TaxTMI 
TaxTMI 
2024 (1) TMI 1278
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....)] on 22.12.2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s. 263 of the Act on 23.12.2009. The impugned order, in both the appeals, is a common order though it bears two different DINs. 2. In an assessment framed by Ld. AO u/s 143(3) on 19.12.2006, the returned loss of Rs. 125.71 Crores was determined at income of Rs. 107.68 Crores after certain adjustments and disallowances. In an assessment framed u/s 143(3) r.w.s. 263 on 23.12.2009 consequent to revisionary order dated 17.10.2008, the assessed income of Rs. 107.68 Crores was re-determined at Rs. 109.81 Crores after more adjustments. 3. The assessee assailed both these orders before first appellate authority vide common order dated 22.12.2022 which is in further challenge before us. The assessment framed u/s 143(3) is subject matter of ITA No. 204/Chny/2023 whereas assessment framed u/s 143(3) r.w.s. 263 is subject matter of ITA No. 205/Chny/2023. 4. The grounds raised by the assessee in ITA No. 204/Chny/2023 are as under: - 1. The order of National Faceless Appeal Centre (NFAC), Delhi /CIT(A) is contrary to law, facts and in the circumstances of the case. 2. T....
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....power cost and 10 paisa per unit on captive power by the Tamilnadu Tax on consumption or sale of Electricity Act, 2003 and the validity of the Act was challenged before the High Court. Hence should be allowed as ascertained liability. 4.3 The CIT(A) / NFAC ought to have appreciated that the provision was disallowed in the regular computation u/s 43B. Sec 43B applies only to liability which is otherwise allowable and hence the entire amount should be allowed in computing Book Profits. 5. The CIT(A) / NFAC erred in confirming the disallowance of Rs. 5519.30 lakhs out of interest paid on borrowings used for the purpose of Business as being attributable to interest free advances given to Associate Companies. 5.1 The CIT(A) / NFAC ought have appreciated that the advances were made in the course of business hence no disallowance of interest is called for. 5.2 In any event, NFAC having observed that the Appellant has interest free funds of Rs. 117764. 99 Lakhs and advances was only to the extent of Rs. 94910 lakhs (Para 4.7.3.3) ought to have held that investments should be considered as having been made out of interest free funds and hence no disallowa....
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....ating to consumption of captive power for the period from January 1986 to March 1994 which was disputed by the appellant by filing a Writ petition and the said demand was stayed by the Hon'ble High Court of Madras, subject to the condition that the appellant pay Rs. 2 Crores. 3.2 The CIT(A) / NFAC ought to have appreciated that the balance amount of Rs. 98,67,181/- debited to P&L account represents the electricity tax imposed on the supply of TNEB power 5% of power cost and 10 paisa per unit on captive power by the Tamilnadu Tax on consumption or sale of Electricity Act,2003 and the validity of the Act was challenged before the High Court. Hence should be allowed as ascertained liability. 3.3 The CIT(A) / NFAC ought to have appreciated that the provision was disallowed in the regular computation u/s 43B. Sec 43B applies only to liability which is otherwise allowable and hence the entire amount should be allowed in computing Book Profits. 4. The CIT(A) / NFAC erred in confirming the disallowance of bad debts written off amounting to Rs. 84,08,789/- in the memo of income which is included in the miscellaneous expenditure of Rs. 1321.73 lakhs amounts to ....
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....hemes as notified by State Government and would not apply to interest liability converted into loans by banks and financial institutions. The Ld. AO relied on the decision of Hon'ble High Court of Madras in the case of Kalpana Lamps and Components Ltd. (255 ITR 491) wherein it was held that mere postponement of liability to pay interest does not amount to actual or constructive discharge. Further, the amendment made by Finance Act, 2006 would squarely apply and accordingly, the claim of interest to the extent of Rs. 4199 Lacs was disallowed u/s 43B. 7.2 During appellate proceedings, the assessee reiterated its submissions. In the alternative, the assessee pleaded that the deduction of the same may be allowed in the year of payment or upon reversal of liability. The Ld.CIT(A) concurred with Ld. AO that the aforesaid decision of Hon'ble Apex Court in the case of Gujarat Polycrete Pvt. Ltd. (246 ITR 463) as well as CBDT Circular No. 674 dated 29.12.2003 deals with Sales Tax Deferral Scheme. The decision was rendered before amendment to Sec.43B as brought in by Finance Act, 2006 with retrospective effect from 01.04.1989 and 01.04.1997 respectively. Therefore, the same would not appl....
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.... bills. It was confirmed that the relevant income received by SMO was fully offered to tax in the return of income. 8.2 However, Ld. AO held that the companies / projects figuring in the list, from whom contracts receipts were received by the assessee, did not tally with the break-up of contractee as per TDS certificates. The assessee could not reconcile the two lists and therefore, it was to be concluded that the income contained in the TDS certificates was not recognized in the Profit & Loss Account. As per accounting policy for revenue recognition, the assessee was recognizing income from longterm contracts on percentage of completion method. However, up-to AY 2002-03, the income on long-term contracts was being recognized on completed contract method and the new method was being followed from AY 2003-04 onwards. It was clear that the projects mentioned in the TDS certificates were long standing contracts, which on all probability, would have attained a considerable percentage of completion which was clear from steep decline in receipt of progress payments. Therefore, the submissions of the assessee were to be rejected. Since the assessee claimed TDS credit in this year, the ....
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....nt ledgers from books of accounts. No discrepancy is noted in the same. Therefore, the impugned addition is merely on suspicion and nothing more. By deleting the addition of Rs. 608.29 Lacs, we allow the corresponding grounds raised by the assessee. 9. Disallowance of Electricity Tax under normal provisions and u/s 115JB 9.1 The assessee debited liability of Rs. 298.67 Lacs which include amount of Rs. 200 Lacs deposited as per directions of Hon'ble Court towards self-generation tax as disputed by the company. The remaining amount of Rs. 98.67 Lacs was self-generation tax as per assessee's own working. It transpired that the Tamil Nadu Electricity Board (TNEB) imposed electricity tax demand of Rs. 10.51 Crores relating to consumption of captive power for the period form Jan, 1986 to March, 1994. The same was disputed by the assessee before Hon'ble High Court of Madras which was pending for adjudication. The Hon'ble Court, vide order dated 13.07.2004, stayed the recovery of the demand subject to payment of Rs. 200 Lacs. The assessee paid the same and debited the same to the Profit & Loss account. Regarding the balance amount, the same was as calculated by the assessee as per Ta....
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....s liability has not yet crystallized and the same is merely in the nature of contingent and an unascertained liability only which may or may not arise. Undoubtedly, the same is covered under the provisions of Sec.43B. Therefore, the same has to be disallowed in normal computations u/s 43B as well as while computing Book Profits u/s 115JB. Therefore, we confirm the stand of lower authorities and dismiss the grounds raised by the assessee in both the appeals. 10. Interest disallowance 10.1 The assessee claimed interest expenditure of Rs. 15666.03 Lacs against loan liabilities of Rs. 231081.72 Lacs. However, it was noted by Ld. AO that the assessee advanced various sums to group entities against which no interest was received during the year. The same has been tabulated on page No. 15 of the assessment order as under: - No. Name of the Party Amount (In Lacs) 1. Deposits against Equity to SPIC Fertilizers & Chemicals Ltd. (SFCL) 8260.14 2. Indo Jordan Chemicals Ltd. (IJCL) 1435.70 3. Ind-ITAL Chemicals Ltd. (TPL) 10.55 4. SPIC Technologies Ltd. 2200.66 5. SPIC Petrochemicals Ltd. (SPC) 82.39 6. Gulf Bahrain 11.20 7....
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....IC Fertilizers & Chemicals Ltd. (FXE), Dubai and M/s Indo Jordon Chemicals Ltd. (IJCL) The assessee advanced funds to SPIC fertilizers and Chemicals Ltd. (FXE) Dubai for Rs. 8260.14 Lacs and M/s Indo Jordon Chemical Ltd. of Jordon for Rs. 1435.70 Lacs. The assessee relied on the decision of Tribunal for AY 2000-01 holding that these investments were for expansion of business. The Ld. AO held that these two entities, though subsidiary of the assessee, were separate legal entities. The assessee even bagged contract from one of the subsidiaries and received progress payment of Rs. 261.12 Lacs. It also received substantial income from services implying that all these entities were separate and distinct entities in the eyes of law. Therefore, interest disallowance was attracted. 10.2 Finally, rejecting the submissions of the assessee, Ld. AO held that the assessee resorted to issue of debentures from time to time and always employed interest bearing loan funds in its business. The internal cash accruals, as averred by the assessee, would be minimal in view of huge cash expenditure incurred by the assessee. As per accounting policy, interest bearing funds were diverted to make inve....
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....ness operations of the assessee. 10.6 M/s TAC was joint venture entity of assessee and TIDCO for production of Soda Ash and fertilizer grade ammonia chloride. The assessee acquired entire stake of TIDCO and TAC became associated entity of the assessee. The assessee held 43.93% of ownership interest in TAC and TAC commenced production in 1983. The surplus chemicals of assessee were sold to TAC for producing Soda Ash and Ammonia Chloride, produced by TAC being fertilizer grade is marketed by assessee. The advance was given for expanding the soda ash and ammonia chloride capacity. There was business transaction of this entity such as supply of raw material and marketing and sale of product. Accordingly considering the decision of Hon'ble Supreme Court in the case of Hero Cycles Ltd. (379 ITR 347), Ld. AO was directed not to make any interest disallowance. NAPCL was a joint venture of assessee to produce Benzene, orthoxylene, paraxylene and PTA. However, the project failed to commence production. The assessee merely submitted that the project got delayed due to regulatory consents but the same was not sufficient enough to establish business nexus. Therefore, the disallowance w....
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....having direct nexus with the assessee's main business of manufacturing of Urea and fertilizers etc. The assessee has undertaken to buy back the entire production of Urea from this entity. The ministry of chemicals and fertilizers, vide its letter dated 03.12.1998, informed the assessee that import of urea by assessee from this entity will be given preference. The aforesaid facts substantiate the arguments that investments made by the assessee had direct business nexus and therefore, the test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon'ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) would favor the case of the assessee. In this decision, it was held by Hon'ble Court that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. In fact, Tribunal in ITA No. 232/Chny/2022 order dated 23.09.2022 for AY 2017-18, in similar issue, quashed revisionary proceedings o....
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....h Chennai Petroleum Corporation Limited to establish a large petrochemical plant near Chennai. The plant was to produce raw material for the assessee. The same has resulted into formation of this entity. As per the terms of MOU, the expenses of the joint venture are to be shared equally by the joint venture entities. Considering the same, the assessee has advances sum to this entity towards it share of the expenditure of the project. The investment would ultimately convert into equity shares. All these facts would establish the claim of the assessee that the investment had direct business nexus and therefore, no disallowance could have been made for this investment. Regarding investment in SPC, upon perusal of page No. 182 of the paper-book, it could be noted that the assessee has, in fact, charged interest from this entity. The outstanding loan amount including interest has been converted into equity and bonds which is evident from assessee's financial statements. Therefore, there is no question of disallowing interest against this investment. The Ld. AR has pointed out that there is no investment made by the assessee in SPIC Technologies Ltd. for Rs. 2200.66 Lacs. In fact, ....
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.... 12.2 The Ld. AO, upon perusal of agreement dated 03.03.2004, noted that the shareholders of the assessee granted approval to subscribe or otherwise invest a sum not exceeding Rs. 266 Crores in the equity capital of SPIC. Accordingly, the assessee made advances against equity and ICD which aggregated to Rs. 248.54 Crores as on 31.03.2003. Since there was delay in allotment of equity shares, the assessee pressed the said company for compensation for the delay. The interest accrued as on 31.03.2002 amounted to Rs. 306.10 Crores which SPC agreed to pay in full and final settlement. The Ld. AO upon perusal of report of statutory auditor as well as directors report, held as under: - 9.3 I have examined the above contentions. As per the agreement dated 03-03-04 entered into between SPIC and SPIC Petro, the shareholders of SPIC had granted approval to subscribe or otherwise invest a sum not exceeding Rs. 266 crores in the equity capital of SPIC Petro. Accordingly, SPIC has made both advances against equity and intercorporate deposit to SPIC Petro and as on 31-03-03, the total deposit and ICD to SPIC Petro aggregated to Rs. 248.54 crores. Since there was delay in allotment of equ....
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....rs and as reported by the Directors to the AGM. As a corollary, the deduction claimed by the assessee in the Return of Income amounting to Rs. 10573.31 lakhs with the narration "Interest income already offered for tax" is indefensible. The accounts have been audited and certified by the Statutory Auditors and laid before the shareholders of the company in the AGM and passed by the shareholders. When the assessee's statement during assesment proceedings are in conflict with the statutory auditor's remarks in the financial accounts, only the observations of the auditors have to be taken into account. Hence, the claim is not allowable on facts and the non-controvertible evidence provided by the audit reports. This would be further clear from the discussion given below: 9.8.1 One of the main contentions of the assessee regarding its claim for reducing Rs. 10573.31 lakhs in the statement of total income is that this interest has already been offered to tax for the asst. years 2001-02 (5726.45 lakhs) and 2002-03(4846.86 lakhs). Let us examine this claim with reference to the printed accounts (For the sake of a fuller appreciation of facts, it is necessary to extensively ....
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.... is also followed in respect of funds invested in the investee company." The following significant observations have been made by the Board in Directors Responsibility Statement at P.16 of the Annual Report: "The Directors consider that the treatment of Borrowing Costs mentioned in the Notes on Accounts is in accordance with the policy being consistently followed by the Company over the years in respect of companies in which the company has invested substantially, as confirmed in Notes 1(iii) and 6 of the Notes on Accounts in Schedule 15." 9.8.3 From the above, it is quite clear that the assessee has not been following accounting standard No. 16 but has been following only US GAPP. This would also mean that the assessee has capitalised in its books of account interest liability attributable to funds specifically borrowed for the purpose of investments in/advances to the companies that are promoted by it. The usage of the expression "charged to the P&L account" in the above Notes is significant. In other words, the amount of Rs. 5726.45 lakhs reduced form the total interest and financial charges in Schedule 14 for the year ended 31.3.2001 represents only s....
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.... "Interest capitalised as part of the carrying amount of advance against equity to SPIC Petro for the period from 1.4.2000 to 31.3.2002 amounting to Rs. 10573.31 lakhs have been charged to the P&L account of the current year, as this was not in accordance with AS 1.6 borrowing costs which is mandatory from 1.4.2000" Note 1(iii) at page 58 also says in part as follows: "This policy of capitalising such borrowing costs has been discontinued from the current year and interest capitalised for the period 1.4.2000 to 31.3.2002 has been charged to the P& L account" Further, in the directors Report at page 13, it is mentioned as follows: "The interest charged to SPIC Petro ..... on the advance against equity, from the period 1.4.2000 to 31.3.2002, amounting to Rs. 105.73 crores has been written off, during the financial year 2002-03. No interest has also been capitalised for the year 2002-03. Thus the mistake in not following AS No. 16 in the earlier two years (capitalising the borrowing cost) was set right during the year ending 31.3.2003 by passing necessary accounting entry to be in line with AS 16. This had the effect of charging off to the....
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....om interest charges account in the P&L account. But the distinction between them is one of kind and not of degree. Capitalisation of interest is always shown as deduction from the gross interest liability and it (capitalisation) can never be shown in the credit side of the P&L account. Whereas, recognition of interest income can be either shown as a deduction from interest liability (as per netting off principle) or as an item of income in tile credit side of the P&L account. The ledger account concerned for passing journal entry for capitalisation of interest liability are quite different from those in the case of recognition of interest income. It is also crystal clear from the facts narrated above that whatever tax that accrued to the Revenue u/s 115JB for the AY 2001-02 resulted because of the assessee's mistake in not following the mandatory AS No. 16 and not otherwise. The mistake has to be rectified only for the asst. years concerned (i.e. 2001-02 and 2002-03) and not for any other asst. year. Further, it is significant to note that, when the assessee was called upon to furnish the actual accounting entries passed in its books in this regard right from the AY 2001-02 to ....
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....ertified by the Statutory Auditors and as reported by the Directors to the shareholders. The reduction of interest as sought by the assessee was not in accordance with the notes to the accounts as well as directors' statement. The assessee was not following Accounting Standard-16 but it was following US GAAP. The assessee had capitalized the interest liability attributable to funds specifically borrowed for the purpose of investments / making advances to the companies that are promoted by it. The impugned amount of Rs. 5726.45 Lacs as reduced from the total interest and financial charges in Schedule-14 for the year ended 31.3.2001 represents only such capitalisation of a portion of interest liability of the assessee and does not represent any income accrued in the accounts as interest receivable from those promotee companies. Had there not been interest bearing borrowals for the purpose of investment in SPIC Petro, there would not have arisen any necessity to capitalize a portion of the interest charges. Thus, the interest and financial charges incurred by the assessee have not been netted against the interest receivable from the promoted companies (as the assessee would have it), ....
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....n the books of accounts based on agreement dated 03.03.2004. Therefore, the same was not offered as income during this year since the same was not claimed as deduction in AY 2003-04. However, Ld. CIT(A) concurred with the observations of Ld. AO that the interest was to be recognized for this assessment year. Aggrieved, the assessee is in further appeal before us. 13. The submissions of Ld. AR are that during AY 2003-04, the assessee provided for interest receivable for Rs. 20036.32 Lacs and Rs. 10573.31 Lacs from SPIC petro in the earlier years but did not claim the deduction of the same in the return of income. The same was settled in AY 2004-05. Hence, the provisions made in the earlier (but not allowed in those years) was reversed and credited to Profit & Loss Account. The same is, therefore, reduced from the income since it is only a reversal provisions disallowed in earlier years. We are of the considered opinion that the income, if already taxed, could not be taxed twice. The Ld. AO is directed to verify the aforesaid facts as stated by Ld. AR and re-adjudicate this issue keeping in mind the fact that there would be no double taxation of the same income notwithstanding the....
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....ion of Rs. 86.48 Lacs, party wise break up was furnished by the assessee. The aforesaid provision of Rs. 1690.09 Lacs was fully added back while computing income under normal provisions. In the above background, the assessee contended that it was provision for ascertained liability. The assessee also submitted that as per Explanation (1) to the second proviso to Sec.115JB(2), the amount set aside for provision made for meeting liability other than ascertained liability ought to be added back while computing book profits u/s 115JB. Further, the second proviso to Sec.115JB was brought in only by the Finance act No. 2 of 2009 and therefore, said adjustment would not be justified. Another issue raised in revisionary proceedings was issue of bad debts written off for Rs. 84.09 Lacs. The same was claimed under the head misc. expenditure. However, the assessee again claimed the same in the computation of income. The same resulted into double deduction to the assessee. 16.2 However, rejecting assessee's submissions, the revisionary authority held that the aforesaid provision for doubtful debts was unascertained liability which needed to be adjusted u/s 115JB. The balance amount of Rs. 8....