TaxTMI 
TaxTMI 
2010 (10) TMI 1084
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....er of Income tax (Appeals); 3. The learned Commissioner of Income tax (Appeals) was not justified in deleting the disallowance of Rs. 15,59,046/- out of interest payments for non business purposes. The burden was on the assessee to prove the genuineness of the claim; 4. The learned Commissioner of Income tax (Appeals) erred in holding that the amount of Rs. 32,69,65,146/- being advance made to Gujarat Prestrop Electricals Ltd. [GPEL] towards the liability of financial institutions, was for business purpose and that the claim of write off of the same was admissible. The learned CIT(A) also erred in allowing write off of Rs. 4,66,20,000/- on account of reduction in the value of equity investments in the said Gujarat Prestrop Electricals Ltd. The Commissioner of Income tax (Appeals) ought to have appreciated that the assessee company had no normal business transactions with GPEL. 5. The learned Commissioner of Income tax (Appeals) erred in holding that actual payment of bonus pertaining to A.Y 2001- 02 should be allowed in A.Y 2002-03 in total disregard to provisions of sec.43B, which allow education in respect of payments which are otherwise allowable and made on or before t....
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.... and assessed as income from house property. It was further noticed that no part of depreciation on corporate building and repairs and maintenance has been disallowed by the assessee. Accordingly, AO worked out the depreciation and also worked out the repair expenses and ultimately disallowed a sum of Rs. 31,66,617/-. 4. On appeal, the ld. CIT(A) adjudicated the issue vide para-4 which is as under: "4. The next ground is relating to the disallowing Rs. 3166617/- being depreciation and repairs expenses incurred in respect of a building let out by the assessee to Apollo International Ltd. in Gurgaon and Rs. 50000/- towards building let out to others. The AO's view is that the let out portion of the building is not used for assessee's own business. Since depreciation is being claimed on the basis of use wholly and exclusively for business, the assessee should not be entitled to it in proportion. The claim of the AR and appellant is that they are entitled to depreciation on the entire block of assets which constitutes the building. Under the concept of block of assets, proportionate disallowance cannot be made. There has been addition and reduction in the total block of assets un....
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....to be borne by the assessee , i.e., lessor. The question arose whether such stamp duty charge were allowable expenditure, the Hon'ble Delhi High Court observed as under:- "The legislature has used the word "namely" in section 24 of the I.T.Act, 1961, and this shows that the heads of expenditure whereof deduction can be claimed in the computation of income from house property are exhaustive. If a particular type of expenditure is not specifically provided to be deductible, deduction thereof cannot be claimed from out of the annual value. Neither section 23 nor section 24 provides for the deduction of the expenses incurred towards stamp duty or registration in respect of the lease of the house property for a period of five years, in compiling its income from the house property". On the basis of the above observation, it was held as under:- "Held accordingly, that the assessee-firm was not entitled to deduction of a half share of the stamp duty and registration charges borne by it in respect of a lease of its house property for a period of five years, in computing its income from the house property". 124. Thus from the above decision, it is clear that in respect of income ....
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....ppeal as noted in the earlier order of the Tribunal. The relevant para 23 is as under:- "The second issue is regarding disallowance of Rs. 1,68,857/- as deduction being payments made to the clubs in the interest of furthering the business of the assessee . According to the Assessing Officer an amount of Rs. 15,12,898/- was shown as expenses towards clubs. These expenses were not treated as business expenses and hence were added back. However, the assessee claimed that such expenses were admissible as they were incurred in the regular course of business and are allowable u/s. 37(1) of the Act. It was also submitted that for the assessment year 1996-97, the CIT(A) has set aside a similar disallowance to examine whether such expenses were of a personal nature or were in the nature of donation or any other contribution by the assessee. The ld. Counsel for the assessee contended that the Assessing Officer after verification had allowed the full amount for the assessment year 1996- 97. On appeal, the CIT(A) found that the break up of expenses filed by the assessee was identical in nature to the expense incurred in the assessment year 1996-97. The CIT(A) further found that as per th....
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....so submitted that since assessee has a mixed pool of funds, therefore, interest expenses have been correctly allocated on proportionate basis on the investment in tax free funds and as such rightly disallowed. 16. On the other hand, ld. counsel of the assessee submitted that these are trade assets as per the decision of the Hon'ble Supreme Court in the assessee's own case reported in 255 ITR 223 and, therefore, no interest could have been disallowed. He further submitted that the earlier decision by the Tribunal was rendered on the basis of the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. & Ors. In ITA NO.8057/M/03 & Ors., dated 20th October, 2008, wherein it was held that section 14A is applicable to all heads of income and Rule 8D is of retrospective nature. However, this Special Bench decision has been reversed by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. holding that Rule 8D does not have retrospective effect and accordingly the earlier decision of the Tribunal would not apply. He also referred to another unreported decision of the Hon'ble Kerala High Court in the case of CIT vs. Leena Ramch....
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....ee is engaged in trading in shares. So far as acquisition of shares in the form of investment is concerned the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s.14A is squarely attracted" Thus, it is clear that the earlier decision of the Tribunal is not applicable in this year because Rule 8D which was held to be retrospective in nature by the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. & Ors. [supra] which was followed, has itself been reversed by the Hon'ble Bombay High Court in the case of Godrej Boyce wherein the rule was held to be not of retrospective in nature. In that case it was further held that in earlier year only a reasonable sum of expenditure which was directly related to earning exempt income could be disallowed. Secondly, the Hon'ble Kerala High Court in the case of Leena Ramchandran [supra] has clearly held that if shares are purchased on account of trade assets, then sec.14A is not attracted. However, it is not clear from the orders of the lower authorities whether the shares were purchased on account of trade or investment. Therefore, in the interests of justice, w....
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.... a separate entity and were liabilities created by GPEL and, therefore, those liabilities cannot become the business expenditure of the promoter/guarantor i.e. the assessee company. In this background, according to him, the loss could not be allowed u/s.28 of the Act. 19. It was submitted before the AO vide letter dated 27-12-2005 that investments in GPEL by making payment as a guarantor towards settlement of creditors of GPEL would be treated as business carried on by the assessee and in this respect reliance was placed on the decision of the Apex Court in the assessee's own case for the A.Y 1998-99 reported at 255 ITR 273. AO observed that in that case the issue was whether investment made in the units of UTI could be said to be business of the assessee or not. He further observed that investments in the units of UTI could not be equated with the repayment of creditors of other company. He also observed that any profit or loss from investments in units and shares has been treated as income from capital gains in the subsequent year and accordingly the argument that GPEL should be considered as one of the business activity was also rejected. He also referred to the segment repor....
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....y Apollo Tyres on behalf of GPEL as per the scheme was transferred from the bank's account to the accounts of Apollo Tyres and shown in their balance sheet as an unsecured liability to Apollo Tyres Ltd. Hence, according to the accounts maintained by GPEL, the liability was not relinquished but it was shifted from the banks to the guarantor viz., Apollo Tyres." In the above background, AO denied the claim for deduction of Rs. 32,69,65,146/-. 23. On appeal, ld. CIT[A] decided the issue vide paras 11 and 12. The relevant portions of those paras are as under: "11.......... But I find that the AO has not gone into the crux of the facts stated above. As far as the facts are concerned, the following situation emerge:- (i) It was an authorised and legitimate business decision. (ii) It is a joint venture by the Government of Gujrat, not an arrangement to siphon money or park funds, neither the AO has established this nor any such situation emerge from the facts. (iii) And most importantly, both the payments and reduction in value of investments was directly out of the settlement package by the appropriate authority i.e. BIFT. 12. The appellant has relied on 74 ITR 78....
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.... given by ATL to GPEL or its creditors was basically a contribution on account of capital to GPEL. Even the settlement was reached with its creditors by the GPEL and it cannot be said that the assessee company settled the creditors of GPEL. The role of ATL i.e. the assessee company was limited to only financing the settlement. In fact, the assessee company has made an investment and the fate of that investment would be known in future and, therefore, presently the investment made by the assessee cannot be treated as loss. 25. He also emphasized that even the Board resolution for writing off this investment was passed on 26-6-2002 i.e. much after closing the accounts and, therefore, this claim, in any case, could not have been made in this case. He also submitted that the claim cannot be entertained even as bad debt because the assessee company has not accounted for investment made in GPEL while determining the profits of the assessee company. 26. On the other hand, ld. counsel of the assessee submitted that the claim made by the assessee has to be considered as genuine claim suffered by the assessee while settling the dues and the same may be treated as either business loss u....
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....its and GPEL was established under that power. 27. He submitted that assessee company was already in the process of rehabilitation of other group companies, such as, BST Mfg. Ltd, Universal Steel and Alloyed Ltd. and such pre-rehabilitation schemes were approved by the Board of Directors of the company. He submitted that deduction on account of write off of the outstanding loans of Universal Steel and Alloyed Ltd. has already been allowed by the Tribunal in A.Y 1996-97 on the grounds of business expediency [I.T.A.No.43/Cochin2001 (copy filed)]. He submitted that the above noted background and the factual matrix would show the nature of multi dimensional activity undertaken in a regular and systematic manner by the assessee company as per the objects of the company the formation of GPEL was also a step in that direction. 28. Coming to the facts of the write off he pointed out that GPEL was incorporated in June 28, 1990 and pursuant of the grant of letter of intent by the Government of India for manufacture of copper clad laminates the assessee company entered into a shareholders agreement with GIIC on May 2, 1991 from which two promoter companies i.e. GIIC and ATL were to hold....
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.... expediency and no disallowance of interest was made for interest free loan given to GPEL. 30. He further pointed out that being main promoter of GPEL, ATL also stood guarantor for various term loans availed by GPEL from various banks and financial institutions which were duly approved by the Board of Directors, the operations of GPEL which were continuously being monitored by the assessee company, turned unsatisfactory right from inception and GPEL incurred heavy cash losses in F.Yrs. 1993-94 and 1994-95 leading to liquidity problems and working capital constrains. Ultimately, GPEL made a reference to Board for Industrial and Financial Reconstruction (for short BIFR). The BIFR at its meeting held on August 11, 1997 declared GPEL as sick industrial company and appointed IDBI as the Operating Agency to formulate a scheme for revival. A draft rehabilitation scheme dated October 8, 1999 was prepared and circulated by IDBI, copy of which has been placed at pages 188 to 202 of the paper book. This scheme was ultimately approved by the Hon'ble Gujarat High Court vide order dated 15-6- 2001, copy of which is placed at pages 154 to 179 of the paper book. Since ATL had stood as a cor....
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....ss in the business dealings at the behest of the assessee, then payments on account of such grants would amount to honouring the commitments of the assessee company. Therefore, following this decision, the Tribunal has already decided the issue in favour of the assessee. 32. In any case, from the above facts it becomes clear that the assessee company is the main promoter of GPEL and as a promoter of GPEL the assessee is doing business through GPEL because the promoter is basically a pre incorporate agent, whereas the managing agent is a post incorporate agent. Considering the basic reality of the situation, it could be said that the assessee company was virtually in partnership with the Government of Gujarat through GIIC for running the business of GPEL. He submitted that business as defined in sec.2(13) of the I.T.Act, would include any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. This definition is of wide import and is inclusive and not exhaustive. He argued that business has been defined in Halisbury's Law of England, Third Edition, Volume 38 Page 10 which was extracted by the Hon'ble Kerala High Court in th....
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....onstruing the word "profit" as used in section 2(15) of the Act, it was observed by the Hon'ble Supreme Court in the case of Sole Trustee, Lok Shikshana Trust vs. CIT - 101 ITR 234 held that- "By the use of the expression "profit motive" it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In the case of CIT vs. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1 (SC), Sarkar J., speaking for the majority, observed that business as contemplated by s. 10 of the Indian Income Tax Act, 1922, is an activity capable of producing a profit which can be taxed. The Court further observed that when business activity is carried out, profit motive as a normal incident is implied unless explicitly excluded." b) In the case of Indian Chamber of Commerce vs. CIT [101 ITR 796] (S.C) it was observed that an activity which yields profit or gain in the ordinary course must be presumed to have been termed for profit or gain. Be brought to our attent....
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....f the assessee. 34. The ld. counsel of the assessee submitted that though GPEL cannot be called subsidiary of the assessee, but still it cannot be denied that assessee had deep interest in the affairs of this joint sector company and was also made responsible for day-to-day operations of this company. In fact, the assessee company wanted to embark on diversification of its business activities to new areas of industries and this was the step in that direction the loan and guarantee given to GPEL are thus on the basis of commercial expediency and even the write off of the same is on the basis of commercial expediency and in that sense the claim should be alternatively allowed u/s.36(1)(vii) as bade debt or as revenue expenditure u/s.37(1). In this regard he mainly relied on the decision of the Hon'ble Supreme Court in the case of S.A. Builders vs. CIT [supra]. He particularly emphasized the observation of the Supreme Court wherein it was held that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". He also laid lot of emphasis on the following observations of the Hon'ble Supreme Court: "However, where ....
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....for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman. The amount of Rs. 1,30,925 was deductible as a trading loss for the year in question." He submitted that similar view was taken by the Hon'ble Bombay High Court in the case of CIT vs. F.M.Chinoy and Co. (P) Ltd. [74 ITR 780] and CIT vs. Investa Industrial Corporation Ltd. [119 ITR 380] (Bom). Similarly, the Hon'ble Supreme Court in the case of Essen P. Ltd. vs. CIT [65 ITR 625] wherein some money was advanced to the managed company and also certain guarantees were given, the same were held to be allowable as bad debt under the old I.T.Act. Again the Hon'ble Supreme Court in the case of CIT vs. Amalgamations Pvt. Ltd. [226 ITR 188] wherein the assessee had given guarantees for loan taken by the subsidiary company and such subsidiary company having gone into liquidation, the loss was held to be allowable expenditure. Again, the Hon'ble Calcutta High Court in the case of Turner Morrison and Co. Ltd. vs. CIT [supra] where some monies were advanced to some subsidiary company and such subsidiary company was being wound up and certain m....
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....rt or pleasure. It was mainly taken up with over all business plans of the assessee company. Similarly, there is no force in the objection of the AO that loss was of capital nature because the loss has been incurred in the course of carrying on of the business of the joint venture and it was not for acquisition of any capital asset. Similarly, there is no force in the objection that assessee is not in the business of banking or money lending and by giving guarantees for a company which is not subsidiary the claim is not tenable because GPEL was promoted by the assessee company in which assessee was deeply interested. The control and management operations of GPEL were with the assessee company in terms of joint shareholders agreement and in any case starting of this project and lending money was because of the commercial expediency as observed by the Hon'ble Supreme Court in the case of S. A. Builders vs. CIT [supra]. Regarding the objection of the AO that GPEL has not gone into liquidation and, therefore, claim should not be allowed he referred to the observations of the Hon'ble Kerala High Court in the case of CIT. Vs. Kerala State Industrial Development Corporation [289 I....
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....Court rather supports the case of the assessee. 37. While concluding he again emphasized that the issue is basically covered by the earlier decision of the Tribunal in assessee's own case vide I.T.A.No.43/Coch/01 for A.Y 1996-97 wherein vide para-16at page 13 the Tribunal while referring to the decision of Spencer & Co. [supra] and Dungan Agro Inds. [supra] allowed the write off of the loans on account of advances and bank guarantees given to revive the group company i.e. Universal Steel and Alloyed Ltd., which was also declared as a sick industrial unit. 38. In his rejoinder, the ld. CIT DR submitted that the decisions cited by the ld. counsel of the assessee are not applicable because GPEL was not a subsidiary of the assessee company. He then referred to clause-11 of the memorandum of association given at page-301 of the paper book and submitted that everything permitted by the memorandum cannot mean that assessee would have right to do business in such fields. Memorandum is basically allowing only to mean and provide activity which a company is authorised to carry on. He also emphasized again that the claim made by the assessee cannot be called bad debt and, therefore, sam....
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....o -(i) defer the payment of purchase tax on the basis of interest free deposits, (ii) to defer sales tax liability, (iii) to defer octroi duty and (iv) to defer electricity duty. The Central Government to grant - (i) an exemption from sec.41(1) of the Income Tax Act, (ii) an exemption from sec.36(1) of the Act, (iii) to exempt the company from the provisions of sections 100 to 102 of the Companies Act, 1956 and (iv) to exempt the company from the applicability from the provisions of sec.81A of the Companies Act. 40. The assessee company was further exempted from compliance of sec.372 of the Companies Act and from SEBI Regulations. Even Ahmedabad Electricity Corporation was required to make minimum demand charges and penalty thereon as well as to ensure uninterrupted power supply to GPEL. The equity capital was also required to be written down by 90%. In view of this scheme, assessee company made payments in the form of guarantees and/or payment of loans and interest charges to banks and financial institutions which amounted to Rs. 32.70 crores. In its board meeting held on 26-6-2002 it was decided that the amount recoverable from GPEL was not recoverable considering the over ....
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.... at the same time it is authorised by clause IIIB(6) of "objects incidental or ancillary to the attainment of the main object" which reads as under: "6. To amalgamate, enter into partnership or into any arrangements for sharing profits, union of interests, co-operation, joint-adventures, or reciprocal concessions or for limiting competition with any person or company carrying on or engaged in or about to carry on or engage in or which can be carried on in conjunction therewith or which is capable of being conducted so as to directly or indirectly benefit the Company." The above clause clearly shows that to meet the aspiration of becoming a diversified company the above clause authorised it to enter into any partnership or arrangement to start any business. Therefore, for getting into the new business a letter of intent was got issued from Government of India to start new business of production and manufacture of copper clad laminates and the company known as GPEL was incorporated in May 2, 1999. The assessee with specific intention of establishing its foothold in the State of Gujarat for expansion of its existing business of tyre entered into collaboration with the Government....
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....mpanies Act and compliance of SEBI guidelines for issue of optional convertible debentures. vii. The government was also required to grant exemption to ATL i.e. the assessee company from compliance of provisions of sec.370A of the Companies Act; viii. The Ahmedabad Electricity Corporation was required to waive minimum demand charges and penalty from the date of discontinuation to the date of reconnection and was further directed to ensure uninterrupted power of supply. ix. The assessee company was specifically required to bring in capital of Rs. 291 lakhs towards the rehabilitation scheme. The payment made by the assessee is, in fact, towards compliance of the Rehabilitation Scheme. It clearly shows that the assessee company was trying to rehabilitate the operations of the GPEL but still the same could not be revived. Therefore, in addition to the above compulsions by the order of the BIFR, the assessee company was further required to defend its reputation by paying to the financial institutions and bankers towards discharge of its guaranteed liabilities and other liabilities as proposed by the BIFR. Failure to pay these liabilities would have exposed the assessee compa....
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....see and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." From the above observations it become clear that claim has to be allowed even if it is not necessary to make such payments if the payments had been made voluntarily on the grounds of commercial expediency. Further it is not necessary that such business should be that of assessee itself. In the case before us though the amounts have been made in respect of GPEL but basically assessee was trying to establish the new business through GPEL and was also trying to achieve the larger business interest by establishing further factory in the State of Gujarat and it has been done also by establishment of tyre manufacturing unit at Limda near Baroda. 46. We also find that this is not the first time that the assessee company has ventured into this new diversification but earlier also the assessee company has forme....
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....on the business. The loss should be a revenue loss and not capital loss. The assessee company had initiated steps to revive group companies like Universal Steel and alloys Ltd. (USAL) which was declared as sick industrial unit. The assessee company had advanced money to it and has also furnished corporate guarantees to the bankers of USAL on the directions of BIFR. On appeal, however, the CIT(A0 directed the Assessing Officer to examine both the items and to that extent, he restored the matter to the file of the Assessing Officer. 16. We have heard the rival submissions and perused the material available on record. The ld. Counsel for the assessee made an exhaustive interpretation of `business'. For this proposition, the ld. Counsel for the assessee relied on various case laws by various High Courts and supreme court. Prominent among them is the decision of the ITAT, Chennai Bench in the case of M/s.Spencer & Company Ltd. Vs. ACIT in ITA No.598/Mds/2004 for the assessment year 2000-01 in which the Hon'ble JM is party. In this case it has been held that when the assessee company discharged certain liabilities of its subsidiary company to save its reputation, the same were allowab....
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....hat the assessee- company had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. But since the assessee-company had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63, it was held that the balance of Rs. 4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. This was upheld by the High Court. On appeal to the Supreme Court by the Revenue " Held, dismissing the appeal, that the assessee company had incurred the loss in carrying on its own business which includes furnishing guarantees to debts borrowed by its subsidiary companies. The assessee-company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators which was received in the relevant previous year for the asst. yr. 1962-63 and it was allowable in that year." In the case of Turner and Morrison & Co. Ltd. vs. CIT [supra], the AO as well as the ld. CIT DR distinguished these two decisions on the basis that GPEL was not a subsidiary of the assessee company an....
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....nal, on the other hand, has dealt with this question from two angles-firstly, that the deduction was disallowable since the assessee had shown this amount after the close of the accounting year as on 13th May, 1982; and, secondly, because the assessee was not in the business of money-lending. On both the counts, we disagree with the Tribunal for the following reasons. It is immaterial whether the bad debt is shown after the close of the accounting year or during the accounting year itself. A Division Bench of this Court, in the case of CIT vs. United Bank of India (1993) 69 Taxman 505 (Cal), has held as under: "The accounts of a company are generally made up for every year after a particular date at a later point of time. A company is entitled in law to finalise later as to what was the position of its accounts up to a particular date. A company can similarly finalise its accounts for various purposes at a later date with retrospective effect. In the instant case, in the accounts necessary entries were made for writing off the debt as bad in the light of the facts and circumstances of the case. Recommendation was moved by the concerned branch of the bank to write off the a....
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....ness. It is equally difficult to appreciate the observations of the High Court that it was in the larger interest of the assessee's business that the guarantee was given. In our opinion the view of the Appellate Tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not fall within s. 10 (2)(xi). No attempt was made nor indeed could it be usefully made to claim any allowance under s. 10(2)(xi) of the Act. For the reason given above the correct answer to the question referred should be in the negative and against the assessee. The appeals are thus allowed." From the above it is clear that the claim was made only as a bad debt. No other provision was relied on. Moreover, there was no privity of contract or any legal relationship between the assessee and the selling agent. There was no statutory provision or contractual obligation by which the assessee was bound to pay the guaranteed loan and it was not authorised by the memorandum of association of the company. In the case before us, as pointed out by the ld. counsel of the assessee, the same is authorised by clause-6 of ....
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.... sec.43B that the deduction cannot be allowed in the year of payment if it has been made before the due date for filing the return for the previous year. I am, therefore, inclined to fully agree with the appellant that the claim of bonus payment is to be allowed in the current year. The appeal on this point is allowed." 53. Before us, ld. CIT DR strongly supported the order of the AO and submitted that when payment was made in the earlier year only, assessee could have easily claimed the deduction in that year. 54. On the other hand, Ld.counsel of the assessee referred to the cross objection filed by the assessee company and submitted that payment has been made in the next assessment year i.e. 2003-04 as the assessee is making payment of bonus generally on the occasion of Onam which is a big festival in Kerala. He argued that ld. CIT(A) has clearly observed that provisions of sec.43B does not impose any such restriction. He pointed out that similarly the bonus payment for this year was made in A.Y 2003-04 and deduction was also claimed in that year and not for this year which is a consistent stand of the assessee and in any case, there should be some consistency and if the....
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....essee by the method of accounting adopted by him. Therefore, it is clear that items referred to in sec.43B can be allowed only if payment has been made and the same are allowable in which payment has been made. Since assessee has been making payment on account of bonus on the occasion of Onam which is a most important festival in the State of Kerala and has been consistently claiming deduction of payment of bonus only in the year of payment. This fact becomes clear from the assessment order because no claim has been made in the A.Y 2003-04 on the basis of proviso to sec.43B. 57. The proviso to sec.43B gives further concession that if payment in respect of any of the items referred in sec.43B is made in a particular year before the due date of filing of the income tax return, then such claim can be made in the earlier year also for which return is due to be filed. This seems to be only a further concession and cannot be read as a restriction that necessarily deduction has to be claimed in the earlier year which AO had interpreted. We fail to understand that as to how AO has referred to the decision of McDowell by observing that in earlier year i.e. A.Y 2001-02 there was a loss....
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.... Unit in the ratio of production being 45% as adopted by the assessee Rs. 15,23,17,500 Add: 1) Finance charges relating to Baroda Rs. 22,38,00,000 Unit as allocated by the assessee [41.34%] 2) Interest on term deposit received which was netted off against finance charges and assessed as income from other sources-Rs.1.2 Crores (2.89-1.69) :41.34% Rs. 49,60,800 3) Premium o redemption of debentures Not debited to P&L account claimed 27.95 Lakhs - 41.34% Rs. 11,55,400 Total Rs. 33,22,33,700 Expenses attributable to Power Generation Unit at Baroda @ 3.77% as stated supra Rs. 1,44,10,200 ========== 59 This issue has been adjudicated by the ld. CIT[A] vide para-15 which is as under: "15. The next ground relate to computation of deduction under section 80IA in respect of the new industrial undertaking i.e. Power Generating Unit at Baroda. While considering this claim, the AO has reduced the profit of the unit by allocating head office expenses proportionately on the ground that certain activities undertaken at the head office is in respect of the functioning of the 80IA unit. Factually it has been argued that the AO does not have any such evidence....
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.... Ltd. 142 Taxman 5. 62. He argued that for computing the profits of an undertaking eligible for deduction u/s.80IA, only the profit of the undertaking has to be computed. He argued that head office expenses would mainly be in relation to the marketing division. This will have no relevance to the production of power. Therefore, such expenditure cannot be allocated. Similarly, the other important activity carried out by the head office would be in respect of procurement of material. Issues like procurement of technology etc., are handled at the head office level which have no relevance with the production of power. Therefore, there is no rational in allocation of the head office expenses to this unit. 63. We have considered the rival submissions carefully. As far as the decision of the Hon'ble Madhya Pradesh High Court in the case of Prakash Chandra Basant Kumar [supra] is concerned, in that case assessee had two units. One was called main unit and other was called unit No. 2. The assessee owned car, scooter, trucks and tankers. The assessee, however, confined its claim of depreciation on these vehicles to the main unit. The Assessing Officer allocated the depreciation i....
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....diture on account of marketing and procurement of material etc., may not have any relevance with the power generation unit and, therefore, allocation of these expenses on the basis of the turnover may not be appropriate. Considering the over all circumstances, we are of the view that if a sum of Rs. 10 lakhs is allocated out of the expenses of this power unit that would meet the ends of justice. However, in addition to this, interest has also to be allocated. For this purpose, we set aside the order of the ld. CIT[A] and remit the matter back to the file of the AO with a direction to ascertain whether any direct borrowings were made for the purpose of acquire the machinery for power generation unit, then such interest may be allocated. If the investment has been made out of the common funds then interest may be allocated on the basis of the turnover which the AO has already adopted for allocation of the expenses. Thus, this ground is partly allowed. 64. Ground No.7: After hearing both the parties, we find that the AO during assessment proceedings while analyzing the book profits computed u/s.115JB noticed that assessee, inter alia, reduced one item from such book profits amou....
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....elevant portion is as under: "18...... On going through these pages, however, I find that the stress applied by the AO is on allowability of this expenditure as a genuine business expenditure which has already been discussed earlier. The AO has not gone into the details as to how an amount transferred from reserves created out of the profits of earlier years can be treated as book profit for the purpose of levying tax under the MAT provision under sec.115JB. One has to go into plain understanding of the MAT provisions. The Minimum Alternative Tax was imposed on certain companies where the taxable income was reduced because of various deductions under the IT Act. the specific manner of computation of the book profit by making certain additions to the book profit and certain exclusions have been specifically provided under the Act. On plain reading of the section, there is no addition in respect of any withdrawal or transfer from an earlier year's reserve. Both factually and legally such a situation cannot arise for the simple reason that an amount existing in an earlier year's reserve is nothing but the post-tax paid profit of the company of earlier years. All income that has alr....
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....in view of clause (i) of Explanation 1 to sec.115JB(2). He submitted that details regarding the reserve being created out of the profits were submitted before the AO and that explanation has been rejected merely on the basis that in those years the company suffered tax under normal provisions and not under the provisions of sections 115JA and 115JB. He argued that the basic purpose of enactment of sections 115J, 115JA and 115JB was to bring to taxation those companies which were though declaring profits and also distribution dividends but were not paying taxes in view of the deductions claimed under various provisions of the Act. The MAT concept was basically to levy some tax on the so called zero tax companies. 70 He submitted that as observed in assessee's case reported at 255 ITR 273 AO has no power to change net profits except in the circumstances prescribed under the Act itself. These observations have been later on followed by the Hon'ble Supreme Court in the case of Malayala Manorama Co. Ltd. Vs. CIT [300 ITR 251]. 71. We have carefully considered the rival submissions carefully and find force in the submissions Ld. counsel of the assessee. The relevant portion of prof....
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....ound No.4. This amount was to be withdrawn from the general reserve of the equivalent amount. Therefore, it cannot be said that this withdrawal is not part of the profit & loss account. The withdrawal is very much part of the profit & loss account and has been specifically met for write off of GPEL account. Clause (i) to Explanation 1 to sec.115JB reads as under: Sec.115JB: ......... Explanation [1].-For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- a) ......... b) ......... c) ......... d) ......... e) ......... f) ......... g) ......... h) ......... i) ........ if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by, (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the a....
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....n of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT [supra]. Therefore, we deem it fit to discuss that decision because it cannot support both sides. In that case the issue is regarding computation of book profits arising in the following manner: "The Assessing Officer while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act 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 for in the Explanation to section 115j. The AO does not have the jurisdiction to go behind the net profit shown in the profit & loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in sec.115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company the Assessing Officer has to accept the authenticity of the accounts with....
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....ng and other expenses" as per schedule-9. This was added back while computing the total income under the normal provisions of the Act. However, it was not added to the net profit while computing the book profits u/s.115JB. On enquiry it was submitted that this sum could not be disallowed under any items of (a) to (f) mentioned in Explanation to sec.115JB. It was further submitted that diminution in the investment could not be a provision made for meeting liabilities and the provision was towards reduction of the value of investment. AO did not accept this argument and by following the decision of the Hon'ble Madras High Court in the case of DCIT vs. Beardsell Ltd. 162 CTR 467, wherein it was observed that provision for doubtful debts could be considered as an amount towards unascertained liability. He added this sum to the book profits computed u/s.115JB. 74. On appeal, ld. CIT[A] decided this issue vide para-20 which is as under: "20. The next ground relate to the AO adding back provision made or deduction in respect of value of investments amounting to Rs. 1,24,73,244/- for sec.115JB. This is dealt in para 3(ii) of page 8 of the assessment order. The AO has relied on 21....
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....book profit u/s.115JB as per the revised return was in the following manner: Net profit as per P&L account Rs. 36,80,96,430 Add: Provision for tax Rs. 17,94,62,418 Rs.54,75,58,848 Less: Dividend income u/s.10(33) 10,59,119 Amount withdrawn from reserve 32,69,65,146 Amount withdrawn from fixed Asset revaluation Reserve 87,09,140 Amount of profits eligible for Deduction u/s.80HHC 3,33,459 Rs. 33,70,66,864 Book profit Rs. 21,04,91,984 From the above, it is clear that there is no figure of Rs. 1,24,73,244/-. Therefore, it is not clear as to how the AO has considered this figure as provision. Since the order of the ld. CIT[A] is also not clear on this fact, therefore, in the interests of justice, we set aside the order of the CIT[A] and remit the matter back to the file of the AO with a direction to verify whether it is a case of actual write off or provision and then decide the issue in accordance with law. Accordingly, this ground is allowed for statistical purposes. 78. Ground No.9: This issue is identical to the issue decided by us vide para-17 while adjudicating ground No.3. Both the parties made similar arguments. Therefore, following that order....
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....cision of the Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT 245 ITR 428. 83. We have considered the rival submissions carefully. We are unable to agree with the submissions of the ld. DR. Normally bonus will be calculated on the basis of entitlement of each of employee. Similarly, once leave encashment and gratuity has been ascertained on the basis of actuarial valuation, then it cannot be said that these are unascertained liabilities. The Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT [supra] has held as under: Held, reversing the decision of the High Court, that the provision made by the assessee company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts for the accounting year during which the provision is made of the liability. The liability is not a contingent liability." However, we further find that AO has perhaps not examined the issue in detail and before us ....
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....ayment of bonus vide paras 55 to 57. In view of that decision, the cross objection has become infructuous. Therefore, the same is dismissed accordingly. 88. In the result, cross objection is dismissed as infructuous. 89. I.T.A.No.377/Coch/2006 :In this appeal, revenue has raised the following grounds: 1. The order of the Commissioner of Income tax (Appeals)-II, Kochi in Appeal No.24, 25, 26 & 27//R-I/CIT-II/08-09 dated 30- 03-2009 is opposed to law, weight of evidence, facts and circumstances of the case. 2. The learned Commissioner of Income tax (Appeals) erred in holding that DG Power Generation Units I & II constituted an 'undertaking' in terms of sub-section 4(iv) of Section 80IA of the Income Tax Act. He ought to have held that no undertaking eligible for deduction under section 80IA was in existence. 90. As observed while adjudicating I.T.A.No.298/Coch/2009, the assessment was reopened for reconsideration whether assessee is entitled to deduction u/s.80IA for the power generation units. After examining the facts deduction was denied mainly on the basis that no separate undertaking existed and the power generated from such power unit has been used by the assesse....
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....sessee carrying on a particular business to set up a new industrial undertaking on account of which exemption of tax u/s. 15C may be claimed." It has been clearly observed that even if the commodities produced by the new units were consumed by the old units, even then deduction under section 15C of the old Act were allowable. Therefore, in view of the above observation, the assessee's DG units cannot be called reconstruction of the old unit and they are definitely new units. 53. The second aspect which has been emphasized by the Revenue is that there is no sale of power to any outsider. In this regard, we would like to refer to the Board's Circular which was issued to Indian Merchants Chambers which is as under:- MOST IMMEDIATE BY SPEED POST " F.No. 178/28/2001-I.T.A.1 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, the 3rd October, 2001 To, The Secretary-General, Indian Merchant's Chamber, LNM IMV Building, P.B. No. 11211, Churchgate, Mumbai-400 020. Subject: Section 80IAof the Income-tax Act, 1961- industrial undertakings engaged in the business of generation of captive power....
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....the expenditure incurred by the captive power generating undertaking in its own profit and loss a/c." sd/- Under Secretary to the Govt. Of India" 54. The above very clearly shows particularly para 3 that even in the case of captive power consumption as long as it is a separate unit, deduction has to be allowed. In fact this principle was laid down in the case of Textile Machinery Corporation Ltd. vs. CIT (supra) by the Hon'ble Supreme Court itself long back. In any case, an identical issue regarding deduction under section 80IA in respect of four power units wherein power was used in the assessee's own units for manufacturing of paper, came up for consideration of the Mumbai Bench of the Tribunal in the case of West Coast Paper Mills Ltd. vs. ACIT (supra). In that case, it was held by para-6 as under:- "We have carefully considered the rival submissions and have gone through the records, including the voluminous paper book filed by the assessee. The assessee, although engaged in the manufacture and sale of paper and paper boards, multi-layer boards, etc., was also into the business of power generation right from the assessment year 1996-97. The findings in the impugned ....
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....e submissions of the revenue and proceeded to grant the relief. The Hon'ble Calcutta High Court confirmed the order of the Tribunal and the Apex Court has dismissed the appeal of the revenue by taking support from its own decision in Textile Machinery Corporation Ltd.'s case (supra) and CIT vs. Indian Aluminium Co.Ltd. (1977) 108 ITR 367 (SC). Therefore, the stand of the Assessing Officer cannot be accepted. Again the Calcutta High Court was faced with the same set of facts in the case of Hindusthan Motors Ltd. (supra). The assessee in that case was engaged in the manufacture of motor cars. It established certain ancillary units. The Assessing Officer repeated his findings on the same line as he did in the case of Orient Paper Mills Ltd. (supra) and denied the relief u/s. 80E of the 1961 Act. The Calcutta High Court held that assessee is entitled to such relief irrespective of whether the ancillaries manufactured were sold by the assessee to outsiders or were used by it for its own manufacture of cars. Similarly, the Bombay High Court in Sahney Steel and Press Work Ltd.'s case (supra), the Assessing Officer denied a similar claim u/s. 80J of the Act on the ground that the new unit ....
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....ion under section 80IA in respect of the new DG power units. Under the circumstances, we find nothing wrong with the order of the ld. CIT(A) and confirm the same. Following above decision, we confirm the order of the ld. CIT(A). 93. In the result, revenue's appeal in I.T.A.No.377/Coch/2006 is dismissed. 94. I.T.A.No.298/Coch/2009: In this appeal the assessee has raised the following grounds: 1. That the Learned Commissioner of Income Tax (Appeals) erred in holding that the reassessment order passed by the assessing officer u/s.143[3] r.w.s. 147 of IT Act is valid and in order. 2. That the Learned Commissioner of Income Tax (Appeals) erred in holding that the reassessment order passed by the assessing officer was not based on change of opinion on same set of facts already existing on record. 3. That the Learned Commissioner of Income Tax (Appeals) erred in concluding that the Hon'ble Supreme Court in the case of GKN Driveshafts [India] Ltd Vs ITO [2003] 259 ITR 19 [S.C] has not held that the notice u/s. 147/148 or assessment order would be bad in law if objections filedl by the assess are not disposed off by the assessing officer. Out of the above grounds, groun....
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....at Baroda. According to the provisions of section 80-IA as was amended w.e.f. 1.4.2000, hundred percent of the profit and gains derived from the undertaking is eligible for deduction from A.Y. 2000-01 onwards under sub section (1) subject to the provision of sub section (3) and (4) of section 80-IA. It is found that all the conditions prescribed are complied with and as such the deduction is admissible. The method for computing the profit is also found to be correct. Subject to the adjustments to be made as discussed in the following sub-paras, profit of this undertaking computed as per return is allowed as deduction. Even though the deduction is for the first year, this is the second year of operation of this Unit. In regard to the Limda Bias Plant at Baroda which was started during the previous year relevant to assessment year 1992- 93, a sum of Rs. 10,31,65,896/- has been claimed as deduction u/s. 80IB (old provision of 80IA. For the purpose of computing the above deduction, the profits of the eligible business was arrived at R. 34,38,86,321/-. In arriving at the above profit, the consolidated profit as per P&L account of Rs. 94.07 crores (before IT provision) was first allocate....
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....y clear, particularly the highlighted portion that an assessment which has been completed under section 143(3), then the same cannot be re-opened after four years unless and until there is failure on the part of the assessee to disclose any material fact relevant to the assessment. As we have observed above, the material facts were already disclosed and the assessment has been reopened merely on the basis of Annual Report and Cost audit Report wherein it was stated that this new DG Power Unit was merely installed as an energy conservation measure and the material was already there with the authorities for the earlier years and despite of that, deduction was allowed for the assessment year 1999-2000 itself which is clear from para 13 of the assessment order quoted above. Even during this year, the assessee has filed all the necessary particulars before the AO. 32. We find that in the case of Gemini Leather Stores vs. I.T.O. (supra) the assessee did not disclose facts relating to the transaction evidenced by certain drafts. Further, the officer himself discovered the facts relevant thereto but by oversight did not bring the amounts represented by the drafts to tax as income of the....
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....ection 44BB. Hence, the observations of the Tribunal in Boudier Christian's case was not a direction necessary for the disposal of the appeal relating to the petitioner. The exigibility of income of the petitioner from manning and management contracts was never an issue directly or indirectly involved in the case of Boudier Christian. Moreover, the Tribunal in the appeal relating to the assessment of the petitioner' own case had considered the decision of the Tribunal in Boudier Christian's case. It is settled law that an appeal is a continuation of the original proceedings and hence when the Tribunal in the appeal relating to the petitioner had considered the decision of the Tribunal in Boudier Christian's case the notice u/s. 147/148 would obviously be on the basis of a mere change of opinion by the income tax authorities, which would not be valid. Even if it were assumed that the law prior to the insertion of the new section 147 would apply, it would make no difference since even under the original 147 notice for reassessment could not be given on a mere change of opinion. Hence, the notice u/s. 147/148 was illegal". 35. This decision of the Hon'ble High Court was confirme....
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.... has escaped assessment". , 37. But as pointed out by the ld. Counsel of the assessee, this position was considered by the Full Bench of the Hon'ble Delhi High Court in the case of CIT vs. Kelvinator of India Ltd., 256 ITR 1. Before discussing its decision, the Hon'ble Delhi High Court has extracted the following observations of Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd., 41 ITR 191(SC) which is as under:- "It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else - far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn from given fact , it will be meaningless to demand that the assessee must disclose what inferences - whether of facts or law - he would draw from the primary facts." "The scheme of the law clearly is that where the Income-tax Officer has reason to believe that an underassessment has resulted from non-disclosure he shall have jurisdiction to start proceedings for reassessment within a period of eight years; and where he has reason to believe that an underassessment has resulted from ....