TaxTMI 
TaxTMI 
2024 (8) TMI 1018
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.... 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 in accordance with ICDs-IV issued by CBDT u/s 145(2) of the Income Tax Act r/w AS-9 and IND AS-11....
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....ed 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 Commission (DERC) in terms of statutory tariff regulations applicable for the electricity supplied within Delhi. However, in respect of the power plant from whi....
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.... 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 audit report of statutory auditor were filed to show that the same was accepted by C&AG and no qualification was made. c). Equity sanction order was produced by the assessee before CIT(A) to establish that ....
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....es 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 period of 60 days from the date of dealing, a late payment surcharge @ 1.25% per month shall be levied by the generating company". Similarly, Regulation 137 of DERC (Terms & Conditions for Determination of Tariff) Regulations 2017, had enha....
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....tem. 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, however CIT(A) sustained the additions. 14. At the time of hearing, Ld AR submitted as under: A. Mercantile system of accounting does not warrant taxation of hypothetical income and therefore revenue recognition must be postponed when there is uncer....
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....lso 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. found that it was not recovering even the principal amount, let alone the overdue interest on the higher purchase agreements. So, it chose to keep the impugned interest in suspense account. Hence, the Tribunal was found to be justified in holding that the impugned sum was not liable to income tax. vi) Mumbai Bench of ITAT in Bectel International Inc. vs DCIT (2016) 71 Taxmann.com 62 have held that ....
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....he 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 in turn depends upon the customer's ability and intention to pay. x) Prior to the enforcement of IND AS-115, IND AS-18 dealing with revenue recognition also held that revenue shall be recognized only when it is certain that future economic benefits in relation to a transaction will flow to the entity. In some cases, this may not be probable until the consideration is received or until an uncertainty is removed. xi) Even the Expert Advisory Committee (EAC) of ICAI....
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.... 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 financial corporation, did not credit interest to Profit & Loss A/c but to suspense account. It filed suit for recovery of loan and the suit was pending. It was held that interest did not accrue during the pendency of suit. In the present case also, principal amount was due from DISCOMS and the assessee company had filed the suit to recover the amount. Hence, it cannot be said that LPSC had accrued to the assessee as income when the principal amount itself was outstanding. E) The system of accounting qua LPSC has been regularly followed by the assessee as well as ac....
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....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 accounts have been duly accepted by the management of the assessee Co. as well as by the tax auditors. iii) Even if some bills / invoices would have raised by the assessee Co. on DISCOMS in respect of LPSC recoverable from them, the same would have tantamounted to bestowing a "claim" upon them. iv) In CIT vs Ashok Bhai Chiman Bhai (1956) 56 ITR 42 (SC), it has been observed that mere raising a claim does not by itself create any legally enforceable right to receive any income. v) Thus, there is a difference between the terms "claim" and "revenue recognition". To convert a piece of claim into recognition of revenue, it is fundamental that there is no probability of un....
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.... 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 income cannot be subjected to tax. i) The issue involved in the present case is revenue neutral. The rate of tax in the present assessment year as well as in the subsequent assessment year is same, therefore, the dispute raised by the revenue is entirely academic or at best may have a minor tax effect. ii) Assessee is also relying upon the judgement of Supreme Court in the case of CIT vs Glaxo Smithkline Asia (P) Ltd. (2010) 236 CTR 1 (SC) wherein Supreme Court did not interfere in the matter as the entire exercise was a revenue neutral exercise. I) When principal amount itself is overdue, recovery of LPSC is uncertain As analyzed in detail above, in the instant case, collection of LPSC is clouded in uncertainty and accordingly, the same is recognised as income....
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....i 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 is held that the deduction u/s 10B is allowable on certain disallowances such as pertaining to section 32, 40(a)(ia), 40A(3), 43B etc, made by the Assessing Officer while computing profits and gains of business activity. V. Bombay High Court in CIT vs Gem Plus Jewellery India Ltd. (2011) 330 ITR 175 held that the disallowance u/s 40(a)(i) is a statutory disallowance and thus enhanced profit due to disallowance shall be considered for deduction u/s 10B of the Act. Assessee is also relying upon following cases:- CIT vs M Pact Technology Services (P) Ltd. (ITA No.228 (Kar) of 2013 dated 11.07.2017) Pr. CIT vs BMC Software India (P) Ltd (2019) 109 Taxmann.com 277 ITO vs Sahasra Electronics Pvt. Ltd. (2010-TIOL-89-ITAT-Del) In view of above judicial precedence, it is submitted that in case addition on account of LPSC is sustained, then correspon....
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.... 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 in respect of those items which involve high level of uncertainty and is recorded by the assessee as and when it is received then in that case it cannot be said that assessee had deviated from the provisions of section 145 of the Act. Hence, no addition could have been made by the Assessing Officer. vi) Disallowance of addition of 679,65,74,000/- to the book profit u/s 115JBof the Act a. Since addition is liable to be deleted under normal provision, the same is also liable to be deleted under MAT provisions as well because Assessing Officer cannot tinker with the books of accounts, impugned adjustment does not fall within the ambit of Explanation 1 to section 115JB(2) of the Act. i. Assessing Officer has made the impugned addition of 679,65,74,000/- to the book profit u/s 115JB of the Act, also contending that the statutory auditors of the assessee Co. has certified the accounts subject to a "qualification to this effect reflected in the ....
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.... 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 to section 115J. vii. 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. viii. The judgment Supreme Court in the case of Apollo Tyres Ltd. is relied upon by various High Courts in the following cases:- i. CIT vs J K Synthetics Ltd. (2016) 73 Taxmann.com 278 (All) ii. CIT vs Kovai Maruthi Paper & Board (P) Ltd. (2007) 294 ITR 57 (Mad) b. Since the addition on account of notional income towards "surcharge on delayed payments" has not been specifically envisaged in any of the limbs laid down under Explanation 1 to section 115J....
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....ercantile system and the assessee has recorded its income on the concept of accrual in this regard. He brought to our notice page 33 of PB wherein assessee itself recognizes above said Revenues and he brought to our notice page 43 of the PB relating to "notes to financial statement" wherein it was declared that this has resulted in non recognition of Revenue of Rs. 67965.74 lacs (31.03.2017 Rs. 52792.41 lacs) with corresponding impact on receivables. It clearly shows that assessee has to recognize the above said Revenue and must have declared the same as part of the receivables as well as financial results. In case of non reorganization of such Revenue assessee has the option of creating provision for bad debts. With regard to Ld. AR submissions, he objected vehemently to the detailed submissions made by the Ld. AR and relied on the findings of the lower authorities. 17. Considered the rival submissions and material placed on record. We observed that the assessee is in the business of generation of electricity and distributes the same through intermediaries like BRPL, BYPL etc to the ultimate customers. Based on the PPAs entered with DISCOMS, the assessee is eligible to claim sale....
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....still he proceeded to make the addition on the basis of method of accounting followed by the assessee. The assessee being a company has to follow the various accounting standards prescribed to prepare/submit its financial statements. Therefore, the duty imposed on the assessee to prepare its financial statements adopting applicable accounting standard to declare true and fair statement of its affairs. 20. Based on the facts on record, we observe that the assessee has not recovered any LPSC in the past and as per the accounting standard and norms, the assessee has to declare its income not only based on accrual system, also supported by the concept of certainty of recovery. In the similar facts on record, the Hon'ble Supreme Court held in the case of Godhara Electricity Co. Ltd. (supra) that there was real accrual of income to the assessee Co. in respect of the enhanced charges for supply of electricity, has to be considered by taking the probability or improbability of realisation in a realistic manner. It observed that the Tribunal had rightly held that the claim at the increased rate made by the assessee Co., on the basis of which necessary entries were made, represented only hy....
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....ill that date was capitalized in the cost of the project in preceding years. Expenditure incurred subsequent to commissioning of project in FY 2013-14 was made out of internal accruals, hence, there is no scope for any disallowance of interest. -With regard to Bamnauli Project, it was submitted that it was entirely funded out of equity capital provided by GNCTD and therefore, question of disallowance of any interest does not arise as there was no interest. 22.4. However, AO rejected the explanation submitted by the assessee and Assessing Officer issued a show-cause notice / draft assessment order-dated 05.04.2021 observing that "in clause 13f(7) (Pg-62) of the Tax Audit Report dealing with ICDs-IX borrowing cost, the tax auditor has reported that amount of borrowing cost capitalized during the year is "Nil" when the borrowed funds are outstanding in the books of assessee companies. The additions made to fixed assets and CWIP are out of such borrowed funds and hence, proportionate interest expenditure is to be capitalized. 22.5. The proportionate disallowance worked out by the Assessing Officer is as under: - Particulars Amount(Rs.) Own Funds (A) 4664,19,66,767 Borrowed F....
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....ixed assets are concerned, the assets worth Rs. 26.611.33 lakh had been added to the fixed assets during the year, the details of which are as under:- Additions to fixed assets during FY 2017-18 Amount (Rs.)(in lakh) Remarks Completed portion of Bawana project transferred from CWIP 6955.59 Refer Note 3 of audited financials (Pg 32 of PB) Other assets which are ready to use and have been directly purchased from outside vendors 19655.74 Total 26611.33 Date-wise details given in TAR (Pg 75-80 of PB) Also refer Note 3 of audited financial (Pg 31 of PB) 14497.62 e) Assessing Officer has observed that part of CWIP and additions to fixed asset during the year had been financed borrowed funds and therefore interest cost proportionate to the same is liable to be disallowed under provision to section 36(1)(iii) r/s Explanation 8 to section 43(1) of the Act. However, Assessing Officer has not established the nexus between the borrowed funds and CWIP/fixed assets. Assessing Officer has not brought on record any material to show that additions to CWIP/fixed assets are out of borrowed funds of the assessee instead of its equity funds, despite interest free o....
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....and arbitrary in nature. h) Commissioning of project amounts to "first put to use". Hence, even if subsequent capital expenditure is considered to be made out of borrowed funds, same cannot be disallowed u/s 36(1) (iii) of the Act. Section 36(1) (iii) reads as under:- "(iii) the amount of interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalized in the books of accounts or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. i) Accordingly, to claim deduction under this provision (i) funds should have been borrowed by the assessee, (ii) funds should be borrowed for the purposes of business and (c) interest should have been paid on such funds. Once all these conditions are satisfied, interest is allowable as deduction u/s 36(1)(i) of the Act. However, proviso carves out an exception. In the case where borrowed funds are ublised for acquisition of an asset then interest i....
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....from CWIP ii) Assessee Co. had purchased other assets amounting to Rs. 19,655.74 lakh directly from outside vendors. These assets were put to use on the same date on which they were acquired or transferred. Even the Ld. Assessing Officer has not pointed out any item which had not been used on the date on which, it was acquired. iii) During the assessment proceeding itself, assessee had pointed out that the expenditure had been incurred out of internal accruals. The cash flow statement was also produced before the Assessing Officer, which is as under:- Sl. No. Cash inflows/outflows during FY 2017-18 (relevant to AY 2018-19) (Rs. in Lakh) 1. Cash generated from operation 63 035 2. Add: Cash generated from investment activities (comprising of interest income, sale of capital assets and also redemption of FDs) 5 465 3. Total cash generated from (1 & 2 above) 68 490 4. Less: Cash outflow from financing activity (comprising of fresh loans + interest repayment) 26 442 5. Balance cash available for capital expenditure including capital WIP (3-4) 42 048 6. Less: Cash outflow out of above on capital expenditure including capital WIP 22 070 7. Net increase inc ash s....
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....1) (SC) and in the case of Munjal Sales Corpn (2008) 298 ITR 298 (SC) dismissed the appeal of the Revenue in the light of finding of CIT(A) that assessee had paid-up capital/reserves/surplus of Rs.6.10 crore on which no interest was being paid and therefore, interest free advances made by it were covered. Assessee had not diverted any borrowed funds on which interest was paid for non-commercial purposes and therefore, there was no question of disallowance of interest out of interest paid by the assessee. Thus, if interest free advances are less than paid-up, share capital/ reserve / surplus of the assessee, no disallowance of interest could be made. ix) Hon'ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT(2021) 438 ITR 01 have categorically held as under: "In a situation where the assessee had mixed fund (made-up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free funds. To put-it in another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to asser....
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....ubmitted that any dispute with regard to treatment of interest expenditure is ultimately academic as the same is revenue neutral over the years. 24. In summary, Ld AR submitted as under: 1. In so far as CWIP is concerned, the Bamnauli Project (PPSII) had been specifically financed from equity infusion by GNCT. 2. Remaining part of CWIP (Bawana Project-PPS-III) had already been commissioned in FY 2013-14, proportionate interest paid on borrowing up to that date had been duly capitalized by the assessee; subsequent capital expenditure had been incurred out of internal accruals; even if it is presumed that this subsequent capital expenditure is incurred out of borrowed funds then proviso to section 36(1)() is not applicable as commissioning of the project and generation of electricity indicates that assets had already been put to use" 3. Additions to fixed asset including the assets purchased directly from outside vendors had been made out of internal accruals/equity funds only. It is evident from TAR that all the assets had been put to use on the same date as that of acquisition. No discrepancy has been pointed out by the Assessing Officer as to any particular item. 4. Asses....
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....auli Project, it was submitted that this project was fully financed out of equity introduced by GNCTD and no borrowed funds were utilized during this AY. The relevant evidence was submitted before CIT(A) and he has rejected the same. For the sake of justice, we observe that none of the tax authorities have verified this aspect and for the sake of clarity, we direct the AO to verify the claim of the assessee and allow the same as per law. The next issue is direct purchase of assets, once it is put to use, or deferred there is no concept of further capitalization. Therefore, we do not see any reason to sustain the addition made by the AO. Therefore, we direct AO to only verify the Project Bamnauli and allow the claim of the assessee as per law after providing proper opportunity of being heard to the assessee. In the result, ground raised by the assessee is partly allowed as per above directions. 26. With regard to ground No.6, the relevant facts are, during the assessment proceeding, Assessing Officer vide notice-dated 21.12.2020 issued u/s 142(1) of the Act directed the assessee to furnish the working of deduction claimed u/s 80IA(4)(iv) of the Act and also to explain whether othe....
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....ndor. Such sum shall be subsequently unwound over the years by applying market interest rate until the liability is fully settled. c) For instance, a sum of 121 is payable to the vendor at the end of two years, suppose market interest rate is 10%. As per the provisions of IND-AS 109, the present value of Rs. 121/- is to be computed by discounting Rs. 121/- over two years at the market interest rate of 10%. In the present example, such present value shall be worked out to be Rs. 100/-. Therefore, the liability towards the vendor shall be initially recorded at Rs. 100/- at the end of first year, such liability shall be increased by applying market interest rate of 10% 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/-. Hence, 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. d) Thus even though no finan....
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....ooks of account but which is not allowable under the Income Tax Act shall be added back to the book profit for the purposes of computing taxable income as well as computing profit/gains derived from eligible business. The computation furnished by the assessee Co. itself reflects that the assessee had added this amount back to its income in the Computation of Income as well as in the computation of deduction u/s 80IA(4) (iv) of the Act. Thus IND-AS adjustment disallowable under the Income Tax Act is added back in the computation of gross total income under normal provisions. vi) Assessing Officer has duly admitted the disallowance of Rs. 7,98,24,639/- made by the assessee while computing gross total income under normal provisions of the Act. The fact that such adjustment was attributable to the specified business of the assessee is also not disputed by the Assessing Officer, hence by no stretch of imagination can such amount be disallowed solely u/s 80IA(4)(iv) of the Act vii) By adding the amount back under the normal provisions in the gross total income, the said amount was also to be added back while computing deduction u/s 80IA of the Act and the same has to be deducted from....
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....gnored the expenditure part and held that the said amount is not the profit derived from industrial undertaking and therefore, deduction u/s 80IA is not allowable on this amount. By not allowing deduction of Rs. 7,98,24,639/- u/s 80IA of the Act, the Assessing Officer has made an attempt to tax a hypothetical income which is not sustainable in law. If seen from another angle, Assessing Officer in the present case, has reduced the same amount of Rs. 7,98,24,639/- from the income side. It would mean that the notional loss on account of unwinding of interest on vendor liabilities has been allowed to the assessee which is a notional loss. This is in gross violation of the legal position. g) Case law relied upon by the Assessing Officer is not applicable to the present case, rather it supports the case of the assessee. i) The Ld. Assessing Officer has 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) for the proposition that the words "Profit & Gains as derived by" are narrower than "Profit attributable or arising from the business of an assessee or an undertaking" ii) It is subm....
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....observed that a sum of Rs. 7,98,24,639/ has been added by the Assessee in its computation of taxable income as the said amount is not allowable under the provisions of Income Tax Act, 1961 being the amount of notional interest accounted for in the accounts of the company during the Financial Year 2017-18 on the liability to be discharged by the Assessee to its contractors in future by adopting IND AS with effect from the financial year 2015-16. The Assessee was required to maintain its accounts on the basis of IND AS 109 (Indian Accounting Standards). As per the said accounting standards, the company was required to account for its liabilities on fair value considering the Present Value basis of the said liabilities. As per the concept of Fair Value/Present Value basis for liabilities, the price payable by the company against the goods and services received by it at present will comprise of the basic (core cost) of the said goods and services and the interest cost which the seller/ service provider shall bear in receiving the price of the goods/ services in future. Therefore, as per the IND AS 109, the amount of liabilities of the company shall be bifurcated in core(basic) and fina....
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.... our view, it is only an accounting adjustment and it has no impact as the computation of taxable income. 30.4. We observed that in the statement of computation of gross taxable income as well as determining the deduction u/s 80IA, the assessee had added back the above said finance cost (unwinding of interest cost) as the above said finance cost was notional and therefore, was not allowable as deduction under the provisions of Income Tax Act, 1961. 30.5. We observed that the deduction u/s 80IA is allowable to the assessee on the basis of eligible unit. In the present case, the assessee has two eligible units eligible to claim deduction u/s 80IA, therefore the computed income under the Act is towards the income generated for the purpose of eligible business u/s 80IA. After careful consideration, we are of the view that the assessee has rightly determined the eligible profit from the eligible business by adopting the declared profit as per Profit and Loss Account statement and added back the notional finance cost, which is otherwise not allowable expenditure under the Income Tax Act. Even otherwise, the assessee determines the eligible profit of the eligible unit separately, by con....
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....ss or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36 or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after su....
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....e had entered into a contract with BHEL on turnkey basis. The said work encompassed civil, structural and architectural design and construction, engineering, manufacturing, inspection, testing, packing, forwarding, dispatch, transportation, port handling, clearance, insurance, loading and unloading, handling and storage etc. iv) During the course of execution of contract, BHEL was required to import certain Plant & Machinery/ equipment from abroad on account of which certain part of the consideration was payable by the assessee to BHEL in foreign currency v) Without pointing out any infirmity, Assessing Officer blindly made the addition. Hence, before the CIT(A), produced relevant part of excerpts of the contract as additional evidence under Rule 46A of the Income Tax Rules However, CIT(A) rejected to admit the same. Since the said evidence was relevant to consider the issue and to render the substantial justice to the assessee, the CIT(A) should have admitted the same. vi) Since under the terms of contract, assessee had paid part of consideration in foreign currency, it would not mean that assessee had imported the assets from abroad. It is submitted that the power plant is ....
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.... was produced by the assessee before CIT(A) as additional evidence under Rule 46A of the Income Tax Rules however CIT(A) did not allow to admit such evidence. Perusal of contract reflects that the said loan had been availed in Indian currency i.e. rupees and not in foreign currency. Thus, all the three conditions required for applying section 43A are not satisfied and therefore, impugned addition is unwarranted. b) Foreign exchange loss is allowable u/s 43AA of the Act as well as ICDs i) as per the provisions of section 43AA of the Act, any foreign exchange gain/loss which is not covered by the provisions of section 43A is allowable as income/expense in accordance with ICDs notified u/s 145(2) of the Act. ii) Section 43AA lays down as under:- "43AA (1) Subject to the provisions of section 43A, any gain or loss ansing on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 (2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in ....
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....ribed by 13 Explanations dealing with various specific situations. None of such Explanations provide that foreign exchange fluctuation loss in respect of assets constructed in India is required to be added to the cost of asset. vii) It is submitted that unrealized foreign exchange losses are allowable as revenue expenditure even u/s 37(1) of the Act. Hon'ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. vs CIT (2010) 189 Taxmann 292 held that loss suffered by the assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by ICAI, on account of fluctuation in rate of foreign exchange is an item of expenditure u/s 37(1), notwithstanding that liability has not been discharged in the year in which fluctuation in rate of foreign exchange occurred. Thus from all the facets, the impugned addition is injudicious and liable to be deleted. c) Case Law relied upon by the Assessing Officer 1) The Assessing Officer has relied upon the judgement of Supreme Court in the case of Sutlej Cotton Mills Ltd. vs CIT (1979) 116 ITR 01. It is submitted that the ratio of the said judgement is not applicable to the present case as ....
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.... been imported by the contractor (i.e. BHEL) and not by the assessee, - the asset constructed is not on deferred payment terms and the loan availed to finance the same is also in Indian currency. b) Once section 43A is not applicable, foreign currency loss on monetary as well as non-monetary assets is allowable u/s 43AA r/w ICDS-VI. c) Assessee follows mercantile system of accounting, books of accounts have not been rejected by the Assessing Officer and the accounting treatment adopted by the assessee is also in consonance with IND-AS 21. Moreover, none of the explanations in section 43(1) require capitalization of unrealized foreign exchange loss and the same is otherwise allowable u/s 37 of the Act as well. d) Without prejudice and in the alternative, depreciation is allowable on the amount of forex loss capitalized u/s 43A of the Act, which has not been granted either in the present year or the subsequent assessment years. 34. On the other hand, Ld DR submitted the relevant facts on record and objected to the detailed submissions of Ld AR. He relied on the findings of lower authorities. 35. Considered the rival submissions and material placed on record. We observed fro....
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....ssessee has held 5% towards liquidated damages till the final closure of the contract. Upto FY 2017-18 almost 90% payment against the contract on foreign currency was paid and balance shown as liability. 35.5. We observe that, as per the IND AS-21 on the Effects of Changes Foreign Exchange Rates, the assessee has to report, at the end of each reporting period, foreign currency monetary items shall be translated using the closing rate. The same standard provides that the exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise. 35.6. At the time of hearing, the bench directed the assessee to submit the relevant claim made during the year, the assessee has submitted the relevant Calculation of foreign exchange Gain/loss for AY 2018-19 (FY 2017-18) as under: Details of Foreign Exchange Gain/Loss incurred during FY 2017-18 for BHEL Amount in Rs. Name of the Party Nature of Transa....
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....ion for put to use and claiming depreciation thereon along with copy of sample bills in respect thereto. 36.1 Assessee vide reply-dated 04.02.202, 26.02.2021 and 08.04.2021 submitted that it, being a power generating company, had claimed depreciation as per section 32(1) r/w Rule 5(la) and Appendix-IA of the Act. It was further submitted that during the year, total additions to fixed assets were made at 266.11 crores, date-wise details of which had been duly submitted in the tax audit report. 36.2 Amount of additions to fixed assets and depreciation thereon was claimed by the assessee in consonance with IND-AS 16 applicable to the assessee company. However, the Assessing Officer, vide show-cause notice-dated 05.04.2021 and 08.04.2021 worked out the depreciation at Rs. 162,34,00,032/- as against Rs. 398,46,51,672/- claimed by the assessee and accordingly, required the assessee as to why 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 pu....
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....2(1)(i) r/w Rule 5(IA) of the Income Tax Rules. As per this annexure, depreciation rate was to be allowed to the actual cost of the asset. b) Section 32(1)(i) states that in the case of assets of an undertaking engaged in generation or generation and distribution of power, depreciation is to be claimed at such percentage on the actual cost thereof to the assessee as may be prescribed. c) Rule 5(IA) states that the allowance under clause (i) of subsection (1) of section 32 of the Act in respect of depreciation of assets acquired on or after 15 day of April 1997 shall be calculated at the percentage specified in the 2nd column of the table in Appendix-IA of these rules on the actual cost thereof to the assessee as are used for the purposes of the business of the assessee at any time during the previous year. 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) T....
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.... while computing book profit. Since there was no depreciation claimed by the assessee on account of revaluation of asset and therefore, same depreciation was claimed by the assessee in the Profit & Loss A/c as per normal provisions as well as under MAT provisions. e) 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 to section 115J. 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 reducti....
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.... accept the authenticity of books of accounts prepared under the Companies Act and can make only those adjustments to the net profit which are permissible under Explanation 1 to section 115JB of the Act. Thus book profit of the assessee cannot be tinkered with any particular item which is not envisaged within the said Explanation. e) It is not the case of the assessee that any part of depreciation is attributable to any revaluation of asset. 39. Further he submitted that the order passed by CIT(A) is perverse in law and on facts. In this regard, assessee has taken the following ground: 15. That the Ld. CIT(A) and AO has erred in law and 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....