The ACIT, 2(1), v. M/s Shri Synthetics Ltd.,

ITA 451/IND/2006 | 1996-1997
Pronouncement Date: 30-07-2010 | Result: Dismissed

Appeal Details

RSA Number 45122714 RSA 2006
Assessee PAN AAECS0090B
Bench Indore
Appeal Number ITA 451/IND/2006
Duration Of Justice 4 year(s) 1 month(s) 8 day(s)
Appellant The ACIT, 2(1),
Respondent M/s Shri Synthetics Ltd.,
Appeal Type Income Tax Appeal
Pronouncement Date 30-07-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 30-07-2010
Date Of Final Hearing 22-07-2010
Next Hearing Date 22-07-2010
Assessment Year 1996-1997
Appeal Filed On 21-06-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH JUDICIAL MEMBER AND SHRI B.R.KAUSHIK ACCOUNTANT MEMBER PAN NO. : AAECS0090B I.T.A.NO.471/IND/2006 A.Y. : 1996-97 M/S.SHREE SYNTHETICS LIMITED DY. CIT UJJAIN VS UJJAIN APPELLANT RESPONDENT I.T.A.NO.451/IND/2006 A.Y. : 1996-97 ACIT M/S.SHREE SYNTHETICS LIMITED UJJAIN VS UJJAIN APPELLANT RESPONDENT I.T.A.NO.472/IND/2006 A.Y. : 1997-98 M/S.SHREE SYNTHETICS LIMITED DY. CIT UJJAIN VS UJJAIN APPELLANT RESPONDENT I.T.A.NO.452/IND/2006 A.Y. : 1997-98 ACIT M/S.SHREE SYNTHETICS LIMITED UJJAIN VS UJJAIN APPELLANT RESPONDENT ASSESSEE BY : SHRI S. C. GOYAL ADV. DEPARTMENT BY : SHRI K.K.SINGH CIT DR -: 2 :- 2 O R D E R PER BENCH THESE FOUR APPEALS FILED BY THE ASSESSEE AND THE DE PARTMENT INVOLVE SIMILAR ISSUE. THE SAME ARE THEREFORE DEC IDED BY THIS COMMON ORDER. I.T.A.NO. 471/IND/2006 : A.Y. 1996-97: 2. THIS APPEAL HAS BEEN FILED AGAINST THE ORDER DATED 21ST MARCH 2006 OF THE LD.CIT(A). 3. THE LD. COUNSEL DID NOT PRESS THE GROUNDS OF APPEAL NO. 1.1 TO 4. 4. THE ONLY EFFECTIVE GROUND OF APPEAL IS REPRODUCED B ELOW :- BECAUSE THE LD. AUTHORITIES BELOW ERRED IN HOLDING THAT THERE IS A SALE OF SHARES OF BFL SOFTWARE CO. LTD. RESULT ING IN LONG TERM CAPITAL GAINS AT RS. 276.21 LACS AND ANOTHER S ALE OF FORT WILLIAM COMPANY LIMITED GIVING OUT A SHORT TERM CAP ITAL GAINS OF RS. 90 LACS IS NOT CORRECT BOTH ON FACTS AND IN LAW BEING HELD IN PROMOTERS QUOTA. 5. THE FACTS OF THE CASE ARE THAT THE ASSESSEE FILE D RETURN FOR ASSESSMENT YEAR 1996-97 DECLARING LOSS OF RS. 92 29 40 620/-. IN THE -: 3 :- 3 RETURN THE ASSESSEE AMONGST OTHER THINGS DECLARED CAPITAL GAINS ON TRANSFER OF SHARES TO ITS WHOLLY OWNED SUBSIDIARIES AT RS. 3 70 00 000/- AND CLAIMED THAT THE CAPITAL GAINS ON SALE OF SHARE S TO THE WHOLLY OWNED SUBSIDIARY COMPANIES WAS EXEMPT AS PER PROVISIONS O F SECTION 47(IV) OF THE INCOME-TAX ACT 1961. THE ASSESSMENT WAS FINALIZ ED U/S 143(3) OF THE INCOME-TAX ACT 1961 AS PER ORDER DATED 25 TH MARCH 1999 AT A TOTAL LOSS OF RS. 2 20 65 619/-. 6. THE AO SUBSEQUENTLY OBSERVED THAT THE ASSESSEE HAD MADE WRONG CLAIM OF DEDUCTION U/S 47(IV) OF THE INCOME-T AX ACT 1961. FOR THE CAPITAL GAINS OF RS. 3 70 00 000/- . THE AO ALSO OB SERVED THAT THE ASSESSEE HAD WRONGLY CLAIMED DEPRECIATION ON RS. 1 32 20 375/- AS AGAINST RS. 1 01 28 066/- SHOWN IN THE DETAILS FILE D WITH THE RETURN OF INCOME AND THUS THE EXCESS CLAIM OF DEPRECIATION WAS MADE WRONGLY ON ASSETS WORTH RS. 30 72 309/-. THE AO THEREFORE IS SUED NOTICE U/S 148 OF THE INCOME-TAX ACT 1961 ON 20 TH MARCH 2002 WHICH WAS SERVED ON THE ASSESSEE ON 26 TH MARCH 2002. THE ASSESSEE FILED THE RETURN IN RESP ONSE TO THE AFORESTATED NOTICE U/S 148 OF THE INCOME-TAX AC T 1961 ON 14 TH MAY 2002 DECLARING LOSS OF RS. 2 20 65 609/-. THE ASSE SSMENT WAS FINALIZED AS PER ORDER U/S 143(3) READ WITH SECTION 148 OF THE I NCOME-TAX ACT 1961. -: 4 :- 4 DATED 25 TH FEBRUARY 2003 AT A LOSS OF RS. 1 00 25 441/- SU BSEQUENTLY AS PER ORDER U/S 154 OF THE INCOME-TAX ACT 1961 DATED 8.7.2003 THE AO ALLOWED THE ADJUSTMENT OF CARRIED FORWARD SHORT TER M CAPITAL LOSS OF RS. 80 00 000/- FOR ASSESSMENT YEAR 1992-93 AND LONG TE RM CAPITAL LOSS OF RS. 67 69 075/- FOR ASSESSMENT YEAR 1992-93 AND RS. 24 70 200/- FOR ASSESSMENT YEAR 93-94 AGAINST THE AFORESTATED SHORT TERM CAPITAL GAINS OF RS. 90 LAKHS AND THE LONG TERM CAPITAL GAINS OF RS. 2 76 20 902/- AND DETERMINED THE ASSESSED LOSS AT RS. 21 43 814/-. TH E LD.CIT(A) CONFIRMED THE ADDITION OF RS. 3 70 00 000/- ON ACCOUNT OF CAP ITAL GAINS. IT IS HOWEVER OBSERVED THAT THE ADDITIONS WERE MADE OF R S. 90 LACS AND RS. 2 76 20 902/- ON ACCOUNT OF LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAINS RESPECTIVELY. THUS (THE TOTAL ADDITION OF RS . 3 66 20 902/-) WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF CAPITAL GAINS ON TRANSFER OF SHARES TO THE SUBSIDIARY COMPANIES OF THE ASSESSEE. THE TOTAL ADDITION SO MADE WAS THUS RS. 3 66 20 902/- AND NOT RS. 3 70 00 000/- AND THE ASSESSEE HAS ALSO TAKEN OBJECTION TO THE DELETION O F AFORESTATED ADDITION OF RS. 276.21 LACS AND RS. 90 LACS AS CAN BE SEE FROM THE GROUND OF APPEAL REPRODUCED ABOVE. 7. DURING THE COURSE OF RE-ASSESSMENT PROCEEDINGS U/S 147 OF THE INCOME-TAX ACT 1961 IT WAS CONTENDED BY THE ASSESS EE BEFORE THE AO THAT THE ASSESSEE HAD CLAIMED EXEMPTION OF RS.3.70 CRORES ON THE CAPITAL -: 5 :- 5 GAINS OF RS. 3.70 CRORES BUT THE AFORESTATED SUBSID IARY COMPANIES DID NOT ACCEPT THE TRANSACTION FOR THE REASON THAT THE SHAR ES OF BFL SOFTWARE COMPANY LIMITED (IN SHORT BSL ) AND FORT WILLIAM C O. LTD ( FOR SHORT FWIL) WERE FROM PROMOTER QUOTA AND COULD NOT BE REG ISTERED IN THEIR RESPECTIVE NAMES BEFORE EXPIRY OF FIVE YEARS FROM T HE DATE OF ALLOTMENT. THE ASSESSEE ALSO SUBMITTED THAT IT HAD CREDITED AN AMOUNT OF RS. 3.70 CRORES IN ITS BOOKS OF ACCOUNT FOR FINANCIAL YEAR 1 995-96 RELEVANT TO ASSESSMENT YEAR 1996-97 AS ON 30 TH MARCH 1996 BUT REVERSED THE ENTRY IN THE SUBSEQUENT YEARS THAT THE SHARES WERE RECEIVED BACK AND SINCE THE TRANSACTIONS DID NOT MATERIALIZE THE CAPITAL GAINS WERE NOT LIABLE TO BE TAXED. THE AO HELD THAT THE ASSESSEE WAS NOT ENTITL ED TO DEDUCTION U/S 47(IV) OF THE INCOME-TAX ACT 1961 AND THE SHORT TE RM CAPITAL GAINS OF RS. 90 LAKHS AND LONG TERM CAPITAL GAINS OF RS. 2 76 20 902/- WAS LIABLE TO BE TAXED. 8. THE LD.CIT(A) REQUIRED THE ASSESSEE TO FILE A COPY OF BOARDS RESOLUTION AND OTHER DOCUMENTS CLARIFYING THE CIRCU MSTANCES UNDER WHICH THE SHARES WERE SOLD TO THE WHOLLY OWNED SUBSIDIARY COMPANY. HE ALSO REQUIRED THE ASSESSEE TO FILE THE COPIES OF THE BAL ANCE SHEET OF THE COMPANY FOR THE SUBSEQUENT YEARS BUT THE LD. REPRE SENTATIVE OF THE ASSESSEE EXPRESSED HIS INABILITY TO COMPLY WITH THE REQUIREMENT OF FILING THE COPIES OF BOARD RESOLUTIONS AND OTHER DOCUMENTS REGARDING WHOLLY -: 6 :- 6 OWNED SUBSIDIARY COMPANIES. HE SUBMITTED THAT THE A SSESSEE COMPANY HAD BEEN CLOSED AND THE DOCUMENTS HAVING BEEN SHIFT ED TO CALCUTTA IT WAS NOT POSSIBLE TO FILE COPIES THEREOF. THE ASSES SEE HOWEVER FILED COPIES OF ANNUAL REPORT FOR FINANCIAL YEAR 1996-97 AND 1998-99. THE ASSESSEE ALSO FILED WRITTEN SUBMISSIONS DATED 12 TH MARCH 2004 WHICH HAS BEEN DULY TAKEN NOTE OF BY THE LD. CIT(A) AT PAGES 3 & 4 OF THE IMPUGNED ORDER. THE ASSESSEE ALSO FILED WRITTEN SUBMISSIONS ON 17 TH MARCH 2006 THE RELEVANT PORTION OF WHICH HAS BEEN REPRODUCED B Y THE LD. CIT(A) AT PAGES 5 & 6 OF HIS ORDER. IN SHORT IT WAS REITERAT ED THAT THE SHARES OF BSL AND FWIL WERE FROM PROMOTERS QUOTA AND WERE NOT LI ABLE TO BE TRANSFERRED FOR A PERIOD OF 5 YEARS AND AFTER PROTR ACTED CORRESPONDENCE THE COMPANIES REFUSED TO REGISTER THESE SHARES IN T HE NAME OF SUBSIDIARY COMPANIES AND THUS THERE WAS NO TRANSFER WITHIN T HE MEANING OF SECTION 2(47) OF THE INCOME-TAX ACT 1961. IT WAS CONTENDED THAT THE RELEVANT ENTRIES WERE REVERSED IN THE SUBSEQUENT YEARS BY TR ANSFERRING THE AMOUNT OF RS. 370 LAKHS TO RESERVE AND SURPLUS ACCOUNT AS COULD BE SEEN FROM NOTE AT PAGE 14 OF THE ANNUAL REPORT OF 1996-97 RE LEVANT TO ASSESSMENT YEAR 1997-98. THE SHARES OF BSL ACCORDING TO THE AS SESSEE WERE SOLD DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR 1999- 2000 AND THE SHARES OF FWIL WERE SOLD TO ASSESSEE COMPANY AND WERE REGULAR LY SHOWN IN THE RELEVANT BALANCE SHEET. THUS IT WAS VERY CLEAR THA T NO TRANSFER HAD TAKEN -: 7 :- 7 PLACE AND THERE WAS NO QUESTION OF CHARGING OF EITH ER THE SHORT TERM OR THE LONG TERM CAPITAL GAINS DURING THE ASSESSMENT YEAR 1996-97. 9. AFTER CONSIDERING THE WRITTEN SUBMISSIONS OF THE LD .COUNSEL FOR THE ASSESSEE AND OTHER SUCH RELEVANT MATERIAL THE LD.CIT(A) OBSERVED THAT THE ASSESSEE HAD TRANSFERRED 2.5 LAKHS SHARES OF BS L AND 3 LAKHS SHARES OF FWIL TO ITS SUBSIDIARY COMPANIES NAMELY MADHAV IN VESTMENT COMPANY LIMITED (IN SHORT MIL) AND M/S. GOVIND TRADE LINK AND INVESTORS LIMITED (IN SHORT GTIL ) ON 30 TH MARCH 1996 AT A PROFIT OF RS. 370.00 LAKHS. THE LONG TERM CAPITAL ON SALE OF BSL SHARES WAS WORKED OUT AT RS. 276.21 LAKHS AND SHORT TERM CAPITAL GAINS OF SALE F OR SHARES OF FWIL WAS WORKED OUT AT RS. 90 LAKHS. THE AFORESTATED CAPITAL GAINS WAS CLAIMED AS EXEMPT U/S 47(IV) OF THE INCOME-TAX ACT 1961 BUT L ATER ON IT WAS CONTENDED BEFORE THE AO THAT SUCH SALE TRANSACTION IN SHARES OF BSL AND FWIL DID NOT MATERIALIZE AND THE ASSESSEE THEREFOR E CONTENDED AT THE TIME OF ASSESSMENT PROCEEDINGS THAT THE CAPITAL GAI NS DID NOT ARISE. 10. THE LD.CIT(A) ALSO OBSERVED - (I) THAT THE ASSESSEE HAD SHOWN SALE OF SHARES AT RS. 3 70.00 LAKHS AS OTHER INCOME IN ITEM NO.14 OF THE BALANCE SHEET FOR THE ASSESSMENT YEAR 1996-97 BUT NO QUALIFYING NOTE IN RESPECT OF THE SALE IN QUESTION BEING INCOMPLETE WAS -: 8 :- 8 GIVEN IN THE ANNUAL REPORT OR THE DIRECTORS REPORT WHICH WAS FINALIZED ON 8 TH AUGUST 1996 (II) THE ASSESSEE ALSO FAILED TO POINT OUT THAT THE SALE WAS CONDITIONAL OR IN ANY WAY A QUALIFIED SALE. THE ASS ESSEE ALSO FAILED TO FURNISH COPY OF BOARDS RESOLUTION REGARDING SUCH SALE OF SHARES AND COULD NOT CLARIFY FACTUAL SITUATION REGARDING SUBSIDIARY COMPANIES M IL AND GTIL WHICH CEASED TO BE THE SUBSIDIARY COMPANI ES OF THE ASSESSEE IN SUBSEQUENT YEARS (III) THE ASSESSEE ALSO EXPRESSED ITS INABILITY TO FURNIS H THE COPIES OF BOARDS RESOLUTION AND DETAILS OF CIRCUMS TANCES REGARDING CHANGE OF STATUS OF THE AFORESTATED SUBSI DIARY COMPANIES (IV) THE ASSESSEE HAD PLACED RELIANCE ONLY ON THE REVERS AL OF THE SALE ENTRY IN THE SUBSEQUENT FINANCIAL YEAR 199 6-97 AS PER THE NOTE NO.11 OF THE NOTES ON ACCOUNTS IN TH E ANNUAL REPORT FOR FINANCIAL YEAR 1996-97. (V) ACCORDING TO THE AFORESTATED NOTE NO.11 THE ASSESS EE HAD QUALIFIED THAT THE SALE MADE IN THE PREVIOUS YEAR W AS BASED ON THE LEGAL OPINION OBTAINED BY THE ASSESSEE COMPANY THAT INSPITE OF LOCK-IN PERIOD THE SHARES COULD -: 9 :- 9 BE SOLD AND TRANSFERRED TO ITS WHOLLY OWNED SUBSIDI ARIES BUT SUBSEQUENTLY THE CONCERNED COMPANIES REFUSED TO TRANSFER THE SAID SHARES IN THE NAMES OF THE AFORE STATED SUBSIDIARIES AND THE ASSESSEE WAS REQUIRED TO TAKE BACK THE SHARES SOLD TO THE SUBSIDIARY COMPANIES AND REV ERSED THE ENTRIES IN THE BOOKS OF ACCOUNT SETTING OFF TH E AMOUNT OF RS. 3.70 LAKHS AGAINST GENERAL RESERVE. ON THE BASIS OF FOREGOING FACTS THE LD.CIT(A) CONC LUDED THAT THE ASSESSEE HAD TAKEN DELIBERATE AND CONSCIOU S DECISION TO TRANSFER THE SHARES TO SUBSIDIARY COMPA NIES AT MARKET PRICE AND THE ASSESSEE WAS FULLY AWARE THAT THE SHARES IN QUESTION WERE OUT OF PROMOTERS QUOTA HE NCE NOT LIABLE TO BE TRANSFERRED WITHIN A PERIOD OF FIV E YEARS. ACCORDING TO THE LD.CIT(A) THE TRANSACTION WAS SHO WN IN THE BOOKS OF ACCOUNT TO INCREASE THE PROFIT IN ORDE R TO SHOW BETTER FINANCIAL RESULTS OF THE ASSESSEE COMPA NY BECAUSE THE ASSESSEE WAS PLANNING TO GO FOR PUBLIC ISSUE AND RAISED FURTHER FINANCE FROM MARKET/FINANCIAL INSTITUTIONS. THE LD.CIT(A) ALSO OBSERVED THAT THE ASSESSEE BEING AN OLD EXISTING COMPANY WHOSE ACCOUN TS ARE STATUTORILY AUDITED NOT ONLY ITS EMPLOYEES WER E FULLY -: 10 :- 10 AWARE OF THE LEGAL POSITION BUT THE ASSESSEE HAS A LSO TAKEN LEGAL OPINION OF M/S. MULLA & MULLA & CRAIGIE BLUNT & CAROE ADVOCATES WHO HAD EXPRESSLY OPINED THAT THE SHARES IN QUESTION COULD BE TRANSFERRED BY THE ASSESSEE COMPANY TO ITS AFORESTATED WHOLLY OWNED SUBSIDIARIES. THE LD.CIT(A) FOR THE REASONS DISCUSSED IN DETAIL I N PARA 4 AT PAGES 7 TO 12 OF THE IMPUGNED ASSESSMENT ORDER UPHELD THE ACTION OF THE AO IN BRINGING TO TAX THE LONG TERM CAPITAL GAIN AS ALSO THE SHORT TERM CAPITAL GA INS ON THE SALE OF AFORESTATED SHARES. 11. DURING THE COURSE OF HEARING OF THE APPEAL BEFORE U S THE LD. COUNSEL REITERATED THE SUBMISSIONS TAKEN BEFORE THE LOWER AUTHORITIES AND INVITED OUR ATTENTION TO THE PAPER BOOK FILED ON 13 TH FEBRUARY 2009 AND WRITTEN SUBMISSIONS FILED ON 12 TH JULY 2010. HE ALSO RELIED ON THE DECISION IN THE CASE OF CIT V. INFOSYS TECHNOLOGIES LIMITED (2008) 297 ITR 167 (S.C.) IN SUPPORT OF HIS SUBMISSION THAT T HE SHARES HAD NO REALIZABLE VALUE DURING THE LOCK-IN PERIOD AS THE S AME WERE NOT TRANSFERABLE BEFORE THE END OF THE LOCK-IN PERIOD A ND THUS NO INCOME AROSE TO THE ASSESSEE ON THE PURPORTED TRANSFER OF THESE SHARES IN ASSESSMENT YEAR 1996-97. -: 11 :- 11 12. THE LD. SENIOR D.R. SUPPORTED THE ORDERS OF THE LOW ER AUTHORITIES AND SUBMITTED THAT (I) THERE IS NO DISPUTE ON THE F ACTS THAT THE ASSESSEE HAD SHOWN THE SALE OF SHARES OF BSL AND FWIL ON 30 TH MARCH 1996 AND CREDITED ITS ACCOUNT WITH AN AMOUNT OF RS. 370 LAKH S (II) THAT THE ASSESSEE ITSELF HAD DECLARED LONG TERM CAPITAL GAINS OF RS. 2 76 20 902/- AND SHORT TERM CAPITAL GAINS OF RS. 90 LAKHS ON THE AFORESTAT ED TRANSACTIONS IN THE STATEMENT OF INCOME FILED WITH THE RELEVANT RETURN FOR THE ASSESSMENT YEAR 1996-97 (III) THE ASSESSEE HOWEVER CLAIMED DEDUC TION U/S 47(IV) OF THE INCOME-TAX ACT 1961 WHICH WAS LIABLE TO BE WITHDRA WN AS PER THE PROVISIONS OF SECTION 47A OF THE INCOME-TAX ACT 196 1 IN VIEW OF THE FACT THAT THE WHOLLY OWNED SUBSIDIARY COMPANIES HAD CEAS ED TO BE WHOLLY OWNED SUBSIDIARY COMPANIES WITHIN THE STATUTORY PER IOD OF EIGHT YEARS (IV) THE ASSESSEE DURING REASSESSMENT PROCEEDINGS MADE A CLAIM THAT CAPITAL GAINS HAD NOT BEEN EARNED BY IT BECAUSE THE SHARES WERE NOT IN FACT TRANSFERRED AND THE SALE AGREEMENT WAS CANCELLED. ( V) THIS CLAIM WAS MADE ONLY WHEN IT REALIZED THAT THE EXEMPTION U/S 4 7(IV) OF THE INCOME- TAX ACT 1961 WAS LIABLE TO BE WITHDRAWN IN VIEW O F THE FACT THAT ITS AFORESTATED SUBSIDIARIES HAD CEASED TO BE THE WHOLL Y OWNED SUBSIDIARY COMPANIES OF THE ASSESSEE WITHIN THE STATUTORY PERI OD PRESCRIBED U/S 47A OF THE INCOME-TAX ACT 1961 (VI) THE SUBSEQUENT REV ERSAL OF ENTRIES WAS NOT RELEVANT BECAUSE THE EXCHANGE OF SHARES IN LIE U OF MONETARY -: 12 :- 12 CONSIDERATION HAD TAKEN PLACE AND THE ASSESSEE HAD MADE NECESSARY ENTRIES IN ITS BOOKS OF ACCOUNT FOR FINANCIAL YEAR 1995-96 RELEVANT TO ASSESSMENT YEAR 1996-97. 13. ACCORDING TO THE LD. CIT D.R. IN VIEW OF THE DECIS ION IN THE CASE OF ORIENT TRADING COMPANY LIMITED VS. CIT (19 97) 224 ITR 371(S.C.) THE DIFFERENCE BETWEEN BOOK VALUE OF ORI GINAL SHARES AND MARKET VALUE OF SHARES FOR WHICH THE SAME WERE EXCH ANGED WAS TO BE TREATED AS PROFIT OF THE ASSESSEE IN VIEW OF THE FA CT THAT THE ASSESSEE HAD RECEIVED THE MONEY AND GIVEN THE SHARES TO THE SUBS IDIARY COMPANIES. HE ALSO SUBMITTED THAT THE FINDING OF THE AO THAT THE SALE DID NOT TAKE PLACE FOR THE REASON THAT THE SHARES COULD NOT BE REGISTE RED IN THE NAME OF THE TRANSFEREES WAS OF NO HELP TO THE ASSESSEE BECAUSE THE ORDER OF THE AO HAD MERGED WITH THE ORDER OF THE LD.CIT(A) WHO HAS GIVEN A CLEAR FINDING THAT THE TRANSACTIONS IN QUESTION WERE LIAB LE TO BE TAXED AS SHORT TERM CAPITAL GAINS AND LONG TERM CAPITAL GAINS IN A SSESSMENT YEAR 1996- 97. 14. IN REPLY TO THE SUBMISSIONS OF THE LD. SENIOR D.R. THE LD. COUNSEL SUBMITTED THAT THE DECISION OF THE LD.CIT(A ) ON THIS ISSUE HAD BEEN ACCEPTED BY THE DEPARTMENT BUT THE ASSESSEE I S IN APPEAL AGAINST IT AND THE LD.CIT(A) HAS IGNORED THE FINDING OF THE LD . AO THAT THE SALE DID NOT TAKE PLACE AS PER THE CLAIM MADE BY THE ASSESSE E. HE ALSO SUBMITTED -: 13 :- 13 THAT THE DECISION IN THE CASE OF ORIENT TRADING CO LTD. VS. CIT (SUPRA) DID NOT APPLY TO THE FACTS OF THE CASE BECAUSE IN T HAT CASE THE SHARES OF ONE COMPANY VALUED AT COST AND HELD AS STOCK IN TRADE W ERE EXCHANGED WITH THE SHARES OF ANOTHER COMPANY WHEREAS IN THE CASE OF THE ASSESSEE THE SHARES WERE PURPORTED TO BE SOLD BUT THE SUBSIDIAR Y COMPANIES RESCINDED THE SALE AGREEMENT BECAUSE THE SHARES COULD NOT BE REGISTERED IN THEIR RESPECTIVE NAMES BEFORE THE END OF LOCK-IN PERIOD O F FIVE YEARS AND THUS THERE WAS NO SALE WITHIN THE SCOPE AND MEANING OF S ECTION 2(47) OF THE INCOME-TAX ACT 1961. HE ALSO CONTENDED THAT MERELY BECAUSE THE SHARES WERE PURPORTED TO BE TRANSFERRED THE CAPITAL GAINS WOULD NOT ARISE IN VIEW OF THE SUBSEQUENT EVENTS BECAUSE THE SHARES W ERE RETURNED BY THE SUBSIDIARY COMPANIES TO THE ASSESSEE THE ENTRIES W ERE REVERSED THE SHARES WERE SHOWN AS THE INVESTMENTS OF THE ASSESSEE COMPA NY AND THE PROFIT OF RS. 3 70 00 000/- WAS DEBITED TO THE RESERVE ACCOUN T AS WAS EVIDENT FROM THE SUBSEQUENT BALANCE SHEET AND THE NOTE GIVEN IN THE BALANCE SHEET FOR ASSESSMENT YEAR 1997-98. THE LD. COUNSEL ALSO POINT ED OUT THAT THE ASSESSEE COMPANY CLOSED BOOKS OF ACCOUNT ON 30 TH JUNE 1996 AND THE FINANCIAL YEAR WAS THE PREVIOUS YEAR ONLY FOR THE P URPOSE OF INCOME-TAX ACT 1961 AND THUS IT COULD NOT BE SAID THAT THE TRANSACTION WAS ENTERED INTO AT THE FAG END OF THE RELEVANT ACCOUNTING PERI OD OF THE ASSESSEE COMPANY. -: 14 :- 14 15. WE HAVE CAREFULLY CONSIDERED THE ISSUE IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW MATERIALS PLACED ON RECORD A ND RIVAL SUBMISSIONS. THERE IS NO DISPUTE ON THE FACTS THAT THE ASSESSEE HAD TRANSFERRED THE SHARES TO ITS WHOLLY OWNED SUBSIDIARIES AS ON 30 TH MARCH 1996 MADE NECESSARY ENTRIES IN ITS BOOKS OF ACCOUNT CREDITED THE PROFIT OF RS. 3.70 CRORES TO ITS BOOKS OF ACCOUNT AND HAD SHOWN THE CA PITAL GAINS IN ITS COMPUTATION OF INCOME FOR ASSESSMENT YEAR 1996-97 COPY OF WHICH IS PLACED AT PAGES 29 TO 35 OF THE PAPER BOOK FILED BY THE ASSESSEE. IT IS ALSO NOT DISPUTED THAT THE AFORESTATED TWO SUBSIDIARY CO MPANIES CEASED TO BE THE WHOLLY OWNED SUBSIDIARY COMPANIES OF THE ASSESS EE WITHIN A PERIOD OF EIGHT YEARS AND THEREFORE THE EXEMPTION U/S 47(IV ) OF THE INCOME-TAX ACT 1961 WAS LIABLE TO BE WITHDRAWN AS PER THE PRO VISIONS OF SECTION 47A OF THE INCOME-TAX ACT 1961. THOUGH THE LD. COUN SEL HAS ALSO CLAIMED THAT THE ASSESSEE HAD ENTERED INTO CORRESPONDENCE W ITH THE SUBSIDIARY COMPANIES AS PER DETAILS GIVEN AT PAGES 10 TO 12 O F THE PAPER BOOK AND THAT THE SUBSIDIARY COMPANIES HAD INFORMED THE ASSE SSEE THAT SINCE THE SHARES COULD NOT BE REGISTERED IN THEIR RESPECTIVE NAMES THE SHARES IN QUESTION WERE RETURNED TO THE ASSESSEE AND THE CONT RACT WAS CANCELLED BUT THE COPIES OF RELEVANT CIRCUMSTANCES WERE NOT EXPLA INED BEFORE THE LD.CIT(A). THE FACT THAT THE ENTRIES WERE REVERSED IN THE SUBSEQUENT ASSESSMENT YEARS AND NOTE TO THAT EFFECT WAS ALSO G IVEN IN THE RELEVANT -: 15 :- 15 BALANCE SHEET HAS HOWEVER NOT BEEN DENIED. THE ON LY DISPUTE IS WHETHER THE AMOUNT IN QUESTION IS LIABLE TO BE TAXED AS CAP ITAL GAINS IN VIEW OF THE FACTS DISCUSSED ABOVE AND THE REASONS GIVEN BY THE LD. CIT(A). THE LD.CIT(A) HAS MAINLY UPHELD THE ACTION OF THE AO FO R THE REASON THAT THE ASSESSEE HAD DELIBERATELY AND CONSCIOUSLY ENTERED I NTO THE TRANSACTIONS IN QUESTION TO TRANSFER THE SHARES WITHIN THE LOCK-IN PERIOD FOR THE EXTRANEOUS REASONS OF SHOWING A PROFIT OF RS. 3.70 CRORES IN I TS BOOKS OF ACCOUNT WITH A VIEW TO SHOW BETTER FINANCIAL RESULTS FOR THE PUR POSE OF ATTRACTING SHARE CAPITAL FOR ITS INTENDED PUBLIC ISSUE OF SHARES AND TO GET MORE FINANCES OR LOANS FROM THE FINANCIAL INSTITUTIONS. THE LD. COUN SEL HAS OBJECTED TO THE FINDING OF THE LD.CIT(A) THAT THE ASSESSEE HAD DELI BERATELY AND CONSCIOUSLY ENTERED INTO THE TRANSACTION IN QUESTIO N ON 30 TH MARCH 1996. IN OUR CONSIDERED OPINION THE OBJECTION OF THE LD. COUNSEL IS OF NO RELEVANCE BECAUSE ADMITTEDLY THE SHARES WERE WITHIN THE LOCK-IN PERIOD OF FIVE YEARS AND WERE TRANSFERRED UNDER THE LEGAL ADV ICE THAT SUCH TRANSFER WAS POSSIBLE TO ITS WHOLLY OWNED SUBSIDIARY COMPANI ES. THIS CLEARLY SHOW THAT THE TRANSACTIONS TO TRANSFER THE SHARES W ITHIN LOCK-IN PERIOD WAS WITH THE FULL KNOWLEDGE THAT THE SHARES WERE NOT LI ABLE TO BE ORDINARILY TRANSFERRED FOR THE PERIOD OF FIVE YEARS. HOWEVER THE AMOUNT IN QUESTION CANNOT BE LIABLE TO BE TAXED AS CAPITAL GAINS ONLY FOR THE REASON THAT THE ASSESSEE HAD ENTERED INTO THE TRANSACTIONS FOR EXTR ANEOUS REASONS OR -: 16 :- 16 ARRANGED ITS AFFAIRS WITH ITS SUBSIDIARIES. IT HAS BEEN CLAIMED THAT THE TRANSACTION WAS REVERSED BY THE ASSESSEE IN THE SUB SEQUENT YEAR; THAT THE BSL HAD WRITTEN TO MIL ONE OF ITS SUBSIDIARIES ON 19 TH AUGUST 1996 THAT THE SHARES COULD NOT BE TRANSFERRED TILL 31 ST OCTOBER 1998 THAT AS PER LETTER DATED 27 TH MARCH 1997 THE MIL ALSO HAD INFORMED THE ASSESSE E COMPANY ON 27.3.1997 THAT THEY COULD NOT HOLD THE SHARES AND HAD ACCORDINGLY RETURNED THE SHARES AND TREATED THE CON TRACT AS CANCELLED. SIMILARLY THE ANOTHER SUBSIDIARY M/S. GOVIND TRADE LINK AND INVESTORS LIMITED ( FOR SHORT GTIL) HAD INFORMED THE ASSESSE E ON 27 TH MARCH 1997 THAT IT COULD NOT HOLD THE SHARES IN QUESTION AND RETURNED THE SAME AND CANCELLED THE CONTRACT. THUS ON 27 TH MARCH 1997 ADMITTEDLY IT WAS CLEAR TO THE ASSESSEE THAT THE CONTRACTS HAD BEEN R ESCINDED. THE RELEVANT ENTRIES WERE ALSO MADE IN THE BOOKS OF ACCOUNT ACC ORDINGLY YET THE ASSESSEE FAILED TO FILE ANY REVISED RETURN FOR ASSE SSMENT YEAR 1996-97 OR OTHERWISE BRING IT TO THE NOTICE OF THE AO THAT THE SALE TRANSACTIONS GIVING RISE TO THE CAPITAL GAINS OF RS. 3.70 CRORES HAS BE EN CANCELLED AND THE CAPITAL GAINS HAD NOT BEEN EARNED. EVEN DURING THE PROCEEDINGS FOR FINALIZING THE ORIGINAL ASSESSMENT FOR ASSESSMENT Y EAR 1996-97 IN THE CASE OF THE ASSESSEE U/S 143(3) OF THE INCOME-TAX ACT 1 961 AS PER ORDER DATED 25 TH MARCH 1999 WHICH WAS MUCH AFTER THE CANCELLATION OF THE TRANSACTIONS IN QUESTION THE ASSESSEE DID NOT MAKE ANY CLAIM BEFORE THE -: 17 :- 17 AO THAT THE AGREEMENT FOR SALES IN QUESTION HAD BEE N RESCINDED AND THE TRANSACTIONS OF TRANSFER OF SHARES DID NOT MATERIAL IZE. EVEN THE RETURN FILED IN RESPONSE TO THE NOTICE U/S 148 OF THE INCOME-TAX ACT 1961. THE ASSESSEE DID NOT IN ANY MANNER DISCLOSE THE FACT TH AT THE TRANSACTIONS DID NOT MATERIALIZE. THE FAILURE OF THE ASSESSEE TO FIL E A REVISED RETURN WITHIN THE STATUTORY PERIOD OR MAKE A CLAIM BEFORE THE FIN ALIZATION OF ASSESSMENT TO THE EFFECT THAT THE TRANSACTIONS GIVING RISE TO CAPITAL GAINS HAD BEEN CANCELLED HAS NOT BEEN DENIED BY THE LD. COUNSEL. I T IS THUS VERY CLEAR THAT THE LONG TERM CAPITAL GAINS OF RS. 3.70 CRORES WAS SHOWN BY THE ASSESSEE ITSELF IN ITS STATEMENT OF INCOME FILED WITH THE RE TURN OF INCOME FOR ASSESSMENT YEAR 1996-97 AND NOT CLAIM WAS MADE BY F ILING A REVISED RETURN THAT THE CAPITAL GAINS HAD NOT ARISEN TO THE ASSESSEE. THUS THE CAPITAL GAINS WAS OFFERED TO TAX BY THE ASSESSEE IT SELF IN ITS RETURN OF INCOME. UNDISPUTEDLY THE ASSESSEE HAD CLAIMED THA T THE AFORESTATED CAPITAL GAIN WAS EXEMPT U/S 47(IV) OF THE INCOME-TA X ACT 1961. HOWEVER THE ASSESSEE HAS ALSO NOT DISPUTED THAT THE CLAIM O F EXEMPTION U/S 47(IV) WAS LIABLE TO BE WITHDRAWN BY THE ASSESSING OFFICER IN VIEW OF THE PROVISIONS OF SECTION 47A OF THE INCOME-TAX ACT 196 1 BECAUSE THE AFORESTATED MIL AND GTIL HAD CEASED TO BE WHOLLY OW NED SUBSIDIARY COMPANIES OF THE ASSESSEE WITHIN THE PRESCRIBED STA TUTORY PERIOD. IN THE RETURN OF INCOME FILED ON 14.5.2002 IN RESPONSE TO NOTICE U/S 148 OF THE -: 18 :- 18 INCOME-TAX ACT 1961 ISSUED ON 20 TH MARCH 2002 AND SERVED ON THE ASSESSEE ON 26 TH MARCH 2002 ALSO THE ASSESSEE DID NOT MAKE ANY CL AIM THAT THE CAPITAL GAIN HAS NOT ARISEN TO IT. THE LD. COUNSEL COULD NOT ALSO DENY THE FACT THAT THE RELEVANT BOARDS RESOLUTION AND OTHER CORRESPONDENCE COULD NOT BE FILED BEFORE THE LD.CIT (A). IT WAS BROUGHT TO THE NOTICE OF THE LD. COUNSEL THAT ONCE CAPITAL GAI NS HAD BEEN OFFERED FOR TAX IN THE RETURN OF INCOME AND THE ASSESSEE HAD NO T MODIFIED ITS STATEMENT OF INCOME BY FILING THE REVISED RETURN O F INCOME AND EVEN AT THE TIME OF ORIGINAL ASSESSMENT PROCEEDINGS IT WAS NOT CLAIMED THAT THE CAPITAL GAINS HAD NOT ARISEN TO IT IN VIEW OF THE FACTS DISCUSSED ABOVE THE AO HAD NO AUTHORITY TO IGNORE THE AMOUNT OF RS. 3.7 0 CRORES OFFERED FOR TAX AS CAPITAL GAINS BY THE ASSESSEE IN THE ORIGINA L RETURN OF INCOME IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT I N THE CASE OF GOETZE (INDIA) LIMITED VS. CIT (2006) 284 ITR 323 ( S. C. ). A RELEVANT PORTION OF WHICH IS REPRODUCED BELOW :- (HEAD NOTE) THE QUESTION RAISED IN THIS APPEAL RELATES TO WHET HER THE APPELLATE ASSESSEE COULD MAKE A CLAIM FOR DEDUCTION OTHER THAN BY FILING A REVISED RETURN. XX XX XX XX HE HAS RELIED UPON THE DECISION OF THIS COURT IN NATIONAL THERMAL POWER COMPANY LTD VS. CIT [1998] 229 -: 19 :- 19 ITR 383 TO CONTEND THAT IT WAS OPEN TO THE ASSESSE E TO RAISE THE POINTS OF LAW EVEN BEFORE THE APPELLATE TRIBUNA L THE DECISION IN QUESTION IS THAT THE POWER OF THE TRIBUNAL UNDER SECTION 254 OF THE INCOME-TAX ACT 19 61 IS TO ENTERTAIN FOR THE FIRST TIME A POINT OF LAW PROVIDE D THE FACT ON THE BASIS OF WHICH THE ISSUE OF LAW CAN BE RAISED B EFORE THE TRIBUNAL. THE DECISION DOES NOT IN ANY WAY RELATE T O THE POWER OF THE AO TO ENTERTAIN A CLAIM FOR DEDUCTION OTHERWISE THAN BY FILING A REVISED RETURN. IN THE CIRCUMSTANC ES OF THE CASE WE DISMISS THE CIVIL APPEAL. 16. SO FAR AS THE WITHDRAWAL OF EXEMPTION U/S 47(IV) RE AD WITH SECTION 47A OF THE INCOME-TAX ACT 1961 IS CONCERNE D WE ARE OF THE CONSIDERED OPINION THAT ONCE THE TRANSFEREE SUBSIDI ARY COMPANIES HAD CEASED TO EXIST AS WHOLLY SUBSIDIARY COMPANIES OF T HE ASSESSEE THE EXEMPTION CLAIMED WAS LIABLE TO BE WITHDRAWN AND TH E ACTION OF THE LOWER AUTHORITIES CANNOT BE DISTURBED ON THIS POINT. WE A RE ALSO OF THE CONSIDERED OPINION THAT THE I.T.A.T. IS COMPETENT T O CONSIDER ANY RELATED ISSUE WHILE DECIDING GROUNDS OF APPEAL BEFORE IT A ND EVEN IF THE LOWER AUTHORITIES HAVE NOT CONSIDERED ANY ASPECT OF THE M ATTER WHICH HAS A DIRECT BEARING ON THE ALLOWABILITY OR OTHERWISE OF A CLAIM OR TAXABILITY OF THE INCOME UNDER CONSIDERATION AS PER GROUNDS OF A PPEAL BEFORE THE -: 20 :- 20 I.T.A.T. SUCH ASPECT CAN BE CONSIDERED BY THE I.T .A.T. FOR DECIDING THE ISSUE BEFORE IT. THE FOREGOING SETTLED POSITION OF LAW WAS ALSO BROUGHT TO THE NOTICE OF THE LD. COUNSEL AT THE TIME OF HEARIN G AND HE DID NOT CONTROVERT IT. IN VIEW OF THE FOREGOING DISCUSSION WE ARE OF THE CONSIDERED OPINION THAT RESPECTFULLY FOLLOWING THE DECISION IN THE CASE OF HON'BLE APEX COURT IN THE CASE OF CIT VS. GOETZE (I NDIA) LIMITED (SUPRA) THE CAPITAL GAINS OF RS. 3.70 CRORES SHOWN BY THE A SSESSEE IN ITS COMPUTATION OF INCOME FILED WITH THE ORIGINAL RETUR N OF INCOME IS LIABLE TO BE TAXED IN THE HANDS OF THE ASSESSEE. WE HAVE ALRE ADY HELD THAT THE EXEMPTION U/S 47(IV) OF THE INCOME-TAX ACT 1961. HA S BEEN RIGHTLY WITHDRAWN BY THE ASSESSING OFFICER IN THE REASSESSM ENT PROCEEDINGS IN VIEW OF THE ADMITTED FACT THAT THE AFORESTATED SUBS IDIARIES HAD CEASED TO BE THE WHOLLY OWNED SUBSIDIARY COMPANIES OF THE ASSESS EE COMPANY. THE VALIDITY OF THE REASSESSMENT PROCEEDINGS U/S 147 OF THE ACT HAS ALSO BEEN UPHELD BY THE LD. CIT(A) AND THE DECISION ON THAT I SSUE HAS BEEN ACCEPTED BY THE ASSESSEE. WE THEREFORE SEE NO REASON TO IN TERFERE WITH THE DECISION OF THE LD.CIT(A) ON THIS ISSUE. THE GROUND OF APPEAL IS THEREFORE REJECTED.THE APPEAL OF THE ASSESSEE IS ACCORDINGLY DISMISSED. I.T.A.NO. 451/IND/2006 A. Y. 1996-97 : (REVENUES APPEAL ) 17. THIS APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAIN ST THE ORDER DATED 21 ST MARCH 2006 OF THE LD.CIT(A). -: 21 :- 21 18. THE ONLY GROUND OF APPEAL IS AGAINST THE DECISION O F THE LD.CIT(A) IN DELETING THE ADDITION OF RS. 3 84 039/ - ON ACCOUNT OF DEPRECIATION @ 50 %. 19. THE AO WHILE FINALIZING THE ASSESSMENT U/S 143(3) R EAD WITH SECTION 147 OF THE INCOME-TAX ACT 1961 AS PER HIS ORDER DATED 25 TH FEBRUARY 2003 OBSERVED THAT THE ASSESSEE HAD GIVE N THE DETAILS OF MACHINERY WORTH RS. 1 01 28 066/- WHEREAS THE DEPRE CIATION HAD BEEN CLAIMED ON MACHINERY AT A COST OF RS. 1 32 20 375/- AND THEREFORE EXCESS DEPRECIATION HAD BEEN CLAIMED ON MACHINERY OF RS. 3 0 72 309/-. THE ASSESSEE EXPLAINED THAT THE EXCESS AMOUNT WAS ON AC COUNT OF EXCHANGE RATE FLUCTUATION AND THE LIABILITY ON THE FOREIGN L OAN FOR THE PURCHASE OF MACHINERY HAD INCREASED. ACCORDING TO THE ASSESSEE THE EXCESS LIABILITY ON ACCOUNT OF INCREASED RATE OF FOREIGN EXCHANGE WA S A CAPITAL EXPENDITURE LIABLE TO DEPRECIATION AND THE CLAIM OF THE ASSESSEE WAS CORRECT. THE AO REJECTED THE CLAIM OF THE ASSESSEE AND HELD THAT THE EXCHANGE RATE DIFFERENCE OF RS. 70 90 000/- HAD ALR EADY BEEN INCLUDED BY THE ASSESSEE IN THE COST OF MACHINERY SHOWN AT RS. 1 01 28 066/- AS PER DETAILS GIVEN AT PAGE 5 OF THE ASSESSMENT ORDER AND THE CLAIM OF DEPRECIATION @ 25 % ON THE AMOUNT OF RS. 30 72 309 /- WAS INADMISSIBLE. THE AO THEREFORE ALLOWED DEPRECIATION @ 12-1/2 % ON THE AMOUNT OF -: 22 :- 22 RS. 30 72 309/- AND MADE THE ADDITION OF RS. 3 84 0 39/- WHICH WAS CHALLENGED IN APPEAL BY THE ASSESSEE. 20. BEFORE THE LD.CIT(A) THE ASSESSEE FILED WRITTEN SU BMISSIONS WHICH HAVE BEEN REPRODUCED AT PAGES 4 & 5 OF THE IM PUGNED ORDER OF THE LD.CIT(A). IT WAS SUBMITTED THAT THERE WAS ESCALATI ON OF PRICE BECAUSE OF FLUCTUATION OF EXCHANGE RATE DURING THE ACCOUNTING PERIOD RELEVANT TO ASSESSMENT YEAR 1996-97 AND FOUR PAYMENTS WERE MADE AT HIGHER RATE OUT OF WHICH TWO PAYMENTS WERE MADE IN THE MONTHS OF AP RIL 1995 AND ANOTHER TWO PAYMENTS WERE MADE IN OCTOBER AND NOVEM BER 1995 AND THAT THE AO WAS NOT CORRECT IN HOLDING THAT THE PAY MENTS MADE IN OCTOBER AND NOVEMBER 1995 WERE ENTITLED TO ONLY 50 % OF T HE DEPRECIATION AT THE AVAILABLE RATE BECAUSE THE MACHINERY WAS ALREA DY IN USE AND THE FOREIGN EXCHANGE FLUCTUATION WOULD ADD TO THE TOTA L COST OF THE MACHINERY NOT ONLY FOR SIX MONTHS BUT WOULD BE ENTITLED FOR DEPRECIATION AT FULL FOR THE ENTIRE YEAR. IT WAS ALSO SUBMITTED THAT IN VIEW OF THE DECISION IN THE CASE OF CIT VS. ARVIND MILLS LIMITED 193 ITR 255( S. C.) WIDIA (I) LIMITED VS. CCIT 233 ITR 1 ( KERALA) AND CIT VS. M OTOR INDUSTRIES CO.LTD. 173 ITR 374 (KAR) THE INCREASE IN THE CO ST OF THE ASSETS ON THE MONEY PAYABLE IN FOREIGN CURRENCY WAS TO BE ADDED T O THE COST OF THE ASSETS AS PER THE PROVISIONS OF SECTION 43A OF THE INCOME-TAX ACT 1961. IT WAS ALSO SUBMITTED THAT THE CLAIM OF THE ASSESSEE W AS SUPPORTED BY -: 23 :- 23 CIRCULAR FILE NO. 1(40-8/67/TPL) DATED OCTOBER 9 1 967 OF THE C.B.D.T. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE I.T .A.T. IN THE CASE OF DY. CIT VS. ICICI(INDIA) LIMITED 85 ITD 85 (CALCUTTA) ( T.M.). THE LD.CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE DEPRECIATION COULD NOT BE RESTRICTED MERELY BECAUSE RELIABILITY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION WAS DISCHARGED IN T HE LATER HALF OF THE FINANCIAL YEAR. 21. THE LD. CIT DR RELIED ON THE ASSESSMENT ORDER. THE LD. COUNSEL SUBMITTED THAT THE MACHINERY HAD BEEN INSTALLED DUR ING THE FINANCIAL YEAR 1989-90 AND ADDITIONAL LIABILITY RELATED TO THE MAC HINERY UTILIZED IS TO BE CONSIDERED AS THE COST OF THE MACHINERY ENTITLED TO DEPRECIATION FOR THE ENTIRE PERIOD. 22. ON CAREFUL CONSIDERATION OF FACTS IN VIEW OF THE DE CISIONS OF THE LOWER AUTHORITIES MATERIAL PLACED ON RECORD AND TH E RIVAL SUBMISSIONS WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THE LIABILITY ON ACCOUNT O F DIFFERENCE IN EXCHANGE RATE AROSE DURING THE RELEVANT ACCOUNTING PERIOD. THE MACHINERY FOR WHICH THE LIABILITY HAS INCREASED HAS BEEN UTIL IZED FOR THE ENTIRE ACCOUNTING PERIOD AND THEREFORE THE DATE OF PAYME NT OF THE LOAN IS NOT RELEVANT FOR ENHANCEMENT OF COST OF MACHINERY AND A LLOWING DEPRECIATION THEREON. IT HAS BEEN HELD IN THE CASE DY. CIT VS. I CICI (INDIA) LIMITED -: 24 :- 24 (SUPRA) THAT THE ASSESSEE SHOULD BE ENTITLED TO DEP RECIATION ON THE ENHANCED LIABILITY IN RESPECT OF COST OF THE ASSETS DUE TO FLUCTUATION IN THE EXCHANGE RATE. THE RELEVANT PORTION OF THE AFORESTA TED ORDER IS REPRODUCED BELOW :- .THE ASSESSEE SHOULD BE ENTITLED TO DEPRECIATION AS WELL AS INVESTMENT ALLOWANCE ON THE ENHANCED LIABILITY IN R ESPECT OF THE COST OF THE ASSETS CONCERNED DUE TO FLUCTUATION IN THE EXCHANGE RATE. THIS VIEW IS FURTHER FORTIFIED BY TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. VEGETABLE PRODUCTS LTD. [1973] 88 ITR 192 WHEREIN IT WAS HELD THAT IF THE COURT FINDS THAT THE LANGUAGE OF T HE TAXING PROVISION IS AMBIGUOUS OR CAPABLE OF MORE MEANINGS THAN ONE THEN THE COURT HAS TO ADOPT THAT INTERPRETATIO N WHICH FAVOURS THE ASSESSEE MORE PARTICULARLY SO WHEN TH E PROVISION RELATES TO THE IMPOSITION OF PENALTY. I THEREFORE CONCUR WITH THE LD. ACCOUNTANT MEMBER. 23. RESPECTFULLY FOLLOWING THE AFORESTATED DECISION WE SEE NO REASON TO INTERFERE WITH THE DECISION OF THE LD.CIT (A) WHICH IS CONFIRMED. THE APPEAL OF THE REVENUE IS DISMISSED. I.T.A.NO. 472/IND/2006 ASSESSEES APPEAL ( A.Y. 1 997-98) : -: 25 :- 25 24. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 21 ST MARCH 2006 OF THE LD.CIT(A) FOR THE ASSESSMENT Y EAR 1997-98. 25. THE FIRST GROUND OF APPEAL IS REPRODUCED BELOW :- BECAUSE ON FACTS AND CIRCUMSTANCES OF THE CASE TH E LD. AUTHORITIES BELOW ERRED IN INCLUDING THE INTEREST O N ICD LOAN TO AN EXTENT OF RS. 11699000/- TO TAX SINCE NO INTE REST IS ACCRUED DURING THIS YEAR AND CHARGED TO THE COMPANY S A/C AND THE WHOLE/SUBSTANTIAL AMOUNT HAS BEEN WRITTEN O FF AS BAD DEBT IN SUBSEQUENT PERIOD ENDING JUNE97 (WHEN THE BOOKS WERE CLOSED) RELEVANT FOR ASSESSMENT YEAR 98-99. 26. THE SECOND GROUND OF APPEAL IS GENERAL IN NATURE. 27. THE FACTS OF THE CASE ARE THAT THE ASSESSMENT U/S 1 43(3) OF THE INCOME-TAX ACT 1961 IN THE CASE OF THE ASSESSEE WA S FINALIZED AS PER ORDER U/S 143(3) DATED 31 ST MARCH 2000 AT A TOTAL LOSS OF RS. 17 57 66 900/-. THE ASSESSMENT WAS REOPENED FOR THE REASONS DISCUSSED IN THE ASSESSMENT ORDER BY ISSUING A NOTICE U/S 148 OF THE INCOME-TAX ACT 1961 DATED 4 TH MARCH 2002 WHICH WAS SERVED ON THE ASSESSEE ON 26 TH MARCH 2002. THE AO AMONG OTHER THINGS OBSERVED TH AT INTEREST OF RS. 1 16 99 000/- HAS ACCRUED TO THE ASSESSEE ON I NTER-CORPORATE DEPOSITS BUT THE ASSESSEE HAD NOT ACCOUNTED FOR THE AFORESTA TED INTEREST IN ITS BOOKS OF ACCOUNT. THE AO HELD THAT SINCE THE BOOKS OF ACC OUNT WERE MAINTAINED -: 26 :- 26 ON MERCANTILE SYSTEM THE AMOUNT OF RS. 1 16 99 000 /- WAS TO BE CONSIDERED AS THE INCOME OF THE ASSESSEE ON ACCRUAL BASIS IN VIEW OF THE DECISION IN THE CASES OF CIT VS. STATE BANK OF TRAV ANCORE 158 ITR 102 (S.C.) AND TUTICORIN ALKALI CHEMICALS AND FERTILIZ ERS LIMITED VS. CIT (1997) 227 ITR 172 ( S. C.). THE APPEAL FILED BY TH E ASSESSEE ON THIS ISSUE WAS REJECTED BY THE LD. CIT(A) WHO CONFIRMED THE A DDITION OF RS. 1 16 99 000/-. THE RELEVANT PORTION OF THE ORDER OF THE LD.CIT(A) AT PAGES 8 TO 9 OF THE IMPUGNED ORDER IS REPRODUCED BELOW :- 4.3.3. THERE IS NO DISPUTE TO THE BROAD PROPOSITIO N OF FACTS. ICD TO THE EXTENT OF RS. 517.83 LAKHS WERE OUTSTANDING IN SEVEN PARTIES ON WHICH INTEREST WAS ALSO OUTSTANDING TO THE EXTENT OF RS. 361.58 LAKHS. SUCH POSITION PRIMA-FACIE PERTAINS TO THE FINANCIAL YEAR ENDING 3 1.3.96 I.E. RELEVANT FOR ASSESSMENT YEAR 96-97. ON SUCH OUTSTAN DING AMOUNT FURTHER INTEREST FOR THE FINANCIAL YEAR 97-9 8 WAS NOT CHARGED WHICH WAS WORKED OUT BY THE ASSESSING OFFI CER AT RS. 116.99 LAKHS. THE COMPANY IS FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING. IN THE PAST ALSO WHEN THERE WAS NO RECOVERY THE APPELLANT COMPANY HAS DEBITED INTERES T TO THE PARTIES ACCOUNT AS IS EVIDENT FROM THE CHART ENCLO SED. BUT FOR THE REASON THAT THE EXTENDED ACCOUNTING YEAR EN DED ON -: 27 :- 27 30.06.97 THERE WAS NO REASON TO FOLLOW ANY DIFFEREN T STAND OR ACCOUNTING PRACTICE IN RESPECT OF CHARGING OF INTER EST ON SUCH ICDS WHICH WAS ALL ALONG BEEN CHARGED ON ACCRUAL B ASIS. IT IS ALSO SETTLED POSITION OF LAW THAT THOUGH ACCOUNT ING ENTRY ARE RELEVANT BUT THEY ARE NOT CONCLUSIVE IN SO MUC H AS BY NOT PASSING ENTRY IN THE BOOKS OF ACCOUNT THE APPELLAN T CANNOT DEFER THE ACCRUAL OF INTEREST WHICH ACCRUES AS PER TERMS OF CONTRACT BETWEEN THE APPELLANT AND OTHER PARTY AND ACCOUNTING PRINCIPLE AND PRACTICE FOLLOWING. THUS IT CLEARLY EMERGES THAT THE AMOUNT OF RS. 116.99 LAKHS WAS THE ACCRUED INTEREST ON ID UP TO 31.3.97. 4.3.4. IT IS ALSO SETTLED POSITION OF LAW THAT EACH AND EV ERY AY IS A SEPARATE UNIT OF ASSESSMENT AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE CANNOT BE PERMITTED TO DESTROY THE ACCRUAL OF INCOME WHICH HA S ALREADY ACCRUED AS DISCUSSED ABOVE. THE ARBITRATION AWARD WHICH IS BEING RELIED ON BETWEEN APPELLANT A ND THE THIRD PARTIES WERE SETTLED THROUGH THE PRIVATE ARBITRATORS. NOTHING HAS BEEN BROUGHT ON RECORD THA T PRIOR TO ARBITRATION ANY CIVIL SUIT WERE FILED BY THE APPELLANT COMPANY FOR RECOVERY OF SUCH HUGE AMOUNTS -: 28 :- 28 AND ARBITRATION PROCEEDINGS WERE INITIATED AT THE B EHEST OF COURT OR THE APPELLANT COMPANY HAVING BEEN LEFT WITH NO ALTERNATIVE TO TAKE RECOURSE TO THE ARBITRA TION PROCEEDINGS. EVEN COPIES OF SUCH ARBITRATION AWARD HAVE NOT BEEN FILED AND AS PER BRIEF TERMS OF AWARD NOTED AGAINST MODE OF RECOVERY IT IS SEEN THAT NOM INAL LUMP SUM AMOUNT OF RS. 7.48 LAKHS WAS ONLY AGREED TO BE PAID BY 30.9.97 TO 31.10.97 AS NOTED AGAINST THE NAME OF SEVEN PARTIES AND BALANCE AMOUNT OF APPROXIMATELY RS. 49.00 LAKHS WAS AGREED TO BE RECOVERED IN 6 OR 4 QUARTERLY INSTALLMENTS STARTING FROM 1.10.97. NO EVIDENCE OR DETAILS HAVE BEEN BROUGHT O N RECORD TO ESTABLISH THAT LARGE AMOUNT OF RS. 923.02 LAKHS WAIVED AS PER TERMS OF ARBITRATION ( WHICH PRIMA-FACIE DOES NOT INCLUDE FURTHER INTEREST FOR T HE PERIOD 1.4.96 TO THE DATE OF ARBITRATION AWARD) WAS NECESSITATED BY BUSINESS CONSIDERATIONS AND FINANCI AL POSITION OF ALL THE SEVEN PARTIES WERE SO BAD THAT NO FURTHER RECOVERY WAS POSSIBLE. 4.3.5. IN THESE FACTS THE DECISION OF HON'BLE SUPREME COU RT IN THE CASE OF MORVI INDUSTRIES LIMITED VS. CIT 82 -: 29 :- 29 ITR 835 (S.C.) CLEARLY APPLIES AND ACCORDINGLY SUCH INCOME IS RIGHTLY ASSESSABLE IN THE HANDS OF THE APPELLANT COMPANY IN ASSESSMENT YEAR 1997-98 IRRESPECTIVE OF THE EVENTS OCCURRING AFTER THE BALA NCE SHEET DATE AND WITHOUT PREJUDICE TO THE APPELLANTS RIGHT TO CLAIM APPROPRIATE RELIEF OR DEDUCTION AGAI NST SUCH AMOUNT IN SUBSEQUENT YEAR/YEARS IN ACCORDANCE WITH LAW. THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. STATE BANK OF TRAVANCORE 158 I TR 102 (S.C.) ALSO CLEARLY SUPPORTS THE CASE OF THE REVENUE AND THERE IS ABSOLUTELY NO MERIT IN THE CONTENTIONS ADVANCED BY THE APPELLANT IN THIS BEHA LF DISTINGUISHING SUCH DECISION ON FACTS WHEN THE BROA D RATIO CLEARLY APPLIES TO THE FACTS OF THE CASE. THU S THE ADDITION MADE BY THE ASSESSING OFFICER AT RS. 116.9 9 LAKHS FOR ACCRUED INTEREST IS HEREBY CONFIRMED. 28. DURING THE COURSE OF HEARING OF THE APPEAL BEFOR E US THE LD. COUNSEL REITERATED THE SUBMISSIONS TAKEN BEFORE THE LOWER AUTHORITIES. HE SUBMITTED THAT THE ACCOUNTING PERIOD OF THE ASSESSE E ENDED ON 30 TH JUNE 1996 AND THE COMPANY WAS FILING INCOME TAX RETURN ON FINANCIAL BASIS AS PER THE PROVISIONS OF THE INCOME-TAX ACT 1961. IT W AS FURTHER CONTENDED THAT THE AMOUNT OF RS. 1 16 99 000/- WAS NOT CREDIT ED TO INTEREST ACCOUNT -: 30 :- 30 AS LARGE AMOUNT OF PRINCIPAL AND INTEREST ON ICD L OAN COULD NOT BE RECOVERED FROM THE PARTIES AND WAS WRITTEN OFF AS B AD DEBT ON 30 TH JUNE 1997 I.E. AFTER MARCH 1997. IT WAS ALSO CLAIMED TH AT AS PER NOTE NO.12 GIVEN ALONGWITH THE RETURN FILED AFORESTATED POSIT ION WAS BROUGHT TO THE NOTICE OF THE AO AND SINCE NO ACTUAL INCOME WAS EAR NED NOR ANY CLAIM WAS MADE FOR THE BAD DEBT IN THE RELEVANT RETURN OF INCOME THE AMOUNT WAS NOT CREDITED TO THE INTEREST ACCOUNT AND THE AC TION OF THE LOWER AUTHORITIES IN MAKING THE ADDITION IN QUESTION TO T HE INCOME OF THE ASSESSEE AND CONFIRMATION THEREOF WAS NOT CORRECT. THE LD. COUNSEL ALSO SUBMITTED THAT THE DECISION TO WRITE OFF THE BAD DE BT AS A RESULT OF ARBITRATION AWARD AND NOT CHARGING INTEREST ON THE AFORESTATED ICDS WAS ALLOWED AFTER CONSIDERING THE COMMERCIAL EXPEDIENCY AND THE AO COULD NOT HAVE SIT ON THE JUDGMENT ON THE BUSINESS DECISI ON TAKEN BY THE ASSESSEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE . IN SUPPORT OF HIS SUBMISSION HE RELIED ON THE FOLLOWING DECISIONS :- (A) CIT V. A. RAMAN AND CO. (1968) 67 ITR 11 (S.C.) (B) CIT VS. EICHER LIMITED (2010) 320 ITR 410 (DEL). 29. THE LD. CIT DR RELIED ON THE RELEVANT PORTION OF THE ORDER OF THE LD.CIT(A) AND SUBMITTED THAT SINCE THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNT ON MERCANTILE SYSTEM THE INTEREST WAS LIABLE TO BE TAXED -: 31 :- 31 ON ACCRUAL BASIS IN VIEW OF THE DECISION IN THE CAS E OF CIT VS. STATE BANK OF TRAVANCORE (SUPRA) AND TUTICORIN ALKALI CHEMICAL S AND FERTILIZERS LIMITED VS. CIT (SUPRA). 30. WE HAVE CAREFULLY CONSIDERED THE ISSUE IN VIEW OF THE MATERIALS PLACED ON RECORD THE ORDERS OF THE AUTHORITIES BEL OW AND RIVAL SUBMISSIONS. UNDISPUTED FACTS ARE THAT THE ASSESSEE HAD ADVANCED LOAN AGGREGATING TO RS. 517.83 LAKHS TO VARIOUS COMPANIE S BY WAY OF INTER- CORPORATE LOANS ON WHICH INTEREST WAS PROVIDED IN T HE BOOKS OF ACCOUNT AT RS. 366.90 LAKHS BUT INTEREST OF RS. 116.99 LAKHS WAS NOT PROVIDED IN THE BOOKS OF ACCOUNT. THE ASSESSEE FINALLY HAD WRITTEN OFF BAD DEBTS AT RS. 8.23 CRORES DETAILS OF WHICH WERE PLACED BEFORE TH E LOWER AUTHORITIES. A NOTE WAS ALSO GIVEN BY THE STATUTORY AUDITORS STAT ING THAT THE COMPANIES TO WHOM INTER-CORPORATE DEPOSITS/LOANS WERE GIVEN IN EARLIER YEARS WERE NOT REPAYING THE PRINCIPAL AND INTEREST AMOUNT AND THE ARBITRATION IS UNDERTAKEN WITH THE SAID PARTIES TO ARRIVE AT THE S ETTLEMENT AND AVOID LITIGATION. THE FINAL ARBITRATION AWARD AS CONFIRME D BY THE ADVOCATES/SOLICITORS OF CALCUTTA HIGH COURT WAS REC EIVED BY THE COMPANY DURING THE PERIOD ENDING JUNE 1997 AND AS AGAINST TOTAL AMOUNT OF RS. 973.55 LAKHS WHICH WAS UNDER ARBITRATION T HE ASSESSEE COULD RECOVER ONLY AN AMOUNT OF RS. 62.03 LAKHS AND THE B ALANCE AMOUNT OF RS. 911.52 LAKHS WAS DEBITED AS IRRECOVERABLE AMOUNT WR ITTEN OFF. THERE WAS -: 32 :- 32 NO DISPUTE ON THE FACT THAT THE AMOUNT OF RS. 116.9 9 LAKHS WAS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT DURING FINA NCIAL YEAR 1996-97 RELEVANT TO ASSESSMENT YEAR 1997-98 DESPITE THE FA CT THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THE A RBITRATION AWARD WAS ISSUED SUBSEQUENT TO 31 ST MARCH 1997. THE RELEVANT DETAILS WERE NOT FILED BEFORE THE LOWER AUTHORITIES AS IS CLEAR FROM THE D ISCUSSION AT PARA 4.3.4 AT PAGES 8 & 9 OF THE ORDER OF THE LD.CIT(A) WHICH HA S BEEN REPRODUCED ABOVE. THE QUESTION HOWEVER REMAINED THAT IF THE PARTIES WERE NOT IN A POSITION TO PAY THE INTEREST WHETHER THE ASSESSEE W AS JUSTIFIED IN NOT CREDITING THE AMOUNT OF INTEREST TO THE RELEVANT BO OKS OF ACCOUNT AND CLAIMING IT THAT IT WAS NOT THE INCOME OF THE ASSES SEE. IT HAS BEEN HELD IN THE CASE OF CIT VS. A. RAMAN AND CO. (1968) 67 ITR 11 (S.C.) THAT THE LAW DOES NOT OBLIGE A TRADER TO MAKE THE MAXIMUM PR OFIT THAT HE CAN OUT OF HIS TRADING TRANSACTIONS. INCOME WHICH ACCR UES TO A TRADER IS TAXABLE IN HIS HANDS : INCOME WHICH HE COULD HAVE BUT HAS NOT EARNED IS NOT MADE TAXABLE AS INCOME ACCRUED TO HIM. 31. THE FACTS OF THE CASE OF THE ASSESSEE ARE ALSO SIM ILAR TO THE FACTS IN THE CASE OF CIT VS. EICHER LIMITED(2010) 320 ITR 410 (DEL). IN THAT CASE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BUT THE ASSESSEE DID NOT DECLARE ANY INTEREST ACCRUED ON TH E LOANS GIVEN TO A PARTY FOR THE REASON THAT THE LOAN AND INTEREST HAD NOT B EEN PAID AFTER 31 ST -: 33 :- 33 MARCH 199 AND ONE TIME SETTLEMENT WAS ARRIVED AT WHEREBY THE OUTSTANDING AMOUNT OF RS. 617 LAKHS INCLUDING THE P RINCIPAL AMOUNT OF RS. 350 LAKHS AND INTEREST AMOUNT OF RS. 267 LAKHS WAS ULTIMATELY SETTLED AT RS. 480 LAKHS. THE ADDITION MADE BY THE TRIBUNA L OF THE AMOUNT OF RS. 68 25 000/- BEING THE INTEREST ACCRUED ON THE INTER CORPORATE DEPOSIT WAS DELETED BY THE I.T.A.T. AND THE DECISION OF THE I. T.A.T. WAS UPHELD BY THE HON'BLE DELHI HIGH COURT. THE RELEVANT PORTION OF THE DECISION OF THE HON'BLE HIGH COURT IS REPRODUCED BELOW :- FOR BUSINESS EXPEDIENCY AND A PRACTICAL APPROACH A COMMERCIAL DECISION WAS ARRIVED AT BY THE ASSESSEE TO SETTLE AT AN AMOUNT OF RS. 480 LAKHS AND WHICH IS NOTHING UNUSUAL BECAUSE MANY FACTORS COME INTO PLAY SUCH AS TIME OF LITIGATION COSTS OF LITIGATION NEED OF THE FUNDS BY THE ASSESSEE-COMPANY AND SO ON. WE FIND THAT THE TRIBUN AL WAS RIGHT IN OBSERVING AS UNDER :- WE DO NOT FIND ANY REASON WHY THE SOUND PRINCIPLE S BASED UPON REALISABILITY OF THE AMOUNT DUE ON THE O BJECTIVE CRITERION OF A STICKY ACCOUNT SHOULD NOT BE ACCEPTE D EVEN IF ACCOUNTS ARE MAINTAINED UNDER THE MERCANTILE SYSTEM WHICH RECOGNIZES REVENUE NOT ON THE ABSTRACT THEORY OF RI GHT OF RECOVERY BUT ON THE ACTUAL PROSPECT OF SUCH RECOVER Y AS SO -: 34 :- 34 OBSERVED AND RECOGNIZED IN THE ABOVE REFERRED CASES OF THE HON'BLE SUPREME COURT WHICH HAVE BEEN FOLLOWED BY THE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF C IT VS. GOYAL M. G. GASES P. LTD. [2008] 303 ITR 159. 32. RESPECTFULLY FOLLOWING THE AFORESTATED DECISION OF THE HON'BLE DELHI HIGH COURT WHICH IS APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE WE ARE OF THE CONSIDERED OPINION THAT THE INTEREST AMOUNT OF RS. 116.99 LAKHS WAS NOT LIABLE TO BE TAXED IN THE HAND S OF THE ASSESSEE. THE GROUND OF APPEAL OF THE ASSESSEE IS THEREFORE AL LOWED. THE APPEAL OF THE ASSESSEE IS ACCORDINGLY ALLOWED. I.T.A.NO. 452/IND/2006 - A.Y. 1997-98 : (REVENUES APPEAL ) : 33. THIS APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINS T THE ORDER DATED 21.3.2006 OF THE LD.CIT(A) FOR THE ASSESSMEN T YEAR 1997-98. 34. THE GROUNDS OF THE APPEAL ARE REPRODUCED BELOW :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD.CIT(A) ERRED IN A. DELETING THE ADDITION OF RS. 54 84 632/- ON ACCOUNT OF POWER BILL. B. DISALLOWANCE OF RS. 78 37 000/- MADE ON ACCOUNT OF EXPENSES OF ENDURING NATURE. -: 35 :- 35 C. DISALLOWANCE OF RS. 4 19 76 800/- U/S 43B ON UNPAID EXCISE DUTY. 35. THE FIRST GROUND IS AGAINST THE DELETION OF ADDITI ON OF RS. 54 84 632/- ON ACCOUNT OF POWER BILL. THE AO WHILE FINALIZING THE ASSESSMENT U/S 143(3) READ WITH SECTION 148 AS PER HIS ORDER DATED 25 TH MARCH 2003 DISALLOWED THE CLAIM OF RS. 54 84 632/ - ON ACCOUNT OF ELECTRIC BILL OF M.P.E.B. FOR THE REASON THAT THE C LAIM RELATED TO EARLIER YEARS AND WAS NOT ADMISSIBLE AS EXPENDITURE IN ASSE SSMENT YEAR 1997-98. THE LD.CIT(A) AS PER HIS IMPUGNED ORDER ACCEPTED TH E SUBMISSION OF THE ASSESSEE THAT THE PAYMENT WAS NOT FOR THE EARLIER Y EARS BUT AN UNUSUAL DEMAND WAS RAISED BY M.P.S.E.B. AGAINST FINAL FUEL COST ADJUSTMENT WHICH WAS PAID AGAINST THE BILL DATED 14 TH AUGUST 1996 FOR RS. 42 81 181/- AND BILL DATED 27 TH MAY 1996 FOR RS. 12 03 451/-. THE LD.CIT(A) OBSERVED THAT THERE WAS NO DISPUTE ON THE FACT THAT THE AFORESTATED BILLS WERE RECEIVED BY THE ASSESSEE DUR ING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 1997-98. THE AO ALSO DI D NOT HOLD THAT THE BILLS HAD BEEN RAISED EARLIER AND REMAINED OUTSTAND ING. THE LD.CIT(A) ALSO OBSERVED THAT THE ASSESSEE HAD NOT CLAIMED DED UCTION OR MADE PROVISION FOR THE AFORESTATED ELECTRIC CHARGES IN A NY EARLIER YEAR AND THEREFORE THE CLAIM WAS ADMISSIBLE IN THE YEAR UND ER CONSIDERATION. -: 36 :- 36 36. THE LD. CIT DR RELIED ON THE ASSESSMENT ORDER AND L D.COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF THE LD.CIT( A). 37. WE HAVE CAREFULLY CONSIDERED THE ISSUE IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW MATERIALS PLACED ON RECORD A ND RIVAL SUBMISSIONS. IN OUR CONSIDERED OPINION THE DEPARTMENT COULD NOT CHALLENGE THE FINDING OF THE LD.CIT(A) THAT THE BILLS WERE RECEIV ED DURING THE RELEVANT ACCOUNTING PERIOD AND THE LIABILITY HAD THEREFORE ACCRUED DURING THE ACCOUNTING PERIOD RELEVANT TO ASSESSMENT YEAR 1997- 98. SINCE THE LIABILITY HAD ACCRUED DURING THE PERIOD RELEVANT TO ASSESSMEN T YEAR 1997-98 WE SEE NO REASON TO INTERFERE WITH THE DECISION OF THE LD.CIT(A) BECAUSE THE ADDITIONAL LIABILITY ON ACCOUNT OF ENHANCED COST AS PER BILLS DATED 14 TH AUGUST 1996 AND 27 TH MAY 1996 CRYSTALLIZED DURING THE FINANCIAL YEAR 1996-97 RELEVANT TO ASSESSMENT YEAR 1997-98. THIS G ROUND OF THE REVENUE IS REJECTED. 38. THE NEXT GROUND OF APPEAL IS AGAINST DELETION OF AD DITION OF RS. 78 37 000/- ON ACCOUNT OF EXPENSES OF ENDURING NATU RE. 39. THE AO OBSERVED THAT THE ASSESSEE HAD INCURRED EXPE NDITURE OF RS. 78 37 000/- WHICH RESULTED IN ENDURING BENEFIT TO THE ASSESSEE AND WAS REQUIRED TO BE CAPITALIZED AND CLAIM IN INSTALL MENT ON THE BASIS OF THE YEARS IN WHICH THE BENEFIT ACCRUED TO THE ASSESSEE. HE ALSO OBSERVED THAT THE EXPENDITURE WAS FOR 132 KVA D. C. LINE AND V. R . S. FOR 10 YEARS -: 37 :- 37 AND THEREFORE THE CLAIM WAS TO BE DISALLOWED AS R EVENUE EXPENDITURE AND REQUIRED TO BE TREATED AS CAPITAL EXPENDITURE IN VI EW OF THE DECISION IN THE CASE OF EMPIRE TULE CO. LTD. VS. CIT (1980) 124 IT R 1 ( S.C.) AND THE DECISION IN THE CASE OF INDIAN OXYGEN CO.LTD. (198 7) 164 ITR 446 ( CAL). THE LD.CIT(A) ACCEPTED THE SUBMISSION OF THE ASSESSEE THAT THE ASSESSEE HAD TREATED THE AMOUNT AS DEFERRED EXPENDI TURE AND MADE A CLAIM OF ONLY CERTAIN PERCENTAGE THEREOF AND THE BALANCE AMOUNT HAD BEEN WRITTEN OFF AND NOT CLAIMED AS ADMISSIBLE DEDUCTIO N. FOR THE REASON THAT THE CLAIM HAD BEEN ALLOWED IN EARLIER YEARS. THE LD .CIT(A) HELD THAT SINCE THE AMOUNT WAS NEVER CLAIMED AS DEDUCTION DURING TH E YEAR UNDER CONSIDERATION THERE WAS NO JUSTIFICATION FOR THE D ISALLOWANCE IN QUESTION. 40. WE HAVE CAREFULLY CONSIDERED THE ISSUE IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW MATERIALS PLACED ON RECORD A ND RIVAL SUBMISSIONS. IT IS SEEN THAT THE LD.CIT(A) HAS ENCLOSED THE REPORT OF THE AO DATED 4 TH AUGUST 2004 AS ANNEXURE A TO HIS ORDER. IT IS SEE N FROM THE PAGE 2 OF THE REPORT THAT THE ASSESSEE HAD INCURRED EXPENDITU RE OF RS. 44 96 000/- ON 130 KVA DC LINE IN ASSESSMENT YEAR 1992-93 AND RS. 28 96 810/- RS. 57 14 500/- AND RS. 16 60 000/- FOR ASSESSMENT YEAR S 1993-94 TO 1995-96 AS V. R. S. PAYMENT. THE AO TREATED THAT THE ASSESS EE HAS REDUCED THE ENTIRE EXPENDITURE FROM THE COMPUTATION OF INCOME F OR THE RELEVANT ASSESSMENT YEAR AND HAS ONLY OFFERED 10 % OF EXPEND ITURE IN ITS INCOME. -: 38 :- 38 IT IS THEREFORE NOT VERY CLEAR AS TO WHETHER THE SUBMISSION MADE BY THE ASSESSEE THAT THE EXPENDITURE WAS WRITTEN OFF AND N OT CLAIMED IN THE RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATI ON IS CORRECT OR NOT. THE LD.CIT(A) HAS ACCEPTED THE SUBMISSION OF THE AS SESSEE AND DELETED THE ADDITION WITHOUT DISCUSSING THE SUBMISSIONS OF THE AO AS PER HIS REPORT DATED 4 TH AUGUST 2004. WE THEREFORE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH THE DIRECTION THAT HE SHOULD VERIFY THE CLAIM OF THE ASSESSEE AND DECIDE THE ISSUE AS PER LAW AFTER GIVI NG PROPER OPPORTUNITY TO THE ASSESSEE. 41. THE NEXT GROUND OF APPEAL IS AGAINST THE DISALLOWAN CE OF RS. 4 19 76 800/- U/S 43-B OF THE INCOME-TAX ACT 1961 ON ACCOUNT OF UNPAID EXCISE DUTY. 42. DURING THE COURSE OF REASSESSMENT PROCEEDINGS THE AO OBSERVED THAT THE AUDITORS IN THE REPORT FOR FINANC IAL YEAR 1996-97 PERTAINING TO 1 ST APRIL 1995 TO 30 TH JUNE 1997 HAVE REMARKED THAT THE EXCISE DUTY OF RS. 5 24 71 000/- WAS PROVIDED FOR I N THE BALANCE SHEET AS LIABILITY. ACCORDING TO THE AO THE EXCISE DUTY LIA BILITY WAS TO BE ALLOWED U/S 43-B OF THE INCOME-TAX ACT 1961 ONLY IF THE RE TURN HAS BEEN FILED BY THE ASSESSEE U/S 139(1) OF THE INCOME-TAX ACT 1961 AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF INDIAN SMELTIN G & REFINERY CO.LTD. VS. CIT 248 ITR 4 ( S. C.). THE AO HELD TH AT THE ASSESSEE HAD -: 39 :- 39 SHOWN LIABILITY IN THE BALANCE SHEET AND THE LIABIL ITY THEREFORE REMAINED UNPAID AND HENCE LIABLE TO BE DISALLOWED AS EXPENDI TURE U/S 43B OF THE ACT. THE ASSESSEE CONTENDED THAT THE COMPANY HAD UN DERTAKEN THE LIABILITY BUT NOT CLAIMED IT IN THE PROFIT AND LOSS ACCOUNT AND HENCE THERE WAS NO QUESTION OF DISALLOWING THE SAME IN ASSESSME NT YEAR 1997-98. IT WAS FURTHER CONTENDED THAT THE LD.CIT(A) OBSERVED T HAT THE AO HAD CONCEDED BEFORE HIM THAT THE SUBMISSION OF THE ASSE SSEE WAS CORRECT AND THE ADDITION COULD NOT BE SUSTAINED FOR THE REASON THAT THE UNPAID AMOUNT FOR EXCISE DUTY BY WAY OF ADDITION IN COMPUTATION O F INCOME HAS BEEN OFFERED FOR TAX FOR ASSESSMENT YEAR 1998-99 AND THE AMOUNT WAS NEVER CLAIMED IN THE ASSESSMENT YEAR 1997-98. HE THEREFO RE DELETED THE ADDITION. 43. DURING THE COURSE OF HEARING OF THE APPEAL THE LD. SENIOR D.R. RELIED ON THE ASSESSMENT ORDER AND THE LD. COUNSEL SUPPORTED THE ORDER OF THE LD.CIT(A). 44. WE HAVE CAREFULLY CONSIDERED THE ISSUE IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW MATERIALS PLACED ON RECORD A ND RIVAL SUBMISSIONS. 45. IT IS OBSERVED FROM THE REPORT DATED 4 TH AUGUST 2004 OF THE AO ENCLOSED AS ANNEXURE A TO THE IMPUGNED ORDER OF THE LD.CIT(A) THAT THE AO HAS SUBMITTED THAT THE ASSESSEE HAD CLOSED ITS B OOKS OF ACCOUNT ON 30 TH JUNE 1997 AND PREPARED TWO BALANCE SHEETS ONE FO R THE PERIOD 1 ST -: 40 :- 40 APRIL 1996 TO 31 ST MARCH 1997 AND ANOTHER FOR THE ENTIRE PERIOD FOR 1 ST APRIL 1996 TO 30 TH JUNE 1997. IT HAS ALSO BEEN REPORTED THAT THE LIA BILITY OF RS. 5 24 71 000/- ON ACCOUNT OF ESTATE DUTY LIAB ILITY HAD NOT BEEN SHOWN IN THE BALANCE SHEET FOR THE PERIOD FROM 1 ST APRIL 1996 TO 31 ST MARCH 1997 BUT HAS BEEN SHOWN ONLY IN THE BALANCE SHEET AS ON 30 TH JUNE 1997 FOR THE REASON THAT THE ASSESSEE HAD MA DE PROVISION OF RS. 524.71 LAKHS TOWARDS CONTINGENT LIABILITY OF EXCISE DUTY BEING DIFFERENCE IN LIABILITY ON CLEARANCE OF GOODS ON THE BASIS OF FINAL ASSESSMENT ORDER RECEIVED AND ALSO INCLUDE IN IT RS. 333.16 LAKHS PR OVIDED ON ESTIMATE BASIS FOR THE AFORESTATED PERIOD FOR WHICH THE ORDE R HAS NOT BEEN RECEIVED. THE AO HAS ALSO REPORTED THAT THE COMPANY HAS PREFE RRED APPEALS AGAINST THE ORDERS RECEIVED BY IT AND THE RELEVANT NOTE HAS BEEN LEFT IN THE BALANCE SHEET AS ON 30 TH JUNE 1997. THE AO ALSO ACCEPTED THAT THE AMOUNT O F RS. 5 61 10 332/-WAS PROVIDED FOR AFTER 31.3.97 AND OUT OF THIS PROVISION RS. 5 24 71 000/- HAS BEEN ADDED IN THE COMPUTATION OF INCOME FOR THE ASSESSMENT YEAR 1998-99. 46. THE LD.CIT HAS HOWEVER AUTHORIZED THE APPEAL ON T HIS ISSUE DESPITE THE REPORT OF THE AO THAT THE LIABILITY WAS PROVIDED FOR IN THE BALANCE SHEET AS ON 30 TH JUNE 1997 RELEVANT TO ASSESSMENT YEAR 1998-99 AND NOT IN THE BALANCE SHEET AS ON 31 ST MARCH 1997 RELEVANT TO ASSESSMENT YEAR 1997-98. IN CASE THE PROVISION WAS NOT MADE DURING THE -: 41 :- 41 FINANCIAL YEAR 1996-97 RELATING TO ASSESSMENT YEAR 1997-98 I.E. THE YEAR UNDER CONSIDERATION THERE WAS NO REASON TO QUESTIO N THE DECISION OF THE LD.CIT(A) ON THIS ISSUE. WE THEREFORE RESTORE THI S ISSUE TO THE A.O. WITH THE DIRECTION THAT HE SHOULD MAKE NECESSARY ENQUIRI ES TO ASCERTAIN THE CORRECT FACTS AND DECIDE THE ISSUE AFRESH AFTER GIV ING PROPER OPPORTUNITY TO THE ASSESSEE. THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 47. THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 30 TH JULY 2010. SD/- SD/- (JOGINDER SINGH) (B. R. KAUSHIK) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :30 TH JULY 2010. CPU* 2328D307