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TMI Blog2010 (4) TMI 886X X X X Extracts X X X X X X X X Extracts X X X X ..... ion method of accounting’ or to follow the Assessing Officer by following ‘percentage method of accounting’, that situation itself is sufficient to prove the bona fide of the assessee - revised return of income filed by assessee was in accordance with sub-section (5) of section 139 and, therefore, Assessing Officer was not justified in rejecting said return - in favour of the assessee Disallowance on account of administrative charges paid to HDFC as a revenue expenditure and treating the same as deferred revenue expenditure - Assessee-company paid certain amount as administrative charges on loan obtained from bank – Held that:- There was no material on record on basis of which it could be said that there was an in-built condition of liability for a number of years - it was not revenue’s case that assessee had incurred a liability to pay a larger amount than what it had borrowed at a future date - loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan is a liability and has to be repaid and, it is erroneous to consider a liability as an asset or an advantage - expenditure was made for securing the use of money for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 12 lakhs in addition to other payments like telephone, printing, etc. The Assessing Officer had held that the payment of Rs. 12 lakhs was excessive compared to any benefit derived from the service. He further held that the amount of only Rs. 3 lakhs per annum to be reasonable amount for the service done/rendered by the subsidiary company and had disallowed the balance amount of Rs. 9 lakhs by applying the provisions of section 40A(2) of the Act. After considering the submissions of the assessee, the CIT(A) deleted the disallowance made by the Assessing Officer by observing as under : "I have considered the Assessing Officer s reasoning and the learned counsels argument in this regard. It is seen that the Assessing Officer had not given any reasons as to why the rent of Rs. 12 lakhs paid by the assessee to the subsidiary company was regarded as excessive. He has merely observed that since the whole building is owned by the assessee-company itself there is very little logic in the arrangement of first receiving rent of Rs. 57 lakhs and then paying back a rent of Rs. 12 lakhs. The Assessing Officer had not said anything else as to why there is no logic in the arrangement of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on the basis of accounting standard VII of ICAI, was rejected by the Assessing Officer by following the judgment of ITAT in the case of JCT Ltd. v. Asstt. CIT [1998] 65 ITD 169 (Cal.). Before the CIT(A), the assessee followed the judgment of Bombay High Court in the case of CIT v. Lokhandwala Construction Industries Ltd. , wherein the Hon ble Bombay High Court upheld the stand of the assessee that interest on borrowings for the purpose of the business is allowable under section 36(1)( iii ) and it will not go to the work-in-progress. The CIT(A) followed the said judgment and directed the Assessing Officer to delete the disallowance of Rs. 9,88,03,025. 8. We have heard the learned representatives of the parties and perused the record. Since the CIT(A) followed the judgment of jurisdictional High Court in the case of Lokhandwala Construction Industries Ltd. and directed the Assessing Officer to delete the disallowance, we do not find any infirmity in the action of the CIT(A) and, hence, we uphold the order of CIT(A) on this count. 9. Ground No. 3 is against the action of CIT(A) in deleting the addition of Rs. 2,14,166 on account of payment towards superannuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uts restriction in allowing the deduction on account of superannuation fund that the deduction was not to be allowed unless such sum has actually been paid on or before the due date as defined in the Explanation below clause 5( a ) and sub-section (1) of section 36 of the Act. Since the due date for payment of contribution to provident fund being 31-5-1997, the payment is found to be made in time and, therefore, the CIT(A) deletion the disallowance made by the Assessing Officer. We find no infirmity in the order of CIT(A) and the same is hereby upheld. ITA Nos. 2665/M./04 and 2666/M./04 for assessment years 1998-99 and 1999-2000 - Appeals by revenue 12. Ground No. 1 is that the CIT(A) erred in directing the Assessing Officer to assess the income from completion method of accounting , and not on percentage method of accounting . 13. Briefly the facts of this ground are that the Assessing Officer noted that the assessee till assessment year 1996-97 followed completion method of accounting . The Assessing Officer was of the view that percentage method of accounting is proper method. To maintain consistency the Assessing Officer made assessment following percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of accounting , and not on percentage method of accounting . 19. This ground is identical to the ground No. 1 for assessment year 1998-99. Following the conclusions drawn in that ground in para No. 14, we confirm the order of the CIT(A) on the issue for this year also. 20. Ground No. 2 is that the CIT(A) erred in allowing the claim of Rs. 12,65,21,744 by way of interest under section 36(1)( iii ) of the Act. 21. This ground is identical to the ground No. 2 for assessment year 1998-99, therefore, following the conclusions drawn therein, we uphold the order of CIT(A) on this issue. ITA No. 6326/M./03 - Appeal by the assessee for assessment year 1997-98 22. Ground No. 1 reads as under : ( i )the CIT(A) grossly erred in upholding the Assessing Officer s order and thereby rejecting the revised return filed by the appellant, ( ii )the CIT(A) grossly erred in confirming the Assessing Officer s order and not accepting the computation of income under section 115JA of the Act at Rs. 5.07 crores, when the actual income as per completion contract method was only Rs. 4.81 crores. 23. The assessee is a public limited company carrying on the business of develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer was justified in rejecting the revised return filed by the assessee and was also justified to proceed to make assessment on the basis of the original return of income. The action of the Assessing Officer in making the assessment on the basis of the percentage of completion method is also justified because the assessee itself has maintained its accounts for the assessment year under consideration on the basis of that method. The fact that the assessee has been following some other method in the earlier years or in the later assessment years is not relevant for deciding the issue in assessment year under consideration. Accordingly, this ground of appeal of the assessee is dismissed." 24. The learned AR submitted that in earlier years for assessment years 1983-84 to 1987-88, the assessee has filed return of income on the basis of completion method of accounting . Said completion method of accounting followed by the assessee has been accepted by the ITAT by rejecting reference filed by the department. The learned AR further submitted that in assessment year 1989-90, the assessee succeeded before the ITAT on the issue of method of accounting. The learned AR further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn on the basis of completion method of accounting . 26.1 Let us see what is the relevant provision of section 139 is (5). The said section reads as under : "If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier." 26.2 What was contemplated by section 139(5), was filing of revised returns when the assessee "discovered" any "omission" or any "wrong statement". The word "omission" would connote "an unintentional act or neglect to perform what the law required"; the words "wrong statement" would include in its scope "a statement which was not false to the knowledge of the person making it"; and the word "discover" would take in its ambit "that which was hidden, concealed or unknown". The word discovers , connotes discovery of some omission or wrong statement in the return, of which the assessee was not aware at the time of filing of the original return. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting or to follow the Assessing Officer by following percentage method of accounting , that situation itself is sufficient to prove the bona fide of the assessee. The second reason for filing revised return of income was that the assessee wrongly calculated capital gain on 1810 shares of PPTL whereas in fact 1792 shares were sold. The Assessing Officer found that selling of 1792 shares was the correct fact. The Assessing Officer himself has utilized certain facts of the revised return while making assessment. There were bona fide omission and wrong statement in original return of income which was discovered by the assessee, therefore, the revised return of income filed by the assessee is in accordance with sub-section (5) of section 139 of the Act. Here, we would also like to refer one judgment of the Apex Court in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323 where in the issue before the Court was whether the appellant-assessee could make a claim for deduction other than by filing a revised return before Assessing Officer. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Income-tax Act to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. v. Asstt. CIT [2003] 86 ITD 315 , which directly deals with the issue. The CIT(A) noted that the ITAT has held that the expenditure has the effect for the period of loan. Following the said decision of ITAT, the CIT(A) upheld the order of Assessing Officer. 29. The learned AR submitted that on identical set of facts the CIT(A) in assessee s own case for assessment year 1996-97 has decided the issue after a detailed discussion in favour of the assessee. The learned AR further submitted that the CIT(A) has distinguished the judgment of the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. ( supra ) wherein the issue of debenture on discount, which was redeemable after a period of 10 years. The learned AR further submitted that the CIT(A) in assessment year 1996-97 has rightly held that the claim of the assessee is a revenue expenses and the same is allowable in view of the judgment of the jurisdictional High Court in the case of CIT v. Associated Cement Cos. Ltd. [2001] 249 ITR 3 (Bom.) wherein it has been held that commitment charges paid to a Financial Institution is to be held as revenue expenditure. In case of India Cement Ltd. v. CIT [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of loss which has not gone out of the assessee s pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro. A contingent liability that may arise in future is, however, not expenditure . It would also cover not just a one-time payment but a liability spread out over a number of years. The Court further held that when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. It is not necessary to go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed, at a future date. From the facts of the case, we noticed that the case under considered is covered by the judgment of the Apex Court in the case of India Cement Ltd. ( supra ) wherein it was held that a loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan is a liability and has to be repaid and, it is erroneous to consider a liability as an asset or an advantage. The nature of the expenditure incurred in raising a loan would not depend upon the nature of purpose of the loan. A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may, after raising the loan, change its mind and spend it on securing capital assets. Therefore, the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was the revenue expenditure or capital expenditure that ( a )the loan obtained was not an asset or advantage of an enduring nature; ( b )the expenditure was made for securing the use of money for a certain period; and ( c )it was irrelevant to consider the object with which the loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Assessing Officer has, accordingly, taxed the amount of Rs. 6,19,02,450 as business income for assessment year 1997-98. The CIT(A) discussed this issue at pages 12 to 17 of his order and held that the entire income is taxable as business income and the Assessing Officer s action in taxing the business income at Rs. 6,19,02,450 as against assessee s claim of capital gains of Rs. 5,75,33,970 in respect of the alleged conversion of capital asset into stock-in-trade is upheld. 33. The learned AR submitted that in assessment year 1993-94, the assessee converted shares of subsidiary company from investment to stock-in-trade. The conversion done at fair market value and, accordingly, capital gains of Rs. 6,19,02,450 was calculated and shown in computation of total income for assessment year 1993-94 and put a note on the said computation reads as under : "In view of the provisions of section 45(2) of the Income-tax Act, 1961, profit on conversion or investments of shares held in a subsidiary company, Prabhadevi Properties Trading Co. Ltd., into stock-in-trade would be chargeable to tax as the income of the previous year in which such stock-in- trade is sold or otherwise tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction is a business transaction and not conversion of investment into stock-in-trade or otherwise. 34. We have heard the learned representatives of the parties and perused the record. The admitted facts of the case under consideration are that the assessee has converted shares of subsidiary companies from investment to stock-in-trade in assessment year relevant to assessment year 1993-94. In assessment year 1993-94, this conversion has been accepted by the revenue which is evident from the material on record, relevant assessment order and order passed by the Assessing Officer under section 154 of the Act. In the year under consideration, i.e., assessment year 1997-98, the assessee has sold the said shares, which were converted from investment into stock-in-trade in assessment year 1993-94. On the basis of admitted facts, the question to be examined in assessment year 1997-98 is whether the Assessing Officer can examine the nature of transaction in the year of sale, i.e., assessment year 1997-98, which has already been converted from investment to stock-in-trade in earlier year assessment year 1993-94. In this connection, we would like to refer the relevant section, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch envisage existence of two different persons, transferor and transferee while in the act of conversion, there are not two persons and non gains arise on the person making the conversion. Thus, said difference escaped assessment altogether. As there was lacuna in the statutory provisions where the conversion of investment into stock-in-trade was not transferred and, therefore, was not subject to capital gain. This lacuna has been plugged by insertion of sub-clause ( iv ) in section 2( 47 ) defining transfer and sub-section (2) in section 45 providing for charging of capital gains. Sub-clause ( iv ) of section 2( 47 ) enlarged the definition of transfer so as to include such conversion and sub-section (2) of section 45 brought the said difference to charge as capital gains. It is provided in sub-section (2) that when such conversion takes place and subsequently when said asset is sold as stock-in-trade, the difference in question would be chargeable to tax as the income of the previous year in which ultimate sale took place. A Circular No. 397, dated 16-10-1984 [1985] 152 ITR (St.) 29, Explanatory Notes on the provisions of the Taxation (Amendment) Act, 1984, explained the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by taking the fair market value of the capital assets on the date on which it was converted or treated as stock-in-trade as the same is to be deemed as full value of the consideration received as a result of the transfer of capital assets, can be examined only in the year of conversion, i.e., assessment year 1993-94. Now what is to see in the year of sale, assessment year 1997-98 is only chargeability of capital gain and business income. The Assessing Officer did not dispute about the calculation of Rs. 6,19,02,450. He disputed only that Rs. 6,19,02,450 shown by the assessee as the capital gain is a business profit as he was of the view that conversion was non-genuine. The Assessing Officer has tried to examine the genuineness of transaction and its conversion from investment to stock-in-trade in the year when the asset was sold as stock-in-trade. In view of the above discussion, we are of the view that the genuineness of the transaction or genuineness of conversion of assets from investment to stock-in-trade which has already converted in earlier year and not during the year, cannot be examined in the year of the sale of stock-in-trade. It can be examined only in the year when ..... X X X X Extracts X X X X X X X X Extracts X X X X
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