2022 (2) TMI 42 - AT - Income Tax

Reopening of assessment u/s 147 - Disallowance of custom duty paid - deduction of custom duty on payment basis as provided under the provisions of Section 43B - Whether complete evidence of payment of custom duty in the relevant previous year along with bills of entries ? - HELD THAT - The assessee has claimed the deduction for the custom duty in the proceedings under Section 143(3) of the Act first time before the ITAT which was admitted and allowed subject to the verification by order dated 3rd December 2004. Thus, the question arises, the claim which have been made by the assessee in the proceedings under Section 143(3) of the Act, can the assessee made a similar claim in the income escapement proceedings. Reassessment proceedings under Section 147 of the Act are for the benefit of the revenue and not for the assessee as held by the Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. 1992 (9) TMI 1 - SUPREME COURT . It is not for the taxpayer to convert the reassessment proceedings in to a regular assessment proceeding and agitate issues which were concluded in the original assessment proceedings. The Income tax liability cannot be reduced to a figure less than that determined in the original assessment. The claim of the assessee for the custom duty is not applicable in the given facts and circumstances for the reason that the present proceedings before us are under Section 147 of the Act which cannot extend any benefit to the assessee. Accordingly, before going into the intricacies whether the assessee is eligible for the custom duty paid by it as deduction or not is not within the provisions of law. Once, a claim is not admissible, we refrain ourselves from adjudicating the issue raised by the assessee on the admissibility of custom duty paid by it. Hence, the ground of appeal of the assessee is dismissed. Netting of interest by AO while computing deduction u/s 80IA - HELD THAT - As in original assessment proceeding under section 143(3) of the Act claim of the assessee for deduction on other income under section 80IA was disallowed by the AO. The mater reached to this tribunal 2004 (12) TMI 289 - ITAT AHMEDABAD-B as confirmed the stand of the AO that other income should be excluded from the calculation of the deduction under section 80IA We hold that the claim of the assessee for the netting of interest income while computing the deduction under section 80-IA of the Act is not maintainable in the given facts and circumstances for the reason that the present proceedings before us are under Section 147 of the Act which cannot extend any benefit to the assessee. Accordingly, without going into the intricacies whether the assessee is eligible for the netting of interest for computing the deduction under section 80-IA of the Act, we hold that the claim of the assessee is not maintainable. Even on merit we note that the ITAT on the previous occasion has set aside the issue to the file of the AO in 2011 (10) TMI 723 - ITAT AHMEDABAD with the direction to establish the nexuses between the interest income viz a viz the interest expenses. However, we note that assessee has not establish such nexuses based on the documentary evidence. Thus it appears to us, the assessee even on merit, fails. Hence, the ground of appeal of the assessee is dismissed. Disallowance of the depreciation on the amount of interest capitalized on machine - AO found that there was no payment of the interest to the ICICI bank by the assessee and amount of interest was converted into the principal amount of loan from ARCIL thus the impugned amount of interest expenses cannot be capitalized on the machines and cannot be subject to depreciation - HELD THAT - There is no dispute to the fact that the payment was made by the assessee towards interest after converting the same as fresh loan from ARCIL - payment of interest to the ICICI Bank by way of acquiring the fresh loan is a valid mode of payment. Indeed, such fresh loan shall be treated as principal amount and the repayment of the same will be made over a period of time of the loan. However, the accounting adjustments the books of accounts for the interest expenses and repayment of the loan along with interest would have been made the regular course. There is no allegation by the revenue that such accounting adjustments have not been made in the books of accounts - the assessee has made the payment of interest expenses on the loan borrowed from ICICI bank by converting the same into of fresh loan from ARCIL. Accordingly we hold that, the assessee cannot be denied the depreciation allowance on the amount of interest capitalised on the machines. Consequently, set aside the finding of the learned CIT-A, and direct the AO delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Addition of prior period expenses - AO observed that the assessee should have claimed such expenses in the year to which it pertains as per the mercantile system of accounting - HELD THAT - The genuineness of the expenses have nowhere been doubted by the authorities below. Thus it is transpired that the expenses claimed by the assessee were incurred for the purpose of the business in the earlier year and the same were eligible for deduction in that particular assessment year in which such expenses were incurred. Now the question arises the expenses genuinely incurred by the assessee in the earlier year could be disallowed in the year under consideration when such expenses were claimed. The answer stands in affirmative. It is for the reason that the expenses there is no loss to the revenue as there is no change in the rate of tax. See NAGRI MILLS CO. LTD. 1957 (9) TMI 30 - BOMBAY HIGH COURT - e find difficult to convince ourselves with the finding of the authorities below. Accordingly, we set aside the decision of the Ld. CIT-A, and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed. Non-payment of outstanding dues under the provisions of Section 41(1) - assessee before Ld. CIT-A submitted that outstanding amount relates to purchase of motor car, therefore, the provision of Section 41(1) will not apply as the same is capital in nature - HELD THAT - Provisions of Section 41(1) reveals that it is applicable with regard to an allowance or deduction in respect of loss, expenditure or trading liability incurred by the assessee. But the depreciation claimed by the assessee, though it is an allowance, but it is not in respect of loss, expenditure or trading liability as envisaged under the provisions of Section 41(1) of the Act. Accordingly, we are of the view that such outstanding liability against the car cannot be treated as trading liability and therefore the same is outside the purview of the provisions of Section 41(1) of the Act. In holding so, we draw support and guidance from the judgement of Hon ble Supreme Court in the case of Nectar Beverages (P.) Ltd. 2009 (7) TMI 5 - SUPREME COURT . Once a transaction, representing loan against the capital assets, is not a trading liability as envisaged under the provisions of Section 41(1) of the Act. The same cannot be charged to tax on the reasoning that it has ceased to exist in the books of accounts. Accordingly we are not convinced with the finding of the authorities below. Thus, we set aside the finding of the Ld. CIT-A, and direct the AO to delete the addition made - Decided in favour of assessee. Disallowance of depreciation in respect of unit 1 on the reasoning that it was not in operation - HELD THAT - On perusal of the provisions of Section 32 of the Act, it is one of the precondition for claiming the depreciation on a particular asset that it should be used for the purpose of the business. However, the Hon ble courts have interpreted the word used by holding that assets which are ready to use shall be considered as used for the purpose of the business. In other words, the assets which are not actively used but used passively are also eligible for depreciation under the provisions of section 32 of the Act. In holding so we draw support and guidance from the Judgment of Hon ble Delhi High Court in the case of Oawal Agro Mills Ltd. 2010 (12) TMI 947 - DELHI HIGH COURT The assets deployed in the unit No. 1, though not in operation during the year, but assets were previously used and ready to use for the purpose of the business. Thus, it can be said that there was passive use of these assets. Assets used unit No. 1 became the part of the block of assets and lost their individual identity. Accordingly, the assets deployed in unit No. 1 cannot be segregated for the purpose of the depreciation. These assets will remain part of the block of assets and therefore would be entitle for depreciation even in a situation that assets were not used for a particular year for the purpose of the business. Accordingly, we set aside the finding of the Ld. CIT-A, and direct the AO to delete the disallowance made by him. Hence, the ground of appeal of the assessee is allowed. Addition of closing value of raw materials, spares, WIP and finished goods written off on account of obsolescence - AO disregarded the contention of the assessee by observing that there was no report furnished by the assessee of an expert suggesting that the impugned raw materials, stores and spares, working progress etc. either have nil value or negligible value - HELD THAT - Before we touch the issue whether these items were known salable/nonmoving, it is pertinent to note that if the deduction in the closing stock is denied which will certainly enhance the profit of the assessee. But, the same closing stock will become the opening stock in the subsequent year and the profit of the subsequent year will reduce by the amount of such claim of the assessee. Thus, we note that there will not be any impact on the income of the assessee if we see from the overall position. The year under dispute, the income of the assessee will get enhance and the income of the assessee by the same amount will get the decrease in the next year. Thus, overall there will not be any impact on the taxable income of the assessee on account of such adjustment in the value of the closing stock. We also note that the Hon ble Supreme Court in the case of Mahindra Mills Ltd 1975 (3) TMI 1 - SUPREME COURT has held that the closing stock of the year will become the opening stock of the next year hence the same telescoped - in our view no addition representing the adjustment in the value of closing stock is warranted. The stock has been written off from the books accounts in systematic manner by the approval of the Board of Directors. Therefore, all these details cannot be brushed aside - we hold that the assessee cannot be denied the deduction in the value of closing stock on account of non-moving/unsaleable items. Thus we set aside the order of the Ld. CIT-A, and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed. Addition on account of non-ITA payment of employees contribution towards the Employees Provident fund and ESI which was paid within the grace period - HELD THAT - Admittedly, the assessee is required deposit the employee s contribution towards the PF/ESI within the time specified under the respective Act. If it is not done so, the same is treated as income of the assessee under the provisions of Section 2(24)(x) read with Section 36 (1)(va) of the Act. Under the provision of PF and ESI Act, the period for making the payment has been specified within 15 days from the end of the month in which salary of the assessee became due. However, there has been given the grace period of 5 days under the relevant Act for making the payment of employee s contribution towards the PF/ESI. Therefore the assessee is liable to deposit the employee s contribution on or before 20th day of the month from the close of the month in which the salary was due for payment. Therefore in our considered view grace period of 5 days should also be allowed to the assessee as provided under the respective Act. See AMOLI ORGANICS (P) LTD. 2013 (11) TMI 971 - GUJARAT HIGH COURT - thus we direct the AO to delete the addition to the extent of amount of PF/ESI deposited within grace period. Hence the ground of appeal of the Assessee is allowed in part. Depreciation for an amount on the written down value of the fixed assets - HELD THAT - At the outset we note that impugned dispute for the depreciation on the written down value was emanating from the assessment year 2002-03 and onwards. Admittedly, the ITAT for the assessment year 2002-03 to 2005-06 was pleased to allow depreciation on the addition of the fixed assets which were in dispute.Once the ITAT has allowed the depreciation on the addition of the fixed assets in the initial assessment year, the question of making the disallowance of the depreciation on the same set of assets the subsequent year does not arise. Hence we set aside the finding of the Ld. CIT-A, and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed. Addition on account of disallowances of provision for bad and doubtful debts - As bad and doubtful debt were not credited in P L account. Thus, the AO in view of submission of the assessee disallowed the same and added to the total income of the assessee - HELD THAT - AR appearing on behalf of the assessee has not brought anything on record in order to comply the provisions as discussed above. Accordingly, the mere fact that bad debts has been written off in the books of accounts shall not extend any help to the assessee in the given facts and circumstances. Thus, we hold that there is no infirmity in the order of the authorities below. Accordingly, we confirm the same. Hence the ground of appeal of the assessee is hereby dismissed.

Summary

Issues Involved:
1. Deduction of custom duty under Section 43B of the Income Tax Act.
2. Netting of interest income while computing deduction under Section 80IA.
3. Disallowance of depreciation on interest capitalized on machinery.
4. Disallowance of prior period expenses.
5. Addition under Section 41(1) for outstanding dues.
6. Disallowance of depreciation on closed unit.
7. Addition to closing stock for obsolete inventory.
8. Disallowance of employees' contribution to PF/ESI.
9. Disallowance of depreciation on tangible assets.
10. Disallowance of provision for doubtful debts.

Detailed Analysis:

1. Deduction of Custom Duty under Section 43B:
The assessee claimed a deduction for custom duty paid under Section 43B, which was initially allowed by ITAT subject to verification. However, in the reassessment proceedings under Section 147, the AO and CIT-A denied the deduction, stating that reassessment proceedings are for the benefit of the revenue and not for the taxpayer. The Tribunal upheld this view, dismissing the appeal.

2. Netting of Interest Income under Section 80IA:
The assessee sought to net interest income against interest expenses while computing deduction under Section 80IA. The AO and CIT-A disallowed this, and the Tribunal upheld the decision, noting that the assessee failed to establish a nexus between interest income and expenses. Additionally, the Tribunal emphasized that reassessment proceedings cannot benefit the taxpayer.

3. Disallowance of Depreciation on Interest Capitalized:
The assessee capitalized interest on machinery acquired through a loan. The AO disallowed depreciation on this interest, which was confirmed by CIT-A. The Tribunal reversed this decision, allowing the depreciation, stating that the payment of interest through a new loan is a valid mode of payment.

4. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses, which was upheld by CIT-A. The Tribunal allowed the deduction, citing that the genuineness of expenses was not doubted and referencing the Bombay High Court's judgment in CIT vs. Nagri Mills Co. Ltd.

5. Addition under Section 41(1) for Outstanding Dues:
The AO added an outstanding liability for a car under Section 41(1), which was confirmed by CIT-A. The Tribunal reversed this, stating that the liability was capital in nature and not a trading liability, thus outside the scope of Section 41(1).

6. Disallowance of Depreciation on Closed Unit:
The AO disallowed depreciation for a closed unit, which was upheld by CIT-A. The Tribunal reversed this, stating that assets ready for use qualify for depreciation and that assets in a block lose their individual identity.

7. Addition to Closing Stock for Obsolete Inventory:
The AO added back the value of obsolete inventory, which was confirmed by CIT-A. The Tribunal reversed this, noting that the closing stock adjustment would neutralize in the subsequent year's opening stock and referencing the Supreme Court's judgment in Mahindra Mills Ltd vs. PB Desai.

8. Disallowance of Employees' Contribution to PF/ESI:
The AO disallowed late payments of employees' PF/ESI contributions, which was upheld by CIT-A. The Tribunal allowed the deduction for payments made within the grace period, referencing the Gujarat High Court's judgment in CIT vs. Amoli Organics Pvt. Ltd.

9. Disallowance of Depreciation on Tangible Assets:
The AO disallowed depreciation on certain assets, which was partly confirmed by CIT-A. The Tribunal allowed the depreciation, referencing its own decisions in earlier years where the additions to fixed assets were accepted.

10. Disallowance of Provision for Doubtful Debts:
The AO disallowed the provision for doubtful debts, which was confirmed by CIT-A. The Tribunal upheld this, noting that the assessee failed to show that the debts were previously credited in the profit & loss account as required under Section 36(2).

Conclusion:
The Tribunal provided relief to the assessee on several issues, particularly regarding depreciation and prior period expenses, while upholding the revenue's stance on custom duty deduction and netting of interest income. The decisions were guided by established legal principles and precedents.