2011 (12) TMI 585 - AT - Income Tax

Reopening of assessment - Held that - Originally the return was processed u/s. 143(1). Later on, the AO has recorded the reasons which clearly show that income has escaped assessment and the case is clearly covered by Explanation 2(c) of sec. 147. Further, the Hon ble Supreme Court has held in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2007 (5) TMI 197 - SUPREME Court ) that if a return has been only processed u/s. 143(1), then re-opening is justified. Disallowing the loss due to Exchange rate fluctuation to the extent of loan which was not paid during the year - Held that - Total loss was ₹ 12.45 crore out of which loss of ₹ 8.22 crore was of capital expenditure and ₹ 4.23 crore was on revenue side. Part of this has been disallowed mainly on the basis that the payment has not been made and it was only a notional loss. The Hon ble Supreme Court has clearly held in the case of CIT vs. Woodward Governer (I) Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT that loss incurred on revenue side on account of foreign exchange fluctuation is allowable. Since the disallowance of loss amounting to ₹ 47,01,720/- is admittedly on revenue side, therefore, we set aside the order of ld. CIT(A) and direct the AO to allow this loss. Exemption u/s.10B - Held that - We find that as far as the issue regarding premium on transfer of import licences, insurance claim, sundry credit balance written back and staff agreement deposit forfeiture is concerned, the same has been decided against the assessee by the order of Tribunal for earlier year, particularly in asstt. year 1998-99 Compensation for amount received on surplus of assets can also be not related to the business of export and, therefore, the same is also decided against the assessee. Refund of sales-tax - We agree with the contention of the ld. Sr. Advocate, Shri Y.P. Trivedi, that when sales-tax is initially paid, that will go on to increase the purchases which means profit is reduced and when sales-tax is refunded the profit would increase and therefore payment and reimbursement would nullify each other. Therefore, we hold that refund of sales-tax cannot be reduced from profits. Ddisallowing the interest u/s.36(i)(iii) being the amount capitalized in the Books - Held that - The assessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing. Disallowing Commission paid to M/s. L.K. Corporation by relying on order for the earlier Assessment Years - Held that - Even in earlier year a sum of ₹ 1,50,000/- paid to M/s. L.K. Corporation as commission was disallowed and the Tribunal has in earlier year restored this matter to the file of AO for reconsideration. Consistent with the earlier order, we restore this issue to the file of AO with a direction to reconsider the same and the decide the same as per decision of earlier year. Disallowing the Forfeiture of employees security deposit - Held that - Similar disallowance was made even in earlier year and the matter travelled to Tribunal. After considering the submissions, the Tribunal decided the issue against the assessee, which is also an admitted position in the chart. Therefore, following the earlier year order, we decide this issue against the assessee.

Issues Involved:
1. Validity of Notice issued u/s 148 r.w.s. 147 of the I.T. Act, 1961.
2. Disallowance of loss due to Exchange rate fluctuation.
3. Income/receipts not derived from industrial units for claiming exemption u/s 10B.
4. Disallowance of interest u/s 36(1)(iii).
5. Disallowance of commission paid to M/s. L.K. Corporation.
6. Disallowance of forfeiture of employees' security deposit.
7. Disallowance of project expenses of Century Cement and Century Pulp Divisions.

Issue-wise Detailed Analysis:

1. Validity of Notice issued u/s 148 r.w.s. 147 of the I.T. Act, 1961:
The assessee challenged the validity of the notice issued under section 148, arguing that the reopening of the assessment was without jurisdiction as the conditions laid down in section 147 were not satisfied. The CIT(A) upheld the AO's decision, stating that the income had escaped assessment based on issues like loss on account of exchange fluctuation, income of units u/s 10B, interest on loans taken for new projects, commission payment, and provision for doubtful debts. The Tribunal found that the return was initially processed u/s 143(1) and later reopened with recorded reasons indicating income had escaped assessment, thus justifying the reopening under Explanation 2(c) of section 147, supported by the Supreme Court decision in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd.

2. Disallowance of loss due to Exchange rate fluctuation:
The AO disallowed a portion of the foreign exchange rate fluctuation loss claimed by the assessee, which was not paid during the year, deeming it a notional loss. The CIT(A) upheld this disallowance. However, the Tribunal referred to the Supreme Court decision in CIT vs. Woodward Governor (I) Pvt. Ltd., which allowed the deduction of such losses on the revenue side. Consequently, the Tribunal directed the AO to allow the loss of Rs. 47,01,720.

3. Income/receipts not derived from industrial units for claiming exemption u/s 10B:
The CIT(A) disallowed the exemption u/s 10B for certain incomes/receipts, including premium on transfer of import licenses, insurance claims, sundry credit balance written back, staff agreement deposit forfeiture, compensation received, and surplus on sale of assets. The Tribunal upheld the disallowance for these items based on earlier Tribunal orders. For CST reimbursement, the Tribunal agreed with the assessee's argument that it should not reduce profits, distinguishing it from the Bombay High Court decision in CIT vs. Dresser Rand India Pvt. Ltd.

4. Disallowance of interest u/s 36(1)(iii):
The AO disallowed interest of Rs. 30,20,699, capitalized in the books, related to the purchase of a capital asset. The CIT(A) confirmed this disallowance. However, the Tribunal referred to the Supreme Court decision in DCIT vs. Core Health Care Ltd., which allowed such interest as a deduction under section 36(1)(iii), even if the machinery was not used in the year of borrowing. The Tribunal decided this issue in favor of the assessee.

5. Disallowance of commission paid to M/s. L.K. Corporation:
The AO disallowed a commission payment of Rs. 1,50,000 to M/s. L.K. Corporation, and the CIT(A) upheld this disallowance based on earlier assessment years. The Tribunal restored the matter to the AO for reconsideration, consistent with the earlier Tribunal order.

6. Disallowance of forfeiture of employees' security deposit:
The AO disallowed the forfeiture of employees' security deposit of Rs. 1,87,167, and the CIT(A) confirmed this disallowance. The Tribunal upheld this decision, following the earlier year's Tribunal order.

7. Disallowance of project expenses of Century Cement and Century Pulp Divisions:
The AO disallowed project expenses of Rs. 2,04,477 related to new projects under construction. The CIT(A) upheld this disallowance, referencing decisions in CIT vs. J.K. Chemicals Ltd., Ciba of India Ltd. vs. CIT, and CIT vs. Tata Mills Ltd. The Tribunal, however, noted that similar expenses were allowed in earlier years and directed the AO to reconsider the issue in line with the earlier Tribunal order.

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