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TMI Blog2016 (5) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The accounts of the taxpayer were duly certified by the auditors and the same was accepted by shareholders in the Annual General Meeting which was filed with Registrar of Companies and as per the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) and Hon'ble Bombay High Court in the case of Kinetic Motor Co. Ltd. the AO cannot make any adjustments to the book profits of the taxpayer once it was certified by the auditors. - Decided against assessee. Not allowing the expenditure disallowed u/s 14A of the Act while reducing the dividend income for the MAT - Held that:- From the plain reading of the provisions of this section 115JB of the Act, it is clear that the expenditure incurred in relation to dividend income then the book profit as per section 115JB will stand increased by that amount. However the assessee submitted that the Rule 8D of the IT Rules, 1962 came in force from 24.03.2008 so disallowance under section 14A is not applicable for the year under consideration. However we disagree with the view of ld. AR in terms of the provisions of section 115JB of the Act which are self explanatory. Accordingly in our considered view we find no infir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act for the clarification by issuing show cause notice to the party before making the disallowance. We also find that the order of the AO is silent about the deduction of TDS from the payment of the consultancy charges to the party. Accordingly in the interest of Justice and fair play we’re inclined to the restore this file to the AO for fresh adjudication as per law after giving opportunity to the assessee. We also direct the AO to issue show cause notice to WBIDC under section 133(6) of the Act for the necessary details and clarification as required under the provisions of law. - Decided in favour of assessee for statistical purpose. Disallowance u/s 14A r.w.r 8D - Held that:- Rule 8D of the IT Rules came into effect from 24.03.2008 and the instant case before us is for AY 2005-06. Therefore, the provisions of Rule 8D of the IT Rules is not applicable in assessee’s present case. We further find that prior to insertion of Rule 8D of the IT Rules various courts have held that the disallowance in terms of provision of Sec. 14A of the Act should be restricted @ 1% of dividend income - Decided in favour of assessee partly Addition on account of year end adjustment in lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts and advances as the provision for unascertained liability. Therefore for computing the book profit under the provisions of MAT deduction for such provisions was disallowed and added to the book profit. However in our considered view the provision for Sec. 115JB speaks for the provisions created for unascertained liabilities therefore we disagree with the view of the AO. See CIT vs. HCL Comnet Systems and Services Ltd (2008 (9) TMI 18 - SUPREME COURT ) - Decided against revenue. - ITA No. 581 & 587/Kol /2009 - - - Dated:- 13-4-2016 - Shri N. V. Vasusdevan, Judicial Member And Shri Waseem Ahmed, Accountant Member For the Petitioner : Shri Harakamal Chakraborty, GM (Fin. Acc.) For the Respondent : Shri Rajat Subhra Biswas, CIT-DR ORDER Per Waseem Ahmed, Accountant Member These are cross-appeals by assessee and Revenue against common order of Commissioner of Income Tax (Appeals)-XXXII, Kolkata dated 28.01.2009. Assessment was framed by JCIT, Range-12, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide his order dated 28.12.2007 for assessment year 2005-06. Shri Harakamal Chakraborty, Ld. Authorized Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event the provisions of section 234B and 234C are not attracted in a case where there was no liability to pay any advance tax under section 208 on any of the due dates for payment of the advance tax installments and that there is retrospective amendment of the low long after the close of the financial year imposing liability for tax. 4. During the course of hearing before us, Ld. AR of assessee did not press for grounds No. 1 and 4 and same stand dismissed as not pressed. 5. The first issue raised in ground no. 2 by the assessee is that ld. CIT(A) erred in confirming the order of the AO by adding the deferred tax liability of ₹ 243.670 lacs in book profit but not excluding the amount of deferred tax assets included brought forward loss. 5.1 During the year under consideration, AO while computing the book profit under the MAT provisions of the Act, has added the deferred tax liability on account of following reasons : 5.2 The AO treated the deferred tax liability as unascertained liabilities. The AO also observed that deferred tax is nothing but income tax which arises due to timing difference. It is the difference between the taxable income and accounting income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count, the net profit as shown in the profit and loss account should be increased by that amount for the purposes of determining book profits under that section. Hence, the action of the AO in this regard is confirmed. The assessee s other contention raised in ground No. 15 does not have any locus standi in the eyes of law since the fact remains that the amount of deferred tax is on account of divergence between account profit and tax profit and as such not an item for which adjustment is allowed as per the provisions of section 115B irrespective of its certainty/uncertainty of accrual. Hence this ground of assessee stands dismissed. The plea of the assessee that the amount of deferred tax assets embodied in the brought forward loss should be excluded while working out the MAT liability was rejected by the ld. CIT(A) on the ground that the provisions of the Act are very clear as mentioned in sub-clause (iii) of explanation to section 115JB. It states that LOSS BROGHT FORWARD OR UNABSORBED DEPRECIATION WHICHEVER IS LESS AS PER BOOKS . So brought forward loss means loss as reflected in the profit/loss account. Being aggrieved by this order of Ld. CIT(A) assessee came in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act and various judicial pronouncement that for the levy of the tax under the provisions of MAT the assessee has to work out the profit in the manner as prescribed in explanation 1 to section 115JB(2) of the Act. As per the provisions of the Act the manner for working out the profit cannot be altered as per the requirement of the assessee. The relevant provision of the law is reproduced below : 115JB.(1) (2) Explanation [1].- For the purposes of this section, , book receipt profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a)--- (b)--- ----------- (h) the amount of deferred tax and the provision therefor, ------- if any amount referred to in clause (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account, and as a reduced by,-]]] ---- [(iii) the amount of loss brought forward or not so the depreciation whichever is less as per books of account. From the plain reading of the provisions of this section 115JB of the Act, it is cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined under section 115JB. In any case, Rule 8D of the Income-tax Rules came into force from 24.03.2008 and hence was not in force during the relevant assessment year. Rule 8D will take effect from assessment year 2008-09. This has been decided by the Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. Mumbai vs DCIT (2010) 328 ITR 81 (Bom).On the other hand the ld. DR vehemently relied on the orders of authorities below. We find in terms of clause (f) to explanation 1 of section 115JB of the Act that any expenditure incurred in relation to the income to which the provisions of section 10 applies then the book profit will accordingly be reduced by the said expenditure. The relevant extract of the provision is reproduced below. 115JB.(1) (2) Explanation [1].- For the purposes of this section, , book receipt profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a)--- (b)--- ----------- (f) the amount or amounts of expenditure to any income to which section 10 (other than-------------apply ---------- (h) the amount of deferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Where on the last date of the financial year preceding the relevant assessment year, the assessee had no liability to Assessment Year advance tax, he cannot be asked to pay interest in term of s. 234B and s. 234C for default in making payment of tax in advance which was physically impossible. As the issue is already covered by the decision of Hon'ble jurisdictional High Court in favour of assessee, we accordingly direct the AO not to charge any interest under section 234B 234C of the Act on account of retrospective amendment in clause (h) (i) to explanation 1 of section 115JB of the Act. Hence we allow this ground of appeal of the assessee. 13. The next issue raised in ground no 5 6 by the assessee in this appeal is that Ld. CIT(A) has erred in confirming the order of A.O by disallowing the deferred revenue expenses for ₹ 15.46 crores. 14. Before coming to the specific issue let us understand the background of the case. The assessee has incurred several expenses prior to the commencement of commercial production from the assessment year 1985-86 to 2001-02. The commercial production started w.e.f. 01/08/2001. Expenses incurred prior to the commencement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure pertains to the assessment years starting from AY 1985-86 to 2001-02. However, the AO has disregarded the claim of the assessee by considering that the amount of amortized expenses and its allowability needs to be determined as per the provisions of the Act. There is no provision under the Act for claiming the deferred revenue expenditure. All the deferred revenue expenditures are revenue in nature and should have been claimed in the year of its incurrence. Accordingly, the A.O. has disallowed the deferred revenue expenditure and added to the total income of the assessee. 15. Aggrieved, assessee preferred an appeal before the Ld. CIT(A). Before Ld. CIT(A) assessee has claimed the deferred revenue expenditure as per the Guidance Note issued by ICAI on expenditure incurred during construction period. The assessee has amortized this deferred revenue expenditure amounting to ₹ 805.65 million for a period over five years after the commencement of commercial production on 01.08.2001. The same has been allowed by the A.O. in earlier years. Ld. AR claimed that if this deferred revenue expenses cannot be claimed as an expense u/s 37 then assessee should be allowed to cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in case of Madras Industrial Investment Corporation Limited vs. CIT [1997] 225 ITR 802 (SC) has also upheld the principle of deferred revenue expenses. The ld. AR also pleaded that the deferred revenue expenses can also be allowed to be capitalized under section 32 of the Act. 17. From the aforesaid discussion, we find that the assessee has incurred expenses prior to the commencement of business and classified as deferred revenue expenditure. The assessee started claiming those expenses after the commencement of business 1/5th over the period of 5 years. However, the lower authorities disallowed the same on the ground that there is no provision under the Act to claim the deferred revenue expenses. From the facts of the case we observe that the AO is not skeptical about the genuineness of the expenses incurred. The whole amount of ₹ 154.64 million has been incurred in connection of business prior to the commencement of commercial production. Any expense incurred in connection to the business is an allowable expenditure. From the above explained citations of the cases denying the non existence of deferred revenue expenditure term in the act is not reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and operation of vehicles. (f) Appropriate expenditures in connection with temporary structures and service facilities built or acquired specially for the purpose of construction (see paragraphs 9.4 and 9.5 of this Note). (g) Preliminary project expenditure to the extent to which it is capitalized as part of the construction cost (see paragraph 3 of this Note). (h) Financial expenses including interest and other similar charges (see paragraph 4 of the Note). (i) Depreciation on fixed assets as well as on temporary structure and other facilities used during the period of construction (see paragraph 9.4 and 9.5 of this Note). (j) Expenses on test runs (see paragraph 11 of this Note). (k) Expenses on land grading and leveling (see paragraph 96 of this Note). Taking a consistent view by the decision of Hon ble Supreme Court and reliance in the aforesaid guidance note we reverse the orders of authorities below. Hence, this ground of the assessee is allowed. 18. Next issue raised by the assessee by way of additional ground no. 7 is that the ld. CIT(A) erred in confirming the order of AO by disallowing the payment of ₹ 90.36 million to WB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless the same is proved to be paid for commercial considerations. The burden of proof is always upon the assessee. The ld. CIT(A) has also relied in the following decisions : 1. Ramanand Sagar Vs. Deputy CIT (2002) 256 ITR 134 The Hon ble court held that just debiting will not make that expense allowable. Assessee furnished Xerox copies of bills and vouchers. In this case AO was not satisfied with the justification of the assessee and hence disallowed this expense. It was held by the High Court that disallowance made by the AO. was held to be order. 2. Malayala Manorama Co. Ltd Vs. CIT (2006) 284 ITR 69 It was held that while computing the income chargeable under the head Profit and gains from business and profession only those expenditure which are incurred wholly and exclusively for the purpose of business and profession alone shall be allowed. In view of above, Ld. CIT(A) held that assessee could not provide any supporting documents in support of this claim regarding the genuineness and the quantum of expenditure. Accordingly the ld. CIT(A) upheld the action of AO. Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. 21. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR submitted that as per Sec. 14A of the Act all those expenses are disallowed which are directly attributable to earn this dividend income. No management expense is directly incurred by the assessee to earn this dividend income. Assessee stake in that company is very less in the company and it is just an investor in that company. However the AO outrightly rejected the submission of the assessee on the reasoning that certain amount of expenditure must have been incurred like administration expenses, establishment expense etc. to earn this exempted income and so disallowed @ 5% of total dividend income i.e. ₹ 94,59,450/-. 24. Aggrieved, assessee preferred an appeal before Ld. CIT(A). Before Ld. CIT(A) Ld. AR has given explained sec 14A that as per this section only those expenses are disallowed which are directly identifiable to be incurred to earn that exempted income. Here assessee is holding only a minor stake that too only in one company. The assessee also submitted that it was held in ITAT Mumbai Bench in ITA No.8057/Mum/03, ITA No. 1372/Del/2005, ITA No.183/Del/2005 and ITA No.2048/Del/2005 that Rule 8D read with section 14A of the act will be applicable in case of al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere. The appeal is dismissed. In this view of the matter, we reverse the orders of authorities below and directed the Assessing Officer to make disallowance @ 1% of dividend income. Accordingly, this ground of assessee s appeal is allowed in part. 26. In the result, assessee s appeal is partly allowed for statistical purpose. Coming to Revenue s appeal in ITA No. 587/Kol/2009 AY 05-06. 27. Grounds raised by Revenue are as under:- 1. On the facts and circumstances of the case, Ld. CIT(A) has erred in deleting the addition of ₹ 1,20,90,000/- arisen as a result of revaluation of sundry creditors which is notional loss and contingent in nature. 2. On the facts and circumstances of the case, the Ld. CIT(A) is not justified in deleting the amount of ₹ 13,55,80,000 on a/c of expenses claimed on freight. 3. On the facts and circumstances of the case,, Ld. CIT(A) has erred in deleting the addition of ₹ 1240 Million accepting the change of accounting method as bonafide. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the AO by observing as under:- the appellant s contention in this regard is found to be acceptable, since the AR of the assessee vide his letter dt. 15.01.2009 has confirmed that the sundry creditors under this account were on revenue account and not on capital account. Since, it is submitted that such exchange fluctuation has arisen on account of normal business transactions of material procurement etc., it is an allowable deduction u/s. 37(1). I agree with the contention of the appellant and hence this ground is allowed. Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. 30. We have heard rival contentions and perused the materials available on record. Before us Ld. DR vehemently supported the order of AO and on the other hand the learned AR relied on the order of Ld CIT(A) and filed a paper book which running from pages 1 to 97. From the aforesaid discussion, we find that the AO treated the difference arising on account of foreign exchange in the value of sundry creditors as notional loss and contingent liability which the assessee has not incurred so it was disallowed. However we strongly disagree with the view of the AO on the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. 31. We also find support from the decision of Hon ble Delhi High Court in the case of CIT vs Woodward Governor India Private Limited [2007] 294 ITR 451 (Del) where it was held that:- We affirm the decision of the Income-tax Appellate Tribunal in Oil and natural Gas Corporation Ltd. V. Deputy CIT (Asstt.) [2003] 261 ITR (AT) 1 (Delhi) which rightly follows the settled position as explained in the judgment of the Hon'ble Supreme Court which we have referred to. We, therefore, reject the submission of the Appellant in these appeals tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prayed that these expenses are incurred in connection with the business only and are eligible for deduction while computing the income under the head of business . Accordingly the learned CIT(A) has deleted the addition made by the AO by observing as under:- This ground of the appellant is against disallowance of expenses of freight of ₹ 13,55,80,000/-. The appellant during the relevant previous year has debited to the P L a/c ₹ 135.58 million under the heading freight charges . Out of the said amount 46.99 million represents the element of freight cost in excess of recovery and 86.59 million representing freight charges on stock transfer which is not for any recovery or otherwise. The AO has disallowed the freight expenses on the ground that the freight charges is receivables of the appellant and in the nature of balance sheet item and hence the said disallowance was made. The AO has not disputed that these expenses were incurred by the appellant. The freight charges short received from customers can be for various reasons and the AO was not justified in disallowing the same only for the reason that they were recoverable from the customers. Such expenditure si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h paragraph 3.7 of the foreign trade policy. The assessee in the earlier years was used to recognized custom duty benefit under the target plus scheme in the books of accounts on the basis of completion of export. However, the assessee from the year under consideration changed its accounting policy to recognize the custom duty benefit under the target plus scheme on the basis of receipt of license from the Director General of Foreign Trade. As a result of change the profit of the assessee came down by the above stated amount for the year under consideration but the same was shown in the subsequent year. However the AO disregarded the change in the accounting policy on the ground that the benefit under target plus scheme is a available to the assessee on the basis of incremental growth of the export. For the year under consideration, there was an incremental growth in the exports of the assessee therefore the assessee was entitled for the benefit of custom duty. Accordingly the AO held that the income on account of custom duty is available immediately when the assessee achieves the incremental growth in the export business. Therefore, the AO disallowed the claim of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for debiting the duties leviable on the goods, but for this exemption; (3) That the said certificate and goods imported against it shall not be transferred or sold; From the aforesaid, it is amply clear that the duty benefit under the scheme was available to the assessee only on receipt of this certificate issued by the Director-General of foreign trade. Prior to the year, assessee was recognizing the income on the completion of export but that really does not entitle the assessee for the duty exemption unless the certificate is received by the assessee. In view of above, we find no infirmity in the order of Ld CIT(A). Hence this ground of appeal of the Revenue is dismissed. 40. The 4th issue raised by Revenue in this appeal is that ld. CIT(A) erred in accepting the revised return in spite of the fact known to him that the accounts have not been approved in the AGM of the company. 41. At the outset the ld. AR drew our attention on page number 14 of the supplementary paper book where necessary papers were placed regarding the adoption of financial statements submitted with the revised income tax return. Proof of filing the audited financial statements with the Min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Sec. 115JB speaks for the provisions created for unascertained liabilities therefore we disagree with the view of the AO. In this connection, we are putting our reliance in the decision of Hon ble Apex Court in the case of CIT vs. HCL Comnet Systems and Services Ltd (2007) 305 ITR 409 where it was held as under:- As stated above, the said Explanation has provide six items, i.e., Item Nos (a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with Item No. (c) which refers to the provision for bad and doubtful debt. The provision for bad and doubtful debt can be added back to the net profit only if Item (c) stands attracted. Item (C) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertain liabilities. The assessee s case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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