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TMI Blog2011 (7) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961 on 22.03.2004 and the taxable income was determined at ₹ 4,34,80,620 u/s. 115JB of the Act. Later it was noticed by the Assessing Officer that an unascertained liability to the extent of ₹ 48,21,346 debited towards provision for doubtful debts was not added to the income computed u/s. 115JB of the Act. Accordingly notice u/s. 148 was issued on 31.3.2006 to reopen the assessment. The assessee objected reopening of assessment. Not agreeing with the objection of the assessee, the Assessing Officer completed the re-assessment by adding ₹ 48,21,346 towards provision for doubtful debts since this is an unascertained liability. On appeal, the CIT(A) decided the issue both on reopening and also on merit in favour of the assessee. Against this the Revenue is in appeal before the Tribunal. 3. The contention of the learned DR is that sufficiency or correctness of the material to form a belief for reopening of assessment is not required and the addition of ₹ 48,21,346 being provision for doubtful debts in computing the book profit u/s. 115JB is in accordance with the provisions of the Income-tax Act, 1961. 4. On the other hand, the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords which were duly considered by the Assessing Officer while passing the original assessment u/s. 143(3) of the Act. More so, there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessee s assessment of income. He relied on the order of the CIT(A). 5. We have heard both the parties and perused the material on record. The only reason which has been given for reopening assessment is that an unascertained liability to the extent of ₹ 48,21,346 debited towards provision for doubtful debts was not added to income computed as book profit u/s. 115JB of the I.T. Act. According to the Assessing Officer there was escapement of income to that extent in terms of Explanation 2(c)(i) to proviso to section 147 of the I.T. Act. However, we find that the original assessment was completed u/s. 143(3) of the Act and the Assessing Officer considered all the materials on record for completing the assessment. Clearly there is no new material which alleged to have come to the notice of the Assessing Officer which has caused to seek reopening of the assessment. Admittedly, the reopening is on the basis of the same assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit for manufacturing Amorphous Core materials at Rudraram, Medal District. The interest expenditure so claimed was towards borrowings in respect of the said unit during the year. The assessee claimed that as there was unit of control, management and finance in all the units, including the unit being set up, the interest on borrowings was allowable u/s. 36(1)(iii) r.w.s. 37 of the Act. Several judicial pronouncements were cited to support the contention. It was explained before the Assessing Officer that in the process of expanding its existing manufacturing facilities the assessee had started setting up the said unit in the year 1997-98. As it was a very high technology based project, it took long time to set up and production did not take place till the end of the previous year relevant to assessment year 2003-04. Year-wise details of unallocated expenditure, amounting to ₹ 17,74,30,104/- incurred in respect of the said project till 31.03.2002 were furnished. Out of the total expenditure of ₹ 3,34,25,522/- incurred during the previous year relevant to assessment year 2002-03, ₹ 2,27,84,040/- were towards interest on borrowings for setting up the project. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of fixed assets also comes into the ambit of section 36(1)(iii), is accepted, then the Explanation-8 to section 43(1) would become superfluous. He felt that the legislative intention is that interest in respect of borrowed funds used for business purpose only should be allowed as per section 36(1)(iii) and the interest incurred in respect of borrowed funds for acquisition of capital assets would not come into the ambit of that provision. In view of these observations, the claim for deduction of interest of ₹ 2,27,84,040/- was rejected. 10. The learned DR submitted that the expenditure incurred by the assessee was for new project and not for expansion of already existing project. Further the assessee had given a dual treatment in respect of interest payable by them on loan borrowed from EXIM Bank. The assessee kept the entire interest amount unallocated capital expenditure for future capitalisation in respect of the unit being set up. However, for the purpose of income-tax the assessee claimed deduction of this interest in the computation of income and there is no reason for the assessee to give dual treatment for the same expenditure one in the books of account and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(iii), the provisions of Explanation-8 to section 43(1) become infructuous. 12. On the other hand, the learned counsel for the assessee submitted that interest paid is allowable as deduction u/s. 36(1)(iii) of the Act. When money was borrowed and utilised in acquisition of new plant and machinery or capital asset though such assets have not been put to use or when the borrowings were utilised for the purpose of expansion of the business or establishing a unit which is in the same business is allowable as deduction. For this purpose he relied on the following decisions: a) DCIT vs. Core Health Care Ltd., 298 ITR 194 (SC). b) Alembic Chemical Works Co. Ltd. vs. CIT, 177 ITR 377 (SC). c) Standard Refinery Distilleries Ltd. vs. CIT, 79 ITR 589 (SC). d) CIT vs. Hindustan Zinc Ltd., 269 ITR 369 (Raj.) e) CIT vs. Western Bengal Coalfields Ltd., 233 ITR 139 (Cal.). f) CIT vs. Usha Iron Ferro Metal Corporation Ltd., 296 ITR 140 (Del.) g) CIT vs. Indian Telephone Industries Ltd., 175 ITR 215 (Karn.) h) CIT vs. Expended Metal Manufacturers, 189 ITR 317 (All.) i) Kanhiram Ram Gopal vs. CIT, 170 ITR 41 (MP). j) Gland Pharma Ltd. vs. JCIT, ITAT Hyderabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration Ltd., 296 ITR 140 and on the decision of the ITAT Mumbai Bench B in the case of Situ Electro Instruments Pvt. Ltd. vs. ITO, Mumbai, in 19 SOT 13. The learned counsel for the assessee further relied on the common order of this Tribunal A Bench in I.T.A. Nos. 35 and 36/Hyd/2001, I.T.A. Nos. 54 55/Hyd/2001 and I.T.A. Nos. 177/Hyd/2002 and 953/Hyd/2003 order dated 28th February, 2007 in the case of Gland Pharma Ltd., Hyderabad. 14.1 He submitted that the company is carrying on the business of manufacturing and sale of Amorphous and CRGO transformers and its related products. Amorphous Metal is one of the main raw material for manufacturing of Amorphous transformers, which is being imported. The company in the process of backward integration commenced the setting up of the plant for manufacturing amorphous metal for its captive consumption at its existing manufacturing facilities at Rudraram, Medak District. 14.2 According to the AR during the previous year relevant to the assessment year 2002-03 the company had incurred an amount of ₹ 2,27,84,040/- towards interest on the amounts borrowed in the name of the company for setting up amorphous metal plant and clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riteria laid down by the Hon ble Supreme Court have been satisfied, the amount of interest incurred on the Amorphous Metal Project claimed as deduction u/s. 36(1)(iii) of I.T. Act, 1961 is allowable as revenue expenditure. Though the interest has been in the expenditure pending capitalisation in the books of account, the same is allowable as revenue expenditure u/s. 36(1)(iii) of IT Act, 1961. This stand is supported by the recent decision of the Hon ble Supreme Court of India in the case of United Commercial Bank vs. Commissioner of Income-tax reported in (1999) 106 Taxman, 601. 14.5 He submitted that the above stand is also further reported by the decisions of the Hon ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Limited vs. CIT reported in 82 ITR 363 and in the case of India Cements Limited vs. CIT reported in 60 ITR 52. The same stand had been taken by the Hon ble Hyderabad Tribunal in the case of IAC vs. Coromandel Fertilizers Limited reported in 29 ITD 455. The above stand is supported by the decision of the Hon ble ITAT, Pune Bench in the case of Kalyani Steel Limited vs. Dy. Commissioner of Income-tax reported in 62 ITD 233. The decisions in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e management. Further there was interlacing and interrelated fund and administration. 16. In the case of Standard Refinery Distillery Ltd. (79 ITR 9) the Hon ble Supreme Court has laid down the principles which should be considered in determining whether two lines of business constitute the same business . Those principles are interconnection, interlacing, inter-dependent and unity furnished by the existence of common management, common business organisation, common administration, common fund and common place of business. In the present case the Amorphous Metal Plant is part and parcel of same management controlled by same board of directors and headed by single managing director. The funds for all the divisions are common. As narrated by the learned AR, business is carried on at common place at Plot No. 28, IDA, Balanagar, Hyderabad-500 037. The product manufactured by Amorphous Metal Plant is for captive consumption at its existing manufacturing unit since Amorphous metal is one of the raw materials for manufacturing of Amorphous Transformers. Being so, this is nothing but ancillary unit of the assessee for facilitating smooth functioning of the assessee s unit. Being so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting liabilities other than ascertained liabilities. The assessee s case can fall within the ambit of item (c) only if the amount (i) is set aside as a provision, (ii) the provision is made for meeting a liability, and (iii) the provision should be for other than an ascertained liability, i.e., it should be for an unascertained liability. Item (c) of the Explanation to section 115JA is not attracted to the provisions for bad and doubtful debts. The provision for bad and doubtful debts is made to cover up probable diminution in the value of the assets, i.e., a debt which is an amount receivable by the assessee. Such a provision cannot be said to be a provision for a liability, because even if the debt is not recoverable no liability can be fastened on the assessee. Any provision made towards irrecoverability of a debt cannot be said to be a provision for liability. Decision of the Delhi High Court in CIT vs. HCL Comnet Systems and Services Ltd. (2007) 292 ITR 299 affirmed. 18. In view of this, the issue stands settled against the Department and in favour of the assessee. This ground raised by the Revenue is dismissed. 19. The last ground in I.T.A. No. 809/Hyd/2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be computed on the adjusted book profit computed u/s. 115JA, accordingly, we dismiss the ground taken by the Revenue. In the result, Revenue appeal in I.T.A. No. 809/Hyd/2008 stands dismissed. I.T.A. No. 936/Hyd/2008 (By Revenue): 21. The sole ground in this appeal is with regard to allowability of depreciation on computer peripherals at 60% instead of 25% by treating it as a plant and machinery. 22. We have heard both the parties on this issue and also perused the material available on record. In our opinion computer and peripherals attached with the computer would be entitled for depreciation under Item III (5) Depreciation Schedule as laid down in Appendix-I to Income-tax Rules, 1962 as per which 60% depreciation is allowable. For this purpose we place reliance on the order of the Tribunal Kolkata Bench in the case of ITO vs. Samiran Majumdar, 280 ITR (AT) 74 (Kol.). This ground of the Revenue is dismissed. In the result, Revenue appeal in I.T.A. No. 936/Hyd/2008 is dismissed. I.T.A. Nos. 239 845/Hyd/09 1462/Hyd/2010: 23. The next common ground in I.T.A. No. 239/Hyd/09, 845/Hyd/09 and 1462/Hyd/2010 is with regard to disallowance of usance interest on impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the supplier of the goods to the assessee that where the payment of purchase price was delayed beyond 45 days, the assessee is liable to pay usance interest. According to the assessee s counsel the payment of this interest cannot be equated with interest on loan and hence, deduction of tax at source was not attracted. Hence there is no application of section 40(a)(i) of the Act. According to the learned counsel for the assessee this interest is part and parcel of the purchase price. He relied on the decision in the case of CIT vs. India Pistons Ltd., 282 ITR 632 and the judgement of jurisdictional High Court in the case of CIT vs. Visakhapatnam Port Trust (supra) which is applicable to the facts of the case. He relied on the judgement of Supreme Court in the case of Vijaya Ship Breaking Corporation Ors. vs. CIT, 314 ITR 309. 26. On the other hand, the learned DR submitted that the judgement relied on by the learned counsel for the assessee in the case of Visakhapatnam Port Trust (supra) was rendered in the context of liability to pay tax on the basis of DTAA and the case of the German company was that it had no permanent establishment in India and therefore, since section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome so chargeable under subsection (1), income-tax shall be deducted at source. If that be so, income-tax thereon shall be deductible at source u/s. 195(1) of the Act. 28. According to the DR, such liability of the assessee to deduct tax at source from interest so payable cannot depend upon any particular mode that may be adopted by the assessee for making payment. Thus, with the introduction of section 9(1)(v) w.e.f. 1.6.1976, the said decision of the Andhra Pradesh High Court cannot assist the assessee. Further the above decision of A.P. High Court was given in respect of the A.Ys. 1970-71 to 1974-75 when the term interest had not been defined in the Act. Section 2(28A) was inserted by the Finance Act, 1976, w.e.f. 1.6.1976, defining the term interest , as under: 28(A) ... Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. 29. He contended that consequent to the above insertion, interest is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered its decision in the above case, for the A.Y. 1995-96, stating that the disallowance u/s. 40(a)(i) is unwarranted, the Gujarat High Court quashed the ITAT order and upheld the disallowance. 33. He drew our attention to the grounds raised before the Hon ble Gujarat High Court which are as follows: (1) Whether the usance interest paid by the assessee apart from the purchase price of the ship would fall within the scope of definition of term interest u/s. 2(28A) of the Income-tax Act, 1961? (2) Whether Appellate Tribunal was right in law and on the facts in deleting the disallowance under section 40(a)(i) of the Act for the failure on the part of the assessee to deduct tax at source from usance interest paid to a non-resident under section 195(1) of the Act? (3) Whether the Appellate Tribunal was right in law and on facts in holding that usance interest partakes the character of purchase price and, therefore, not liable to deduction at source u/s. 195(1) of the Act. 34. While deciding on the grounds of appeals mentioned above, the Gujarat High Court held as under: ... The meaning of the term interest is very wide and would include interest on unpaid purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinue to bind the buyer in respect of the income by A.Y. of interest and other sums that are deemed to accrue or arise in India in favour of the nonresident seller. The buyer does not get absolved from his contractual liabilities under the contract of sale or from his statutory liabilities, such as, of making deduction of tax at source under section 195(1) of the Act while making payment by the mode of a letter of credit. 35. The DR crystallised the questions of law which were decided by the Hon ble Gujarat High Court as follows: (1) The usance interest paid by the assessee was not any part of the purchase price of the ships and was interest within the meaning of the definition of the term interest u/s. 2(28A) of the Income-tax Act, 1961. (2) The assessees who did not deduct tax at source u/s. 195(1) of the Income-tax Act, 1961 on the usance interest payable outside India and on which tax had not been paid, are not entitled to deduct the amounts of such usance interest in computing their income chargeable under the head profits and gains of business or profession . The Tribunal was, therefore, wrong in deleting the disallowance u/s. 40(a)(i) of the Act for failure on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he credit availed by it for purchasing from a non-resident under Letter of Credit opened in favour of the nonresident. This issue came for consideration in the case of Vijay Ship Breaking Corporation vs. DCIT (86 ITD 497) (Rajkot) where the Tribunal decided the issue in favour of the assessee and held that usance interest did not fall within the term of interest as given in section 2(28A) and it will take character of purchase price and, therefore, assessee was not liable to deduct tax at soured from the said payment of interest and hence disallowance of interest made u/s. 40(a)(i) was not attracted. However, this view was reversed by Gujarat High Court in the case of CIT vs. Vijay Ship Breaking Corporation (supra) and held that the usance interest paid by the assessee was chargeable under the provisions of the I.T. act, 1961 and since the assessee was responsible of paying to non-resident, they were liable to deduct the income tax u/s. 195 of the Act. It was held that usance interest was not any part of the purchase price and was in fact interest within the meaning of definition of the term interest u/s. 2(28A) of the I.T. Act. However, this judgement of Gujarat High Court was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable only if they satisfied he conditions mentioned for their liability to tax as envisaged in the various specific articles, Art. VIII referred to taxability of interest in India. Interest would be taxable if it arose out of indebtedness. The words any other form of indebtedness from sources in the other territory could only mean interest arising or accruing as a separate source of income. It would not include interest payable on the unpaid purchase money agreed to be part of the sale consideration. There was nothing in the initial contract by way of novation converting the balance of consideration into a loan. Hence, the interest received by the seller cannot be regarded as interest on money lent notwithstanding the nomenclature adopted by the parties. The assessee was immune from liability either wholly or partly to income-tax in view of the provisions of the Double Taxation Avoidance Agreement between the Federal Republic of Germany and India. 41. Accordingly, the assessee is not liable to deduct TDS on that usance interest and the provisions of seciton195 r.w.s. 40(a)(ia) are not applicable. Accordingly, we allow the ground taken by the assessee in these appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of the purchases to the extent of ₹ 2,17,73,575/- consequent to this adjustment is not an allowable deduction. The Assessing Officer disallowed the assessee s claim. 44. With regard to normal computation of income on the impugned issue he submitted that the Assessing Officer erred in disallowing an amount of ₹ 2,17,73,575/- stating that the adjustment made by the assessee is not correct. It is submitted that due to the change in the accounting policy, the advance licensing benefits recognised as income in the earlier years is written off. It is submitted that the Assessing Officer has not disputed the change in the accounting policy, but disallowed the assessee s claim. It is contented that the claim of the assessee is allowable and the learned counsel for the assessee accordingly prayed that the claim be allowed. 45. With regard to computation of book profit on this issue, he submitted that the Assessing Officer erred in adding the amount of ₹ 2,17,73,575 to the book profits. It is submitted that there is a change in the accounting policy and hence the benefit recognised in the earlier years is written off. It is submitted that the adjustments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies Act. The requirement as per Part-II in clause-2 reads as under: (b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. 48. He submitted that the assessee company claims that there is a change in the accounting policy consequent to which the value of the import entitlements recognised as income in the earlier year is reversed. Consequent to this adjustment, the expenditure towards purchases debited to the P L account is higher by ₹ 2,17,73,575/-. The raw material consumption as per Schedule-14 of the P L account is as under: Opening Stock 7,07,52,977 Add: Purchases 68,29,52,703 75,37,05,680 Less: Closing stock ₹ 4,48,60,104 Sakes ₹ 75,08,501 5,23,68,605 70,13,37,075 49. It is clear from these details that the effect of the change in account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) thereof) or [***] section 11 or section 12 apply; or] (g) the amount of depreciation,] (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, 51. If any amount referred to in clauses (a) to (i) is debited to the profit and loss account and as reduced by (i) to (viii). (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or] (ii) the amount of income to which any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer cannot make any adjustment other than the above to the book profit shown in the Profit and Loss A/c. if the assessee prepared the Profit and Loss A/c. in accordance with the provisions of Part II and III of Schedule VI of Companies Act, 1956. Further there is a condition that the Profit and Loss A/c. thus prepared shall be on the same basis as prepared and presented before the annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956. Before us the Revenue authorities are not able to show the Profit and Loss A/c. is prepared by the assessee for income-tax purpose is not prepared in accordance with the provisions of Part II and Part III of Schedule VI of Companies Act, 1956. Once the Revenue authorities having accepted the Profit and Loss A/c. which is prepared in accordance with Part II and Part III of Schedule VI of the Companies Act, the Revenue authorities have no power to recompute the profit in the Profit and Loss A/c. by including the unutilised import entitlements in the purchase account as it was held in the case of Apollo Tyres Ltd. vs. CIT, 255 ITR 273 that the book profit should be strictly construed as that which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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