2008 (9) TMI 399 - AT - Income Tax

Disallowance of interest and administrative expenses u/s 14A - Valuation of Closing Stock - Computation of book profits u/s 115JB. Disallowance of interest and administrative expenses u/s 14A - claimed exemption u/s 10(33) - CIT(A) deleted the expenditure incurred for earning dividend income u/s 14A - HELD THAT - We are of the view that the order of the ld CIT(A) is to be upheld on this issue. These investments were made in the earlier years and not during the year under consideration. The assessee is having sufficient own funds and also interest-bearing funds. In the absence of any evidence to show that the assessee had made the investment during the year under consideration out of interest-bearing funds, we have no reason to disturb the order of the learned first appellate authority on this point. The appeal by the Revenue, hence, on this ground fails and it is dismissed. Valuation of Closing Stock - CIT(A) in directed the AO to make adjustments in the opening stock when addition is made on account of unutilized portion of Cenvat to the closing stock - assessee was following exclusive method for accounting duty and was forced to adopt an increased valuation in its closing stock on account of application of s. 145A - HELD THAT - Sec. 145A, mandates that the changes on account of adjustments mentioned therein have to be given effect on purchase, sale of goods and inventory. Therefore, in our opinion, the decision of the Hon'ble Delhi High Court in the case of Mahavir Aluminium Ltd. 2007 (11) TMI 41 - HIGH COURT OF DELHI would be squarely applicable on the facts. The Hon'ble Delhi High Court was dealing with application of s. 145A and clearly held that when on account of application of that section a change is per se forced upon the assessee in the valuation of its closing stock, a corresponding adjustment in opening stock has to be carried out for consistency - Therefore, following the decision of the Hon'ble Delhi High Court, we are of the opinion that the learned CIT(A) was justified in directing the AO to make corresponding adjustments in the opening inventory also. Appeal of the Revenue on ground No. 2 therefore stands dismissed. Computation of book profits u/s 115JB - assessee is aggrieved that learned CIT(A) approved the decision of the AO that assessee's book profits for the purpose of computing MAT liability under s. 115JB of the Act need not be reduced by Rs. 5,62,27,445, which according to the assessee was brought forward losses of the amalgamating company - HELD THAT - There is no discussion in the assessment order nor in the order of the learned CIT(A) as to whether balance considered by the assessee as unabsorbed loss remaining after giving effect to amalgamation, which it deducted from its net profit, comprised of unabsorbed depreciation or unabsorbed business loss. There is also no finding whether there was any unabsorbed depreciation at all - The Explanation (iii) to sub-s. (2) of s. 115JB clearly debars any such deduction if unabsorbed depreciation is nil. Hence, though the assessee is eligible for set off based on the revised accounts, it is necessary to verify whether the claim has been correctly made - Therefore, we set aside the orders of the learned CIT(A) as well as the AO regarding the computation of book profits of the assessee u/s 115JB and direct the AO to consider assessee's claim for deduction of loss of the amalgamating company remaining unabsorbed to the extent allowed by Expln. (iii) to sub-s. (2) of s. 115JB. Ground number one of the assessee is allowed for statistical purposes. In the result, appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:

1. Deletion of expenditure incurred for earning dividend income under Section 14A of the IT Act, 1961.
2. Adjustments in the opening stock when addition is made on account of unutilized portion of Cenvat to the closing stock.
3. Computation of book profits for the purpose of computing MAT liability under Section 115JB of the IT Act.

Detailed Analysis:

Issue 1: Deletion of Expenditure Incurred for Earning Dividend Income under Section 14A of the IT Act, 1961

The Revenue objected to the CIT(A)'s order, which deleted the expenditure incurred for earning dividend income under Section 14A of the IT Act, 1961. The AO had disallowed a portion of interest and managerial expenses, attributing them to the earning of exempt dividend income. The assessee argued that the investments in UTI were made from its own funds and not from borrowed funds, and no expenses were incurred during the year to earn the said dividend. The CIT(A) deleted the disallowance, noting that the AO did not substantiate the claim that investments were made out of borrowed funds. The Tribunal upheld the CIT(A)'s order, stating that there was no evidence to show that the investment during the year was made out of interest-bearing funds. Hence, the Revenue's appeal on this ground was dismissed.

Issue 2: Adjustments in the Opening Stock when Addition is Made on Account of Unutilized Portion of Cenvat to the Closing Stock

The Revenue objected to the CIT(A)'s direction to the AO to make adjustments in the opening stock when an addition is made on account of the unutilized portion of Cenvat to the closing stock. The AO had added back the Cenvat credit to the closing stock value but did not make a corresponding adjustment to the opening stock. The CIT(A) directed the AO to make corresponding adjustments in the opening stock, following the principles of Section 145A of the Act. The Tribunal agreed with the CIT(A), noting that Section 145A mandates adjustments for tax, duty, cess, or fee on purchases and sales of goods and inventory for determining income under the head "Profits and gains of business or profession." The Tribunal found that the decision of the jurisdictional High Court in Melmould Corporation did not deal with the application of Section 145A. The Tribunal followed the decision of the Delhi High Court in Mahavir Aluminium Ltd., which held that adjustments for Section 145A should be made for all items mentioned in the section for consistent results. Therefore, the Revenue's appeal on this ground was dismissed.

Issue 3: Computation of Book Profits for the Purpose of Computing MAT Liability under Section 115JB of the IT Act

The assessee was aggrieved by the CIT(A)'s decision that the assessee's book profits for computing MAT liability under Section 115JB need not be reduced by Rs. 5,62,27,445, which were brought forward losses of the amalgamating company. The assessee argued that the amalgamation scheme sanctioned by the Bombay High Court had a retrospective effect from 1st Jan., 2001, and the losses of the amalgamating company should be set off against the assessee's profits. The AO did not accept this argument, stating there was no express provision in the statute for such a deduction. The CIT(A) upheld the AO's decision, noting that the assessee had prepared two sets of accounts, one for the Companies Act and another for the IT Act, which was against the ratio laid down by the Supreme Court in Apollo Tyres Ltd.

The Tribunal noted that the assessee had revised its computation for MAT liability after receiving the High Court's order. The Tribunal found that the second set of accounts prepared by the assessee was in accordance with the Companies Act. The Tribunal also noted that the proviso to Section 115JB(2) allowed for the preparation of separate annual accounts. However, the Tribunal remitted the matter back to the AO to verify whether the deduction claimed by the assessee complied with the conditions specified in Explanation (iii) to Section 115JB(2), which allows deduction of the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books of account. Therefore, the Tribunal set aside the orders of the CIT(A) and the AO regarding the computation of book profits and directed the AO to reconsider the assessee's claim. The assessee's appeal was partly allowed for statistical purposes.