AI Drafter 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2020 (9) TMI 63
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppeal:- "Ground no. 1: Deduction of payment to Vista Information Systems Pvt Ltd ("Vista‟) 1.1. On facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the order of the learned AO in disallowing payment of INR 33,92,00,000 made to Vista, claimed by Appellant in the return of income for the subject year. 1.1.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) as well' as the learned AO failed to appreciate that the liability for the aforesaid expense accrued in the subject year and hence, the Appellant had rightly claimed the deduction for the same in the return of income for the subject AY. Ground no. 2: Deduction of Actual Usage of Provision of Obsolescence 2.1. On facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not holding that there has been violation of principles of natural justice as the learned AO did not provide a show-cause opportunity before making the aforesaid addition, and hence, the addition made by the learned AO is bad in law and void ab initio. 2.2. Without prejudice to Ground 2.1 above, o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng installation, testing, commissioning and repair and maintenance services in relation to Telecom equipment supplied by Nortel group companies and marketing and after sale support services to Nortel group of companies. 4. Assessee filed its return of income on 30 November 2013 declaring loss of Rs. 533,036,855. The case of the assessee was selected for scrutiny by issue of notice u/s 143 (2) of the act. During the course of assessment proceedings the various issues were examined and ultimately the assessment order u/s 143 (3) of the act was passed on 21st of March 2016 wherein the learned assessing officer made following additions which are the subject matter of dispute in this appeal :- i. Disallowance of expenses of Rs. 33.92 crore claimed by the assessee through computation of total income though not accounted in this year but in preceding previous year as well as held by the assessing officer that the claim of the above deduction pertains to assessment year 2012 - 13 and not to the year under consideration. ii. Disallowance of deduction claimed by the assessee of Rs. 25,851,322/- on account of usage of "provisions for obsolescence‟ claimed to have be....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the order of the learned CIT - A preferred this appeal before us. 6. First ground of appeal is with respect to the disallowance confirmed by the learned CIT - A of INR 33,92,00,000 of payment made to Vista Information Systems private limited. Facts show that assessee due to global bankruptcy of Nortel group, sold its various businesses to various entities. Some of its business was sold to kapsch. The AMC and sale of spares related to business sold to that group was given to Kapsch India entity Vista Information systems Limited. As the contract was for AMC and supply of parts post warranty period, the assessee was to pay Rs. 33.92 Cr to Vista Information Pvt Ltd for performing the AMC and sale of parts to Telecom Consultants of India Limited. This sum was accounted for in the books of the assessee for the year ended on 31.3.2012. It was also claimed as deduction in that year i.e. AY 2012.13. The return for AY 2012-13 was not filed in time so LD AO disallowed the loss for that year. However, during assessment proceeding for that year assessee wrote a letter to AO that above liability did not pertain to AY 2012-13 but to AY 13-14 therefore the claim for the same in AY 2012-13 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lso referred to the financial statement for assessment year 2013 - 14 and note number 36 to state that the claim of the assessee is allowable for assessment year 2013 - 14 only. He therefore stated that the lower authorities are not correct in disallowing the above claim. 8. The learned departmental representative vehemently supported the order of the learned assessing officer, referred Para number 3.5 of the assessment order, and stated that the above sum accrues in assessment year 2012 - 13. He further referred to the agreement dated 30 December 2011 placed at page number 136 - 180 of the paper book and stated that the claim of the assessee is allowable for assessment year 2012 - 13 only. As assessee has filed belatedly return of income for that year and therefore such sum could not have been allowed to be carried forward to the next year and therefore the assessee is claiming that the same should be allowed for assessment year 2013 - 14. He further referred to page number 256 of the paper book where the amount provided for in assessment year 2012 - 13 and in that year it accrued. Therefore he submitted that when the annual accounts of the assessee prepared by the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. He therefore submitted that there is no error in the orders of the lower authorities on this issue. 9. The learned authorized representative in rejoinder submitted that the assessee was in liquidation therefore the provision was made in assessment year 2012 - 13 but there is no reason for revision of accounts of the assessment year 2013 - 14 to incorporate the above entries. Even otherwise, he relied on the decision of the honourable Supreme Court in case of Kedarnath Jute mills Ltd 82 ITR 365 and Sutlej Cotton Mills Limited 116 ITR 01 to submit that the manner of treatment in the accounts of particular sum cannot be determinative of the allowability of the expenditure. 10. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also gone through a paper books submitted by assessee where in annual accounts, correspondences and agreements are placed. Brief facts of these expenditure is that assessee has entered into service contract with Telecommunications Consultant India Ltd [ TCIL] for rendering services in connection with design, manufacture, supply, installation, testing and commissioning of Eastern Railways network.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the said contract. These obligations included entering into an annual maintenance contract (AMC) with TCIL to supply and guarantee the availability of maintenance papers for the network. It was stated by the assessee that in the light of insolvency proceedings filed by the Nortel group and the subsequent sale of Nortel groups business across locations, the assessee company entered into a contract with Vista Information Systems private limited (Vista) whereby the assessee company was to pay to be stern amount of Rs. 33.92 crore is for taking over the residual obligation from the assessee company. 3.3 The assessee further intimated that the agreement between the Assessee Company and Vista was dated 30/12/2011 and the payment was made to Vista on 8/5/2012. It was stated that the assessee has claimed deduction of Rs. 33.92 crore is in assessment year 2012 - 13 but later sought to withdraw the claim vide written submission dated 28/11/2013 filed during the assessment proceedings for assessment year 2012 - 13, however, the AO allowed the said deduction, against which the assessee has filed an appeal before the learned CIT (A), which was pending. 3.4 The reply of the AR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....12 - 13 unless the date was extended by agreement in accordance with clause 7 of the agreement. 3.7 The assessee‟s claim of deduction of Rs. 33.92 crore could thus only pertain to assessment year 2012 - 13 and not to the year under consideration. The claim cannot be allowed to be shifted from assessment year 2012 - 13 to assessment year 2013 - 14 merely because of the fact that the assessee‟s return of loss for assessment year 2012 - 13 was not filed u/s 139 (3) of the act and the assessee could not avail the loss resulted from the impugned claim in assessment year 2012 - 13. 3.8 In view of the above facts and circumstances of the case, the assessee is impugned claim of deduction of Rs. 33.92 crore is not admissible for the year under consideration and the same is disallowed and added to the assessee is taxable income." 12. Aggrieved with the above addition, assessee challenged the same as per ground number [1] before the learned CIT - A. The learned CIT A in Para number 5.1 dealt with the whole issue as under:- "5.1 The matter has been examined. The appellant has not attended the appellate proceedings, nor submitted any submissions, the re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s creditors arrangement act (CCAA) in Canada. Also certain US subsidiaries of Nortel network Corporation Canada including Nortel Networks incorporation and Nortel Networks capital Corporation, have filed voluntary petitions in the United States Under chapter 11 of the US bankruptcy code , and certain of Europe, Middle East and Africa subsidiaries of the ultimate holding company have also made consequential filings. Subsequently, on July 14, 2009, Nortel Networks (CALA) incorporation (NCCI), a U.S.-based subsidiary that operates in the CALA region, also filed a voluntary petition for relief Under chapter 11 in the United States bankruptcy Court for the District of Delaware (US court) and became a party to the Chapter 11 proceedings. On July 17, 2009, this US court entered a further order of joint administration that provided for the joint administration of NN CALA‟s case with the pre-existing case of its debtor affiliates. As part of business and financial restructuring plans, the ultimate holding company to date, has completed a number of divestitures including:- i. the sale of substantially all of our code division multiple access (CDMA) business and long-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as sold and transferred inventory to GEnband for a consideration of Rs. 11036328/- which has been paid by Genband and received by the company in the previous year. - Pursuant to above and in order to implement the sale of inventory and assignment of MSS contracts and purchase orders related to the MSS business of the company to the purchaser (Ericsson India private limited), the company had entered into an asset sale agreement dated March 31, 2011 (which is also the effective date), whereby the company agreed to sell inventory at a consideration of Rs. to 717000 to the purchaser. Further, as part of the said asset sale agreement the company agreed to pay Rs. 1 2616768 to the purchaser for accepting liabilities of assignment of M is as contracts and purchase order as per the details and terms contained in the asset sale agreement. - Pursuant to above, the company discussed and entered into a tripartite agreement dated 9 December 2011 with Bharat Sanchar Nigam Ltd (BSNL) and Ericsson India private limited (Ericsson) whereby Ericsson has entered into new AMC contracts with BSNL for phase IV and phase IV.5 AMC with effect from first January 2012. Consequently, BSNL ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sis except those with significant uncertainties. 16. Based on the above financial statements the assessee furnished its return of income and in the computation of total income claimed the above expenditure of Rs. 33.92 crore for assessment year 2012 - 13. The assessee filed his return of income on 2 January 2013 declaring total income at Rs. nil and also claimed the current year‟s loss of Rs. 735615769/- including unabsorbed depreciation of Rs. 43720911/-. As the above return was filed belatedly i.e. not within the due date prescribed u/s 139 (1) of the act, the assessment order was passed u/s 143 (3) of the act on 24th of March 2015 wherein the learned assessing officer after raising the query on the carry forward u/s 72 of the act of the losses, disallowed the business loss of Rs. 6 91894858/- and assessed the income of the assessee at a loss of Rs. 43720911/- (i.e. Unabsorbed depreciation) . Thus it is apparent that the learned assessing officer has allowed assessee carry forward of unabsorbed depreciation of Rs. 43720911/- and disallowed the business loss of Rs. 6 91894858/- i.e. to not to carry forward , in view of the provisions of Section 72 of The Act as assessee h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat above expenditure of Rs. 33.92 crore does not relate to that year ( i.e. AY 2012-13) as the liability with respect to the payment of in the subsequent financial year. Before us, also assessee produced the letter dated November 28, 2013, which was filed before the assessing officer on 29 November 2013. According to the paragraph number (1) of that letter about the claim of payment made to Vista Information Systems private limited, the assessee submitted as under:- "In the return of income for the subject a while, Nortel India has erroneously claimed expenses of Rs. 33.92 crores in respect of payment made to Vista. Further, since Nortel India had filed a belated return for the subject AY, the same cannot be revised now to withdraw the aforesaid claim. Therefore, Nortel India hereby wishes to withdraw the claim of the aforesaid expenses in the subject assessment year. Nortel India, however, reserves the right to claim the aforesaid expenses in the relevant subsequent year in which the liability of the said expenses actually arose." 18. The learned Commissioner Of Income Tax (Appeals) - 33, New Delhi passed an order for assessment year 2012 - 13 on 11/11/2016 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2. 22. In note number 36 to the financial statement placed at page number 254 of the paper book there is no change as compared to the note number 37 for financial year 31/3/2012. 23. Now it is important to examine how the liability on the assessee has arose and in which year. The assessee has submitted the copy of the agreement between Nortel and Vista Information Systems Ltd dated 30 December 2011 placed at page number 136 - 180 of the paper book. This agreement has been entered into between Nortel Networks (India) private limited, Nortel Networks Singapore Pte Ltd and Vista Information Systems private limited. The preamble to the agreement shows that Nortel companies i.e. India and Singapore has entered into supply and service contract with Telecommunication Consultants India Ltd [TCIL] dated 28 September 2004 pursuant to tender issued by Eastern Railways for design, manufacture, supply, installation, testing and commissioning of mobile train radio communication system on Howrah Section of the Eastern Railway. Nortel Singapore was awarded supply contract whereas Nortel India was awarded service contracts. In the maintenance contract, warranty period has already expired, all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e also to be transferred to that group through an Indian entity of that group i.e. Vista Information Systems Ltd. This was also necessary because Nortel has also filed for insolvency proceedings worldwide. Naturally , when Nortel group has sold certain products and also provided services with respect to those products then, if Nortel is exiting that business, somebody else who is reliable and capable of performing that work was required to be appointed for carrying out the annual maintenance etc and supply of spare for that particular product. Apparently, it was part of the global group‟s sale of the business of the assessee as it is evident as per the notes to accounts of the assessee for the year ended on 31 March 2012 and 2013. 25. On reading paragraph number [3] of the agreement which is titled as new AMC contract, it is apparent that a fresh contract are required to be entered into by the telecommunication consultants India Ltd with Vista which would be facilitated by Nortel group. The contract of annual maintenance would also be similar to what Nortel was performing till now. According to paragraph number 3.3 Vista was to agree if TCIL seeks minor modification. Accor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inancial statements prepared by the assessee for that year has shown that above liability accrue on the assessee in assessment year 2012 - 13. Financial statements are always prepared by the assessee; auditor merely expresses an opinion on them. These accounts were never found to be or never stated by the assessee to be incorrect. Further, the claim made by the assessee is only required to be tested on the principle that whether the liability accrue during the year or not. The manner of payment of such accrued liability in subsequent year cannot defer the accrual of such liability. The payment is merely a discharge of the liability already accrued. Further, if the accounts are maintained as per the correct accounting principles, they cannot be disregarded. The accounting entries can only be rejected if they are not in conformity with the proper accounting principles. Mandate of the decision of the Honourable Supreme Court in case of Sutlej cotton mills Ltd versus CIT (116 ITR1 ) has also held that:- "But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itional provisions made during the year Nil Nil 31000171 Usage of provisions during the year 25851322 6432504 62777915 Release/reversal during the year Nil Nil Nil Closing balance Nil 25851322 32283826 30. The above provision was with related to inventory was dealt with by the assessee in its computation of total income for respective years as Under:- Particulars 31st of March 2013 (assessment year 13 - 14) 31st of March 2012 (assessment year 2012 - 13) 31st of March 2011 (assessment year 2011 - 12) Amount of provision added to the total income created during the year nil Nil 31000171 Amount of provision utilized during the year claimed as a deduction in the computation of total income 25851322 6432504 55492445 Based on the above statement it is apparent that assessee is creating a provision for obsolescence of inventory, it is added back to the total income of the assessee for that year in which the provision is created. The assessee claimed deduction of the provision utilized by the assessee during the year. Accordingly, for assessment year 2013 - 14 the assessee claimed deduction of Rs. 258513....
X X X X Extracts X X X X
X X X X Extracts X X X X
....escence was also submitted as per annexure seven. He referred to page number 277 of the paper book wherein the details of Year wise movement of provision for obsolescence made by the assessee from financial year 2008 - 09 to financial year 2012 - 13 was tabulated. In view of this he submitted that the provision created by the assessee of Rs. 3.10 crore was disallowed for financial year 2010 - 11 for assessment year 11 - 12 and therefore for assessment year 2013 - 14 the claim of the assessee should have been allowed. 32. The learned departmental representative vehemently supported the order of the learned assessing officer referring to Para number 4.2 of the order of the learned AO and stated that it is the valuation of inventory and it is not a provision made in assessment year 2011 - 12. He submitted that the valuation of inventory is allowable in the year in which the value is derived at. He submitted that the assessee should have valued the inventory at the cost or market value whichever is less and whenever there is a valuation below the cost; the relevant expenditure is pertaining to that year and cannot be considered as allowable in next year. He submitted that merely bec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was asked to justify the admissibility of this amount along with supporting evidences and was asked to intimate the corresponding income on account of provision returned back credited to the profit and loss account with supporting evidence. 4.2 In response to show cause, the AR of the assessee furnished reply dated 12/2/2016 filed on 19/2/2016, wherein copies of relevant extracts of financial statements and computation of income for assessment year 2012 - 13 and assessment year 2013 - 14 were attached as annexure - 13. Perusal of the same reveals that in note 12 - inventory of notes to accounts for assessment year 2012 - 13, the assessee has reduced Rs. 25851322/- from the value of inventory on account of provisions for obsolescence. In the computation of income for assessment year 2012 - 13, the assessee has nowhere added back this amount to total income. Further, it is observed from note 11 - inventory of notes to account for assessment year 2013 - 14 that the assessee had used the entire provision in assessment year 2012 - 13 and nothing was left to be carried forward. In the absence of offering the amount of Rs. 25851322/- tax in the earlier years is claimed by the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not result in cannot give rise to violation of natural justice. It is most disheartening to note and observe such grounds of appeal. Nevertheless, on merits of the matter, this office is of firm view that the addition made by the AO is in order. The appellant has also to note that once appellant claims that it‟s following any policy, the detection of anomaly therein by revenue cannot be wished away/explained showing/reflecting figures as net of utilization in next year‟s opening balance, as is being sought to be done by the appellant in instant case. The appellant would have done well by pinpointing and explaining as to how and where the income of Rs. 25851232/- was offered to tax instead of obfuscating the core issue in the garb of "showing opening balance net of utilization" of subjective. The core matter still lies unexplained as to where and how the said sum has been offered for tax (earlier) by appellant and AO has rightly treated and added back the said sum with which this office concurs. The appeal of the appellant is thus dismissed GOA no. 2.1 and 2.2" . 36. On careful consideration of the relevant information submitted before us by the learned auth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....addition of Rs. 8208537/- on account of differential interest income as per profit and loss account and amount as per Form No 26 AS for the subject year. The learned assessing officer during the course of assessment proceedings examined form number 26 AS and directed the assessee to reconcile this income with income shown in the profit and loss account. Assessee furnished its reply on 24th of February 2016. The AO noted that interest income from ICICI bank and Citibank NA was shown at Rs. 20403911/- and Rs. 72449672/- respectively against the interest income and in form number 26AS at Rs. 2 0700119/- and Rs. 80362091/respectively. Explanation furnished was examined by the AO and found to be general in nature. AO was of the view that assessee is following the mercantile system of accounting and in respect of income, the assessee is required to recognize such income on accrual basis. Form number 26 AS shows the accrued income from the respective banks paid/payable to the assessee. The AO found that there is a difference in interest income of Rs. 296208/- in case of ICICI bank and Rs. 7912329/- in case of Citibank -. Therefore the learned assessing officer made an addition of Rs. 8....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for that year‟s 20700119/-. Similarly it was submitted that for Citibank NA the interest income as per the books of account is Rs. 80362091/- and the identical amount has been shown in form number 26 AS. He further submitted that this letter was submitted before the assessing officer on 28th of March 2016 which was not considered by the AO and the learned CIT - A. 40. The learned departmental representative vehemently supported the order of the lower authorities and submitted that when there is a difference between the interest income paid by various banks to the assessee as per form number 26 AS which has been shown to have accrued to the assessee during the year and tax deduction at source thereon has been claimed, therefore the interest has accrued to the assessee and it is chargeable to tax in the year in which it has accrued and it does not help the case of the assessee if it has been offered to tax in the subsequent year. He submitted that the income should be chargeable to tax in the year in which it accrues. He submitted that when the assessee has been claiming for the tax deduction at source credit on such income towards his tax liability, the interest income sho....