 for derating of existing equity shares of ICCL by 95%, and to convert part of debt by lenders into ICCL equity. Subsequently as per the assessee the derating was done @50% and for that compensation was paid to the financial institutions otherwise they would have not agreed for reduction of de-rating. In our opinion, if the shares are de-rated by 95%, the lenders would have got more shares on conversion of loan in to equity. Once the de-rating is reduced, the natural consequence is that the lenders got less shares in ICCL on conversion of the loan into equity. This means that the lenders will be getting the share on conversion of loan into equity at settlement at a higher price. The company therefore, would have compensated the lender so that they may arrive at a settlement. This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to Rs. 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred cannot be regarded for facilitating the business of the assessee or liquidating the recurring claims as contended by the ld. A.R. The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003. The expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation. This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value. The compensation so paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal. The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile share holder of ICCL. Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital. Therefore, the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee.
B) ++ The assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236 = 2010-TIOL-907-HC-MUM-IT. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact High Court deleted the additions which were made in respect of the issues other than the issues in respect of which proceedings u/s 147 were initiated. In the impugned case, the addition for the unabsorbed depreciation was duly made along with disallowance for compensation paid to the lenders for de-rating of the shares on account of arriving of the settlement for long term borrowing of the company which got merged with the assessee company, by the assessing officer. The reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation. The disallowance of unabsorbed depreciation was deleted by the Appellate Authority that does not mean no addition was made by the assessing officer on the basis of the reason to believe recorded by him. The section 147 of the Income Tax Act talks of assessing officer not of the appellate authority. These decisions in our opinion are not applicable to the facts of the case. In our opinion, there is no illegality in this case as per the provision of section 147 of the Income Tax Act. We accordingly dismiss this technical plea of the A.R;
++ ICCL had borrowed money from its lenders i.e. with six bankers and two financial institutions. The ICCL was not able to make the payment or to fulfil its commitment towards the re-payment of the long term debt. Therefore a debt restructuring plan for ICCI was approved and the terms lenders had suggested in 2003 for derating of existing equity shares of ICCL by 95%, and to convert part of debt by lenders into ICCL equity. Subsequently as per the assessee the derating was done @50% and for that compensation was paid to the financial institutions otherwise they would have not agreed for reduction of de-rating. In our opinion, if the shares are de-rated by 95%, the lenders would have got more shares on conversion of loan in to equity. Once the de-rating is reduced, the natural consequence is that the lenders got less shares in ICCL on conversion of the loan into equity. This means that the lenders will be getting the share on conversion of loan into equity at settlement at a higher price. The company therefore, would have compensated the lender so that they may arrive at a settlement. This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to Rs. 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred cannot be regarded for facilitating the business of the assessee or liquidating the recurring claims as contended by the ld. A.R. The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003. The expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation. This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value. The compensation so paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal. The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile share holder of ICCL. Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital. Therefore, the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee.
Revenue's appeal dismissed; Assessee's C.O dismissed
Case followed:
General Motors Ltd, 354 ITR 244 (Guj)
ORDER
Per: P K Bansal:
This appeal as well as cross objection have been filed against the order of CIT(A), Bhubaneswar passed u/s 143(3) dated 17.12.2012. In the appeal, the revenue has taken the following effective grounds of appeal :-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have disallowed the entire unabsorbed depreciation pertaining to assessment years 1990-91 to 1997-98 aggregating to Rs.42578.02 lakh for the purpose of carry forward in view of the provisions of Sec.32(2) of the I.T. Act which were effective from 01.04.97 to 31.03.02 before the same were amended by Finance Act 2001 w.e.f. 01.04.02 and to that extent the Ld. CIT(A) should have rectified the order of the AO by enhancing the disallowance made by the A.O.2. On the facts and in the circumstances of the case, Ld. CIT(A) has not correctly appreciated the import of the provisions of Sec.32(2) as they existed from 01.04.97 to 31.03.02 and has also not followed the decision of the Hon'ble ITAT, Spl. Bench 'E' Mumbai in the case of DCIT Vs Times Guarantee Ltd reported in - 2010-TIOL-340-ITAT-MUM-SB, 131 TTJ 257 in which the same issue was examined in detail.3. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in accepting the contention of the assessee without giving the AO a reasonable opportunity in violation of Rule 46A."
2. In the C.O. the assessee has taken as many as eleven grounds of appeal. Ground no. 1 to 7 since not pressed therefore, stands dismissed as not pressed. Now there remains following grounds survived:-
"8. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Rs.7.41 crores incurred in connection with de-rating of shares without appreciating that neither the said item of income formed part of the reasons recorded by the assessing officer for initiating re-assessment proceedings under section 147/148 of the Act, nor was such expenditure connected with the issue of deduction for unabsorbed depreciation on the basis of which reassessment proceedings had been initiated.9. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Rs.7.41 crores incurred in connection with de-rating of shares without appreciating that even in terms of Explanation 3 to section 147 of the Act roving and fishing enquiries are not permitted and that only those items of income which are connected with and come to the notice of the assessing officer after initiating the re-assessment proceedings can be brought to tax under section 147 of the Act.10. Without prejudice, that the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Rs.7.41crores incurred and claimed by the respondent in connection with de-rating of shares without appreciating that such expenditure was on revenue account and incurred wholly and exclusively towards business of the appellant.11. Without further prejudice, that the CIT(A) erred on facts and in law in not allowing amortization of expenses incurred in connection with de-rating of shares under section 35DD of the Act."
3. The only issue involved in the grounds taken by the revenue relate to the carry forward and set of the unabsorbed depreciation for the assessment year 1991 to 1997-98. The brief facts relating to this issue are that the Assessing Officer noticed that the assessee claimed unabsorbed depreciation relating to Indian Charge Chrome Ltd which was amalgamated with the assessee company amounting to Rs. 502,15,46,000/- w.e.f. 01.04.2005. The Assessing Officer examined the claim for carry forward and set off and was of the view that after the amendment of section 32(2) w.e.f. 1.4.1997 the assessee was entitled to carry forward and set off unabsorbed depreciation for a particular year only for a total period of eight assessment years subsequent to the assessment year to which the unabsorbed depreciation relates.This provision existed till assessment year 2001-02. The assessing officer after examining the details was of the view during the original assessment that depreciation relating to the assessment year 1990-91 and 1992-93 got lapsed and could not be carried forward beyond assessment year 2001-02. The total depreciation so lapsed was Rs.182,74,22,000/-and therefore he allowed carry forward of balance depreciation amounting to Rs.319,41,24,000/-. When the matter went before the CIT(A) the CIT(A) took the view that the denial of the benefit of carry forward of unabsorbed depreciation relating the assessment year 1990-91 to 1992-93 was not in accordance with the law and accordingly directed the assessing officer to allow unabsorbed depreciation of Rs. 182,74,22,000/- relating to these years for the purpose of carry forward. The revenue went in appeal before the ITAT on 29.11.2010. In the mean time the Assessing Officer by issuing the notice u/s 148 dated 28.10.2010, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating to Rs. 42578.02 lakh has lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remains unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forward only upto the end of the assessment year 2005-06. In view of provision to section 32(2) as it exists prior to assessment year 1997-98. Thus revenue was of the view that the sum of Rs. 24304 lakh has been deemed to have escaped assessment within meaning of Explanation 2 of section 147 and subsequently assessing officer after considering the objections and submissions of the assessee took the view vide order dated 15.4.2011 that the unabsorbed depreciation amounting to Rs 243,03,80,000/- relating to the assessment year 1993-94 to 1997-98 got lapsed before assessment year 2006-07 and reduced the carry forward of unabsorbed depreciation to Rs.1,85,55,39,761/- lakh. The tribunal vide its order dated 16.12.2011 restored the issue to the file of the CIT(A) in the light of the finding of the assessing officer in the re-assessment order. The assessee went in appeal before the CIT(A) on 13.5.2011 against the order of the assessing officer dated 15.4.2011. CIT(A) disposed off both the appeals against the original assessment and re-assessment by common order dated 17.12.2012 by taking the decision on the entire amount of unabsorbed depreciation amounting to Rs. 502,15,46,000/- for the unabsorbed depreciation and took the view in favour of the assessee relying on the decision of Hon'ble Gujarat High Court in the case of General Motors Ltd, 354 ITR 244 (Guj).
4. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below and the case law cited before us. We have also gone through the circular no. 762 dated 18.2.1998 as well as circular no.14 of 2001. We have also gone through the decision of General Motors Pvt. Ltd vs CIT, 354 ITR 244. In our view the impugned issue taken by the revenue in its grounds of appeal is duly covered by the decision of Hon'ble Gujarat High Court in the aforesaid case in which Hon'ble Gujarat High Court has held as under :-
".Prior to the Finance Act No.2 of 1996, the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the assessment year 1997-98. CBDT Circular No. 762, dated 18-2-1998 in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. [Para 31]So, the unabsorbed depreciation allowance of assessment year 1996-97 would be added to the allowance of assessment year 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from assessment year 1997-98. [Para 32]The provision of section 32(2) was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. [Para 34]The said CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and, accordingly, the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. This amendment has become applicable from assessment year 2002-03 and subsequent years meaning that only unabsorbed depreciation available to an assessee on 1st day of April, 2002 (assessment year 2002-03) will be dealt within accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 3292) as it stood before the said amendment. If the intention of the Legislature has been to allow the unabsorbed depreciation allowance worked out in assessment year 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001, it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence, a purposive and harmonious interpretation has to be taken keeping in view the purpose of amendment of section 32(2). While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of section by the clear words used in section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under section 32(2, in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32(2) shall be mandatory. Therefore, the provisions of section 32(2) as amended by the Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the time it is set off against the profits and gains of subsequent years. [Para 37]Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which deductible in the first place from the income of the business to which it relates. If such depreciation amount is in excess than the amount of the profits of that business, then such excess should be adjusted against the profits and gains from any other business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next year. Where there is current depreciation for such succeeding year, the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from assessment year 1997-98 up to the assessment year 2001-02 got clarified forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. [Para 38]"
No contrary decision was brought to our knowledge by the ld. D.R except relying on the order of Assessing Officer. The SLP against the said order has been dismissed by Hon'ble Supreme Court. We noted that Gujarat High Court while deciding the issue in General Motors (I) Pvt. Ltd vs DCIT has not noticed its earlier decision in Devesh Metcast Ltd vs JCIT, 338 ITR 130 (Guj) and that of Madras High Court in the case of Commissioner of Income-tax vs RPIL Signalling Systems Ltd. 328 ITR 283 (Mad) which had taken a contrary view. Since SLP has been dismissed against the decision of Gujarat High Court in the case of General Motors (I) Pvt Ltd we are bound to follow the same. This is also a settled law that if there is contrary decisions of different High Courts and there is no decision of the jurisdiction High Court, the view favourable to the subject has to be taken. In respect of ground relating to violation of Rule 46A, the ld. D.R could not explain what fresh evidence has been filed by the assessee before the CIT(A). We therefore, dismiss all the ground taken by the revenue.
5. In the C.O the ground nos. 8 to 11 relate to the issue relating to the claim of the deduction amounting to Rs.7.41 crores incurred by paying the compensation for de-rating of the shares. The brief facts of this issue are that during the course of the re-assessment proceeding, the assessing officer noticed that the assessee has claimed a sum of Rs. 741,74,113/- as revenue expenditure on account of compensation paid to lenders for de-rating of the shares. The assessee was asked to explain. The assessee explained that ICCL merge with IMFA w.e.f. 1.4.2005. As per the agreement ICCL entered into with its lender i.e six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt in the year 2003. One of the conditions of the said settlement was that ICCL should merge with its promoter company IMFA and ICCL should de-rate its existing capital by 95%. The share holders of ICCL did not accept the proposal of de-rating and therefore, lenders were requested to reduce the de-rating from 95% to 50% through ICCL and a request was made to IDBI vide letter dated 19.8.2005. The lender accepted the proposal but demanded a sum of Rs. 74,174,113/- as compensation towards loss being suffered due to such changes in the de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The assessing officer took the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also told that the expenditure was not as a result of amalgamation therefore, this is not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The assessing officer thus rejected the claim. The assessee went in appeal before the CIT(A), CIT(A) after considering the submission of the assessee confirmed the order of the assessing officer by observing as under :-
"11. As regards the compensation pertaining to the reduction of de-rating from 90% to 50%, it is clearly relatable to the restricting/modification of share capital of M/s. ICCL. On one hand the lending consortium accepted that the share capital in the company should be de-rated by 50% instead of the original proposed 95%, on the other hand for doing so the consortium demanded and got compensation amount of Rs.7,41,74,113/-. The benefit which accrued to M/s.ICCL-IMFA (amalgamated company) was a direct easing reduction in loan amount payable to the lending consortium and / or the period of payment. In other words, the compensation was paid for funds facilitation. Directly or indirectly, payment of such compensation did not have any beneficial impact on the trading activity which was otherwise being carried on either by M/s. IMFA or M/s. ICCL. This compensation definitely does not have any connection with "remove of obstacles" for smooth conduct of business.11.1. I have gone through all the citations of cases contained in para-4.0 to 4.2 in the paper book submitted by the appellant (page 30 to 37). In my humble observation, not a single case pertains to funds facilitation or payment on account of variation in face value of share capital.12. In view of my foregoing discussions, I confirm the action of the AO holding that the impugned compensation was paid as a precondition for debt restructuring and more particularly for the consortium agreeing upon the de-rating percentage at 50% instead of 95%. Since this is not at all an expenditure relatable to amalgamation (in fact amalgamation and de-rating were 2 individual conditions for debt restructuring), there is no question of amortization of expenditure either."
6. The ld. A.R in this regard contended before us that the assessee has to incur an expenditure of Rs. 7,41,74,113/- as compensation paid to the financial institution for making necessary amendment in the structured settlement proposal to de-rate ICCL's existing shares by 50%. It was submitted that ICCL had entered into an agreement with its lenders i.e. with six bankers and two financial institutions led by IDBI for a structured settlement of its long term debt during the year 2003. One of the conditions in the said settlement was that ICCL should merge with its promoters company IMFA and ICCL should derated its existing share capital by 95%. The share holders of ICCL did not accept the proposed de-rating and requested the lenders to reduce the de-rating from 95% to 50% through ICCL. The ICCL made a request to the IDBI. As agreed, the compensation of Rs. 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA (ICCL since merged with effect from 1, April 2005) treated the expenditure on compensation against reduction of de-rating amounting to Rs. 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. The expenditure has wrongly been treated by the revenue as capital expenditure. The expenditure has been incurred for the furtherance of the business of the assessee. The expenditure is of not enduring nature. The expenditure is closely related to the business and therefore, it has to be viewed as an integral part of the conduct of the business. Reliance was placed on the following decisions :-
"1. Empire Jute Co. Ltd vs CIT [1980] 124 ITR 1 (SC) = 2002-TIOL-238-SC-IT2. CIT vs Shantilal P. Ltd. [1983] 144 ITR 57 (SC)3. CIT vs Desiccant Rotors International Pvt. Ltd. [2012] 347 ITR 32 (Del) = 2011-TIOL-517-HC-DEL-IT.4. CIT vs Karamchand Premchand Pvt. Ltd. [1993] 200 ITR 281 (Guj).5. Asst. CIT vs W.S.Industries (India) Ltd. [2011] 128 ITD 98 = 2009-TIOL-725-ITAT-MAD."
7. The ld. A.R could not filed the copy of the settlement arrived at between ICCL and lenders. Alternately, it was contended that since the expenditure is related to the amalgamation, therefore, the assessee be allowed deduction as per the provisions of section 35DD.
7.1 The ld. A.R also taken a technical objection that once the action of the CIT(A) deleting the disallowance made by the assessing officer in respect of carry forward and set off of unabsorbed depreciation is confirmed, there will remain no addition on the basis of reasons recorded by the assessing officer for initiating action u/s 147. The assessing officer will not be able to make any other addition as the word used in section 147 is 'and'. In this regard reliance was placed on the following decisions :-
1. Ranbaxy Laboratories Ltd vs CIT, 336 ITR 136 (Del) = 2011-TIOL-356-HC- DEL -IT2. CIT vs Jet Airways (I) Ltd, 331 ITR 236 (Mum) = 2010-TIOL-907-HC-MUM-IT.
8. The ld. D.R on the other hand vehemently contended that deletion of the addition by the Appellate Authority does not mean that no addition was made by the assessing officer. The decision of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT (Supra) and that of CIT vs Jet Airways (I) Ltd are the cases where no addition was made by the assessing officer on the basis of the reasons recorded. The addition was made in respect of other income for which reasons were not recorded. On the issue of payment of the compensation for the de-rating of the share of ICCL, reliance was placed on the decision of CIT(A). It was also argued that the provision of section 35DD were not applicable as this expense is not related to the amalgamation.
9. We heard the rival submission and carefully considered the same along with the orders of tax authorities below. So far the technical issue relating to the power of the assessing officer in respect of addition made by disallowing compensation paid to the lenders for de-rating is concerned, we noted that in this case the assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT (supra) and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236 = 2010-TIOL-907-HC-MUM-IT. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact Hon'ble High Court deleted the additions which were made in respect of the issues other than the issues in respect of which proceedings u/s 147 were initiated. In the impugned case, the addition for the unabsorbed depreciation was duly made along with disallowance for compensation paid to the lenders for de-rating of the shares on account of arriving of the settlement for long term borrowing of the company which got merged with the assessee company, by the assessing officer. The reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation. The disallowance of unabsorbed depreciation was deleted by the Appellate Authority that does not mean no addition was made by the assessing officer on the basis of the reason to believe recorded by him. The section 147 of the Income Tax Act talks of assessing officer not of the appellate authority. These decisions in our opinion are not applicable to the facts of the case. In our opinion, there is no illegality in this case as per the provision of section 147 of the Income Tax Act. We accordingly dismiss this technical plea of the ld. A.R.
10. Now, we will deal with the plea of the ld. A.R whether the expenditure incurred by ICCL which got amalgamated in the assessee in respect of compensation paid to the lenders against the reduction of the de-rating. This is an undisputed fact that ICCL had borrowed money from its lenders i.e. with six bankers and two financial institutions. The ICCL was not able to make the payment or to fulfil its commitment towards the re-payment of the long term debt. Therefore a debt restructuring plan for ICCI was approved and the terms lenders had suggested in 2003 for derating of existing equity shares of ICCL by 95%, and to convert part of debt by lenders into ICCL equity. Subsequently as per the assessee the derating was done @50% and for that compensation was paid to the financial institutions otherwise they would have not agreed for reduction of de-rating. In our opinion, if the shares are de-rated by 95%, the lenders would have got more shares on conversion of loan in to equity. Once the de-rating is reduced, the natural consequence is that the lenders got less shares in ICCL on conversion of the loan into equity. This means that the lenders will be getting the share on conversion of loan into equity at settlement at a higher price. The company therefore, would have compensated the lender so that they may arrive at a settlement. This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to Rs. 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred cannot be regarded for facilitating the business of the assessee or liquidating the recurring claims as contended by the ld. A.R. The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003. The expenditure so incurred is clearly on capital account, it cannot be regarded to have been incurred for serving the debt or to have been incurred for the purpose of the amalgamation. This expenditure can also not be regarded to have been incurred for the purpose of the amalgamation as the debts has been converted into the equity shares at a lesser value prior to the merging of the ICCL into IMFA and compensation has been paid to the lenders on conversion of the debts into equity shares at a higher value. The compensation so paid is directly linked with the loss suffered by the lenders on account of conversion of debts into equity shares due to the amended proposal. The assessee gets benefited in consequence that it has to allot less shares in its company to the erstwhile share holder of ICCL. Thus this expenditure has clearly being incurred by the assessee on capital account for the purpose of share capital. Therefore, the expenditure cannot be allowed as a revenue expenditure u/s 37(1) as it is a capital expenditure. The assessee also cannot get deduction u/s 35DD of the Income tax Act as this expenditure has nothing to do with the amalgamation and incurrence of this expenditure was made for allotting the shares in ICCL not for the purpose of amalgamation of ICCL with the assessee.
11. We have gone through the case laws as relied on by ld. A.R. The decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd (supra) in our opinion will not assist the assessee as the issue involved in that case does not relate for paying the compensation to the lender on conversion of the long term debt into equity share at a higher value as has been expected by the lender. The expenditure so incurred is not for facilitating the day-to-day trading operations of the assessee company and enabling the management and conduct of the assessee company's business to be carried on more efficiently. The decision of Hon'ble Supreme Court in the case of CIT vs Shantilal Pvt. Ltd (supra) deals with the award of compensation by an arbitration award on a dispute between the parties. The question involved relate to whether the loss suffered by the assessee was a loss incurred in a speculative transaction. Thus, this decision will not apply to the facts of the case. The decision of Delhi High Court in CIT vs Desiccant Rotors International Pvt. Ltd (supra) will also not apply with the facts of the case as the amount was paid for settlement of suit for infringement of patent. The issue was whether the amount so paid is penalty or business expenditure. In the case of CIT vs Karamchand Premchand Pvt. Ltd. [1993] 200 ITR 281 (Guj) the issue relate to the payment made for securing or augmenting electrical power supply whether it is a revenue expenditure or capital expenditure. The Hon'ble Court took the view that the expenditure has been incurred for profit making apparatus and due to its profit making structure can be operated with greater productivity therefore, payment will take the character of revenue expenditure. The compensation in the case of the assessee has not been made for profit apparatus or for increase in production but for compensating the share capital. This decision therefore is not applicable in the case of the assessee. We have also persued the case of Chennai bench in the case of ACIT vs WS Industries, 128 ITD 98 = 2009-TIOL-725-ITAT-MAD. This decision relate to the claim made by the assessee for discharging the corporate guarantee given for its subsidiary company under the settlement with the banks by affecting one time settlement. This decision has not to deal with the compensation paid on capital account. Thus this decision is also not applicable to the facts of the case before us. We therefore, dismiss the ground nos. 8 to 11.
12. In the result, both the appeal filed by the revenue as well as C.O filed by the assessee are dismissed.
13. Order pronounced in pursuance of Rule 34(4) of ITAT Rules, 1963 by putting on notice board of the Bench at Cuttack on 6.6.2014.
2014-TIOL-417-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' AHMEDABAD
BENCH 'D' AHMEDABAD
ITA No.581/Ahd/2010
Assessment Year: 1998-1999
Assessment Year: 1998-1999
SAMIR DIAMOND MFG PVT LTD
DIAMOND NAGAR LASKHANA
KAMREJ, SURAT
PAN NO:AADCS3061K
DIAMOND NAGAR LASKHANA
KAMREJ, SURAT
PAN NO:AADCS3061K
Vs
ASSTT COMMISSIONER OF INCOME TAX
CIR.4, SURAT
CIR.4, SURAT
G C Gupta, VP And Anil Chaturvedi, AM
Date of Hearing: June 18, 2014
Date of Decision: July 4, 2014
Appellant Rep by: Shri S B Vaidya
Respondent Rep by: Shri B L Yadav, CIT-DR
Respondent Rep by: Shri B L Yadav, CIT-DR
Income tax - Section 271(1)(c) - Whether when AO makes disallowances of wages claimed on estimate basis, such disallowance calls for imposition of penatly.
The assessee is an exporter, manufacturer, distributor & supplier of diamonds. The assessee had filed its return and had allowed himself wages paid on estimated basis in the return of income. During assessment, the AO disallowed such wages and held that the assessee had admitted bogus wages, and therefore, penalty under section 271(1)(c) was levied on him.
Having heard the parties, the Tribunal held that,
++ we are of the considered opinion that the disallowance has been made by the department out of wage expenses by way of estimate only. The disallowance was considered at this second appellate stage by the Tribunal and some part relief out of this disallowance out of wages was allowed to the assessee in the quantum appeal of the assessee. In the facts of the case of the assessee, it cannot be said that the assessee has admitted bogus payment claimed under the head "wage expenses". Accordingly, we hold that since it is a case of disallowance made out of wage expenses for the reason that the assessee could not establish the same fully with documentary evidences, it is not a fit case for levy of penalty under section 271(1)(c).
Assessee's appeal allowed
ORDER
Per: G C Gupta:
This appeal by the assessee for the assessment year 1998-1999 is directed against the orders of the CIT(A).
2. The only ground of the appeal of the assessee is as under:
"1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of AO in imposing penalty of Rs.8,75,000/- under section 271(1)(c) of the Act, 1961."
3. The learned counsel for the assessee submitted that the disallowance out of payment of wages was made on ad hoc basis by way of estimate only, and therefore, no penalty under section 271(1)(c) could be levied on the assessee. He relied on a series of decisions in CIT Vs. Smt. K. Meenakshi Kutty, 258 ITR 494 (Mad), CIT Vs. Lallubhai Jogibhai Patel, 261 ITR 216 (Guj), CIT Vs. Valimkbhai Patel, 280 ITR 487 (Guj) = 2006-TIOL-37-HC-AHM-IT, M/s. Vistar Constructions P. Ltd. Vs. CIT, ITA No.5149/Del/2011, CIT Vs. Norton Electronics Pvt. Ltd., 41 taxmann.com 280 (Allahabad) and Rajlaxmi Prints P. Ltd. Vs. IT, ITA No.809/Ahd/2010.
4. The learned DR has opposed the submission of the learned counsel for the assessee. He submitted that it is not a case of disallowance made purely on estimate basis, and in fact, in this case, the assessee has admitted bogus wages, and therefore, penalty under section 271(1)(c) was levied on the assessee. He relied on the decision of the Hon'ble jurisdictional High Court in CIT Vs. Lallubhai Jogibhai Patel, 261 ITR 216 and A.M. Shah & Company Vs. CIT, 238 ITR 415 (Guj).
5. The learned counsel for the assessee in his rejoinder submitted that the assessee has never admitted any bogus wages, and in fact the disallowance out of wages is by way of estimate only. He referred to the reply of the assessee dated 9.8.2008 filed before the AO, wherein In para 3, it was clearly mentioned that some employees might have put the signatures of some other employees and it might not be possible to produce the employees, and that the assessee is ready to offer 20% of such expenses in respect of which the signatures do not tally as additional income assessable only for A.Y.1998-99 subject to imposing no penalty. The assessee has categorically stated in his reply in para 4 (j) that the assessee has agreed for disallowance of Rs.6,50,000/- on the basis of wrong facts stated by the AO in his order under section 131 while impounding assessee's wage register that ratio of wages to receipts in case of the assessee is higher compared to such ratio in case of Venus Jewels P. Ltd.
6. We have considered rival submissions and have perused the orders of the AO and the CIT(A). We find that there is no evidence brought on record on behalf of the Revenue in this case to prove that the assessee was indulging in making entries of bogus payments in its wage account. In fact the assessee has in his reply dated 9.8.2008 in para 3 has submitted that signatures of some of the employees might not be tallied as the same employees might have signed differently in different style in different months, and also that it might be that the other employee might have put the signature on behalf of the employees concerned. The assessee further submitted that as it is not possible to prove the assessee's claim to the satisfaction of the department, the assessee is ready to offer 20% of such expenses in respect of which the signatures do not tally as additional income assessable only for A.Y.1998-99 subject to imposing no penalty. In para 4(j) of the said reply dated 9.8.2008, the assessee submitted that it has agreed for disallowance of Rs.6,50,000/- on the basis of wrong facts stated by the AO in his order under section 131 while impounding assessee's wage register that ratio of wages to receipts in case of assessee is higher compared to such ratio in case of Venus Jewels P. Ltd. In these facts of the case, we are of the considered opinion that the disallowance has been made by the department out of wage expenses by way of estimate only. The disallowance was considered at this second appellate stage by the Tribunal and some part relief out of this disallowance out of wages was allowed to the assessee in the quantum appeal of the assessee. In the facts of the case of the assessee, it cannot be said that the assessee has admitted bogus payment claimed under the head "wage expenses". Accordingly, we hold that since it is a case of disallowance made out of wage expenses for the reason that the assessee could not establish the same fully with documentary evidences, it is not a fit case for levy of penalty under section 271(1)(c), which is accordingly cancelled and the ground of the appeal of the assessee is allowed.
7. In the result, appeal of the assessee is allowed.
Order pronounced in Open Court on the date mentioned hereinabove.
2014-TIOL-408-ITAT-KOL
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' KOLKATA
BENCH 'B' KOLKATA
ITA No.766/Kol./2010
Assessment Year: 2005-2006
Assessment Year: 2005-2006
DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-1, KOLKATA, P-7, CHOWRINGHEE SQUARE
KOLKATA-700069
CIRCLE-1, KOLKATA, P-7, CHOWRINGHEE SQUARE
KOLKATA-700069
Vs
M/s GLOSTER JUTE MILLS LTD
21, STRAND ROAD, KOLKATA-700001
PAN NO:AAACG9800G
21, STRAND ROAD, KOLKATA-700001
PAN NO:AAACG9800G
ITA No.687/Kol./2010
Assessment Year: 2005-2006
Assessment Year: 2005-2006
M/s GLOSTER JUTE MILLS LTD
21, STRAND ROAD, KOLKATA-700001
PAN NO:AAACG9800G
21, STRAND ROAD, KOLKATA-700001
PAN NO:AAACG9800G
Vs
ADDL COMMISSIONER OF INCOME TAX
RANGE-1, KOLKATA
RANGE-1, KOLKATA
Mahavir Singh, JM And Shamim Yahya, AM
Date of Hearing: June 30, 2014
Date of Decision: July 2, 2014
Date of Decision: July 2, 2014
Appellant Rep by: Shri Imlimeren Jamir, JCIT, Sr. DR
Respondents Rep by: Shri Soumen Adak & Shri Harish Agarwal, ARs.
Respondents Rep by: Shri Soumen Adak & Shri Harish Agarwal, ARs.
Income tax - TUFS Scheme – subsidy – revenue/capital reciept - Whether subsidy received by the assessee under the Technology Upgradation Fund Scheme is capital receipt.
The assessee is a Public Limited Company engaged in manufacturing of Jute & jute allied products and generation of power. The assessee debited the P&L a/c. with the net amount of interest, after adjusting the subsidy of Rs.77,18,242/-. In computing the assessable income the assessee deducted the said amount on the ground that the subsidy was capital in nature. The AO did not agree with the above proposition and rejected the assessee's claim that subsidy under TUFS should be treated as a scheme of capital subsidy. He opined that the subsidy was revenue in nature and had to be added in the total income of the assessee as a revenue receipt.
On appeal, the Tribunal held that,
++ we are of the opinion that as held hereinabove in order to sustain competitiveness in the domestic as well as international markets and overall long-term viability of the industry, the concerned Ministry adopted the TUFS scheme envisaging Technology Upgradation of the Industry. Hence, the subsidy received in this regard falls into capital field.
Assessee's appeal allowed
ORDER
Per: Shamim Yahya:
ITA No. 687/Kol/2010
1. This appeal by the assessee emanates out of the order of ld. Commissioner of Income Tax (Appeals)-XI II, Kolkata dated 29.01.2010 for the assessment year 2005-06.
2. Ground of appeal reads as under :-
"That on the facts and in the circumstances of the case, ld. CIT(A) was not justified rather grossly erred in holding interest subsidy of Rs.77,18,242/- received under the Technology Upgradation Fund Scheme (TUFS) as revenue receipt".
3. In this case the assessee is a Public Limited Company engaged in manufacturing of Jute & jute allied products and generation of power. During the assessment proceedings the Assessing Officer noted that under the "Technology Upgradation Fund Scheme" (in short TUFS), the assessee received subsidy from Central Government of Rs.77,18,242/- on account of 'interest refund'. Though the assessee debited the P&L a/c. with the net amount of interest, after adjustment of the abovementioned subsidy of Rs.77,18,242/-. In computing the assessable income the assessee deducted the said amount on the plea that the subsidy was capital in nature.
4. The Assessing Officer did not agree with the above proposition and rejected the assessee's claim that subsidy under TUFS should be treated as a scheme of capital subsidy. He opined that the subsidy was revenue in nature and had to be added in the total income of the assessee as a revenue receipt.
5. Upon assessee's appeal, in this regard ld. CIT(Appeal) affirmed the Assessing Officer's action holding as under: -
"I have considered the above submissions of the A/Rs of the assessee. First of all, I agree with the AO that the assessee cannot claim the interest refund under TUFS to be capital in nature just on the ground that there was an offer to choose between TUFS & CLCS which appears to be a scheme of capital subsidy. First of all this equality between the two schemes is not applicable in the case of the assessee because the assessee was not eligible for CLCS as it was not a small scale industry. Secondly, even if the assessee was eligible for CLCS the nature of the subsidy has to be decided on the basis of the actual scheme under which the assessee received.Now, if we consider the nature of the TUFS we find that under this scheme if the eligible industry invests in certain specified plants & machinery, factory building, captive power plant etc. using funds borrowed from certain banks/financial institutions, then out of the interest paid on such borrowed funds, 5% is refunded by the Govt. Thus it can be seen that the objective of this scheme may be to encourage the eligible industries to invest in upgradation of technology but the assistance/incentive given does not have any direct relation with the cost of acquisition of such plant & machinery etc. Rather, the subsidy/incentive/assistance given in the form of sharing/ reimbursing 5% of the interest which is paid on the funds borrowed for acquiring the plant and machinery. Thus, it can be seen that the subsidy given has a very remote connection with the cost of acquisition of plant & machinery. Therefore, it cannot be said that through this subsidy Govt. has met a part of the cost of plant & machinery used for upgrading the technology. Rather, the Govt. has met a part of the interest paid by the assessee which is very much a revenue expenditure and is debited by the assessee in the P & L a/c. as such. As per the decision of Hon'ble Supreme Court in the case of Sahani Steels (supra) this subsidy has not been given to the assessee for setting up any business rather it has been given to the assessee after commencement of production and it goes on to increase its profitability. Therefore, it is in the nature of a trade receipt and has to be taxed as income of the assessee.I have examined the various court cases cited by the A/R and find that the facts of these court cases are different from the facts of the assessee's case and hence, they are not applicable here.In view of the above discussion, I confirm the addition of Rs.77,18,242/- made by the AO".
6. Against the above order of ld. CIT(Appeals), assessee is in appeal before the Tribunal.
7. We have heard the rival submissions and perused the material available on record. Ld. Counsel of the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT –vs.- Sh. Sham Lal Bansal in ITA No. 472 of 2010, wherein it had been held that interest subsidy received under TUF Scheme is capital in nature. Ld. Counsel for the assessee has further submitted that this issue is covered in favour of the assessee by the decision of the Hon'ble Apex Court in the case of CIT – vs.- Ponni Sugars & Chemicals Ltd. reported in (2008) 306 ITR 392 (SC) = 2008-TIOL-174-SC-IT wherein it has been held that it is the purpose of the incentive which decides its nature and not the modality or the source thereof. That this issue is also favourably covered by the decision of Hon'ble jurisdictional High Court in the case ofCIT –vs.- Rasoi Ltd. (2011) 335 ITR 438 (Cal.) = 2011-TIOL-320-HC-KOL-IT, wherein it has held that subsidy received for expansion of capacities, modernization and improving the marketing capabilities to tide over the crises for promotion of industry in the state is to be treated as capital in nature. That similarly, the issue is covered in the case of Shree Balaji Alloys & Ors. –vs.- CIT (2011) 333 ITR 335 (J&K) = 2011-TIOL-269-HC-J&K-IT wherein it has been held that excise duty refund and interest subsidy received for the purpose of eradication of unemployment in the state by acceleration of industrial development and removing backwardness of the area that lagged behind in industrial development is to be treated as capital receipt.
Ld. A.R. also submit ted that similar view was given in following decisions: -
DCIT –vs. - Reliance Industries (2004) 88 ITD 273 (Mum.)(SB) = 2003-TIOL-14-ITAT-MUM-SB;CIT –vs.- Chaphalkar Brothers (2013) 351 ITR 309 (Bom.);CIT –vs.- Birla VXL Ltd. (2013) 90 DTR 376 (Guj.)(HC) = 2013-TIOL-229-HC-AHM-IT;Hydro Carbons & Chemicals –vs.- ACIT (ITA No.1982-86/Kol/09 dated 29.04.2011);Indo Rama Synthetics (I) Ltd. –vs.- ACIT (2012) 33 CCH 526 (Del.)(ITAT).
8. Ld. Departmental Representative, on the other hand, relied upon the orders of the authorities below.
9. We have carefully considered the submissions. We find considerable cogency in the submissions of the ld. Counsel of the assessee. We find that identical issue under the Technology Upgradation Fund Scheme (in short 'TUFS') of Ministry of Textiles was considered by the Hon'ble Punjab & Haryana High Court in ITA No.472 of 2010 vide decision dated 17.01.2011. Hon'ble High Court has considered and held the issue as under: -
"2. The assessee is engaged in manufacture and sale of woolen garments. It received subsidy for repayment of loan taken for building, plant and machinery under the Credit Linked Capital Subsidy Scheme under Technology Upgradation Fund Scheme (TUFS) of Ministry of Textiles, Government of India. The assessee claimed the said subsidy to be capital receipt but the Assessing Officer did not accept the same and added back the same to the income of the assessee holding the same to be revenue receipt. On appeal, the CIT(A) upheld the plea of the assessee, which view has been affirmed by the Tribunal with the following observations:-"Having regard to the aforesaid, in our view, it is quite clear that the objective of the subsidy scheme was to enhance the technology apparatus of the assessee by assisting in acquiring machinery and further that the subsidy so received was utilized for repayment of loans taken by the assessee to set up the new unit, as was the intention of the subsidy.10. Considered in the aforesaid light, in our view, the facts of the instant case are on all fours comparable to those considered by the Hon'ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) and therefore, a natural corollary is that the nature of the subsidy in question is capital. Therefore, both on the issue of the objective of the scheme and on the utilization of the funds received as subsidy, the subsidy is to be viewed as capital in nature having regard to the judgment of the Hon'ble Supreme Court in the case of Ponni Sugars & Chemical Ltd. (supra).11. Reliance placed by the Revenue on the case of Sawhney Steels and Press Works Ltd. & others (supra), in our view, is not appropriate having regard to the aforesaid features of the scheme, which are not in dispute. Moreover, in the case of Sawhney Steels and Press Works Ltd. & others (supra), it was found as a fact that the subsidy was given to meet recurring expenditure and was not for acquiring a capital asset. Whereas in the instant case, admittedly, there is no provision in the scheme to grant subsidy to meet any recurring expenditure and neither such a case has been set up by the Department. The only objections of the Department are that the subsidy has been given after commencement of production and, secondly that it was for repayment of loans. Both these factors do not distract from the nature of the subsidy being treated as capital, as explained by the Hon'ble Supreme Court in the case of Ponni Sugars Chemicals Ltd. (supra)."3. We have heard learned counsel for the appellant.4. Learned counsel for the revenue submitted that the subsidy was not given at the time of setting up of the industry but after commencement of production for repayment of loan. In such situation, the amount should have been treated as revenue receipt, as per judgment of the Hon'ble Supreme Court in Sahney Steel & Press Works Ltd. & Ors. v. CIT (1997) 228 ITR 253 = 2002-TIOL-11-SC-IT.5. We are unable to accept the submission.6. The purpose of scheme under which the subsidy is given, has been discussed by the Tribunal. To sustain and prove the competitiveness and overall long term viability of the textile industry, the concerned Ministry of Textile adopted the TUFS scheme, envisaging technology upgradation of the industry. Under the scheme, there were two options, either to reimburse the interest charged on the lending agency on purchase of technology upgradation or to give capital subsidy on the investment in compatible machinery. In the present case, the assessee has taken term loans for technology upgradation and subsidy was released under agreement dated 12.7.2005 with Small Industry Development Bank of India. The relevant clause of the agreement under which the subsidy was given is as under:-"Para 8. - to prevent misutilization of capital subsidy and to provide an incentive for repayment, the capital subsidy will be treated as a non interest bearing term loan by the Bank/Fis. The repayment schedule of the term loan however will be worked out excluding the subsidy amount and subsidy will be adjusted against the term loan account of the beneficiary after a lock in period of three years on a pro-rate basis in terms of release of capital subsidy. There is no apparent or real financial loss to a borrower since the countervailing concession is extended to the loan amount."7. In view of above, the view taken in Sahney Steel & Press Works Ltd. & Ors., could not be applied in the present case, as in said case the subsidy was given for running the business. For determining whether subsidy payment was 'revenue receipt' or 'capital receipt', character of receipt in the hands of the assessee had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel & Press Works Ltd. & Ors. itself and reiterated in later judgment in CIT v. Ponni Sugars & Chemicals Ltd. & ors. (2008) 306 ITR 392 = 2008-TIOL-174-SC-IT, referred to in the impugned order of the Tribunal.8. In view of above, since the matter is covered by judgment of the Hon'ble Supreme Court in Ponni Sugars & Chemicals Ltd. & ors. against the revenue, no substantial question of law arises".
Thus we find that on identical issue the matter has been decided in favour of the assessee. In these circumstances, we are of the opinion that as held hereinabove in order to sustain competitiveness in the domestic as well as international markets and overall long-term viability of the industry, the concerned Ministry adopted the TUFS scheme envisaging Technology Upgradation of the Industry. Hence, the subsidy received in this regard falls into capital field. Hence respect fully following the precedent as above we set aside the order of the ld. CIT(Appeals) and decide the issue in favour of the assessee.
10. In the result, the appeal filed by the assessee stands allowed.
11. ITA No. 766/Kol/2010 (Revenue's appeal)
This appeal by the Revenue emanates out of the order of ld. Commissioner of Income Tax (Appeals)-XI II, Kolkata dated 29.01.2010 for the assessment year 2005-06.
12. Ground of appeal reads as under :-
"Ld. CIT(A) has erred on the facts and in law in directing the AO to allow setoff of unabsorbed depreciation of Rs.54,47,722/- and unabsorbed business of Rs.39,18,762/- from 100% EOU against the taxable income of the asses see from other units".
13. In this case, the assessee during the year under consideration had three different units of income as under: -
| Sl. No. | Unit | Profit before taxation |
| (1) | DTA | Rs.7,96,69,247/- |
| (2) | 100% EOU | Rs.91,66,484 (Loss) |
| (3) | Power Plant | Rs.45,93,612/- |
Rs.7,50,96,375/- |
The above-stated loss of EOU was arrived at after charging of the depreciation of Rs.52,47,722/-. The commercial production at the EOU started in the previous year relevant to the AY 2004-05. In that year also, the assessee suffered loss. In the computation of income, the assessee set off the loss from EOU with the profit of other units. The Assessing Officer disallowed unabsorbed depreciation of Rs.52,47,722/- and business loss of Rs.39,18,762/- for the textile unit of the assessee on the ground that these losses relate to a unit whose profits are exempt under section 10B and hence, such losses cannot be adjusted against profit of taxable units.
14. Upon Revenue's appeal, ld. CIT(Appeals) decided the issue in favour of the assessee holding as under: -
"I have perused the facts and circumstances of this issue and also the decision of Hon'ble ITAT in the case of the assessee itself for AY 2004-05 in the order dated 28.03.2008. I find that the facts of this is sue for AY 2005-06 are the same as were in AY 2004-05. Since for AY 2004-05 Hon'ble ITAT has given a decision in favour of the assessee, therefore, for AY 2005-06 also the same decision will prevail, Therefore, respect fully following the decision of Hon'ble ITAT I hold that the business loss and depreciation loss in respect of the 100% EOU unit shall be set off against the profits of other units".
15. Against the above order of ld. CIT(Appeals), Revenue is in appeal before us.
16. It has been urged that ld. CIT(Appeals) has erred in granting relief to the assessee by relying on the decision of the Hon'ble ITAT in assessee's own case for the assessment year 2004-05, which has not been accepted by the Department and appeal under sect ion 260A has been filed before the Hon'ble High Court of Kolkata.
17. We have heard the rival content ions and perused the materials available on record. We find that it is clear that identical issue has been decided in favour of the assessee by the Tribunal in earlier years. It is not the case that Hon'ble Jurisdictional High Court has reversed the order of the Tribunal. In these circumstances, we do not find any infirmity in the order of ld. CIT(Appeals). Hence, we uphold the same.
18. In the result, the appeal filed by the Revenue stands dismissed.
(Order pronounced in the open Court on 2.7.2014.)
2014-TIOL-377-ITAT-MUM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' MUMBAI
BENCH 'D' MUMBAI
ITA No.7304/Mum/2011
Assessment Year: 2006-07
Assessment Year: 2006-07
M/s RAJ ENTERPRISES
C/O SHRI ISHWAR SHIVGAN PATEL
A/504, GREENASH BUILDING
VASANT GARDEN, NEAR SAPNA NAGARI
GOLDEN TOWER, MULUND-400080
PAN NO:AABFF1632Q
C/O SHRI ISHWAR SHIVGAN PATEL
A/504, GREENASH BUILDING
VASANT GARDEN, NEAR SAPNA NAGARI
GOLDEN TOWER, MULUND-400080
PAN NO:AABFF1632Q
Vs
INCOME TAX OFFICER
WARD-3(2), KALYAN INCOME TAX OFFICE
RANI MANSION, BURBAD ROAD
KALYAN (W), MUMAI
WARD-3(2), KALYAN INCOME TAX OFFICE
RANI MANSION, BURBAD ROAD
KALYAN (W), MUMAI
Rajendra, AM And Sanjay Garg, JM
Date of Hearing: February 25, 2014
Date of Decision: March 12, 2014
Date of Decision: March 12, 2014
Appellants Rep by: Shri K Gopal, Jitendra Singh & Satendra Kumar Pandey
Respondent Rep by: Shri Sanjeev Jain, DR
Respondent Rep by: Shri Sanjeev Jain, DR
Income Tax - Sections - 44AD, 68, 69, 69A - Whether provisions of section 68 can be invoked in a case where the return was furnished u/s 44AD.
The assessee, was a firm engaged in the contract/construction business filed its return of income admitting a total income of Rs.31,888/- estimated on the basis of provisions of section 44AD .The AO noticed that a sum of Rs.4,45,000/- and Rs.6,85,000/- respectively was credited in their capital accounts of the partners. The AO treated the same as unexplained cash of the firm hence added back the same into the income of the assessee firm u/s 68 .The CIT(A) deleted the addition in respect of cash credit of Rs.4,45,000/- but sustained the addition of Rs.6,85,000/- in the hands of the assessee.
On Appeal before the Tribunal the AR submitted that since the assessee had furnished the return of income under provisions of section 44AD hence, there was no necessity to maintain books of account. It was further submitted that since the assessee had not been maintaining any books of account hence the additions made by the AO u/s 68 were not sustainable. The second contention was that even the additions, if any, could have been made by the AO at the hands of the partners and not at the hands of firm .The DR submitted that merely because the assessee firm has furnished return of income u/s 44AD that does not mean that the assessee firm was free to introduce any cash in its books of account or otherwise.
Having heard the parties, the Tribunal held that,
++ from the provisions of section 44AD, it reveals that in the absence of books of account and subject to satisfaction of the requirements of section 44AD, the income will be assessed on presumptive basis at the rate of 8% of the gross receipts or total turnover. However, if the assessee admits or claims that it has received more income than 8% of the turnover, it is free to offer the same at a higher rate. Though there is no necessity to maintain accounts in case of furnishing return u/s 44AD yet, if the assessee has maintained any accounts and has furnished the same with the return of income, like the capital account of the partners in the case in hand, the AO can examine said accounts and if he finds that there is an introduction of unexplained cash in the capital accounts of the assessee, he would be justified to ask the assessee to explain the source of such credits and in the absence of any satisfactory explanation, the AO will be justified in adding such sum into the income of the assessee;
++ the assessee firm had submitted the capital accounts of the partners of the firm and the AO observed from the capital account of the partners that there was introduction of the unexplained cash and as such he was justified in invoking the provisions of section 68. Even otherwise there are corresponding sections like section 69 and section 69A which deals with the unexplained cash/investments/money/expenditure etc. When we read section 68 along with section 69 and 69A then the conclusion will be that if there is some introduction of any cash or the assessee is found to be owner of any money or any investments have been made during the year by the assessee, the source of which assessee fails to explain, then the additions can be made into the income of the assessee under the relevant sections;
++ the assessee firm has failed to explain the source of cash even from the partners. Under such an event the AO is justified in adding the same into the income of the assessee firm. No infirmity in the order of the CIT(A)
The assessee, was a firm engaged in the contract/construction business filed its return of income admitting a total income of Rs.31,888/- estimated on the basis of provisions of section 44AD .The AO noticed that a sum of Rs.4,45,000/- and Rs.6,85,000/- respectively was credited in their capital accounts of the partners. The AO treated the same as unexplained cash of the firm hence added back the same into the income of the assessee firm u/s 68 .The CIT(A) deleted the addition in respect of cash credit of Rs.4,45,000/- but sustained the addition of Rs.6,85,000/- in the hands of the assessee.
On Appeal before the Tribunal the AR submitted that since the assessee had furnished the return of income under provisions of section 44AD hence, there was no necessity to maintain books of account. It was further submitted that since the assessee had not been maintaining any books of account hence the additions made by the AO u/s 68 were not sustainable. The second contention was that even the additions, if any, could have been made by the AO at the hands of the partners and not at the hands of firm .The DR submitted that merely because the assessee firm has furnished return of income u/s 44AD that does not mean that the assessee firm was free to introduce any cash in its books of account or otherwise.
Having heard the parties, the Tribunal held that,
++ from the provisions of section 44AD, it reveals that in the absence of books of account and subject to satisfaction of the requirements of section 44AD, the income will be assessed on presumptive basis at the rate of 8% of the gross receipts or total turnover. However, if the assessee admits or claims that it has received more income than 8% of the turnover, it is free to offer the same at a higher rate. Though there is no necessity to maintain accounts in case of furnishing return u/s 44AD yet, if the assessee has maintained any accounts and has furnished the same with the return of income, like the capital account of the partners in the case in hand, the AO can examine said accounts and if he finds that there is an introduction of unexplained cash in the capital accounts of the assessee, he would be justified to ask the assessee to explain the source of such credits and in the absence of any satisfactory explanation, the AO will be justified in adding such sum into the income of the assessee;
++ the assessee firm had submitted the capital accounts of the partners of the firm and the AO observed from the capital account of the partners that there was introduction of the unexplained cash and as such he was justified in invoking the provisions of section 68. Even otherwise there are corresponding sections like section 69 and section 69A which deals with the unexplained cash/investments/money/expenditure etc. When we read section 68 along with section 69 and 69A then the conclusion will be that if there is some introduction of any cash or the assessee is found to be owner of any money or any investments have been made during the year by the assessee, the source of which assessee fails to explain, then the additions can be made into the income of the assessee under the relevant sections;
++ the assessee firm has failed to explain the source of cash even from the partners. Under such an event the AO is justified in adding the same into the income of the assessee firm. No infirmity in the order of the CIT(A)
Assessee's appeal dismissed
ORDER
Per: Sanjay Garg:
The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] dated 15.06.11. The grounds of appeal taken by the assessee are reproduced as under:
"1. The Learned Commissioner of Income-Tax (Appeals) erred in sustaining the addition of Rs.6,85,000/- made to the returned income of the appellant firm by the assessing officer U/s.68 of the Income Tax Act, 1961, being introduction of capital by a partner namely Shri Shivgan Jetha Patel.2. The Learned Commissioner of Income-Tax (Appeals) also erred in sustaining the disallowance of interest on capital of one of the partners, namely Shri Shivgan Jetha Patel, U/s.69 of the Income Tax Act, 1961.3. The Appellant prays that the addition of Rs.6,85,000/- and disallowance of interest thereon as above made to the returned income of the appellant firm by the assessing officer U/s.68 & 69C of the Income Tax Act, 1961, be deleted.4. The Appellant craves leave to add to, amend or alter, delete, and/or modify the above grounds of appeal."
2. The facts of the case are that the assessee, a firm engaged in the contract/construction business filed its return of income admitting a total income of Rs.31,888/- estimated on the basis of provisions of section 44AD of the Income Tax Act (hereinafter referred to as the 'Act'). During the assessment proceedings the Assessing Officer (hereinafter referred to as the 'AO') noticed from the capital account of the partners of the firm namely Shri Ishwar Shivgan Patel and Shri Shivgan Jetha Patel that a sum of Rs.4,45,000/- and Rs.6,85,000/- respectively was credited in their capital accounts. The assessee could not satisfy the AO about the genuineness of the source of induction of funds as capital. So the AO treated the same as unexplained cash of the firm which was credited to the capital account of the partners by the firm hence added back the same into the income of the assessee firm under section 68 of the Act.
3. On appeal, the ld. CIT(A) deleted the addition in respect of cash credit in the capital account of Shri Ishwar Shivgan Patel being satisfied from the explanation offered by the assessee regarding the source of credits. However, he found that the assessee had failed to furnish any details/explanation regarding the cash introduction of Rs.6,85,000/- made in the capital of Shri Shivgan Jetha Patel. He observed that the copy of bank account of said Shri Shivgan Jetha Patel did not reflect in any cash withdrawal. Accordingly, he sustained the addition of Rs.6,85,000/- in the hands of the assessee. The assessee is thus in appeal before us.
4. We have heard the ld. representatives of both the parties and also have gone through the records. The first contention of the ld. A.R has been that since the assessee had furnished the return of income under provisions of section 44AD hence, there was no necessity to maintain books of account. The income under section 44AD is offered on estimation basis at the rate of 8% of the total turnover. For invoking or making additions under section 68, the maintaining of books of accounts is not necessary. Since the assessee had not been maintaining any books of account hence the additions made by the AO under section 68 were not sustainable.
The second contention raised by the ld. A.R has been that even the additions, if any, could have been made by the AO at the hands of the partners and not at the hands of firm as the capital was allegedly introduced in the capital accounts of the partners and it was the partners who had to explain the source of income. In support of his contention, he has relied upon the decision of the Hon'ble Madras High Court in the case of "CIT vs. Taj Borewells" 291 ITR 232 (Mad.) = (2007-TIOL-255-HC-MAD-IT) and further upon another decision of Hon'ble Madhya Pradesh High Court in the case of "CIT vs. Metachem Industries" (2000) 245 ITR 160 (MP).
5. On the other hand, the ld. DR has submitted that merely because the assessee firm has furnished return of income under section 44AD that does not mean that the assessee firm is free to introduce any cash in its books of account or otherwise. If any unaccounted cash, money or other security is found with the assessee, the assessee is bound to offer an explanation for the same and in the absence of any explanation, the AO would be justified in treating the said unexplained money as the unexplained income of the assessee.
6. We have considered the rival submissions of both the parties. Admittedly the assessee has filed return of income under section 44AD of the Act. A careful perusal of the provisions of section 44AD reveals that in case of an eligible assessee doing eligible business as defined under section 44AD of the Act, if the total turnover or gross receipts in the previous year does not exceed the prescribed limit under this section, then a sum equal to 8% of the total turnover or gross receipts of the assessee or a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee shall be deemed to be profits and gains of such eligible business of the assessee.
So from the provisions of section 44AD, it reveals that in the absence of books of account and subject to satisfaction of the requirements of section 44AD, the income will be assessed on presumptive basis at the rate of 8% of the gross receipts or total turnover. However, if the assessee admits or claims that it has received more income than 8% of the turnover, it is free to offer the same at a higher rate.
Now coming to the question of unexplained money, cash etc., we may observe that the limit of gross receipts/turnover has been fixed under the provisions of section 44AD which in this case for assessment year 2006-07 was Rs.40,00,000/-. Hence the income to be assessed on presumptive basis must be in consonance with the gross receipts of total turnover which according to the provisions of the section 44AD is taken at 8%. The conclusion is that though the assessee may claim that it has earned the income less than the 8% of the total turnover yet, if it does not maintain any books of account, still it is bound to offer the income at the rate of 8% of the total turnover/gross receipts. However, the assessee is precluded from claiming that it has in fact earned the income higher than 8% and it has been so declared by it also, but it is absolved any liability of paying the tax on the additional income but only on the income arrived at the rate of 8% of the total turnover. If from the records or from any other evidence, the AO finds that the assessee is the owner or has introduced money which is not in consonance with the presumptive income of 8% of the turnover and further the assessee has not offered any higher income or has failed to explain the source of unexplained money, then he will be justified in treating the same or adding such sum into the income of the assessee.
Though there is no necessity to maintain accounts in case of furnishing return under section 44AD yet, if the assessee has maintained any accounts and has furnished the same with the return of income, like the capital account of the partners in the case in hand, the AO can examine said accounts and if he finds that there is an introduction of unexplained cash in the capital accounts of the assessee, he would be justified to ask the assessee to explain the source of such credits and in the absence of any satisfactory explanation, the AO will be justified in adding such sum into the income of the assessee.
7. In the case in hand, the AO found unexplained cash introduced in the capital account of the partners. The said capital accounts were also filed with the return of income furnished under section 44AD. The ld. CIT(A) from the explanation offered in the case of Shri Ishwar Shivgan Patel was satisfied regarding the source of cash introduced into the capital account of the partners of the firm and hence he deleted the additions. However, the assessee firm since have failed to explain regarding the introduction of cash in the account of Shri Shivgan Jetha Patel, hence he rightly confirmed the addition on account of unexplained introduction of cash in that account.
8. So far the contention of the ld. A.R. that section 68 cannot be invoked in a case where the return is furnished under section 44AD, we are not inclined to accept this contention of the ld. A.R., so far so the facts of this case are concerned. In the case in hand, the assessee firm had submitted the capital accounts of the partners of the firm and the AO observed from the capital account of the partners that there was introduction of the unexplained cash and as such he was justified in invoking the provisions of section 68. Even otherwise there are corresponding sections like section 69 and section 69A which deals with the unexplained cash/investments/money/expenditure etc. When we read section 68 along with section 69 and 69A then the conclusion will be that if there is some introduction of any cash or the assessee is found to be owner of any money or any investments have been made during the year by the assessee, the source of which assessee fails to explain, then the additions can be made into the income of the assessee under the relevant sections.
So far the contention that the additions, if any, can be made in the hands of the partners is concerned, the said contention will come into operation only when the assessee firm explains the source of credit. However, in the case in hand the assessee firm has failed to explain the source of cash even from the partners. Under such an event the AO is justified in adding the same into the income of the assessee firm.
So far the case laws relied upon by the ld. A.R. are concerned, in the case of "CIT vs. Taj Borewells" (supra), the Hon'ble High Court has observed that it is the assessee firm to explain and prove the source of the money. Once the assessee firm has offered an explanation and established that the capital was contributed by the partners only then the same can not be considered for addition in the hands of the firm. However, if the explanation offered by the assessee firm is not satisfactory or the assessee firm could not establish that the capital was contributed by the partners then in that event the AO would be justified in treating the same at the hands of the assessee. Similar is the proposition laid down by the Hon'ble Madhya Pradesh High Court in the case of "CIT vs. Metachem Industries" (supra) i.e. the explanation given by the firm regarding the credit entries must be satisfactory. However, in the case in hand the assessee firm has failed to satisfactorily explain the cash credits in the account of the Shri Shivgan Jetha Patel and as such the ld. CIT(A) in our view rightly sustained the addition to that extent.
In view of our observations, we do not find any infirmity in the order of the ld. CIT(A) and the same is hereby upheld.
9. In the result, the appeal of the assessee is hereby dismissed.
(Order pronounced in the open court on 12.3.2014.)
2014-TIOL-374-ITAT-MUM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'C' MUMBAI
BENCH 'C' MUMBAI
ITA No.2783/Mum./2012
Assessment Year: 2008–09
Assessment Year: 2008–09
M/s P N WRITER & CO PVT LTD
105, DR B AMBEDKAR ROAD
NEXT TO VOLTAS, LALBAUG
MUMBAI-400033
PAN NO:AAACP5966B
105, DR B AMBEDKAR ROAD
NEXT TO VOLTAS, LALBAUG
MUMBAI-400033
PAN NO:AAACP5966B
Vs
ASSTT COMMISSIONER OF INCOME TAX
RANGE-7(1), AAYAKAR BHAVAN
101, M K ROAD, MUMBAI-400020
RANGE-7(1), AAYAKAR BHAVAN
101, M K ROAD, MUMBAI-400020
D Karunakara Rao, AM And Amit Shukla, JM
Date of Hearing: June 12, 2014
Date of Decision: June 18, 2014
Date of Decision: June 18, 2014
Appellant Rep by: Mr Satish R Mody
Respondent Rep by: Mr Morya Pratap
Respondent Rep by: Mr Morya Pratap
Income Tax - Sections 115JAA, 115WD, 115WH, 139, 142, 143(3), 148, 153A & 158BC.
Keywords - administrative expenses - interest expenses - self–assessment tax - refund - advance tax.
Whether the disallowance on dividend income will be applicable on all previous years and would deemed to in accordance with the provisions of rule 8D, even if the amendment is applicable from a subsequent assessment year - Whether an assessee is entitled to interest u/s 244A on the tax paid under self–assessment tax for the purpose of section 140A.
Interest and administrative expenditure
The assessee is a company which involves in providing services in Corporate Relocations, Information Management, Cash Management, Freight Forwarding & Hospitality. The assessee had incurred interest expenditure in relation to the utilisation of the loan for the purpose of business. During assessment, the AO disallowed interest expenditure in accordance with rule 8D(2)(ii) and administrative expenses on account of rule 8D(2)(iii). On appeal, the assessee contented in regard to the said disallowance had been that the disallowance which was made by the AO on the basis of the order of the CIT(A) in assessee's own case for the assessment year 2006–07, which cannot be applied in this year and secondly, it had sufficient surplus funds in the previous year from which investments have been made. The CIT(A) dismissed this ground of the assessee and held that investment had been paid from cash credit bank account therefore, interest paid on such cash credit account and working capital had to be disallowed.
Payment of self–assessment tax
Another issue raised by the assessee was that it had paid self–assessment tax of Rs. 4.50 crores in the month of July 2008, on estimated basis, because it has not paid advance tax during the year. The return of income was filed on 8th January 2009. The AO, while granting and issuing refund, had not allowed interest on the self–assessment tax for the entire period from the date of its payment till the issue of refund. On appeal, the CIT(A), rejected such interest to the assessee and held that the assessee had paid self–assessment tax s on estimated basis and it cannot be said that it was a tax payable on the basis of any return because, the return was filed much later. Hence, the assessee was not entitled for interest u/s 244A.
Having heard the parties, the Tribunal held that,
Interest and administrative expenditure
++ in the assessment year 2006–07 and 2007–08, the Tribunal has upheld the disallowance @ 5% on dividend income as a reasonable basis because, provisions of rule 8D, was not applicable in those years. Therefore, the said finding of the Tribunal will not be applicable here in this year because provisions of rule 8D, is admittedly applicable from the assessment year 2008–09. Thus, the ground is dismissed;
Payment of self–assessment tax
++ the assessee has paid the tax for the purpose of its taxable income for the assessment year 2008–09, in the month of July 2008. The due date for filing the return of income was 30th September 2008. If the tax has been paid prior to the date of filing of return of income, then it has to be construed as amount of "tax already paid" as contemplated in clause (i) of sub–section (1) of section 140A. Thus, the reasoning of the Commissioner (Appeals), cannot be upheld. The tax paid by the assessee for a sum of Rs. 4.50 crores, is nothing but tax paid under self–assessment tax for the purpose of section 140A and once that is so, the assessee is entitled for interest under section 244A. Thus, we hold that the assessee is entitled to refund of self–assessment tax along with the interest under section 244A, which is to be calculated from the date of payment of tax till the date of refund. Accordingly, ground raised by the assessee is treated as allowed.
Assessee's appeal partly allowed
Cases followed:
CIT v/s Sutlej Industries Ltd.; 2010-TIOL-203-HC-DEL-IT.
CIT v/s Vijaya Bank [2011] 338 ITR 489 (Kar.)
ORDER
Per: Amit Shukla:
The present appeal has been preferred by the assessee challenging the impugned order dated 27th December 2011, passed by the learned Commissioner (Appeals)–XIII, Mumbai, for the quantum of assessment passed under section 143(3), of the Income Tax Act, 1961 (for short "the Act") for the assessment year 2008–09, on the following grounds:–
"1. The learned CIT(A) erred on facts and law in partly upholding the Assessing Officer's order in disallowing Rs. 1,38,036 out of interest disallowance of Rs. 26,08,125 by applying rule 8D(2)(ii) on account of investments in shares, which are investments made out of own and surplus funds2. learned CIT(A) erred on facts and law in upholding the Assessing Officer's order in disallowing Rs. 3,70,027 out of expenses, being one half percentage of average value of investment in relation to exempt income by applying rule 8D(2)(iii), which are investments made out of own and surplus funds.3. The learned CIT(A) erred in upholding the action of Assessing Officer in not granting interest u/s 244A on the self–assessment tax paid, on facts and law."
2. Before us, the learned Counsel for the assessee submitted that the Assessing Officer has disallowed interest expenditure of Rs. 26,08,125, in accordance with rule 8D(2)(ii), which has been reduced by the learned Commissioner (Appeals) at Rs.1,38,036, and administrative expenses on account of rule 8D(2)(iii), has been confirmed at Rs. 3,70,024. The assessee's case with regard to the said disallowance has been that the disallowance has been made by the Assessing Officer on the basis of the order of the learned Commissioner (Appeals) in assessee's own case for the assessment year 2006–07, which cannot be applied in this year and secondly, it had sufficient surplus funds in the previous year from which investments have been made. Detail submissions were made before the learned Commissioner (Appeals), which has been incorporated from Page–2 to 4 of the appellate order. Thus, in view of the submissions made therein, it has been contended that no disallowance under the head "interest" should be made. Similarly, on account of administrative expenditure also, no expenditure can be held to be attributable to making the investment and/or earning of the exempt income.
3. The learned Departmental Representative, on the other hand, strongly relied upon the order of the learned Commissioner (Appeals) and submitted that the learned Commissioner (Appeals) has analysed the assessee's submission regarding availability of funds and also the borrowed funds and only after considering the entire facts, he has restricted the disallowance at Rs. 1,38,036, out of disallowance on account of interest of Rs. 26,08,125. Therefore, the findings given by the learned Commissioner (Appeals) should not be set aside.
4. We have carefully considered the rival contentions. On a perusal of the finding of the learned Commissioner (Appeals), we find that he has analysed the assessee's interest expenditure vis–a–vis the utilisation of the loan for the purpose of business. He has also noted the fact that investment to the tune of Rs. 1,36,14,368, has been paid from cash credit bank account and, therefore, interest paid on such cash credit account and working capital has to be disallowed. Based on these findings, he has restricted the disallowance at Rs. 1,38,036, which is not only reasonable but also factually and legally correct and, hence, the findings of the learned Commissioner (Appeals) on this score is upheld. Regarding administrative expenses, the assessee's case has been that it has offered Rs. 60,000, as direct expenditure for the purpose of disallowance and there is no indirect expenditure which can be said to be in relation to the investment yielding tax free income. The learned Commissioner (Appeals) after analyzing the facts of the case, held that such a disallowance has to be made in accordance with the provisions of rule 8D(2)(iii). Such a finding of the learned Commissioner (Appeals) cannot be deviated with because, nothing is borne out from the record that which are the expenses which do not have any bearing or cannot be said to be attributable for earning of exempt income and which expenses are directly relatable to other business activities. In the absence of such details, the formula prescribed under rule 8D(2)(iii), has to be applied. It is further noticed that in the assessment year 2006–07 and 2007–08, the Tribunal has upheld the disallowance @ 5% on dividend income as a reasonable basis because, provisions of rule 8D, was not applicable in those years. Therefore, the said finding of the Tribunal will not be applicable here in this year because provisions of rule 8D, is admittedly applicable from the assessment year 2008–09, and thus the findings of the learned Commissioner (Appeals) is upheld on legal and factual grounds. Thus, ground no.1 and 2 are dismissed.
5. Now, we take up the issue raised in ground no.3 i.e., non– granting of interest under section 244A, on account of self–assessment tax paid.
6. The assessee's case before the learned Commissioner (Appeals) had been that it had paid self–assessment tax of Rs. 4.50 crores in the month of July 2008, on estimated basis, because it has not paid advance tax during the year. The return of income was filed on 8th January 2009. The Assessing Officer, while granting and issuing refund, had not allowed interest on the self–assessment tax for the entire period from the date of its payment till the issue of refund. On behalf of the assessee, reliance was placed on the decision of the Tribunal, Bangalore Bench, in Vijay Bank and also on the decision of the Hon'ble Delhi High Court in CIT v/s Sutlej Industries Ltd., [2010] 37 DTR 25 (Del.) = 2010-TIOL-203-HC-DEL-IT. The learned Commissioner (Appeals) though held that in principle, the assessee should be entitled to interest on the self– assessment tax paid under section 140A and the computation of interest on such self–assessment tax, is to be given in terms of section 244A(1)(b) i.e., from the date of payment of such amount upto the date on which the refund is actually granted. However, he held that the facts of the assessee's case are different from that of the decision of the Hon'ble Delhi High Court because, in the present case, the assessee has paid self–assessment tax of Rs. 4.50 crores on estimated basis and it cannot be said that it is a tax payable on the basis of any return because, the return was filed much later. Hence, the assessee is not entitled for interest under section 244A.
7. Before us, the learned counsel submitted that the nature of tax paid by the assessee was self–assessment tax only and once it is a self–assessment tax, interest has to be allowed under section 244A. In support of his contention, he strongly relied upon the order of the Hon'ble Karnataka High Court in CIT v/s Vijaya Bank, [2011] 338 ITR 489 (Kar.) and the decision of the Hon'ble Delhi High Court in Sutlej Industries Ltd. (supra).
8. The learned Departmental Representative, on the other hand, strongly relied upon the order of the learned Commissioner (Appeals).
9. After carefully considering the rival submissions and on a perusal of the orders of the authorities below, we find that the basic reason for declining the grant of interest under section 244A, on the self– assessment tax paid by the assessee is that, the assessee has not paid the self–assessment tax along with the return of income, but prior to the date of filing of the return of income and that to be on the basis of estimation and, therefore, it is not a tax within the ambit of the provisions of section 140A, so as to be entitled for interest under section 244A. In our view, such an interpretation for denying the interest under section 244A, in the present case, is not tenable. Section 140A(1), reads as under:–
"140A. [(1) Where any tax is payable on the basis of any return required to be furnished under section 115WD or section 115WH or section 139 or section 142 or section 148 or section 153A or, as the case may be, section 158BC, after taking into account,-(i) the amount of tax, if any, already paid under any provision of this Act;(ii) any tax deducted or collected at source;(iii) any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;(iv) any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and(v) any tax credit claimed to be set off in accordance with the provisions of section 115JAA or section 115JD,the assessee shall be liable to pay such tax together with interest payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return and the return shall be accompanied by proof of payment of such tax and interest."
10. On a perusal of the above, it is evident that self–assessment tax is payable on the income shown in any return of income required to be furnished under various provisions of the Act, after taking into account, the amount of tax, if any, paid earlier which can also include advance tax; any tax deducted or collected at source; any tax credited; any tax claimed to be set–off in accordance with the provisions of section 115JAA; or any relief of tax or deduction of tax claimed under section 90, 90A or section 91. Thus, the self–assessment tax includes any amount of tax which has already been paid under the provisions of this Act. In this case, the assessee has paid the tax for the purpose of its taxable income for the assessment year 2008–09, in the month of July 2008. The due date for filing the return of income was 30th September 2008. If the tax has been paid prior to the date of filing of return of income, then it has to be construed as amount of "tax already paid" as contemplated in clause (i) of sub–section (1) of section 140A. Thus, the reasoning of the learned Commissioner (Appeals), cannot be upheld. The tax paid by the assessee for a sum of Rs. 4.50 crores, is nothing but tax paid under self–assessment tax for the purpose of section 140A and once that is so, the assessee is entitled for interest under section 244A. This is fully supported by the decision of Hon'ble Karnata High Court in Vijaya Bank (supra) and also the decision of Hon'ble Delhi High Court in Sutlej Industries Ltd. (supra). Thus, we hold that the assessee is entitled to refund of self–assessment tax along with the interest under section 244A, which is to be calculated from the date of payment of tax till the date of refund. Accordingly, ground no.3, raised by the assessee is treated as allowed.
11. In the result, assessee's appeal is partly allowed.
(Order pronounced in the open Court on 19.6.2014)
2014-TIOL-386-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'C' AHMEDABAD
BENCH 'C' AHMEDABAD
ITA No.109/Ahd/2011
Assessment Year: 2006-07
Assessment Year: 2006-07
BAJAJ PROCESSORS LTD
109 NEW CLOTH MARKET
OUTSIDE RAIPUR GATE
AHMEDABAD
PAN NO:AABCB3640D
109 NEW CLOTH MARKET
OUTSIDE RAIPUR GATE
AHMEDABAD
PAN NO:AABCB3640D
Vs
INCOME TAX OFFICER
WARD-1(2), AHMEDABAD
WARD-1(2), AHMEDABAD
Mukul Kr Shrawat, JM And T R Meena, AM
Date of Hearing: March 10, 2014
Date of Decision: March 14, 2014
Date of Decision: March 14, 2014
Appellant Rep by: Shri J P Jhangid, Sr.DR
Respondent Rep by: None (Written submission)
Respondent Rep by: None (Written submission)
Income Tax - Sections 36(1)(va), 40B, 43B, 143(3) - ESIC - PF - Whether provisions of section 43B also apply to the payments made in respect of employer's contribution regarding PF and ESIC.
The assessee, a company, is engaged in the business of processing of cloth. It had done the processing of cloth for its own production as well as on job work basis. It was noted by the AO that assessee had not made EPF an ESIC payments within the stipulated time. During assessment, AO had invoked the provisions of Section 36(1)(va) r.w.s. 2(24)(x) and disallowed the total amount of Rs.93,67,042/-. On appeal, CIT(A) held that the provisions of Section 40B were applicable in respect of employers contribution and not in respect of employees contribution. It was also mentioned that the amendment in Section 43B could not be applied for employees contribution. After discussing the provisions of Section 36(1)(va), it was held that in absence of any order of the Jurisdictional HC, addition was rightly made by the AO. On the date of hearing, no one had appeared from the side of the assessee, however a written submission was placed on record wherein the order of the assessee passed by ITAT for A.Y. 2005-06 in ITA No.32, 37/Ahd/2010, dated 17th June, 2011 had been filed, wherein it was held that the issue was covered by the decision of Tribunal in the case of ITO Ward-3 Vapi Vs. Gujarat Themis Biosyn Ltd., in ITA No.2378/Ahd/2008 for AY 2005-06. In that decision Tribunal held that the Delhi HC in the case of P.M. Electronics Ltd. had decided this issue of payment of Employees contribution towards PF after considering the decision of SC in the case of Vinay Cement and also distinguished the case law referred by DR of Bombay HC in Pamwi Tissues Ltd. In the case of CIT vs. Alom Extrusions Ltd. (2009-TIOL-125-SC-IT), SC had held that "Contribution to PF, made before due date of filing of return was allowable as deduction. The deletion of the second proviso to section 43B, and the amendment to the first proviso, by the Finance Act, 2003 was to overcome implementation problems. Consequently, the amendments, though made applicable by Parliament only with effect from 1-4-2004, were curative in nature and would apply retrospectively w.e.f. 1-4-1988. Accordingly, following SC in the case of Alom Extrusions Ltd. and Delhi HC in P.M. Electronics Ltd., the ground was dismissed. The assessee had furnished a detail of month-wise deposit of employees contribution in respect of PF and ESIC. From the side of Revenue, DR had placed reliance on an order of Gujarat HC pronounced in the case of CIT Vs. Gujarat State Road Transport Corporation, (2014-TIOL-76-HC-AHM-IT).
Held that,
++ after perusal of the written submission furnished by the assessee along with the order of the Respected Co-ordinate Bench, in the light of the orders passed by the Revenue Authorities, as well as the arguments of learned DR and the order passed by Gujarat High Court, we are of the view that the first step to deal with this issue is to ascertain the dates of deposit. In the present case, we have noted that neither in the order of AO nor in the order of CIT(A) the dates of deposit have been mentioned. It was an accepted position that there was delay in making the deposit but on what exact dates month-wise deposits have been made, was not noted by the Revenue Authorities. We, therefore, remit this issue back to the stage of the AO to be decided afresh in the light of the order of the Jurisdictional High Court and the latest law as applicable on the date of giving effect to the order of the Tribunal. With these directions, we hereby restore this ground back to the stage of the AO to be decided de novo as per the directions made hereinabove. The AO can also consider the decisions of Hon'ble Supreme Court in the case of Alom Extrusions Ltd., (2009-TIOL-125-SC-IT)and Vinay Cement, (2007-TIOL-251-SC-IT). Resultantly, ground may be treated as allowed but for statistical purpose only. In the result, the appeal of the assessee is allowed but for statistical purpose only.
Case remanded
Cases followed:
Alom Extrusions Ltd., (2009-TIOL-125-SC-IT)
Vinay Cement (2007-TIOL-251-SC-IT)
ORDER
Per: Mukul Kr Shrawat:
This is an appeal filed by the assessee arising from the order of learned CIT(A)-VI, Ahmedabad, dated 04.11.2010 and the solitary ground is reproduced below:
"The Ld. CIT(Appeals VI Ahmedabad has erred in law and on facts in passing appellate order dated 04/11/2010 for A.Y.2006-07 in the case of appellant by confirming the addition of Rs.3,67,042/- on account of late payment of PF and ESIC on account of employees contribution."
2. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) were that the assessee company is engaged in the business of processing of cloth. The assessee has done the processing of cloth for its own production as well as on job work basis. It was noted by the AO that the assessee had not made following payments within the stipulated time.
| "(a) EPF (employee's contribution) - | Rs.3,19,410/- |
| (b) ESIC (employee's contribution) - | Rs. 47,632/- |
Rs.3,67,042/- |
3. The AO had invoked the provisions of Section 36(1)(va) r.w.s. 2(24)(x) of IT Act and disallowed the total amount of Rs.93,67,042/-.
4. When the matter was carried before the First Appellate Authority, it was held by the learned CIT(A) that the provisions of Section 40B are applicable in respect of employers contribution and not in respect of employees contribution. He has also mentioned that the amendment in Section 43B could not be applied for employees contribution. After discussing the provisions of Section 36(1)(va), he has held that in the absence of any order of the Jurisdictional High the addition was rightly made by the AO. On the date of hearing, no one has appeared from the side of the assessee, however a written submission is placed on record wherein the order of the assessee passed by ITAT 'C' Bench Ahmedabad for A.Y. 2005-06 inITA No.32, 37/Ahd/2010, dated 17th June, 2011 has been filed. In the said decision in assessee's own case, it was held as under:
"We have heard both the parties and perused the material on record and find that the issue is now covered by the decision of this Tribunal in the case of ITO Ward-3 Vapi Vs. Gujarat Themis Biosyn Ltd., in ITA No.2378/Ahd/2008 for Assessment Year 2005-06 pronounced on 30.07.2010 wherein Tribunal has held as under:5. We find that the Hon'ble Delhi High Court in the case of P.M. Electronics Ltd. (supra) has decided this issue of payment of Employees contribution towardsw Provident Fund after considering the decision of Hon'ble Apex Court in the case of Vinay Cement (supra) and also distinguished the case law referred by the Ld. DR of Bombay High Court in Pamwi Tissues Ltd. (supra). Even now this issue has been considered by Hon'ble Apex Court in the case of CIT vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) / (2009) 185 Taxman 416 (SC) = (2009-TIOL-125-SC-IT), wherein, it is held that "Contribution to Provident Fund, made before due date of filing of return allowable as deduction. The deletion of the second proviso to section 43B, and the amendment to the first proviso, by the Finance Act, 2003 was to overcome implementation problems. Consequently, the amendments, though made applicable by Parliament only with effect from 1-4-2004, were curative in nature and would apply retrospectively w.e.f. 1-4-1988. Accordingly, following Apex Court in the case of Alom Extrusions Ltd. (supra) and Delhi High Court in P.M. Electronics Ltd. (supra), we dismiss this ground of the Revenue."
4.1 The assessee has furnished a detail of month-wise deposit of employees contribution in respect of PF and ESIC.
5. From the side of Revenue, learned DR has placed reliance on an order of Hon'ble Gujarat High Court pronounced in the case of CIT Vs. Gujarat State Road Transport Corporation, 41 taxmann.com 100 (Guj) = (2014-TIOL-76-HC-AHM-IT).
6. After perusal of the written submission furnished by the assessee along with the order of the Respected Co-ordinate Bench, in the light of the orders passed by the Revenue Authorities, as well as the arguments of learned DR and the order passed by Hon'ble Gujarat High Court, we are of the view that the first step to deal with this issue is to ascertain the dates of deposit. In the present case, we have noted that neither in the order of AO nor in the order of CIT(A) the dates of deposit have been mentioned. It was an accepted position that there was delay in making the deposit but on what exact dates month-wise deposits have been made, was not noted by the Revenue Authorities. We, therefore, remit this issue back to the stage of the AO to be decided afresh in the light of the order of the Hon'ble Jurisdictional High Court and the latest law as applicable on the date of giving effect to the order of the Tribunal. With these directions, we hereby restore this ground back to the stage of the AO to be decided de novo as per the directions made hereinabove. The AO can also consider the decisions of Hon'ble Supreme Court in the case of Alom Extrusions Ltd., 319 ITR 306 (SC) = (2009-TIOL-125-SC-IT) and Vinay Cement, 213 CTR 268 (SC) = (2007-TIOL-251-SC-IT).Resultantly, ground may be treated as allowed but for statistical purpose only.
7. In the result, the appeal of the assessee is allowed but for statistical purpose only.
2014-TIOL-886-HC-AHM-IT
IN THE HIGH COURT OF GUJARAT
AT AHMEDABAD
Tax Appeal No.281 of 2014
COMMISSIONER OF INCOME TAX-I
Vs
CADILA PHARMACEUTICALS LTD
Akil Kureshi And Sonia Gokani, JJ
Dated: May 5, 2014
Appellant Rep by: Mrs Mauna M Bhatt, Adv.
Respondent Rep by: None
Respondent Rep by: None
Income Tax - Sections 115JB & 271(1)(c) - minimum alternative tax - addition in normal income - tax evasion - concealment of loss - Whether concealment of loss by the assessee would amount to tax evasion - Whether in such a case penalty for concealment u/s 271(1)(c) is justified - Whether while computing income of a company under the provision for MAT, AO has only the power of examining whether the books of account are certified by the authorities under the Companies Acts - Whether in such a case, the AO has the limited power of making increases and reductions as provided in the Explanation to such provision.
The assessee is a pharmaceutical company. In the return filed, assessee had declared losses. During assessment, AO had made various disallowances and reduced the losses of the assessee. The AO after passing the assessment order levied a penalty u/s 271(1)(c). On appeal, CIT(A) decided in favour of assessee. On further appeal before Tribunal, the counsel of the Revenue submitted that as there was a reduction in loss, which would mean that the assessee had earned some profit, which proves that it had evaded tax. Thus, the levy of penalty was justified. The Tribunal following the decision in CIT vs. Nalva Sons Investment Ltd. held that there was no issue of tax evasion against the assessee as concealment of loss under normal provision by the assessee would not amount to tax evasion. The Tribunal also observed that the assessee continued to pay tax of minimum alternative basis u/s 115JB even after the disputed additions.
Held that,
++ in the present case, we have noticed that the Commissioner in his order dated November 14, 2008, partially allowed the assessee's appeal in terms of quantum addition and in terms held that no addition for the purpose of computation of book profit under section 115JB of the Act could have been made. The Commissioner in order to come to such conclusion relied on the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT, reported in =2002-TIOL-185-SC-IT-LB and Malayala Manorama Co. Ltd. v. CIT, = 2008-TIOL-77-SC-IT, in which it is held that it is not open for the Assessing Officer to rescrutinize the accounts and satisfy that the accounts have been maintained under the provisions of the Companies Act. While computing the income of a company under the provision for minimum alternative tax, the Assessing Officer has only the power of examining whether the books of account are certified by the authorities under the Companies Acts as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided in the Explanation to such provision;
++ to this proposition of the Commissioner, we have serious doubt. In a case like this, when the assessee concealed certain income not only for the purpose of avoiding excise duty, but also income tax, we wonder whether the provisions of section 115JB of the Act would prevent the Revenue Authorities from making suitable additions not only in the normal computation, but also for computing book profit for minimum alternative tax. We also wonder whether the decisions of the Supreme Court in the case Apollo Tyres Ltd. and Malayala Manorama Co. Ltd.lay down such a proposition. When the assessee holds back certain facts even from the statutory auditors, we wonder whether their certification that the accounts have been maintained as required under the Companies Act would be final and it would be impermissible for the Assessing Officer to go behind that. Such issue, however, we would answer in an appropriate case as and when such facts are presented before us. In the present case, we shall have to proceed on the basis that the order of Commissioner has become final. It is, thus, binding both on the Revenue as well as the assessee. Such order in effect was that addition for normal computation sustained, for the purpose of computation of book profit deleted. The result of this decision of the Commissioner would be that the tax that the assessee would pay before and after additions would remain exactly the same. In other words, since the Commissioner did not permit any increase in the assessee's book profit computation under section 115JB of the Act, even after unearthing the concealed income, the assessee ended up paying the same amount of minimum alternative tax under section 115JB of the Act even after the concealments were unearthed and accepted by the assessee. It is in this background, our discussion on the implication of Explanation 4 to section 271(1) of the Act must be seen. When in facts of the case, the assessee's tax liability did not change despite unearthing of concealed income, no penalty could have been levied. We may clarify that our conclusions should not be seen as laying down, that simply because before and after the additions the assessee remained a MAT company and paid tax under section 115JB of the Act or such similar provision, that by itself would mean that no penalty could be imposed. If the effect of the addition of the concealed income results into higher minimum alternative tax by increasing the book profit also, penalty could as well be imposed. With this clarification, we answer the question against the Revenue.
Revenue's appeal dismissed
Case Followed ;
Nalwa Sons Investments Ltd. 2010-TIOL-890-HC-DEL-IT
JUDGEMENT
Per: Akil Kureshi:
1. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal raising following questions for our consideration:
"A. Whether the Appellate Tribunal has substantially erred in deleting the penalty of Rs.25.43 lacs despite the fact that the corresponding quantum additions were already confirmed by the CIT(A)?B. Whether the Appellate Tribunal has substantially erred in not appreciating the fact that when furnishing of inaccurate particulars has the effect of reducing the loss declared in the return, then such amount is considered as income in respect of which inaccurate particulars have been furnished, as per clause (a) of Explanation 4 to section 271(1)(c)?"
2. The issue pertains to levy of penalty under section 271(1)(c) of the Act. From the record, it emerges that even after the disputed additions, the assessee-company continued to pay tax of minimum alternative basis under section 115JB of the Act. The Tribunal, therefore, held and observed as under:
"4. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgment cited by the Ld.A.R. We find that as per the assessment order, even after making various disallowances, as per which the loss declared by the assessee in the return of income of Rs.7,37,41,571/- was reduced to Rs.6,53,80,460/-, ultimately the tax was levied by the A.O. on book profit of Rs.13,78,32,407/- which is as per form 29B filed along with the return of income and there is no addition in the book profit made by the A.O. Under these facts, now we examine the applicability of the judgment of Hon'ble Delhi High Court rendered in the case of CIT vs. Nalva Sons Investment Ltd., (supra) cited by the Ld. A.R. In that case, it was held by Hon'ble Delhi High Court that when when computation of income was made u/s.115JB and there was losss under the normal provisions it has to be accepted that such addition in normal income did not lead to tax evasion at all, and therefore, penalty u/s 271(1)(c) cannot be imposed. We have already seen that in the present case also, the facts are identical because in the present case also, the computation of income was made by the A.O. u/s 115JB and there was loss under the normal provisions and, therefore, it has to be held that in the present case also, concealment, if any, did not lead to tax evasion at all and, therefore, penalty u/s 271(1)(c) cannot be imposed. Respectfully following this judgment of Hon'ble Delhi High Court, we delete the penalty in the present case."
3. Similar issue came up for consideration before this Court in Tax Appeal No.140 of 2014. Referring to the decision of Delhi High Court in the case of Nalwa Sons Investments Ltd. 327 ITR 543 (Delhi) = 2010-TIOL-890-HC-DEL-IT, it was observed as under:
"11. In the present case, we have noticed that the Commissioner in his order dated November 14, 2008, partially allowed the assessee's appeal in terms of quantum addition and in terms held that no addition for the purpose of computation of book profit under section 115JB of the Act could have been made. The Commissioner in order to come to such conclusion relied on the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT, reported in (2002) 255 ITR 273 (SC) = 2002-TIOL-185-SC-IT-LB and Malayala Manorama Co. Ltd. v. CIT, reported in 300 ITR 251 = 2008-TIOL-77-SC-IT, in which it is held that it is not open for the Assessing Officer to rescrutinize the accounts and satisfy that the accounts have been maintained under the provisions of the Companies Act. While computing the income of a company under the provision for minimum alternative tax, the Assessing Officer has only the power of examining whether the books of account are certified by the authorities under the Companies Acts as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided in the Explanation to such provision.12. To this proposition of the Commissioner, we have serious doubt. In a case like this, when the assessee concealed certain income not only for the purpose of avoiding excise duty, but also income tax, we wonder whether the provisions of section 115JB of the Act would prevent the Revenue Authorities from making suitable additions not only in the normal computation, but also for computing book profit for minimum alternative tax. We also wonder whether the decisions of the Supreme Court in the case Apollo Tyres Ltd. (supra) and Malayala Manorama Co. Ltd. (supra) lay down such a proposition. When the assessee holds back certain facts even from the statutory auditors, we wonder whether their certification that the accounts have been maintained as required under the Companies Act would be final and it would be impermissible for the Assessing Officer to go behind that. Such issue, however, we would answer in an appropriate case as and when such facts are presented before us. In the present case, we shall have to proceed on the basis that the order of Commissioner has become final. It is, thus, binding both on the Revenue as well as the assessee. Such order in effect was that addition for normal computation sustained, for the purpose of computation of book profit deleted. The result of this decision of the Commissioner would be that the tax that the assessee would pay before and after additions would remain exactly the same. In other words, since the Commissioner did not permit any increase in the assessee's book profit computation under section 115JB of the Act, even after unearthing the concealed income, the assessee ended up paying the same amount of minimum alternative tax under section 115JB of the Act even after the concealments were unearthed and accepted by the assessee. It is in this background, our discussion on the implication of Explanation 4 to section 271(1) of the Act must be seen. When in facts of the case, the assessee's tax liability did not change despite unearthing of concealed income, no penalty could have been levied. We may clarify that our conclusions should not be seen as laying down, that simply because before and after the additions the assessee remained a MAT company and paid tax under section 115JB of the Act or such similar provision, that by itself would mean that no penalty could be imposed. If the effect of the addition of the concealed income results into higher minimum alternative tax by increasing the book profit also, penalty could as well be imposed. With this clarification, we answer the question against the Revenue.
4. In the result, the Tax Appeal is dismissed.
5. Before closing, we had under our order dated 23.4.2014 called for explanation from the Registry about this Tax Appeal not being linked with similar appeals. Such explanation has been rendered by the concerned staff under communication dated 2.5.2014. The explanation is accepted and the issue is closed.
Regards,
Pawan Singla , LLB
M. No. 9825829075
Holding period proposed to increased to 36 Month for Unlisted shares and non Equity oriented mutual funds For LTCG Calculation
Long-term Capital Gains on debt oriented Mutual Fund and its qualification as Short-term capital asset
The existing provisions contained in clause (42A) of section 2 of the Act provides that short-term capital asset means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, the period of holding for qualifying it as short-term capital asset is not more than twelve months.
The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined.
Accordingly, it is proposed to amend the aforesaid clause (42A) of section 2 so as to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty-six months.
These amendments will take effect from 1st April, 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years.
Extension of the sunset date under section 80-IA for power sector to 31st March, 2017
Under the existing provisions of clause (iv) of sub-section (4) of section 80-IA of the Income-tax Act, a deduction of profits and gains is allowed to an undertaking which,—
(a) is set up for the generation and distribution of power if it begins to generate power at any time during the period beginning on 1st April, 1993 and ending on 31st March, 2014;
(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1st April, 1999 and ending on 31st March, 2014;
(c) undertakes substantial renovation and modernization of existing network of transmission or distribution lines at any time during the period beginning on 1st April, 2004 and ending on 31st March, 2014.
With a view to provide further time to the undertakings to commence the eligible activity to avail the tax incentive, it is proposed to amend the above provisions to extend the terminal date for a further period up to 31st March, 2017 i.e. till the end of the 12th Five Year Plan.
These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
Budget 2014 – No More double deductions u/s. 10AA and Section 35AD
Deduction in respect of capital expenditure on specified business
I. Under the existing provisions of section 35AD of the Act, investment-linked tax incentive is provided by way of allowing a deduction in respect of the whole of any expenditure of capital nature (other than expenditure on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the "specified business" during the previous year in which such expenditure is incurred. Currently, the following "specified businesses" are eligible for availing the investment-linked deduction under section 35AD as enumerated in clause (c) of sub-section (8) of the said section:-
(i) setting up and operating a cold chain facility;
(ii) setting up and operating a warehousing facility for storage of agricultural produce;
(iii) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;
(iv) building and operating, anywhere in India, a hotel of two-star or above category as classified by the Central Government;
(v) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;
(vi) developing and building a housing project under a scheme for slum redevelopment or rehabilitation, framed by the Central Government or a State Government, as the case may be, and notified by the Board in accordance with the prescribed guidelines;
(vii) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in accordance with the prescribed guidelines;
(viii)production of fertilizer in India;
(ix) setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962;
(x) bee-keeping and production of honey and beeswax; and (xi) setting up and operating a warehousing facility for storage of sugar;
It is proposed to include two new businesses as "specified business" for the purposes of the investment-linked deduction under section 35AD so as to promote investment in these sectors, which are :-
(a) laying and operating a slurry pipeline for the transportation of iron ore;
(b) setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.
It is also proposed to provide that the date of commencement of operations for availing investment linked deduction in respect of the two new specified businesses shall be on or after 1st April, 2014.
II. The existing provisions of section 35AD do not provide for a specific time period for which capital assets on which the deduction has been claimed and allowed, are to be used for the specified business. With a view to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, it is proposed to insert sub-section (7A) in section 35AD to provide that any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.
If any asset on which a deduction under section 35AD has been allowed, is demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax under clause (vii) of section 28. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above. Accordingly, it is proposed to insert sub-section (7B) to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head "Profits and gains of business or profession" of the previous year in which the asset is so used.
| Example: | |||
| Deduction claimed under section 35AD on a capital asset | : | 100 | |
| Depreciation eligible on such asset under section 32 | : | 15 | |
| Profit chargeable to tax in accordance with the proposed sub-section (7B) of section 35AD | : | 85 |
The provisions contained in the proposed sub-section (7B) of the said section would, however, not apply to a company which has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 within the time period specified in sub-section (7A).
III. The existing provisions of sub-section (3) of the aforesaid section provide that where any assessee has claimed a deduction under this section, no deduction shall be allowed under the provisions of Chapter VIA for the same or any other assessment year. As section 1 0AA also provides for profit linked deduction in respect of units set-up in Special Economic Zones, it is proposed to amend section 35AD so as to provide that where any deduction has been availed of by the assessee on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the assessee in the same or any other assessment year in respect of such specified business.
As a consequence of this amendment, section 10AA is also proposed to be amended so as to provide that no deduction under section 35AD shall be available in any assessment year to a specified business which has claimed and availed of deduction under section 10AA in the same or any other assessment year.
These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
Budget 2014 – Signing and verification of return of income
The existing provisions under section 140 of the Act provide that the return under section 139 shall be signed and verified in the manner specified therein.
With a view to enable the verification of returns either by a sign in manuscript or by any electronic mode, it is proposed to amend section 140 of the Act so as to provide that the return shall be verified by the persons specified therein. The manner of verification of return is prescribed under section 139 of the Act.
The amendment will take effect from 1st October, 2014.
Budget 2014 – Loophole allowing Double deduction to Charitable Trust Related to Capital Assets and Depreciation plugged
Existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.
In view of the above, it is also proposed to amend the Act to provide that under section 11 and section 10(23C), income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.
These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
Budget 2014 – Exemption u/s. 10 not allowable to trust who opted for special dispensation U/s. Sections 11, 12 & 13
Rationalisation of taxation regime in the case of charitable trusts and institutions
The existing provisions of section 11 of the Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions subject to various conditions contained in the said section. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it has to be accumulated in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section. If the accumulated income is not applied in accordance with the conditions provided in the said section, then such income is deemed to be taxable income of the trust or institution.
Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.
The sections 11, 12, 12A, 12AA and 13 constitute a complete code governing the grant or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled.
Several issues have arisen in respect of the application of exemption regime in cases of trusts or institutions in respect of which clarity in law is required.
The first issue is regarding the interplay of the general provision of exemptions which are contained in section 10 of the Act vis.-a-vis. the specific and special exemption regime covered in sections 11 to 13. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilised for the object or purpose for which the institution or trust has been established. In many cases it has been noted that trusts or institutions which are registered and have been claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, then a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This defeats the very objective and purpose of placing the conditions of application of income etc. in respect of income derived from property under trust in the first place.
Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations.
Similar situation exists in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.
Therefore, it is proposed to amend the Act to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)]. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).
These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
Budget 2014 – Amends section 10(23C) to define the term "substantially financed by the Government"
Clarification in respect of section 10(23C) of the Act
The existing provisions of sub-clause (iiiab) and (iiiac) of section 1 0(23C) of the Act provide exemption, subject to various conditions, in respect of income of certain educational institutions, universities and hospitals which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government.
Absence of a definition of the phrase "substantially financed by the Government" has led to litigation and varying decisions of judicial authorities who have, for this purpose, relied upon various other provisions of the Income-tax Act and other Acts. Thus, there is lack of certainty in this regard.
Therefore, it is proposed to amend section 10(23C) by inserting an Explanation that if the Government grant to a university or other educational institution, hospital or other institution during the relevant previous year exceeds a percentage (to be prescribed) of the total receipts (including any voluntary contributions), of such university or other educational institution, hospital or other institution, as the case may be, then such university or other educational institution, hospital or other institution shall be considered as being substantially financed by the Government for that previous year.
This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
Budget 2014 – Exemption U/s. 54EC cannot exceed Rs. 50 Lakh despite investment in two Years
Capital gains exemption on investment in Specified Bonds
The existing provisions contained in sub-section (1) of section 54EC of the Act provide that where capital gain arises from the transfer of a long-term capital asset and the assessee has, within a period of six months, invested the whole or part of capital gains in the long-term specified asset, the proportionate capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax. The proviso to the said sub-section provides that the investment made in the long-term specified asset during any financial year shall not exceed fifty lakh rupees.
However, the wordings of the proviso have created an ambiguity. As a result the capital gains arising during the year after the month of September were invested in the specified asset in such a manner so as to split the investment in two years i.e., one within the year and second in the next year but before the expiry of six months. This resulted in the claim for relief of one crore rupees as against the intended limit for relief of fifty lakh rupees.
Accordingly, it is proposed to insert a proviso in sub-section (1) so as to provide that the investment made by an assessee in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.
This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years.
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