2010 (11) TMI 953 - AT - Income Tax

Tribunal dismisses grounds, directs reconsideration of deductions, allows appeal against interest levy.

M/s. Indian Oil Corporation Ltd. Versus The ACIT, Range 10 (1), Aayakar Bhavan, Mumbai

The Tribunal dismissed various grounds raised by the assessee, including disallowances under sections 43B, 80HHC, and 115JB, due to lack of approval from ... - ISSUES PRESENTED AND CONSIDERED 1. Whether grounds challenging assessment adjustments (grounds 1-9 and 23-25) could be adjudicated in absence of requisite approval of the Committee on Disputes (C.O.D.) for a Government of India undertaking. 2. Whether sales of ATF and other petroleum products/bunker oil to foreign carriers constitute 'exports' eligible for deduction under section 80HHC, and whether such products fall within the prohibitory categories of section 80HHC(2)(b) (i.e., 'mineral oil') or (ii) processed minerals and ores not listed in the Twelfth Schedule. 3. Whether specified expenditures treated as 'prior period' items are deductible in the assessment year because the liabilities crystallized in that year, and whether prior period income should be set off against prior period expenses (i.e., whether netting is appropriate). 4. Whether exchange loss on outstanding foreign currency loan arising on 31st March is a revenue deduction or a contingent item (i.e., whether it distorts the true picture of income), and the proper application of governing precedent to determine allowability. 5. Whether interest under section 234D can be levied in respect of refunds granted prior to 1 June 2003 (i.e., whether section 234D has retrospective effect). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of Committee on Disputes (C.O.D.) approval for Government undertakings; dismissal of specified grounds for want of approval Legal framework: For appeals by Government of India undertakings, statutory/internal rules (and established jurisprudence) require prior approval of the Committee on Disputes (C.O.D.) before the appellate authority proceeds on specified grounds. Precedent treatment: The Tribunal referred to Supreme Court authority establishing that C.O.D. approval is required before proceeding in appeals by Government undertakings. Interpretation and reasoning: The Tribunal observed that the assessee admitted the need for C.O.D. approval and specifically that the C.O.D. had not decided or permitted certain grounds (notably grounds 1, 7-9, and 23-25). For grounds not permitted by C.O.D., the Tribunal dismissed them for want of approval. For grounds not decided by C.O.D., the Tribunal dismissed them but granted liberty to seek recall and restoration if approval is obtained later. Ratio vs. Obiter: Ratio - C.O.D. approval is a jurisdictional prerequisite for the Tribunal to adjudicate specified grounds in appeals by Government undertakings; absence of such approval warrants dismissal of those grounds. Obiter - procedural liberty to apply for recall on subsequent grant of approval. Conclusion: Grounds 1-9 and 23-25 were dismissed for want of requisite C.O.D. approval; the assessee may seek recall/restoration if approval is later obtained. Issue 2 - Deductibility under section 80HHC for exports of ATF and petroleum products; characterization as 'mineral oil' or processed minerals/ores Legal framework: Section 80HHC provides deduction for export profits subject to exclusions in section 80HHC(2)(b), which exclude certain goods such as 'mineral oil' and processed minerals/ores not in the Twelfth Schedule. Precedent treatment: The Tribunal applied its earlier decisions in the assessee's own case for prior assessment years, which held that sales of ATF and bunker oil to foreign airlines/ships do not qualify as 'exports' for section 80HHC purposes and that the products fall within the prohibitory ambit of section 80HHC(2)(b). Interpretation and reasoning: Both parties accepted that earlier Tribunal orders against the assessee on identical issues existed for multiple prior years. Respectfully following those earlier Tribunal decisions, the Tribunal rejected the assessee's contention that ATF sales to foreign carriers and other petroleum product exports qualify for deduction and held that such products are excluded under section 80HHC(2)(b). Ratio vs. Obiter: Ratio - Where consistent earlier Tribunal decisions in the same assessee's case determine that particular petroleum product sales are excluded from section 80HHC relief, later panels will follow that precedent absent distinguishing factors. Obiter - None additional. Conclusion: The claim for deduction under section 80HHC in respect of ATF and specified petroleum product exports was disallowed, the issue being decided against the assessee following earlier Tribunal rulings. Issue 3 - Prior period expenses: crystallization test, item-wise consideration, and netting with prior period income Legal framework: On mercantile accounting basis, an expense is deductible in the year in which the liability is crystallized and quantifiable; change in estimate per accounting standards does not necessarily amount to prior period item. Relevant judicial tests require assessment whether liability became real and enforceable in the year claimed. Precedent treatment: The Tribunal reviewed and relied upon multiple authorities (including Supreme Court and High Court decisions) establishing that the determinative test is whether the liability was crystallized and quantifiable in the year claimed; if so, it is deductible in that year even if referable to earlier transactions. Tribunal also cited prior Tribunal orders in the assessee's case which required item-wise consideration. Interpretation and reasoning: The Tribunal found that the Assessing Officer and the Commissioner (Appeals) had not undertaken item-wise determinations applying the crystallization/enforceability tests. Accounting Standard applicability (change in estimate) was noted as relevant only where genuine changes in estimate occur. Given the lack of item-wise analysis, the Tribunal concluded that the proper course was to remit the matter to the AO with directions to examine each item and to allow those items demonstrably crystallized during the relevant year. On netting, the Tribunal indicated that the AO must consider appropriate set-off of prior period income against prior period expenses where warranted (following cited precedent suggesting netting as equitable treatment). Ratio vs. Obiter: Ratio - Prior period items require item-wise adjudication applying crystallization/quantification tests; items shown to have crystallized in the assessment year are deductible. Netting of prior period income against expenses should be considered where appropriate. Obiter - Reference to specific decisions and the assertion that accounting standards apply only to changes in estimates. Conclusion: The Tribunal set aside the prior-period-disallowance issue to the AO for item-wise consideration and directed allowance where liabilities are shown to have crystallized in the assessment year; it also directed consideration of netting prior period income against prior period expenses where appropriate. Issue 4 - Exchange loss on outstanding foreign currency loan (treatment as revenue deduction vs. contingent) Legal framework: Revenue recognition and deduction for exchange differences depend on whether the loss is contingent or represents a bona fide revenue loss crystallized in the year; decisions of higher courts (including the Supreme Court) govern the test and application. Precedent treatment: The Tribunal referred to controlling precedent (including the Supreme Court decision cited) that informs treatment of exchange differences as revenue deductions and to Bombay High Court/Tribunal authorities relied upon by the assessee. Interpretation and reasoning: The Tribunal found that the question required application of the Supreme Court authority and was fact-sensitive; accordingly, it directed remand to the AO to decide the allowability of exchange rate difference as revenue expenditure after affording the assessee a reasonable opportunity and applying the law set out in the referenced Supreme Court decision. Ratio vs. Obiter: Ratio - Where factual assessment is required, the AO must decide exchange loss claims in light of controlling precedent after giving opportunity to parties. Obiter - None additional. Conclusion: The matter of exchange loss was remitted to the AO for fresh consideration in light of the cited Supreme Court authority, with directions to afford the assessee reasonable opportunity. Issue 5 - Levy of interest under section 234D on refunds granted prior to 1 June 2003 Legal framework: Section 234D (interest on delayed refunds) was inserted with effect from a specified date; statutory interpretation requires assessing whether the provision applies retrospectively. Precedent treatment: The Tribunal followed the Bombay High Court decision holding that section 234D came into force w.e.f. 1 June 2003 and does not have retrospective effect. Interpretation and reasoning: Applying the High Court's holding that section 234D is not retrospective, the Tribunal accepted the assessee's contention that interest under section 234D could not be levied in respect of refunds granted prior to 1 June 2003. Ratio vs. Obiter: Ratio - Interest under section 234D cannot be charged in respect of refunds granted before the statute's commencement date (1 June 2003) because the provision lacks retrospective effect. Obiter - None. Conclusion: The Tribunal allowed the ground challenging section 234D interest for refunds prior to 1 June 2003 and accordingly granted relief on this issue; the appeal was thus partly allowed overall.