9911796707
TMI Blog2015 (4) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... s change of opinion. Therefore, to that extent of direction of the CIT given to Assessing Officer for disallowing the amounts of 5,84,80,000/- on amount of interest payable to IDBI and on 985.39 Lakhs on amounts payable to IFCI, which were indeed converted into equity cannot be approved. Addition of liquidated damages - CIT gave a finding that an amount of 194.63 Lakhs representing liquidated damages were allowed in earlier years as a deduction and hence provisions of Section 41(1) applies to the above amount - Held that:- we are unable to understand how Ld. CIT could give a finding that liquidated damages were allowed. Provisions of I.T.Act do not permit payment of interest or any penalty thereon in the form of liquidated damages, unless they are paid under the provisions of Section 43B. As seen from the computation of earlier years, out of total claim payable by assessee, assessee charged part amounts in the P Financial Expenses and part of it was deferred. The amounts were disallowed in the computation of Income Tax as ‘the amounts not paid’. As seen from the order of CIT, he has not given any finding that the interest was allowed in earlier years. Therefore, we are of the opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax erred while proposing the addition of Liquidate damages ₹ 194.63 Lacs as a prior period item by way of crediting to P&L A/c U/s.41(1) under normal provision of the Income Tax Act, 1961. 2. The Commissioner of Income Tax erred while proposing the addition of prior period items ₹ 2,828.32 Lacs to book profit U/s.115JB of the Income Tax Act, 1961. 3. The Commissioner of Income Tax erred while proposing the addition of outstanding interest payable to IDBI ₹ 584.80 Lacs and IFCI ₹ 985.39 Lacs under Section. 43B of the Income Tax Act, 1961. 4. The assessee may add, alter, or modify or substitute any other points to the Grounds of appeal at any time before or at the time of hearing of the appeal". 2. Briefly stated, assessee-company filed its return of income admitting income at ₹ 1,79,90,895/- (before set-off of loss) under the normal provisions of Income Tax Act, 1961 and income of ₹ 17,05,76,352/- under the provisions of Section 115JB of the Act. Assessing Officer completed the assessment u/s.143(3) on 15-07-2009 determining income at NIL after set-off of brought forward losses and accepting the income returned under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Coming to the issues taken up by Ld.CIT, on the issue of taxability of prior period income of ₹ 28,28,29,474/- and u/s.41(1), the CIT directed that an amount of ₹ 194.63 Lakhs representing liquidated damages should be brought to tax under the normal provisions of the IT Act. However, the CIT gave direction to include the entire amount of prior period income for the purpose of Section 115JB computation and directed the Assessing Officer to adopt the base figure of ₹ 37,78,82,427/- as against base figure of ₹ 17,05,86,352/- adopted by assessee in its computation. 6. Coming to the issue of disallowance u/s.43B, assessee's claim of deemed payment of ₹ 5,84,80,000/- payable to IDBI which was converted into equity and similar amount of ₹ 985.39 Lakhs payable to IFCI which was also converted into equity was not allowed and directed Assessing Officer to disallow the above amounts u/s.43B, relying on the CDBT Circular No.7/2006 dt.17-07-2006. Assessee is in appeal against the directions given by CIT both under normal computation as well as under the provisions of Section 115JB. 7. Ld.Counsel referring to the Paper Book filed in this regard stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Book placed on record. As far as the issue of expenditure of interest is concerned, the Assessing Officer has enquired vide his letter dt.03-07- 2009 and assessee replied vide letter dt.09-07-2009 including the detailed note on the claim of interest u/s.43B. Submissions of assessee are as under: "The claim of Interest ₹ 584 lacs paid to IDBI for the asst. year 2006-07 previous year 2005-06. The Company had debited an amount of ₹ 27,63,75,174/- to Profit & Loss Account during the previous year 2004-05 for Assessment Year 2005-06 towards interest and other financial charges including interest on term loans and not claimed in Income tax return under Sec.43B due to non payment of the same. IDBI on Term Loan 15,13,41,984 IDBI on working capital 5,23,16,720 IFCI 7,27,16,470 27,63,75,174 The company had made representations to Financial Institutions for the restructure of Term liabilities of principal and overdue interests up to 31.3.2005 keeping in view of the difficult financial position. IDBI has restructured the term liabilities of the Company up to a cut off date i.e., 31st March, 2005 with reduced rate of interest @ 8%. Accordingly, the over due int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to loans and borrowings but not to equity. In view of this, the CIT's reliance on the Board circular so as to reject assessee's claims of constructive payment of above amounts cannot be approved. Since this issue was also examined by the Assessing Officer in the course of assessment proceedings and having accepted as a constructive payment, the opinion of the CIT can only be considered as change of opinion. Therefore, to that extent of direction of the CIT given to Assessing Officer for disallowing the above amounts vide para 11 & 12 of ₹ 5,84,80,000/- on amount of interest payable to IDBI and on ₹ 985.39 Lakhs on amounts payable to IFCI, which were indeed converted into equity cannot be approved. To that extent, the directions in para 11 & 12 of Ld.CIT are set aside. 14. Coming to the issue of addition of liquidated damages, Ld.CIT gave a finding that an amount of ₹ 194.63 Lakhs representing liquidated damages were allowed in earlier years as a deduction and hence provisions of Section 41(1) applies to the above amount. It was the contention of assessee that this amount has never been claimed as deduction. It was further submitted that interest and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue, on the pretext of amounts are not tallying as was done in consequential order. 16. The last issue to be considered is about the direction of the CIT on the inclusion of prior period income of ₹ 28,28,29,474/- under the provisions of Sec.115JB. During the year, assessee got waiver of interest and also conversion of some of the outstanding amounts to equity under the restructuring scheme with the banks. Consequently, assessee has written back an amount of ₹ 28,28,29,474/- in the P&L A/c as prior period income, generally known as below the line adjustments. Assessee's profit before taxation as per P&L A/c stood at ₹ 17,05,76,352/-. This is the amount which was adopted by assessee for the purpose of 115JB and also accepted by the Assessing Officer in the order u/s.143(3). However, in the P&L A/c after arriving at the profit before taxation, assessee made various provisions for income tax, deferred tax liability and arrived at profit after taxation of ₹ 9,50,52,953/-. Thereafter, assessee added amount of prior period adjustment at ₹ 28,28,29,474/-. By further increasing the balance from the brought forward profit of ₹ 80,81,17,143/-, profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the above discussion that even extraordinary items and prior period adjustment have to be taken to the P&L a/c. The starting point adopted as above has to be increased by the items specified in cls. (a) to (f) of Explanation 1 and has to be reduced by the items specified in cls.(i) to (vii) given in the said Explanation. No other adjustment is permitted by law as laid down by the Supreme Court in the case of Apollo Tyres. None of the clauses given in the Explanation provides for the increase or decrease of the book profits by extraordinary items and prior period adjustments. The AS-5 merely says that prior period and extraordinary items should be separately disclosed along with their nature so that their impact on the operating results can be properly gauged. It does not say that they are not part of the P&L a/c. Similarly, the Guidance Note issued by the ICAI also does not help the case of the assessee, as it merely says that sometimes, appropriation account is included as a separate section of the P&L a/c. But, as discussed above, Parts II and III of Sch. VI to the Companies Act do not speak of appropriation account at all. In the light of the above discussion, it was in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot; profit or loss can be perceived. Two approaches have been indicated in paragraph 19 of the said Accounting Standard (AS-5). The normal approach is to include the prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of the current net profit or loss. The object is to indicate the effect of such items on the current profit or loss. While calculating the tax under section 115JA of the Income-tax Act, 1961, the assessee computed the net profit as per the profit and loss account after reducing the prior period expenses/extraordinary items and profit from generation of power plant. According to the Revenue, the amount of the prior period expenses/extraordinary items could not be deducted for arriving at the net profit for the purpose of section 115JA. According to the assessee, the net profit was to be computed on the basis of the profit and loss account which, in turn, was to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The assessee contended that such a computation of net profit, in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf that the accounts are maintained in accordance with the provisions of the 1956 Act. Beyond that, the assessing authority has no jurisdiction to go further into the accounts. Held, allowing the appeal, that in computing the net profit the assessee had adjusted the prior period expenses and offered the book profit for assessment. No exception could be taken to the course adopted by the assessee in adjusting the prior period expenses in computing the net profit". 18. In view of the above, it is very clear that the computation has to start from the final figure of P&L A/c and necessary adjustments as provided in Explanation to Section 115JB has to be considered, while computing the book profit for the purpose of 115JB. Thus, in the given case, the amount to be considered for starting the computation is ₹ 56,59,99,569/- and not ₹ 17,05,76,352/- as accepted by the Assessing Officer. There seems to be no inquiry under the provisions of Section 115JB and therefore to that extent, order of the Assessing Officer is not only erroneous on the facts but also on the principles of law. We therefore uphold invoking the jurisdiction by CIT on the order of Assessing Officer. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
