2014 (12) TMI 214 - AT - Income Tax

Tariff adjustment u/s 115JB deleted - Taxability of advance against depreciation (AAD) depreciation on land amortized - Advance against depreciation is reserve or not for computation of MAT u/s 115JB - Held that - Following the decision in ACIT, Range II, Faridabad Versus M/s. NHPC Limited 2014 (11) TMI 92 - ITAT DELHI - Advance against depreciation is an amount that is under obligation right from the inception as the same shall be adjusted in future, hence, cannot be designated as reserve - advance against depreciation is nothing but an adjustment by reducing the normal depreciation including in the future years in such a manner that at the end of the useful life of the plant the same shall be reduced to nil - assessee cannot use the advance against depreciation for any other purposes except to adjust the same against future depreciation so as to reduce the tariff in future years. Once AAD is considered as income as is being alleged by Revenue the obvious implication will be that such income in the Balance Sheet is a reserve. It can t be that AAD is an income and then it vanishes. Income has to be carried to the Balance Sheet and such income carried to Balance Sheet will form part of the Reserve . Since AAD has been held by Supreme Court is not a reserve, this contention of the Revenue can t be accepted Decided against revenue. Computation of book profit u/s 115JB on provision for gratuity, leave encashment and post-retirement benefits Held that - In Bharat Earth Movers Versus Commissioner of Income-Tax 2000 (8) TMI 4 - SUPREME Court it has been held that the liability incurred by the assessee under the Leave Encashment Scheme determined on actuarial valuation is an ascertained liability and cannot be considered as a contingent liability - the amount of such provision can be claimed as deduction only on actual payment and not on the simple creation of provision - in the computation of book profit u/s 115JB, deduction is available for such provision of ascertained liability revenue has not drawn attention towards any part of the provisions of section 115JB, which makes the provisions of section 43B(f) applicable to the computation of book profits - if the income under the normal provisions of the Act turns out to be more than the book profit u/s 115JB and the total income is to be computed as per the normal provisions, then no deduction for such provision would be admissible unless the amount of such provision is paid before the due date u/s 139(1) of the Act. Provision for loss in hedged transaction Held that - The loan was taken as a general purpose loan and not for purpose of acquisition of any asset - The finding returned by the CIT(A) remained uncontroverted by the revenue - as the loan was taken not for acquisition of any capital asset but on revenue account, the loss suffered on hedging for payment of interest and repayment of principal amount of loan in foreign currency is deductible as an ascertained liability relying upon CIT Vs. Woodward Governer India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT - such amount, being a provision for an ascertained liability, is deductible in the computation of income, both under the normal provisions and also u/s 115JB of the Act the order of the CIT(A) is upheld. Disallowance u/s 14A Computation of income under MAT provisions Held that - It can be seen from the assessee s balance sheet as on 31.03.2008 that the amount of Share capital with Reserves and surplus stands at ₹ 17,275.83 crore - the amount of Shareholders funds is far in excess of the amount of Investment yielding exempt income relying upon CIT Vs. Suzlon Energy Ltd 2013 (7) TMI 697 - GUJARAT HIGH COURT - there can be no question of disallowance of interest u/s 14A because the amount of Shareholders fund is much higher than the amount of Investments yielding exempt income - the disallowance on account of interest expense is to the tune of ₹ 19.65 crore - If such disallowance is deleted, the remaining amount of disallowance comes to ₹ 5.25 crores - the assessee itself voluntarily made disallowance of ₹ 17.89 crore u/s 14A - as the remaining amount disallowable as per rule 8D is less than the amount suo motu disallowed by the assessee, there is no need for making any further disallowance thus, the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of Tariff adjustment u/s 115JB.
2. Deletion of addition on account of Depreciation on land amortized u/s 115JB.
3. Deletion of addition on account of Provision for gratuity, leave encashment, and post-retirement benefits u/s 115JB.
4. Deletion of addition on account of Provision for doubtful and obsolescence in inventory u/s 115JB.
5. Confirmation of addition on account of 'Advance against depreciation' under normal provisions.
6. Deletion of addition on account of Provision for loss in hedged transactions for book profit u/s 115JB and normal provisions.
7. Deletion of disallowance u/s 14A in the computation of income under normal provisions and MAT provisions.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Tariff Adjustment u/s 115JB:
The assessee showed a tariff adjustment of Rs. 51.80 crore out of the sale of Rs. 1713.79 crore. The AO added back this amount to the book profit u/s 115JB, considering it not an ascertained liability. The CIT(A) reversed this action, relying on the order for the previous year. The Tribunal confirmed the deletion, following the precedent set in the assessment year 2005-06, as no distinguishing facts were presented.

2. Deletion of Addition on Account of Depreciation on Land Amortized u/s 115JB:
The assessee claimed depreciation on land amounting to Rs. 1.30 crore, with Rs. 1.00 crore debited to the Profit and Loss account. The AO added back this amount to the book profit u/s 115JB, stating no depreciation was admissible on land. The CIT(A) deleted this addition. The Tribunal upheld this decision, referencing its order for the assessment year 2004-05, where a similar addition was deleted.

3. Deletion of Addition on Account of Provision for Gratuity, Leave Encashment, and Post-Retirement Benefits u/s 115JB:
The assessee claimed deductions towards provisions for gratuity and leave encashment, supported by the Supreme Court judgment in Bharat Earth Movers Vs. CIT. The AO added back this amount in the computation of book profit u/s 115JB. The CIT(A) concurred with the assessee, and the Tribunal upheld this view, distinguishing between the normal provisions and the computation of book profit u/s 115JB, where such provisions are considered ascertained liabilities.

4. Deletion of Addition on Account of Provision for Doubtful and Obsolescence in Inventory u/s 115JB:
The AO added Rs. 7.74 crore towards provision for doubtful and obsolescence in inventory in the computation of book profit u/s 115JB. The Tribunal, referencing its decision for the assessment year 2004-05, overturned the CIT(A)'s order and allowed the Revenue's ground.

5. Confirmation of Addition on Account of 'Advance Against Depreciation' under Normal Provisions:
The assessee reduced sales by claiming that the advance against depreciation of Rs. 47.88 crore was not a revenue receipt. The AO treated it as a revenue receipt, upheld by the CIT(A). The Tribunal, referencing its previous orders and the Supreme Court judgment in the assessee's own case, held that the advance against depreciation cannot be treated as a revenue receipt. The AO was directed to verify the proper offering of this amount for taxation in the current year.

6. Deletion of Addition on Account of Provision for Loss in Hedged Transactions for Book Profit u/s 115JB and Normal Provisions:
The assessee provided for a loss of Rs. 22.99 crore on derivative exposure related to a loan not for the acquisition of any asset. The AO added this amount in the computation of book profit and normal income, considering it not an ascertained liability. The CIT(A) granted deduction, and the Tribunal upheld this view, referencing the Supreme Court judgment in CIT Vs. Woodward Governor India Pvt. Ltd., considering it an ascertained liability.

7. Deletion of Disallowance u/s 14A in the Computation of Income under Normal Provisions and MAT Provisions:
The AO computed disallowance u/s 14A by applying rule 8D, resulting in an additional disallowance of Rs. 7.01 crore. The CIT(A) deleted this disallowance. The Tribunal upheld this decision, referencing the Bombay High Court judgment in CIT Vs. HDFC Bank Ltd., and the Gujarat High Court judgment in CIT Vs. Suzlon Energy Ltd., which stated no disallowance of interest u/s 14A if the assessee's own capital exceeds the investments yielding exempt income.

Conclusion:
The appeals for the assessment year 2006-07 resulted in partial allowance for the Revenue and statistical allowance for the assessee. For the assessment year 2008-09, the Tribunal upheld similar decisions, providing directions for verification where necessary. The order was pronounced in the open court on 17.10.2014.