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TMI Blog2017 (1) TMI 1287X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration - Held that:- The assessee also incurred cost on the joint venture project which was not materialized and accordingly the same was dropped. Admittedly the impugned Joint venture project was identical to the activities of the assessee and therefore it can be inferred that the project was for the expansion of the existing business of the assessee. In view of above the loss incurred by the assessee was in connection and in the course of the business and hence allowable for deduction. The ground raised by the assessee is allowed. Addition by increasing the value of closing stock - AO disallowed the valuation of closing stock on the ground that closing stock shall be valued either at the cost or market price whichever is less as on the balance sheet date i.e. 31st March 2005 - Held that:- We find that the closing stock needs to be determined as per the method regularly employed by the assessee. The market price prevailing as on the date of balance sheet date should be taken into account while determining the closing stock. The future price of the closing stock cannot form the basis for the valuation of closing stock as on the balance sheet date. Accordingly we hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to avail the bank guarantee in order to participate in tenders. There is a direct nexus between interest income and the income of the business of the undertaking. Indeed the interest income does not par take the character of a profit and gains from the activity of assessee, but it is the income which is derived in the course of the business. Hence the ground raised by the Revenue is allowed partly. Provisions for leave encashment - disallowance under the provisions of MAT u/s 115JB - Held that:- The provisions for the leave encashment is ascertained liability and therefore the same cannot be disallowed under the provisions of MAT u/s 115JB of the Act. However from the order of AO we find that necessary details were not furnished at the time of assessment therefore the same was added back. We also find that the remand report was not called by the learned CIT(A) during the hearing of appellate stage. In view of above we’re inclined to restore the issue to the file of AO for fresh adjudication as per law with the direction to verify whether the provision for leave encashment has been crystallized. Hence the ground of appeal of the Revenue is allowed for the statistical purposes. Add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made by the Assessing Officer of increasing the value of closing stock by ₹ 335,64,496/- 3(b) That on the facts and in the circumstances of the case, the CIT(Appeals) erred in ignoring the accounting policy followed by the appellant consistently. 3(c) That the action of the CIT(Appeals)is in defiance of the decisions of the Supreme Court. 3(d) That the CIT(Appeals)erred in not directing the AO to increase the value of opening stock of A.Y 2006-07 by the similar amount. 4. That the CIT(Appeals)erred in not allowing write off of lease premium of ₹ 24,64,304/- as revenue expenditure as claimed by the appellant. 5(a) That on the facts and the circumstances of the case, the CIT(Appeals) erred in confirming the decision of the AO in charging interest under Section 234B of the Act. 5(b) That the CIT(Appeals)erred in not appreciating that the interest under section 234B is not chargeable if the assessee pays taxes under MAT provisions. 6. That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or at the hearing of this appeal." 4. First issue raised by assessee in this appeal is that Ld. CIT(A) erred in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith effect from 24th March 2008. The instant case before us pertains to the assessment year 2005-06 and therefore in our considered view rule 8D does not apply in the present case. However at the time of hearing, it was fairly agreed by both the sides that the issue is now covered by the decision of the Hon'ble Calcutta High Court in the case of R.R. Sen & Brothers (Pvt.) Ltd. in G.A. No. 3019 of 2012 dated 4th January, 2013, wherein expenditure at 1% of the dividend income is a thumb rule applied consistently as the expenditure relatable for earning of the exempt income. This view also finds support from the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. -vs.- DCIT & Another reported in [2010] 328 ITR 81. In this view of the matter and respectfully following the decision of the Hon'ble jurisdictional High Court in the case of R.R. Sen & Brothers (Pvt.) Ltd. referred to supra as also the decision of the Hon'ble Bombay High Court referred to supra, the Assessing Officer is directed to restrict the disallowance under section 14A of the Act to 1% of the exempt income for normal computation of income as well under section 115JB o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such income which does not form part of the total income under this Act in accordance with such method as may be prescribed90, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]" Perusal of Section 14A of the Act provides that it mandates disallowance of expenditure 'in relation' to the income which does not form part of the total income under the Act while clause (f) in explanation1 to Section 115JB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18/- is added to compute book profit u/s 115JB of the Act which is computed u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962." Respectfully following the proposition laid down by the Hon'ble Tribunal we direct the AO to make the addition of the amount of disallowance under section 14A of the Act read with rule 8D of Income Tax Rules 1962 to the total income of the assessee under the normal provisions and under the provisions of the MAT as specified under section 115JB of the Act. Hence this ground of appeal of the assessee is partly allowed. 9. Second issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the order of AO by sustaining the disallowance of ₹ 5,60,337/- relating to advance written off in the year under consideration. 10. During the year under consideration, assessee has written off advances for ₹ 10,13,245/- in its profit & loss account. On question by AO about the details of such advances assessee failed to furnish the necessary details. Accordingly, AO in the absence of necessary details disallowed the advance written off and added to the total income of assessee. 11. Aggrieved, assessee preferred an appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the necessary details of the advances were placed. On the other hand, Ld. DR submitted that a sum of ₹ 4,41,089/- was written off on account of regulatory fees paid to free trade zone authority in Dubai. The assessee wanted to establish a joint venture company with Union Trading Company (for short UTC). But on a later date the idea of joint venture was dropped, therefore, such loss cannot be constituted as in the course of the business. Such loss is purely in capital in nature. He relied on the order of Authorities Below. 13. We have heard the rival submissions made by both the sides and order of the lower authorities as well as materials available on record. In the present case the AO has disallowed the claim of the assessee for the advance written off for ₹ 10,13,245.00 in the profit and loss account on the ground that the assessee failed to furnish necessary details at the time of assessment. However the learned CIT(A) partly allowed the relief to the assessee for those advances which were in the nature of bad debts and routed through profit and loss account in the past amounting to ₹ 4,52,908.00. The ld. CIT(A) confirmed the disallowances for ₹ 5,60,33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it is clear that the assessee wanted to expand its existing business by establishing the joint venture company with UTC in Dubai. In view of the above it can be inferred that the loss was incurred by the assessee in the course of the business. In holding so we take the guidance and support from the judgment of Hon'ble Calcutta High Court in the case CIT Vs. ITC Limited reported in 63 taxmann.com 176 wherein it was held as under : "7. In so far as the question no.4 is concerned, reference may be made to the views expressed by the CIT (Appeal) which include, inter alia, as follows:- "The appellant company during the course of appellate proceedings has contended that the claim is off revenue nature and was allowable u/s.28/37 (1) of the Income Tax Act 1961. The appellant has strongly relied upon the decision of the Hon'ble I.T.A.T. for the assessment year 1991-92 in the appellant's own case wherein the Ld. ITAT relying upon the judgement of the Hon'ble Supreme Court in the case of CIT v. Mysore Sugar Co. Ltd.(46 ITR 649 ) held that the write off of trade advances were allowable deduction u/s.28 of the Income Tax Act 1961 since such expenses were incurred in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses." 10. Therefore, the question for consideration was, whether the money advanced by the assessee which was written off was or had the character of the revenue expenditure or a capital expenditure? If it had a character of the capital expenditure, then the writing off of the same would not entitle the assessee to claim any deduction. If, on the contrary, it had the character of a revenue expenditure the writing off certainly shall entitle the assessee to claim the deduction. 11. Mr. Bandhyopadhya, learned advocate, appearing for the revenue submitted that the judgment in the case of Mysore Sugar Co. Ltd.(supra) has no manner of application because the money in that case was advanced for the purpose of purchasing raw material but in the case before us the advances were not for the purpose of purchasing raw material. The fact that the advances were made for purchasing the raw material made it an expenditure of a revenue character and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred for the purpose of the expansion of the existing business is not disputable and has not been disputed either. In the premises, the second question is answered in the affirmative and in favour of the assessee" 13.1 The proposition laid down by the Hon'ble Courts as discussed above is squarely applicable to the facts of the case before us. In the case before us the assessee also incurred cost on the joint venture project which was not materialized and accordingly the same was dropped. Admittedly the impugned Joint venture project was identical to the activities of the assessee and therefore it can be inferred that the project was for the expansion of the existing business of the assessee. In view of above the loss incurred by the assessee was in connection and in the course of the business and hence allowable for deduction. The ground raised by the assessee is allowed. 14. Third issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the addition made by AO by increasing the value of closing stock at ₹ 335,64,496/-. 15. Assessee, for the year under consideration has imported molasses from foreign countries for a value of ₹ 19,33,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is perishable commodity and accordingly quality and market rate of the same came down. The assessee also challenged the addition of ₹ 60 lacs on the ground that no material was brought on record for such addition. However, Ld. CIT(A) disregarded the plea of assessee and confirmed the order of AO by observing as under:- "4.6 If it is the case of the assessee that the market price of molasses had declined after the end of the previous year, it is incumbent upon the assessee to show that the conditions of downward fluctuation existed at the balance sheet date and the trend was directly related to and was confirmed by the events occurring after the balance sheet date. That has also not been done. In this situation, the benefit of telescoping of the sale price of the subsequent year and its substitution for the market price at the end of the previous year cannot be given to the assessee. Needless to say, such benefit, in any case, can be given only in exceptional cases. Otherwise, the principle of valuing the inventory at cost or market price at the end of the previous year, whichever is less, will be totally diluted. 4.7 Regarding the addition of ₹ 60,00,000/- on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Assessing Officer cannot be faulted, the addition has to be confirmed. 4.8 The assessee has claimed that the depreciation of the INR vis-a-vis USD at the end of the previous year as compared to the time the stock had been purchased should be factored into the valuation of closing stock. According to the AS-Il, on which reliance has been placed by the assessee, the exchange rate prevailing at 31.03.2005 would apply only if the stock was denominated in foreign currency. No doubt, molasses were imported into India. But, they were sold to Indian parties. The closing stock was taken into assessee's own inventory and the value thereof had to be shown only in Indian . rupees. What happened to value of the INR vis-a-vis the USD subsequent to the date of purchase is .immaterial, simply because the closing stock was not denominated in foreign currency. Hence, 'this contention of the assessee is rejected. 4.9. As regards the assessee's contention that, in case the value of the closing stock is enhanced for the previous year under consideration, the value of the opening stock should be correspondingly enhanced for the next previous year, the same is an axiomatic propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freight, insurance etc., should be added in the value of closing stock. The cancellation letter has no meaning as it is just piece of paper and there is no agreement with the party. Lastly, he vehemently relied on the order of Authorities Below. 18. We have heard the rival submissions made by both the sides and order of the lower authorities as well as materials available on record. In the present case the assessee valued the closing stock at market price which was determined after the balance sheet date. In fact the market price was the price at which the goods were sold by the assessee in the subsequent financial year. However the AO disallowed the valuation of closing stock on the ground that closing stock shall be valued either at the cost or market price whichever is less as on the balance sheet date i.e. 31st March 2005. As per the AO the future price cannot form the basis of valuation of closing stock. The view of the AO was also subsequently confirmed by the learned CIT(A). Now the issue before us arises for our consideration so as to whether the value adopted by the assessee for its closing stock is correct valuation in the aforesaid facts and circumstances. The provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date. 24. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. 25. An assessment is made of net realisable value as at each balance sheet date." 18.2 In view of above we are inclined to concur with the view taken by the lower authorities for the valuation of the closing stock. In this connection we are also putting our reliance in the principles laid down by the Hon'ble Supreme Court in the case of Chanrup Sampatram vs. CIT reported in 24 ITR 481 wherein it was held as under : "Accounts-Valuation of stock-In order to determine trading results of an accounting period, valuation of unsold stock at the close of that period is a necessary part of process-While anticipated loss is taken into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l year. Thus, in order to hold an assessee liable for payment of advance tax, the liability to pay such tax must exist on the last date of payment of advance tax as provided under the Act or at least on the last date of the financial year preceding the assessment year in question. If such liability arises subsequently when the last date of payment of advance tax or even the last date of the financial year preceding the assessment year is over, it is inappropriate to suggest that still the assessee had the liability to pay "advance tax" within the meaning of the Act. In the instant case , the last date of the relevant financial year was 31st March, 2001 and on that day, admittedly, the appellant had no liability to pay any amount of advance tax in accordance with the then law prevailing in the country. Consequently, the appellant paid no advance tax and submitted its regular return on 31st Oct., 2001 within the time fixed by law wherein it declared its total income and the book profit both as nil. However, consequent to the amendment of the provisions contained in s. 115JB by virtue of Finance Act, 2002 which was published in the Official Gazette on 11th May, 2002 giving r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First issue raised by Revenue in this appeal is that Ld. CIT(A) erred in directing the Assessing Officer to hold the profit arising out sale-purchase of shares as capital gain. 24. The assessee in its original return has shown the profit earned on sale of investment as business income but the same was revised in its revised return as Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). However, AO disregarded the claim of assessee by observing that the co-ordinate Bench in assessee's own case in ITA No. 868/Kol/2006 for assessment year 2001-02 dated 28.02.2007 directed to treat the income on purchase and sale of share as business income. Accordingly, the claim made in the revised return by the assessee was rejected and the income was treated as business income. 25. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that shares were always shown as investment in the balance-sheet and not as stock-in-trade. The assessee inadvertently has shown the income under the head "business" from the sale-purchase of shares. However the income of the assessee from the AY 2003-04 has been shown under the head "capital gains" and the same has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2001-02 dated 28.02.2007 directed to treat the income on purchase and sale of share as business income. However on perusal of Hon'ble ITAT order we find that the assessee in that year has claimed the loss on the sale of investment as business transaction which was accepted by the AO. But subsequently the ld. CIT treated the order of the AO as erroneous on this count. The appeal was filed by the assessee against the order passed by the ld. CIT u/s 263 of the Act wherein it was held that the AO has taken one of the possible views. Therefore the order of the AO cannot be held as erroneous. As we find that no ratio was laid down by the Hon'ble ITAT in that case by holding that the loss on sale of investment was to be computed under the head as business income or capital gain. Therefore the order of the Hon'ble ITAT in the own case of the assessee cannot form the basis for holding the capital gain loss as business loss. We also find that basis adopted by the AO for treating the capital gain income as business income is not appropriate. We also find that the assessee claimed the capital gain income in the revised return of income which is within the provisions of the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Explanation[1],- For the purposes of this section, "book 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- … …. Explanation 2-For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include- (i) The amount or amounts set aside as provision for diminution in view of value of any asset; In the light of the amended provisions of section 115JB of the Act we reverse the order of ld. CIT(A) and this ground of appeal of Revenue is allowed. 33. In respect of additional ground raised by Revenue is that Ld. CIT(A) erred in treating the bank interest of ₹ 71,76,378/- and interest on tax refund for ₹ 22,09,030/- as business income. 34. The assessee in the year under consideration has earned interest income on bank deposits as well as income-tax refund which was treated as "business income". However, AO found both the incomes are assessable u/s. 56(2) of the Act and accordingly treated as "income from other source". 35. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas it was submitted that the income tax was paid on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ample copy of bank guarantee which is kept on the record. He supported the order of Ld. CIT(A) in this point and submitted that Ld. CIT(A) was correct in giving relief to assessee. 37. We have heard the rival contentions of both the parties and perused the materials available on record. From the forgoing discussion we find that the AO treated the interest income from bank on FDRs and income tax refund as income from other sources though the assessee claimed the as income from business. Now the issue before us arises so as to whether the income shown by the assessee is business income. At the outset we find that the income from interest on income tax refund is income from other sources in terms of the provisions of section 56(2) of the Act. We also find that interest on income tax refund cannot be said to be derived from the business activity. Hence the same should be taxable under the head income from other sources. Now coming to the issue of interest income on the FDR, the ld. AR claimed that the interest income was intrinsically link with the business of the assessee. The same should be treated as income from business and profession as it was earned on the deposit of margin mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding interest earned from business of undertaking was to be considered." 37.1 We also rely in the case of CIT Vs. Triputi Wollen Mills Limited reported in 193 ITR 0252 where the Hon'ble High Court of Kolkata has held as under : "From the narration of facts, it will be evident that the finding of the Tribunal that the assessee in fact was carrying on business has not been challenged by the Revenue. That apart, the fact remains that although the income was earned by way of interest from the fixed deposits, the ITO allowed the expenditure incurred by the assessee to the extent of the interest income which would go to show that the ITO must consider the expenditure in connection with carrying on business, otherwise, he would have allowed only the expenditure which was incurred in connection with earning of the interest income. Thirdly, the Tribunal found as a fact that earning of the interest income arose from the utilisation of commercial assets. The Tribunal found that the funds utilised in making the fixed deposits with the bank were the business funds temporarily lying in surplus with the assessee. On these facts, the income derived from the utilisation of the commercial assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such delay, such interest is only an accretion to the assessee's receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carried on by the assessee. It is well -settled that interest can be assessed under the head `income from other sources' only if it cannot be brought within one or the other of the specific heads of charge. It is difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. The interest payable to him certainly partakes of the same character as the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as "income from other sources". We also find guidance and support from the judgment of Hon'ble Supreme Court of India in the case of Shyam Bihari Vs. CIT & ANR reported in 345 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec. 115JB of the Act. 42. Assessee, in the year under consideration has created the provision for leave encashment of ₹ 34,68,915/- which was not added in the book profit. During the course of assessment proceedings, AO treated the same as provision made for unascertained liability in terms of the provision of Explanation (c) to Sec. 115JB of the Act. Accordingly, AO added the amount provision for leave encashment to the book profit u/s. 115JB of the Act. 43. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the provision of leave encashment is representing the ascertained liability and relied in the case of Bharat Earth Movers vs. CIT 245 ITR 428 (SC). Assessee also submitted that in the immediate preceding assessment year 2005-06 Ld. CIT(A) allowed the issue in favour of assessee. After considering the same, Ld. CIT(A) reversed the order of AO by observing as under:- "(17) I have considered the submission of the appellant and perused the assessment order. I have also gone through the order of the CIT(A) in the case of the appellant company for A.Y 2005-06. On perusal of appellate order for A.Y 2005-06, it is observed that the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act the provisions representing the unascertained liability will be added to the Book Profit under the provisions of section 115JB of the Act. The provisions for leave encashment is ascertained liability as held by the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT reported in 245 ITR 428. The relevant extract of the order is reproduced below : "If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.-Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC) and Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) : TC 16R.197 applied. Provision made by the appellant company for mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115JB of the Act. However from the order of AO we find that necessary details were not furnished at the time of assessment therefore the same was added back. We also find that the remand report was not called by the learned CIT(A) during the hearing of appellate stage. In view of above we're inclined to restore the issue to the file of AO for fresh adjudication as per law with the direction to verify whether the provision for leave encashment has been crystallized. Hence the ground of appeal of the Revenue is allowed for the statistical purposes. 46. In respect of last issue raised by Revenue is that Ld. CIT(A) erred in deleting the addition made by AO on account of provision for Wealth Tax Act, 1952 in the book profit. 47. At the outset we find that the provisions of section 115JB of the Act require the addition of income tax to the book profit. The relevant provision reads as under:- 115JB.(1) Explanation[1],- For the purposes of this section, "book 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) The amount of income-tax paid or payable, and the provision therefore; or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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