TaxTMI 
TaxTMI 
2016 (5) TMI 479
X X X X Extracts X X X X
X X X X Extracts X X X X
....rst we take up assessee's appeal ITA No.581/Kol/2009 AY 05-06. 3. Grounds raised by assessee together with additional grounds are reproduced below:- "A On assessment u/s 115JB 1. For that the CIT(A) erred in dismissing the additional ground of appeal no. 3 of the appellant that it was not liable to pay any tax under section 115JB. 2. For that the CIT(A) erred in rejecting the ground of appeal no. 16 of the appellant hat in the event the provision for deferred tax was not allowed as a deduction for determining the book profit, then the amount of deferred tax assets that was included in the brought forward loss be also excluded for determining the brought forward loss for the purpose of clause (iii) of the Explanation to sub-section (2) of section 115JB. 3. For that while granting relief in respect of ground of appeal no. 17 the CIT(A) erred in directing the AO to reduce the dividend income of Rs. 18,81,89,000/- by the expenditure directed to be disallowed under section 14A red with rule 8D. 4. For that the provisions of section 234B and 234C have no application in case of computation of income under section 115JB. B. On assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt income tax and deferred income tax. Therefore the same was added for the working of book profit. 5.4 The claim of the assessee for excluding the deferred tax assets embodied in the brought forward loss while working out the MAT liability was also disregarded on the ground that the matter is sub judice with the higher authorities of the same assessee for the other assessment year. So the plea of the assessee cannot be accepted. 6. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who dismissed the appeal of the assessee by observing that the amount of deferred tax liability is to be added back in terms of clause (h) of Explanation 1 to Sec. 115 JB of the Act which states that 'the amount of deferred tax and provision therefor'. The Ld CIT(A) also held that the deferred tax liability is nothing but unascertained liability. The relevant extract of his order reproduced as under:- " The A.O in its order has very clearly brought out the relevant extract of the observation of Hon'ble Apex Court in this judgment in J.K. Industries Ltd. Vs. UOI which is reproduced hereunder:- 'To sum up deferred tax is nothing but accrual of tax out of divergence betwe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3 along with the case compilation book of various courts from pages 1 to 196 respectively. Ld. AR stated that Sec. 115JB of the Act stipulates that c/f loss or unabsorbed depreciation whichever is less is deductible from the current year's book profits, for the financial year 2004-05 (AY 2005-06), the assessee reduced Rs. 212.80 crores from the book profit of that year being the c/f loss as on 31.03.2004 which was lower than the c/f unabsorbed depreciation of Rs. 386.76 crores. However, the said loss of 212.80 crores was computed after taking into account credit of Rs. 333.20 crores on account of deferred tax assets as it was the understanding of the assessee that deferred tax assets and deferred tax liabilities formed part of the book profits. The assessee had also informed the Assessing Officer vide letter dated 27.12.2007 as to how the said amount of Rs. 212.80 crores was determined. On the other hand, Ld. DR vehemently relied on the orders of Authorities Below. 7.1 From the aforesaid discussion, we find that the AO has disallowed the deferred tax liability while working out the profit under the provisions of MAT. The AO treated the liability as unascertained liability. The A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rred tax assets included in the brought forward loss should be excluded from the said amount is not tenable. We are also relying in the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. and Kinetic Motor Co. Ltd. v. DCIT [2002] 262 ITR 330 (Bom) held that the AO does not have the jurisdiction to go beyond the net profit shown in the audited Profit and Loss Account which was accepted by shareholders and filed with Registrar of Companies, except to the extent provided in explanation to Sec. 115JB of the Act. The accounts of the taxpayer were duly certified by the auditors and the same was accepted by shareholders in the Annual General Meeting which was filed with Registrar of Companies and as per the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) and Hon'ble Bombay High Court in the case of Kinetic Motor Co. Ltd. the AO cannot make any adjustments to the book profits of the taxpayer once it was certified by the auditors. Accordingly, in our considered view, we find no infirmity in the order of the ld. CIT(A), hence this ground of appeal of the assessee is dismissed 8. Next issue raised by assessee by way of ground no. 3 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncome then the book profit as per section 115JB will stand increased by that amount. However the assessee submitted that the Rule 8D of the IT Rules, 1962 came in force from 24.03.2008 so disallowance under section 14A is not applicable for the year under consideration. However we disagree with the view of ld. AR in terms of the provisions of section 115JB of the Act which are self explanatory. Accordingly in our considered view we find no infirmity in the decision of the ld. CIT(A), hence this ground of appeal of the assessee is dismissed. 10. Next issue raised by assessee by way of additional ground no. 1 is that provisions of Section 234B and 234C of the Act have no application in case there was no liability to pay any advance tax under section 208 but the liability arose as a result of the retrospective amendment of the law. 11. The assessee for the year under consideration was liable to pay tax under the provisions of MAT under section 115JB of the Act. The book profit as specified under section 115JB of the Act was increased due to the retrospective amendment under the statute i.e. clause (h) & (i) to explanation 1 of section 115JB(2) of the Act by the Finance Act 2008 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding in the assessment year 2007-08. Accordingly the deferred revenue expenses were claimed in the following manner: S. No Assessment Year Amount 1. 2002-03 10,30,83,570/- 2. 2003-04 15,46,25,355/- 3. 2004-05 15,46,25,355/- 4. 2005-06 15,46,25,355/- 5. 2006-07 15,46,25,355/- 6. 2007-08 5,15,41,785/- From the above facts, we find that assessee has claimed deferred revenue expenses in earlier years as well but the same was not disputed by the Revenue. However, for the year under consideration the A.O. has disallowed the deferred revenue expenditure for an amount of Rs. 15.46 crores. The assessee during the year has claimed deferred revenue expenditure for an amount of Rs. 15.46 crores under section 37 of the Act. The AO during the assessment proceedings sought the clarification as to why this expense should be allowed. On being questioned by the AO about the allowability of deferred revenue expenditure, the assessee submitted that the deferred revenue expenditures are on account of amortization of miscellaneous expenses that were incurred prior to the start of the commercial production. The assessee submit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Being aggrieved by this order of Ld CIT(A) assessee is in second appeal before us. 16. The ld. AR before us submitted that there were indirect expenses incurred prior to the commencement of commercial production of the assessee factory on 01.08.2001 and as per the guidance note of the institute of Chartered Accountants of India on treatment of expenses during the construction period, the same were treated as deferred revenue expenses and charged to profit and loss account @ 1/5 p.a. over five years. The learned AR also relied on the decision of Hon'ble Supreme Court in case of CIT vs. UP State Industrial Investment Corporation (1997) 225 ITR 703 and Challapali Sugar Limited v. CIT (1975) 98 ITR 167 the accounting principles are to be followed for determination of income under the income tax Act and hence the amount of deferred revenue expenses charged in the profit and loss account is allowable u/s 37 of the Act. Both AO and the CIT(A) have rejected the same in all the three assessment years on the ground that IT Act recognizes only capital and revenue expenses and not deferred revenue expenses. But they have not substantiated the same with reference to any provisions in the Inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plan, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed assets created as a result of such expenditure. We are also relying in the guidance note issued by the Institute of Chartered Accountant of India on treatment of expenditure during construction period where it was recommended that the indirect expenditure incurred during the construction period should be capitalized as part of indirect construction cost to the extent to which the expenditure is indirectly related to construction or if incidental thereto. An illustrative list of such possible items of expenditure which would qualify for inclusion for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee to furnish the complete details of the payment like services rendered, basis of payments, copy of the agreement, supporting documents etc. The assessee could not substantiate the expenditure except the memo of charge as an evidence of the transaction. Hence the AO made the addition to the total income of the assessee. 20 Aggrieved, assessee preferred an appeal to ld. CIT(A) where the assessee submitted that as per the provisions of section of section 40A(2)(a) if the AO is not satisfied he can disallow the expenditure to the tune of the amount in excess of the fair market value of that goods or services provided by the party having substantial interest in the assessee. Further the payment can also be disallowed by the AO if it is not made in connection of the business or profession of the assessee. But here the AO has not disputed on the reasonableness of amount of the payment or regarding the incurrence of expense wholly and exclusively for the business or profession. It means that the AO is satisfied that this amount of expense is exclusively for the business and profession then, it should be allowed u/s 37(1) of the Act. The ld. CIT(A) has observed that section 40 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AO also observed that the payment was made to the specified person in terms of section 40A(2)(a) of the Act. The learned CIT(A) also confirmed the order of AO by observing that it was the duty of the assessee to make available the supporting evidence at the time of assessment. However from the records we find that WBIDC is a state level financial institution and engaged in providing equity capital and project financing to industrial units being set up in the state of West Bengal. We further find that the payment has been made to the government organization and the AO has not exercised his power under section 133(6) of the Act for the clarification by issuing show cause notice to the party before making the disallowance. We also find that the order of the AO is silent about the deduction of TDS from the payment of the consultancy charges to the party. Accordingly in the interest of Justice and fair play we're inclined to the restore this file to the AO for fresh adjudication as per law after giving opportunity to the assessee. We also direct the AO to issue show cause notice to WBIDC under section 133(6) of the Act for the necessary details and clarification as required under the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in relation to dividend income. Hence Provision of section 14A do not apply at all. Assessee has relied on citation of the following cases: 1. CIT vs. Hero Cycles Ltd [ 323 ITR 518]- P&H High Court 2. Maxopp Investment Limited vs. CIT [(2012)347 ITR 272 (Delhi High Court)] 3. CIT vs. Torrent Power Ltd. [2014] 363 ITR 474 (Gujarat High Court) It was held that Rule 8D was not applicable in the AY 2005-06 to 2007- 08.Rule 8D came into existence from 24.03.2008 and hence it was not applicable for the assessment year under consideration. In this support Ld.AR has relied on the judgement of Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd.Mumbai Vs. DCIT [(2010) 328 ITR 81 (Bom)] On the other hand, Ld. DR vehemently relied on the orders of authorities Below. On perusal of appellate order, we find that direction has been issued to Assessing Officer for making disallowance in terms of provision of Sec. 14A r.w.s. 8D of the IT Rules, 1962. However we understand that the Rule 8D of the IT Rules came into effect from 24.03.2008 and the instant case before us is for AY 2005-06. Therefore, the provisions of Rule 8D of the IT Rules is not applicable in a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earned CIT(A) erred in deleting the addition made by the AO for Rs. 1,20,90,000/- on account of year end adjustment in loss on foreign exchange account due to revaluation of sundry creditors and SBI MMD account. The assessee has debited the profit and loss account by an amount of Rs. 1,20,90,000/- on account of difference arising from the foreign exchange in the value of sundry creditors account and MMD SBI account. The above said difference was recorded on the last day of the financial year while preparing the financial statements. The AO observed that it is a notional loss and represents contingent liabilities which have not been actually incurred by the assessee. Therefore the same was disallowed by the AO and added to the total income of the assessee. 29. Aggrieved, assessee preferred an appeal to learned CIT(A) where it was submitted that the assessee is following mercantile system of accounting. The difference on account of foreign exchange in the value of sundry creditors and SBI MMD account at the end of financial year was recorded in the profit and loss account in terms of accounting standard 11 issued by the Institute of Chartered Accountants of India. The assessee has....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on or after 1-4-2004. Relevant extract of the Accounting Standard is reproduced as follows:- '9. A foreign currency transactions should be recorded on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transactions. 10... 11 (a) At each balance sheet date foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g. where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should b reported in the reporting currency at the amount which is likely to be realized from, or required to disburse, such item at the balance sheet date: 11(b).... 11(c)... 12. Cash receivables....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n this appeal is that learned CIT(A) erred in deleting the addition made by the AO for Rs. 13,55,80,000/- on account of freight expenses. 33. During the year assessee has claimed net freight expenses incurred in connection with domestic, export of the goods and freight on stock transfer. The assessee has also recovered part of the freight charges from the customers incurred in connection with the sales. However the AO observed that expenses incurred on freight was more than the recovery made by the assessee from the customers. The AO also found that the claim of the assessee towards such freight expenses was also disallowed in the AYs 2003-04 and 2004-05, so the AO accordingly disallowed the claim of the assessee for freight expenses and added to the total income of the assessee. 34. Aggrieved, assessee is in appeal preferred an appeal to Ld CIT(A) where it was demonstrated that when the goods are sold to customers on delivery basis then the assessee recovers freight charges from the customers as per the agreement but in some of the cases the freight charges are not recovered in full due to the competition in the market. Besides, assessee recovered the freight charges from th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is in appeal before us. 35. We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently supported the order of AO and left the issue to the discretion of the Bench whereas Ld AR relied the order of Ld CIT(A). From the aforesaid rival materials, we find that the AO has disallowed the freight expenses on the ground that assessee has made short recovery from the customers and similar addition was made in the earlier assessment year. However, the AO has not disputed the quantum of expenses incurred by the assessee on freight. From the submission of Ld. AR we find that out of the total disallowance made by the AO towards freight expenses, a sum of Rs. 86,59,000/- was incurred on the stock transfer by the assessee from the factory to the depots. In our view, the question of disallowance of freight expenses in connection with the stock transfer does not arise. This freight expense has direct connection with the business of the assessee. For other freight expenses, the reason given by the AO for the disallowance is not tenable as the AO has not pointed out any reasonable reasons for the same. There is no doubt that the assessee had made sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngly, Ld CIT(A) deleted the addition made by the AO. Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us. 39. We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently supported the order of AO whereas Ld AR drew our attention on page no. 79 of the paper book where the notification for the custom benefit under target plus scheme is placed. The relevant notification reads as under:- "exemption on goods imported into India against a Duty Credit Certificate issued under the Target Plus Scheme. - In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts goods when imported into India against a duty credit certificate issued under the Target Plus Scheme in accordance with paragraph 3.7 of the Foreign Trade policy (hereinafter referred to as the said certificate) from, - (a) The whole of the duty of customs leviable thereon under the First Schedule to the customs Tariff Act 1975 (51 of 1975); and (b) The whole of the additional duty....
X X X X Extracts X X X X
X X X X Extracts X X X X
....peal is that the learned CIT(A) erred in deleting the addition made by AO for Rs. 21.619 million in the computation of book profit on account of doubtful advances and debts. 43. During the course of assessment proceedings, assessee has debited its profit and loss account by creating the provision for doubtful advance and doubtful debts for the above stated amount in the books of accounts. The assessee for computing its book profit u/s 115JB has not added back the above said provision created for doubtful advance and doubtful debts on the ground that the same is not in the nature of provision for unascertained liabilities. However, the AO disregarded the claim of the assessee by stating that provisions has been provided on account of unseen but anticipated loss of the company and is therefore clearly is in the nature of un-ascertain liability. The AO accordingly held that the provision for doubtful advances and debts should be added in the book profit for the purpose of MAT. 44. Aggrieved, assessee preferred an appeal to Ld CIT (A) who has deleted the addition made by the AO by observing that provision of doubtful debts and doubtful advances stands on different footings from o....