AI Drafter 
TaxTMI 
TaxTMI 
2024 (8) TMI 1018
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....portionate depreciation u/s 32 of the Act 17 67 88 271/- 5. Disallowance of proportionate depreciation u/s 32 of the Act 2 36 12 51 643/- Total 9,59,11,18,274/- 3. Against the order of Ld. CIT(A), the assessee has filed concise grounds of appeal:- "01. That the Ld. CIT(A) has erred in confirming the additions of Rs. 959,11,18,274/-made by Assessment Unit (AU) under normal provisions and additions of Rs. 682,70,31,234/- made by AU to the book profit u/s 115JB of the Act without assigning any reasons and without applying his mind, merely relying upon the reasoning given by the AU. 02. That the Ld. CIT(A) has erred in not exercising the powers conferred upon him u/s 46A of the Income Tax Rules, 1962 by not admitting the additional evidence produced by the assessee when the same were necessary to render substantial justice to the assessee. 03. That the Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 679,65,74,000/- made by AU, being late payment surcharge on over dues, on the ground that the assessee was following mercantile system of accounting when the assessee had not recognised the same as revenue ....
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....e acquired by the assessee and put to use on the same date i.e. On 31.03.2019 ignoring the material fact that the assessee itself had claimed only 50% of the deprecation. 10. That the appellant seeks leave to add, amend, alter, abandon or substitute any of the above grounds during the hearing of the appeal." 4. We shall deal with the above issues ground wise. Ground No.1 is general in nature, the same are not adjudicated. 5. The basic facts are, the Pragati Power Corporation Ltd. (Assessee) is a Government of Delhi undertaking, engaged in generation of electricity. The Assessee is having two gas based electricity generation plants, one at Bawana known as PPS-III and another at IP Estate known as PPS-I, Plant at Bawana i.e., PPS-III plant is eligible for deduction u/s 80IA(4) of the Income Tax Act. 6. The electricity generated by the assessee is supplied to distribution utilities of Delhi i.e. DISCOMS and two other distribution utilities outside Delhi. The income of the assessee is generated from the electricity tariff received from the aforesaid DISCOMS against the electricity supplied to them. The said tariff is determined by Delhi Electricity Regulatory Commissi....
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....essee with BRPL/BYPL (DISCOMS in short). ii) Relevant excerpts from DERC regulations to show that in case of delayed payment or non-payment, a late payment surcharge at the rate of 1.5% is leviable. iii) Comments of C&AG of India on the report of statutory auditor for the year under consideration. iv) Equity sanction order-dated 29.11.2011 issued by GNCTD. v) relevant part of contract entered into by the assessee with BHEL. a). Further Ld AR submitted that the relevant excerpts of DERC regulations filed by the assessee in fact, is not the additional evidence. Assessee had already argued before the Assessing Officer that the invoices were issued as per DERC regulations, therefore, in order to show that the tariff was charged as per DERC regulations, the copy of regulations were filed by the assessee. There was no reason for CIT(A) not to admit the same particularly when the same was not the self-serving document. b). Similarly, Power Purchase Agreements were filed to show that the electricity was sold to DISCOMS as per the agreement, but it was the DISCOMS who failed to make the payment. Moreover, comments of C&AG of India on the....
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...., the evidences submitted by the assessee goes to the root of the matter and Ld CIT(A) could have dealt with the issue on merits instead of rejecting on the face of it. Since the issue raised by the assessee and the additional evidences have direct correlation. Hence these are required to be admitted to adjudicate the issue on merit. Accordingly, the ground no 2 raised by the assessee is allowed. 13. With regard to ground Nos.3 & 4, the relevant facts are, Assessee is engaged in the generation of electricity which is being sold to various distribution utilities (i.e., BRPL, BYPL, etc.) who are in turn distributing the same to the ultimate customers. Under the Electricity Act 2003, PPAs were entered into by the assessee with DISCOMS to regulate the terms and conditions in respect of sale of power. In terms of the said PPAs, late payment surcharge (LPSC) as per DERC regulations is leviable in order to settle the power purchase bills within the stipulated time frame. 13.1. As per Regulation 64 of DERC (Terms & Conditions for Determination of Tariff) Regulations 2012 "in case, payment of any bill for charges payable under these regulations are delayed by a beneficiary beyond a pe....
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.... directed the assessee vide notice-dated 21.12.2020, dated 22.02.2021 and notice-dated 05.04.2021 to show-cause as to why the amount of 679,65,74,000/- be not recognized as revenue as the assessee was following mercantile method of accounting system. 13.6. In response, Vide letter dated 04.02.2021, 26.02.2021 and 08.04.2021, assessee submitted that the amount of LPSC recoverable from DISCOMS had not been accounted as revenue due to continuous default in payment by DISCOMS and underlying uncertainty in its ultimate collection. Assessee relied upon clause 9.2 of AS-9 and clause 4 of ICDs-4 notified u/s 145(2) of the Act where it is stated that "revenue shall be recognised when there is reasonable certainty of its ultimate collection". However, Assessing Officer rejected the submissions made by the assessee and made the addition of Rs. 6,79,65,74,000/- to the income of assessee stating that since the assessee has followed mercantile system of accounting, any receipts accrued in the nature of revenue must be recognized as revenue, whether it is collected or not during the year. 13.7. Against this addition, assessee filed an appeal before CIT(A), relying upon various case laws, ho....
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....ghtly held that the claim at the increased rate made by the assessee Co., on the basis of which necessary entries were made, represented only hypothetical income and the impugned amount as brought under tax by the ITO did not represent the income which had really accrued to the assessee during the relevant previous year. iii) Assessee is also relying upon the following cases: CIT Kota vs M/s Chambal Fertilizers & Chemicals Ltd. Gadepan Kota ITA No.866 of 2008 decided on (Raj) CIT vs Annamalai Finance Ltd. (2009) 319 ITR 196 (Mad) CIT Chennal vs Shriram Investments Ltd. (2015) 378 ITR 533 (Mad) CIT vs Vasisth Chay Vyapar Ltd. (2019) 410 ITR 244 (SC) iv) Delhi bench of ITAT in the case of Brahmaputra Capital & Financial Services Ltd. vs ITO (2009) 119 ITD 266 have held that there was uncertainty regarding ultimate collection of interest hence assessee was justified in not showing the notional interest income which did not actually materialized during the year under consideration. v) Delhi High Court in CIT vs Metropolitan Financier (P) Ltd. (1981) 5 Taxman 216 have held that in the instant case, assessee Co. foun....
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....nition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. When there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by installment. vi) Para 9.5 of AS-9 states that "when recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized. vii) The theory of "realization uncertainty envisaged in section 5 and 145 of the Act also finds place in the financial reporting framework applicable to the assessee Co. viii) Financial statement of the assessee Co. has been drawn-up in accordance with Indian Accounting Standards (IND-AS) notified u/s 129 of the Companies Act 2013. ix) IND-AS-115 deals with "revenue from contracts with customers". Para-9 of IND AS-115 specifies 5 pre-requisites that is to be satisfied in toto in order to account for a contract with customer. One such pre- requisite is the probability of realisation of consideration which....
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....icable to the assessee Co., it emanates that in case probability of realization of a receipt is uncertain at the time of raising of claims, then revenue recognition on account of it shall be postponed until such uncertainty is resolved. D) When matter is sub-judice, no revenue can be recognized. i) It is a settled principle that where a suit has been filed, the right to get the amount for the period after the institution of the suit would depend not on the agreement between the parties but on the discretion of the Court. ii) In CIT vs Bengal Jute Mills Company Ltd. (No.1) (1987) 165 ITR361 (Cal), Calcutta High Court have held that whether there is accrual of interest should be judged from a realistic point of view. iii) In CIT vs Raigharh Jute Mills Ld. (1981) 132 ITR 702 (Cal), Debtor has stopped paying interest and had also denied its liability in the suit filed by the assessee. Hence, assessee stopped charging interest as there was no chance of recovery. Calcutta High Court held that no interest income could be assessed in the hands of assessee. iv) In CIT vs Uttar Pradesh Financial Corporation (1992) 194 ITR 282 (ALL), assessee, a fi....
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....ddl CIT (2019) 112 Taxmann.com 217 (ITAT-Ahmedabad) Travencore Textiles P. Ltd. vs ITO (ITA No.3193/Chny/2018) (ITAT-Chennai) AVTEC Limited vs DCIT (2015) 370 ITR 611 (Del) F) Even if the statutory auditors have made some observation in the accounts in respect of LPSC not shown as income, the said observation has not been accepted by the CAG of India as well as the tax auditor. i) Rather they have accepted the system of accounting followed by the assessee company. ii) ii) In so far as observation by the statutory auditor is concerned, it is stated that assessee Co. is a government Co. u/s 2(45) of the Companies Act, more than 50% of the share capital is held by government of NCT of Delhi. As per the provisions of section 143(6) and (7) of the Companies Act, C&AG can conduct a supplementary as well as test audit of the accounts of government company after the receipt of report of statutory auditor and raise comments upon the same. In the present case, C&AG of India have not pointed out any specific anomaly in the accounting treatment adopted by the assessee Co., in respect of LPSC recoverable from DISCOMS. Further, the audited books of ac....
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....arately u/s36(1)(viia) of the Act. iv) It is submitted that it would have ended in the same result but it is a well recognized principle that no income can be subjected to tax if its realisation is uncertain. Further by recording the said transaction as bad debts, it would have amounted to unilaterally waiving off its right to recover the said amount from the DISCOMS when the outcome of contempt petitions filed by the Delhi Power Utilities have not been concluded and that the DISCOMS have also not waived off their liabilities. It would have resulted into huge financial implications. v) In any case, the treatment on account of bad debts u/s 36(1)(viia) is also based on the accounting treatment and the same would have yielded into same results. Hon'ble Supreme Court in the case of CIT vs Sarkar Builders (2015) 375 ITR 392 (SC) have held that the assessee should not be prejudiced by differences in accounting treatment adopted by him. H) When all the accounting principles laid down under the Income Tax Act and the accounting standards have been duly followed by the assessee and that the impugned issue is revenue neutral in nature, then a hypothetical inco....
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....usiness of generation and sale of power, it is eligible for deduction u/s 80IA of the Act. The business model of the assessee Co. is not in dispute; it is also not the case of the Assessing Officer that LPSC has not been derived from the business of generation and sale of power. Hence, the action of Assessing Officer in inflating the income of the assessee Co. without enhancing corresponding deduction u/s 80IA of the Act is in sheer violation of the requirement of law. iii. Income of an assessee can be enhanced either by way of making an addition to the returned income or by making a disallowance in respect of any component of expense. In both the scenarios "profit and gains" derived by the assessee under the Income Tax Act gets inflated, and the same become eligible for enhanced deduction under Chapter-VIA of the Act. iv) IV Mumbai Bench of ITAT in the case of ITO vs Anthelio Business Technologies (P) Ltd. (2017) 78 Taxmann.com 203, relying upon the Circular No.37/2016 issued by CBDT held that deduction under Chapter- VIA is admissible on the profits enhanced by the Assessing Officer by making disallowance of certain expenditure and accordingly in this case, it i....
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....llowed by the assessee and accepted by the Department, the view taken by the Assessing Officer is permissible in law and therefore, action u/s 263 does not lie. iii. In CIT vs Karnataka Power Transmission Corporation Ltd. (2020) 122 Taxmann.com 99 (Kar) there was uncertainty with regard to recovery / collection of outstanding amount, hence assessee for the assessment year in question decided not to recognize revenue of Rs. 52.89 Cr for wheeling charges. Hon'ble High Court held that the income did not accrue to the assessee but was a hypothetical income which could not have been subjected to tax and in view of AS-9, assessee has rightly decided not to recognize the revenue of Rs. 52.89 Cr for wheeling charges for the relevant assessment year. iv Similar observations are made by Delhi Bench of ITAT in the case of ACIT vs Uttaranchal Jal Vidyut Nigam Ltd. (2022) 138 Taxmann.com 448. It is submitted that in the present case, the method of accounting followed by the assessee was completely in conformity with the provisions of section 5 r/w section 145 of the Act. If the books of accounts are maintained on the basis of mercantile system of accounting except....
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....ssessee Co. have been duly admitted by its management, by its tax-auditor and also by C&AG without raising any qualification in this regard. v. Reliance placed by the Assessing Officer on the judgement of Supreme Court in the case of Apollo Tyre is misplaced. Rather it supports the case of the assessee. The Assessing Officer is duty bound to rely upon the authenticity of books of accounts prepared by the assessee under the Companies Act. It is a trite law that only those adjustments can be made to the net profit of the assessee, which are permissible under Explanation 1 to section 115JB of the Act. The book profit of the assessee Co. cannot be tinkered with any particular item which is not encompassed within the said Explanation. vi. As stated by the Supreme Court in the case Apollo Tyres Ltd. vs CIT (2002) 255 ITR 273 (SC) Assessing Officer has no power to tinker with the computation of book profit made by the assessee, once the accounts of the company are made in accordance with the provisions of Companies Act. The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the Profit & Loss A/c except to the extent provided in the Explanation t....
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....cer in preceding years and in subsequent year. e) Even if the assessee has not recorded bad debts separately, as stated by the Assessing Officer, in its books of accounts, the assessee cannot be prejudiced of any differences in accounting treatment. In any case, it would result in the same income at the end. Moreover, claiming LPSC as bad debts would amount to waiving of right by the assessee for recovery. f) Even if statutory auditors has raised any qualification, the same has not been carried over by the C&AG of India, the management of the assessee Co. as well as the tax auditors. The adjustment made by the Ld. Assessing Officer to the book profit does not fall under any of the limbs envisaged in Explanation 1 to section 115JB of the Act. Thus, as seen from any angle the impugned addition made by the Assessing Officer under normal provisions of the Act as well as u/s 115JB of the Act is injudicious and unwarranted and therefore, is liable to be deleted in the interest of justice. 16. On the other hand, the Ld. DR submitted that assessee followed mercantile system and the assessee has recorded its income on the concept of accrual in this regard. He b....
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.... the above facts on record, in the current assessment year, the assessee chose to disclose the above aspects in its notes forming part of accounts and declared the power purchase income alone and declared in its notes no 27 that the LPSC will be included in the taxable income as and when it recovers from the DISCOMS. 19. After considering the above facts and aspect on record, the AO rejected the same and proceeded to make the addition the LPSC relating to the current AY as income of the assessee with the observation that the assessee follows mercantile system of accounting and the same is chargeable to tax whether it is received or receivable. After considering the facts on record, we are of the view that no doubt in the mercantile system of accounting, the accrued portion of the income has to be declared as income however, it is also relevant and important that the certainty of recovery is relevant and important aspect before declaring and recognizing the same as income chargeable to tax. The AO has acknowledged the fact that the assessee has not recovered any LPSC in the past and still he proceeded to make the addition on the basis of method of accounting followed by the asses....
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.... be not disallowed u/s 36(1)(iii) of the Act. 22.1. In response to this notice, assessee vide reply-dated 04.02.2021 submitted that no funds had been borrowed for the purposes of additions to fixed assets, CWIP and capital advances. It was also clarified that even the borrowing made for working capital requirement had also not been utilized for the purpose of acquisition of aforesaid assets. The said additions were made out of equity funds and reserve funds of the assessee which were far in excess of the additions made. 22.2. Further, vide notice-dated 17.03.2021, Assessing Officer directed the assessee to explain as to why interest in respect of loan availed from Govt of NCT of Delhi (GNCTD) in the nature of project loan be not disallowed. 22.3. In response, Vide reply-dated 05.04.2021 assessee furnished details with respect to projects undertaken by it, stating that it had undertook two projects for development of power plants namely Bawana Project and Bamnauli Project. -With regard to Bawana Project, it was submitted that it is commissioned in the FY 2013-14 and therefore, interest till that date was capitalized in the cost of the project in preceding years. Ex....
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.... a) Assessee Co. has undertaken in-house development of two power plants projects namely PPS-II at Bamnauli and PPS-III at Bawana. As per usual practice, the completed portion of the project is being transferred to "fixed assets" and the remaining portion is reflected in "Capital Work In Progress" (CWIP) outstanding at the end of the year. b) Moreover, assessee Co. had also incurred certain expenditure on direct acquisition of fixed asset from outside vendors, in regular course of its business which have also been added to the fixed asset. c) In so far as CWIP is concerned, the following amount of expenditure had been incurred by the assessee on CWIP standing at the end of the year as under:- CWIP balance as on 31.03.2018 Amount (Rs.)(in lakh) Remarks Bamnauli project for development of PPS-II power plant 10,923.38 Refer Note 3 of audited financials (Pg 32 of PB) Bawana project for development of PPS III power plant Gross Less: completed portion capitalized and transferred to fixed asset (6955.59) 10529.84 Net Balance outstanding as on 31.03.2018 3574.24 Refer Note 3 of audited financials (Pg 32 of PB) 14497....
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....by the CIT(A) as additional evidence and was to be considered in order to render substantial justice to the assessee. iv) In any case it is clear from the sanction order that no borrowed funds were utilized by the assessee Co. for the said project II. Bawana Project (PPS-III) i) As stated earlier, Bawana Project had already been commissioned in FY 2013-14. Interest up to such period had duly been capitalized by the assessee and subsequent capital expenditure was incurred out of internal accruals. ii) Upto 31.03.2014, a total sum of 4,31,831 lakh had been incurred on the said project out of following sources: - i) Equity from GNCTD, ii) Loan from PFC, iii) Loan from GNCTD iv) From internal accruals Proportionate interest cost of Rs. 44,028 lakh in respect of loan availed from PFC and GNCTD had already been capitalized to the cost of such project and the same had not been doubted even by the Assessing Officer. iii) Interest on capital expenditure subsequent to FY 2013-14 was not required to be capitalized even in view of provisions of section 36(1)(iii) of the Act. In any case, subsequent capita....
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....that the legislature has made no distinction in section 36(1)(ii) between "capital borrowed for a revenue purpose" and "capital bomowed fora capital purpose Once the capital is borrowed for business purposes, interest is alllowable as deduction. Similar view is taken in the following cases: JCIT vs Bell Ceramics Ltd. (2015) 56 Taxmann.com 353 (Guj) CIT vs Ishwar Bhuwan Hotels Ltd. 215 CTR 14 (SC) ACIT vs Arvind Polycot Ltd. (2008) 299 ITR 12 (SC) Pr. CIT vs Jay Chemicals Industries Ltd. (2020) 422 ITR 449 (Guj) m) Hence, in view of above, it is stated that the question of capitalizing the interest i) in respect of Bawana Project does not arise due to following reasons:- ii) 1) Project had been commissioned in FY 2013-14 iii) Proportionate interest cost up to 31.03.2014 had already been capitalized by the assessee Co. iv) subsequent capital expenditure had been incurred out of internal accruals v) even if such capital expenditure is considered to be made out of borrowed funds, then also interest cannot be disallowed as "commissioning of project in generation of electricity signifies "put to use....
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.... year. Hence even if it is presumed that investment in fixed assets / CWIP was made out of mixed pool of funds then also it is a settled proposition of law that no disallowance u/s 36(1)(iii) of the Act can be made where interest free owned funds are sufficient to make such investment. Hon'ble Apex Court in the case of CIT vs Reliance Industries Ltd. (2019) 410 ITR 466 (SC) have held that in view of finding recorded by the Tribunal that interest free funds available to the assessee were sufficient to meet its investment. It is to be presumed that the investments were made from the interest free funds available with the assessee. vi) Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. (2009) 313 ITR 340 have held that if there is interest free funds availableto an assessee, sufficient to meet its investments and at the same time assessee had raised a loan, it can be presumed that the investments were made from the interest free funds available. vii) Various Benches of ITAT have taken a similar view, some of the cases are Tata Sky Ltd. vs ACIT (2020) 119 Taxmann.com 424 (Mum-ITAT) ITO vs Anunay Fab (P) Ltd. (2021) 133 Taxm....
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.... has been overruled by the Hon'ble Apex Court in the case of Munjal Sales Corporation vs CIT (2008) 298 ITR 298 (SC) relying upon the settled position that where owned funds are sufficient to make onward investments, it shall be presumed that such investments have been made out of owned funds only and hence, no disallowance can be made u/s 36(1)(iii) of the Act. ii) Ld. Assessing Officer has also relied upon the order of Chandigarh Bench of ITAT in the case of M/s Torque Pharmaceuticals Pvt. Ltd. vs Addl. CIT (Manu/IG/0052/2011), to work out the impugned addition by adopting the methodology for computing average cost of debt enshrined therein. It is submitted that facts of this case are different from the present case. In the said case, assessee had diverted its funds to its other unit and claimed deduction in respect of interest, which is not the scenario in the present case. p) Without prejudice to above, if the proportionate interest is disallowed then depreciation is to be allowed on the said amount. i) The Ld. Assessing Officer had disallowed proportionate interest of Rs. 17,66,79,721/-, invoking the provisions of proviso to section 36(1)(iii) r/....
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....e said figure. 25. On the other hand, Ld DR relied on the findings of lower authorities. 26. Considered the rival submissions and material placed on record. We observed that the AO noticed from the record that the assessee shown outstanding loan in the Balance Sheet and not capitalized any interest amount on the fixed assets purchased during the year and outstanding Capital WIP. He rejected the explanations offered by the assessee and proceeded to make the disallowance of interest claimed by the assessee by adopting the average cost of capital to the assessee and proportionately disallowed to the value of capitalization of fixed assets and outstanding CWIP. We observed that the AO merely observed from the balance sheet the outstanding amounts of borrowed funds and closing CWIP and proceeded to disallow the interest. On careful analysis of the facts on record, we observed that the capitalization of interest is directly linked to the specific funds utilized for the purpose of making investment for the creation of fixed assets. In the given case, we observed that the assessee has proceeded to make investments in the three categories, viz., a). direct purchase of fixed assets, b)....
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....d been increased by 27,98,24,639/- being unwinding of interest on vendor liabilities (IND-AS Adjustment), AO observed that the said amount has not been reduced while computing the amount of deduction. Hence, why the said amount be not disallowed. 26.2. In response, Vide reply dated 09.04.2021, assessee submitted that the said amount pertains to an IND-AS adjustment on account of unwinding of interest on vendor liabilities which is a notional loss charged as finance cost in the books of accounts and hence added back for the purpose of deduction u/s 80IA(4)(iv) of the Act as the same is not allowable as revenue expenditure. 26.3. However, the Assessing Officer rejected the explanation furnished by the assessee and proceeded to make the addition. While making addition, he relied upon the judgement of Supreme Court in the case of CIT vs Sterling Foods (237 ITR 579) (SC) and Pandyan Chemicals Ltd. vs CIT (262 ITR 278) (SC) stating that the said amount is not the income derived from industrial undertaking and therefore, was to be reduced from the profit for the purposes of computing deduction u/s 80IA(4)(iv) of the Act. 26.4. Aggrieved, filed an appeal before Ld CIT(A) and Ld.CI....
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....e cost was notional and therefore, was not allowable as deduction. e) Profit Gains derived by an industrial undertaking is eligible for deduction u/s 80IA(4) of the Act. i) As per the provisions of section 80IA, where the gross total income of an assessee include any profit and gains derived by an undertaking from any business referred to in sub-section (4), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of the profit and gains derived from such business for 10 consecutive assessment years ii) From a careful reading of the above provision, it is discernible that where gross total income of an assessee includes any profit and gains derived from eligible business then a deduction equivalent to 100% of the profit and gains derived from such eligible business shall be allowable as deduction u/s 80IA of Act. Since no separate code or method specifying the manner in which profit and gains derived from eligible business shall be computed, the provisions of the Act are to be applied in the usual manner while working out such d....
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....e subject to tax under the Act. This may lead to double taxation of income which is against the principles of natural justice and is against the intention of law ix) The Assessing Officer has failed to consider that by adding back the amount while computing the amount of eligible deduction, the assessee had infact added back the notional loss debited as finance cost in the books of accounts. Hence, there cannot be any question to further reduce the same as the same would being the entire position back to square one. x) That the amount of Rs. 798,24,639/- is a notional loss which is not allowable under the Income Tax Act and therefore, added back to the income. Hence, there cannot be any question of income not being derived from industrial undertaking. The Assessing Officer has completely failed to understand the facts and circumstances of the present case in true letter and spirit and has framed the assessment on his own whims and fancies, which is not sustainable in law. xi) Case Laws i) Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. vs CIT (1992) 196 ITR 188 (SC) have held that a provision in the taxing statute granting incentives fo....
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....ed upon by the Assessing Officer are applied to the issue under consideration, then the position emerges that the amount of 27,98,24,639/-, being a notional item is an expenditure attributable to the business of the assessee though not derived from the said eligible business. The same was not allowable as expenditure and therefore, was required to be added back while computing the deduction. h) In a nutshell, it is submitted that if the said amount is disallowed while computing the deduction then it would mean that Assessing Officer wants to allow IND-AS adjustment in computing taxable profit which is not the purpose of legislature. 28. Further, Ld. AR summarized submissions as under: a) Notional Loss on account of "unwinding of interest on vendor liabilities" is not an allowable expenditure under the Income Tax Act. If the same is debited to the Profit & Loss A/c then is liable to be added back in the computation of gross total income as well as deduction u/s 80IA. b) Assessee has maintained separate books of accounts for the eligible unit. In the statement of income, assessee has added back this amount while computing gross total income as well as co....
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.... of 10% (say) to the sum of Rs. 100/-. Therefore, Rs. 10/- shall be charged to finance cost alongwith a corresponding increase in the amount of liability. At the end of second year, the liability would be further increased by applying market interest rate of 10% to the revised sum of Rs. 110/. Accordingly, Rs. 11/- shall be charged to finance cost alongwith a corresponding increase in the amount of liability and the revised liability would stand at Rs. 121/- which is the sum actually payable to the vendor. 30.2. Thus, it is actually recognition of present value of future liability in the books of account by notionally debiting the profit and loss, even though no finance cost is actually payable to the vendor/ contractor, the same is notionally charged to the Profit & Loss A/c for each financial year until the year in which the said liability is discharged/ paid off. Such notional finance cost is referred to as "unwinding of interest on vendor liabilities" in the books of accounts of the assessee. During the year under consideration, assessee had debited a sum of Rs. 7,98,24,639/- towards such notional unwinding cost under IND-AS 109 to the Profit & Loss A/c under the head "finan....
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....owed. 31. With regard to ground No.7 the relevant facts are, during the assessment proceeding, Assessing Officer vide notice dated 17.03.2021 issued u/s 142(1) of the Act observed that the net loss on account of foreign exchange transaction and translation amounting to Rs. 17,67,88,271/- is on account of capital assets acquired by the assessee from abroad and therefore, not liable as revenue expenditure u/s 37(1) r/w section 43A of the Act. 31.1 In response, vide reply-dated 05.04.2021, assessee submitted that assessee had entered into a contract with BHEL on turnkey basis for in-house development of a power plant at Bawana (PPS-III). During the course of execution of contract, BHEL had imported certain Plant & Machinery from abroad on account of which certain part of consideration was payable by the assessee in foreign currency. In this regard, assessee had also produced relevant excerpts of the contract with BHEL. The AO rejected the same and proceeded to make impugned disallowance vide show-cause notice-dated 05.04.2021. 31.2 In response, vide reply-dated 08.04.2021, assessee reiterated the same submissions. However, the Assessing Officer made the impugned addition of R....
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....e rate of exchange determined or recognized by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency (b) "Foreign Currency" and "Indian Currency" have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947). Explanation 2.-Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes of this sub-section. Explanation-3. Where the assessee has entered into a contract with an authorized dealer as defined in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947) for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual coat of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset unde....
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....he contractor only and not against the assessee company. vii) Assessee is relying upon the following judicial precedence in which it is held that section 43A is not applicable in the case of Indigenous / domestic asset even if payment is made to the supplier in foreign currency. viii) Hon'ble Supreme Court in the case of CIT vs. Tata Iron & Steel Company Ltd. (1998) 231 ITR 285 (SC) held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Thus, events subsequent to acquisition of assets cannot change the price paid for it. ix) Hon'ble Supreme Court in the case of CIT vs Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC) have held that loss suffered by the assessee on account of foreign exchange difference as on the date of Balance Sheet is an item of expenditure u/s 37(1) of the Act. x) Assessee is also relying upon following judgements:- Cooper cooperation (P) Ltd. vs DCIT (2016) 159 ITD 165 (ITATPune) DCIT vs Maddi Lakshmaiah & Co. Ltd. (2017) 166 ITD 69 (Vizag) (ITAT-Vishakhapatnam) Baby Memorial Hospital Ltd. vs ACIT Circle-1(1), Kozhiko....
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.... a) monetary items and non-monetary items, b) translation of financial statements of foreign operations; c) forward exchange contracts: d) foreign currency translation reserves. Para-5 of ICDS-VI dealing with "effects of changes in foreign exchange rates, notified by CBDT vide Notification dated 29.09.2016 provides that foreign exchange gain/loss on monetary as well as non-monetary items shall be considered as income/expense in the relevant previous year. The only exception to the said treatment as provided in para 6 of the ICDs is section 43A of the Act. Section 43A is not applicable to the instant case as discussed above. Para 5 & 6 of para 5 lays down as under.- "5(i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year. (ii) In respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year, Notwithstanding anything contained in paragra....
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.... present case are different. In the case of Satlej Cotton, assessee was carrying on business in West Pakistan and was being taxed on Pakistan profit in India calculating the income based on the then prevailing foreign exchange rate. During the subsequent assessment years, assessee remitted certain amounts from Pakistan to India and claimed that with the devaluation of Pakistani rupee, it had suffered losses in the said remittances. Hon'ble Supreme Court held that where any profit/loss arises on account of conversion of foreign currency into another currency, the determination of nature of such profit/loss as revenue or capital would depend upon the fact that whether such foreign currency is held by the assessee on revenue account as a trading asset or as a capital / fixed asset. ii) Issue in the present case is in connection with losses arising out of fluctuation in foreign exchange rate in respect of sum payable to an Indian contractor for construction of a power plant located in India. It is not the case as to whether assessee had kept the foreign currency as capital asset or revenue asset. Hence, the reliance on the judgement in the case of Satlej Cotton is misplace....
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....dered the rival submissions and material placed on record. We observed from the record that for in-house development of the power plant at Bawana, assessee had entered into a contracts with BHEL on turnkey basis in May 2008, where the consideration was payable in three different currencies which converts in equivalent INR at that time at Rs. 3499.99 crores, currency wise break-up is given in table below: S. No Contract Currency Contract Price Amount 1 Plant and Equipment including mandatory spares to be supplied from abroad USD 11,87,10,857/- 2 Supply of Domestically manufactured Plant and Equipment including mandatory spares EURO INR 14,17,53,800/- 1418,97,70,172/- 3 All Services INR Rs. 308,70,06,418/- 4 Civil Structural & Architectural Design 85 Construction work INR Rs. 473,02,32,9947- In addition to the above, any taxes except customs were also to be reimbursed to contractor. 35.1. It is brought to our notice that every Contract, for Terms of Payment, referring Terms and Procedure of Payment-Appendix-1 placed at Page 94 to 106. As per the Schedules referred in the Terms and Procedure of Payment above contracted ....
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.... incurred during FY 2017-18 for BHEL Amount in Rs. Name of the Party Nature of Transaction Amount in Foreign Currency O/s as on 31.03.2018 Currency Rate as on 01.0*2017 Rate as on 31.03.2018 (Gain)/Loss Foreign Exchnage (Gain) /Loss BHEL Advance 148,358.62 EURO 79.20 68.11 (11.09) (1,645,297.10) BHEL Advance 368,825.00 USD 65.73 65.63 (0.10) (36,882.50) BHEL Liability 16,459,210.76 EURO 70.50 81.05 10.55 173,644,673.52 BHEL Liability 12,688,819.61 USD 65.73 65.63 (0.10) (1,268,881.96) Net Foreign Exchange Loss booked related to BHEL during FY 2017-18 170,693,611.96 Other Gain/ Losses during the year 6,094,659.04 176,788,271.00 From the above, the assessee has reinstated the forex liability in the Balance Sheet and the excess liability was claimed as forex loss. In the ....
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.... difference of Rs. 236,12,51,643/- be not disallowed and added back to the returned income. Out of the sum of 236,12,51,643/- -a sum of Rs. 3,04,57,234/- had been proposed to be disallowed on account of 50% of the depreciation in respect of assets amounting to Rs. 79,21,25,723/- which had been purchased by the assessee on 31.03.2018 and whose depreciation rate was 7.69%. -balance Rs. 233,07,94,409/- (i.e. Rs. 236,12,51,643- Rs. 3,04,57,234/-) had been proposed to be disallowed by applying SLM rate to the opening WDV of the assets, details of which had been tabulated in the show-cause notice. 36.3 In response, Vide reply dated 08.04.2021, assessee submitted that the calculation was made on the opening WDV by applying SLM rate which is incorrect. Assessee furnished copy of clause-18 of Form 3CD in support of depreciation claimed. However, AO rejected the submissions/calculation/ explanation made by the assessee, AO disallowed the depreciation of Rs. 236,12,51,643/- as per normal provisions and made addition of Rs. 3,04,57,234/- to the book profit u/s 115JB of the Act by observing that the assessee had not submitted working of depreciation. 36.4 Aggrieved, t....
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.... d) Since the assessee was engaged solely in the business of generation and distribution of power, depreciation was claimed as per Appendix-IA. e) It is not the case of Assessing Officer that the assessee was not engaged in the business of generation and distribution of power or the rates applied by the assessee were different from the rate specified in Appendix-1A. f) The Assessing Officer and the CIT(A) had ignored the computation filed by the assessee and disallowed part of depreciation by wrongly computing the same applying SLM rate to the opening WDV g) As per 2nd proviso to Rule 5(1A) of the Income Tax Rules, an option can be exercised by the assessee to compute depreciation in accordance with Appendix-1 instead of Appendix-1A and the same has to be opted on or before the due date of filing of return u/s 139(1) of the Act. It is needless to say that such an option is available to the assessee only and not to the Assessing Officer Assessee had not opted for the said alternative and instead had continued with SLM method provided as per Appendix-1A and therefore, Assessing Officer and the CIT(A) were duty bound to accept the same. h) T....
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....J. f) This case was relied upon by the Supreme Court again in the case of Malyalam Manorama vs CIT (2008) 300 ITR 251 (SC) holding that the Assessing Officer while computing income u/s 115J, has only the power of examining whether the books of accounts have been certified by the authorities under the 1956 Act as having been properly maintained in accordance with the 1956 Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to the said section. g) The judgement of Supreme Court in the case of Apollo Tyres Ltd. is relied upon by various High Courts in the following cases:- CIT vs J K Synthetics Ltd. (2016) 73 Taxmann.com 278 (All) CIT vs Kovai Maruthi Paper & Board (P) Ltd. (2007) 294 ITR 57 (Mad) h) It is not the case of Assessing Officer that depreciation in respect of assets capitalized on 31.03.2018 amounting to Rs. 79,21,25,723/- has not been correctly computed in accordance with Companies Act. Even statutory auditors have duly admitted the same and no qualification has been made to that effect in the audit report. It is also not the case of Assessing Officer that d....
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....on facts in disallowing the depreciation of Rs. 3,04,57,234/- and adding back to the book profit u/s 115JB of the Act alleging the same to be excessively claimed despite the fact that book profit had been arrived at as per the provisions of the Companies Act and had been audited by the statutory auditor. a) The order passed by the Ld. CIT(A) is perverse in law and on facts as he ignored the detailed written submissions running into 200 pages filed by the assessee enclosing relevant documents and relying upon the irrelevant considerations. b) First, CIT(A) committed the error by not admitting the additional evidence filed by the assessee. In fact, those were not the additional evidence as such the same were already brought into the notice of Assessing Officer in the pleading. In any case, CIT(A) had to admit the same to render the substantial justice to the assessee. CIT(A) has not given his own reasons while deciding the issue and had merely confirmed the order of Assessing Officer stating that Assessing Officer had passed a reasoned order and thus the entire purpose of filing the appeal is frustrated. The CIT(A) had to apply his own mind, appreciate the evidence ....