DCIT, Hyderabad v. M/s Vijai Electricals Ltd.,, Hyderabad

ITA 809/HYD/2008 | 2002-2003
Pronouncement Date: 22-07-2011 | Result: Dismissed

Appeal Details

RSA Number 80922514 RSA 2008
Assessee PAN AAACV7259B
Bench Hyderabad
Appeal Number ITA 809/HYD/2008
Duration Of Justice 3 year(s) 2 month(s) 17 day(s)
Appellant DCIT, Hyderabad
Respondent M/s Vijai Electricals Ltd.,, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 22-07-2011
Date Of Final Hearing 14-03-2011
Next Hearing Date 14-03-2011
Assessment Year 2002-2003
Appeal Filed On 05-05-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B' HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT & SHRI CHANDRA POOJARI ACCOUNTANT MEMBER I.T.A. NO. 1072/HYD/2004 A.Y. 2001-02 M/S. VIJAI ELECTRICALS LTD. HYDERABAD. PAN: AAACV7259B VS. THE ASST. CIT CIRCLE-3(4) HYDERABAD APPLICANT RESPONDENT I.T.A. NO. 236/HYD/2009 A.Y. 2005-06 I.T.A. NO. 845/HYD/2009 A.Y. 2006-07 I.T.A. NO. 1462/HYD/2010 A.Y. 2007-08 M/S. VIJAI ELECTRICALS LTD. HYDERABAD. VS. THE ADDL. CIT RANGE-3 HYDERABAD APPLICANT RESPONDENT I.T.A. NO. 935/HYD/2008 A.Y. 2001-02 I.T.A. NO. 809/HYD/2008 A.Y. 2002-03 I.T.A. NO. 936/HYD/2008 A.Y. 2004-05 THE DY. CIT CIRCLE-3(3) HYDERABAD VS. M/S. VIJAI ELECTRICALS LTD. HYDERABAD. APPLICANT RESPONDENT ASSESSEE BY: SHRI S. RAMA RAO REVENUE BY: SHRI C.R. PATI O R D E R PER CHANDRA POOJARI AM : THESE APPEALS BY THE ASSESSEE AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE DIFFERENT ORDERS O F THE CIT(A) FOR ASSESSMENT YEARS 2001-02 2002-03 2004- 05 2005-06 2006-07 AND 2007-08. SINCE CERTAIN ISSUES ARE COMMON AND RELATING TO THE SINGLE ASSESS EE ALL THESE APPEALS ARE CLUBBED TOGETHER HEARD TOGET HER AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE O F I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 2 CONVENIENCE. FIRST WE WILL TAKE UP REVENUE APPEAL S IN I.T.A. NOS. 935 809 AND 936 OF 2008. I.T.A. NO. 935/HYD/2008 (BY REVENUE): 2. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO REOPENING OF ASSESSMENT. IN THIS YEAR THE ASSESSME NT WAS COMPLETED ORIGINALLY U/S. 143(3) OF THE INCOME- TAX ACT 1961 ON 22.03.2004 AND THE TAXABLE INCOME WAS DETERMINED AT RS. 4 34 80 620 U/S. 115JB OF THE ACT . LATER IT WAS NOTICED BY THE ASSESSING OFFICER THAT AN UNASCERTAINED LIABILITY TO THE EXTENT OF RS. 48 21 346 DEBITED TOWARDS PROVISION FOR DOUBTFUL DEBTS WAS NO T ADDED TO THE INCOME COMPUTED U/S. 115JB OF THE ACT. ACCORDINGLY NOTICE U/S. 148 WAS ISSUED ON 31.3.2006 TO REOPEN THE ASSESSMENT. THE ASSESSEE OBJECTED REOPENING OF ASSESSMENT. NOT AGREEING WITH THE OBJECTION OF THE ASSESSEE THE ASSESSING OFFICER COMPLETED THE RE-ASSESSMENT BY ADDING RS. 48 21 346 TOWARDS PROVISION FOR DOUBTFUL DEBTS SINCE THIS IS AN UNASCERTAINED LIABILITY. ON APPEAL THE CIT(A) DEC IDED THE ISSUE BOTH ON REOPENING AND ALSO ON MERIT IN FAVOUR OF THE ASSESSEE. AGAINST THIS THE REVENUE I S IN APPEAL BEFORE THE TRIBUNAL. 3. THE CONTENTION OF THE LEARNED DR IS THAT SUFFICIENCY OR CORRECTNESS OF THE MATERIAL TO FORM A BELIEF FOR REOPENING OF ASSESSMENT IS NOT REQUIRED AND THE ADDITION OF RS. 48 21 346 BEING PROVISION FOR DOUBTFUL DEBTS IN COMPUTING THE BOOK PROFIT U/S. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 3 115JB IS IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME-TAX ACT 1961. 4. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE REOPENING OF ASSESSMENT IS ONLY A CHANGE OF OPINION AND IT CANNOT BE A REAS ON FOR REOPENING OF AN ASSESSMENT WHICH HAS BEEN COMPLETED U/S. 143(3) OF THE ACT. THE ASSESSING OFFICER GONE THROUGH THE ENTIRE RECORD AND OPTED NO T TO MAKE ANY ADDITION TOWARDS PROVISION FOR DOUBTFUL DEBTS. THE ISSUE RAISED BY THE ASSESSING OFFICER F OR REOPENING THE ASSESSMENT IS SUBJECT MATTER OF LENGT HY LITIGATION AND THERE EXIST DIFFERENT VIEWS ON THE I SSUE. IN THE CASE OF CIT VS. ECHJAY FORGING MFG. LTD. 25 1 ITR 15 (BOM) AND CIT VS. USHA MARTIN INDUSTRIES LTD . 105 TTJ 545 (CAL.) (SB) AND ACIT VS. J.G. VACUUM FLASK LTD. 83 ITD 242 (PUNE) WHEREIN IT HELD THAT PROVISION FOR DOUBTFUL DEBTS IS NOT TO BE INCLUDED WHILE WORKING OUT THE BOOK PROFIT U/S. 115JB OF THE ACT. FURTHER THE TRIBUNAL IN THE CASE OF M.C. GUPTA VS. ACIT 270 ITR 106 (AT) HELD THAT WHERE THERE ARE DIVERGENT OPINIONS OF VARIOUS HIGH COURTS BUT NO JUDGEMENTS OF THE JURISDICTIONAL HIGH COURT AND THE DISPUTE WAS PENDING BEFORE THE SUPREME COURT THE REOPENING OF ASSESSMENT IS NOT TO BE DONE BY ADOPTI NG DIFFERENT INTERPRETATION OUT OF THE TWO POSSIBLE ON E WAS NOT VALID. THE MADRAS HIGH COURT IN THE CASE OF AP OLLO HOSPITAL ENTERPRISES LTD. VS. ACIT 287 ITR 25 HELD THAT POWER TO REOPEN AN ASSESSMENT WAS NOT CONFERRE D BY THE LEGISLATURE WITH THE INTENTION TO ENABLE THE ITO I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 4 TO REOPENING THE FINAL DECISION MADE AGAINST THE REVENUE IN RESPECT OF QUESTIONS THAT DIRECTLY AROSE FOR DECISION IN EARLIER PROCEEDINGS. IF THAT WERE NOT THE LEGAL POSITION IT WOULD PLACE AN UNRESTRICTED POWER OF REVIEW IN THE HANDS OF THE ASSESSING OFFICER DEPEND ING ON THE CHANGING MOOD. THE AUTHORITY CANNOT REOPEN THE ASSESSMENT ORDER PASSED BY A MERE CHANGE OF OPINION OR BY DRAWING A DIFFERENT INFERENCE FROM TH E SAME SET OF FACTS AS WERE EARLIER AVAILABLE. FURTH ER HE RELIED ON THE FOLLOWING JUDGEMENTS IN SUPPORT OF HIS ARGUMENTS: A) M.S. RAMA RAJ VS. COMMISSIONER OF AGRICULTURAL INCOME-TAX 131 ITR 429 (KERALA) B) ANDHRA BANK VS. CIT 225 ITR 447 (SC) C) TRANSWORLD INTERNATIONAL INC. VS. JCIT 273 ITR 242 (DEL) D) CIT VS. VIJAYA BANK CORPORATION BANK AND VYSYA BANK 285 ITR 97 (KARN.) E) DT & TDC LTD. VS. ACIT 324 ITR 234 (DEL) F) BERGER PAINTS INDIA LTD. VS. ACIT 322 ITR 369 (CAL.) 4.1 ACCORDING TO THE AR THERE IS NO FRESH MATERIAL ON RECORD FOR REOPENING THE ASSESSMENT OTHER THAN THE RECORDS WHICH WERE DULY CONSIDERED BY THE ASSESSING OFFICER WHILE PASSING THE ORIGINAL ASSESSMENT U/S. 143(3) OF THE ACT. MORE SO THERE WAS NO OMISSION OR FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FUL LY AND TRULY ALL MATERIAL FACTS NECESSARY FOR ASSESSEES ASSESSMENT OF INCOME. HE RELIED ON THE ORDER OF TH E CIT(A). I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 5 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ONLY REASON WHICH HAS BEEN GIVEN FOR REOPENING ASSESSMENT IS THAT AN UNASCERTAINED LIABILITY TO THE EXTENT OF RS. 48 21 346 DEBITED TOWARDS PROVISION FOR DOUBTFUL DEBTS WAS NO T ADDED TO INCOME COMPUTED AS BOOK PROFIT U/S. 115JB OF THE I.T. ACT. ACCORDING TO THE ASSESSING OFFICE R THERE WAS ESCAPEMENT OF INCOME TO THAT EXTENT IN TERMS OF EXPLANATION 2(C)(I) TO PROVISO TO SECTION 147 OF THE I.T. ACT. HOWEVER WE FIND THAT THE ORIGINAL ASSESSMENT WAS COMPLETED U/S. 143(3) OF THE ACT AND THE ASSESSING OFFICER CONSIDERED ALL THE MATERIALS ON RECORD FOR COMPLETING THE ASSESSMENT. CLEARLY THER E IS NO NEW MATERIAL WHICH ALLEGED TO HAVE COME TO THE NOTICE OF THE ASSESSING OFFICER WHICH HAS CAUSED TO SEEK REOPENING OF THE ASSESSMENT. ADMITTEDLY THE REOPENING IS ON THE BASIS OF THE SAME ASSESSMENT RECORDS AS FILED BY THE ASSESSEE AND CONSIDERED BY THE ASSESSING OFFICER DURING THE RELEVANT ASSESSMENT WH ILE PASSING THE ASSESSMENT ORDER U/S. 143(3) OF THE ACT WHICH IN OUR OPINION CANNOT BE A REASON FOR REOPEN ING OF THE ASSESSMENT. FURTHER THE NEW LOGIC RATIONALE AND OPINION WHICH HAS BEEN FORMED BY THE ASSESSING OFFICER FOR SEEKING REOPENING OF ASSESSMENT IS NOTH ING BUT A CHANGE OF OPINION AND NEW APPROACH TO THE EXISTING FACTS AND MATERIALS WHICH THE ASSESSING OFFICER COULD WELL HAVE DONE DURING THE REGULAR ASSESSMENT PROCEEDINGS. NOT ONLY THIS THE RATIONAL E/ LOGIC/REASONS GIVEN THAT UNCERTAIN LIABILITY DEBITE D TOWARDS PROVISION FOR DOUBTFUL DEBTS WAS NOT ADDED TO I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 6 THE INCOME COMPUTED AS BOOK PROFIT U/S. 115JB OF TH E I.T. ACT. THIS ISSUE IS NOT FREE FROM DISPUTE AND THERE EXIST MULTIPLE OPINIONS ON THIS ISSUE AT THE TIME O F REOPENING OF ASSESSMENT. EVEN ASSUMING THAT THE REASON GIVEN BY THE ASSESSING OFFICER IS CORRECT I T WAS SURELY AN EXERCISE WHICH THE ASSESSING OFFICER COUL D HAVE DONE ON THE BASIS OF MATERIAL WHICH HE IS NOW PRESENTLY SEEKING TO DO BECAUSE THE SAME VERY MATERIAL WERE AVAILABLE TO HIM WHILE COMPLETING THE ORIGINAL ASSESSMENT AND MERELY BECAUSE THE ASSESSIN G OFFICER FEELS THAT HE HAS FAILED TO DO WHAT HE OUGH T TO HAVE DONE CANNOT BE A VALID GROUND FOR SEEKING INITIATION OF RE-ASSESSMENT U/S. 147/148 OF THE ACT . IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE OPIN ION THAT IN THIS CASE THE REOPENING IS ONLY ON THE CHAN GE OF OPINION. IT CANNOT BE UPHELD. ACCORDINGLY WE CON FIRM THE ORDER OF THE CIT(A). SINCE WE HAVE HELD THAT THE REOPENING IS BAD IN LAW THE OTHER GROUNDS RAISED B Y THE REVENUE ON MERIT BECOME INFRUCTUOUS. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMISSED. I.T.A. NO. 809/HYD/2008 (BY REVENUE): 6. THE FIRST GROUND IS WITH REGARD TO DELETING OF DISALLOWANCE IN RESPECT OF INTEREST INCURRED ON THE CAPITAL BORROWED FOR AMORPHOUS PROJECT U/S. 36(1)(I I) OF THE ACT. 7. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSING OFFICER NOTICED THAT IN THE COMPUTATION OF INCOME T HE ASSESSEE HAD CLAIMED INTEREST PERTAINING TO THE BORROWINGS FOR AMORPHOUS CORE PROJECT (ACP FOR I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 7 SHORT). BY WAY OF A NOTE IT WAS STATED THAT THE ASSESSEE COMPANY WAS CARRYING ON THE BUSINESS OF MANUFACTURING AND SALE OF CRGO AND AMORPHOUS TRANSFORMERS ETC. AND THEY WERE EXPANDING THEIR MANUFACTURING FACILITY. IN THAT PROCESS THEY WERE SETTING UP A UNIT FOR MANUFACTURING AMORPHOUS CORE MATERIALS AT RUDRARAM MEDAL DISTRICT. THE INTERES T EXPENDITURE SO CLAIMED WAS TOWARDS BORROWINGS IN RESPECT OF THE SAID UNIT DURING THE YEAR. THE ASSE SSEE CLAIMED THAT AS THERE WAS UNIT OF CONTROL MANAGEME NT AND FINANCE IN ALL THE UNITS INCLUDING THE UNIT BE ING SET UP THE INTEREST ON BORROWINGS WAS ALLOWABLE U/ S. 36(1)(III) R.W.S. 37 OF THE ACT. SEVERAL JUDICIAL PRONOUNCEMENTS WERE CITED TO SUPPORT THE CONTENTION . IT WAS EXPLAINED BEFORE THE ASSESSING OFFICER THAT IN THE PROCESS OF EXPANDING ITS EXISTING MANUFACTURING FACILITIES THE ASSESSEE HAD STARTED SETTING UP THE SAID UNIT IN THE YEAR 1997-98. AS IT WAS A VERY HIGH TECHNOLOGY BASED PROJECT IT TOOK LONG TIME TO SET UP AND PRODUCTION DID NOT TAKE PLACE TILL THE END OF T HE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2003-04. YEAR-WISE DETAILS OF UNALLOCATED EXPENDITURE AMOUNTING TO RS. 17 74 30 104/- INCURRED IN RESPECT OF THE SAID PROJECT TILL 31.03.2002 WERE FURNISHED. OUT OF THE TOTAL EXPENDITURE OF RS. 3 34 25 522/- INCUR RED DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEA R 2002-03 RS. 2 27 84 040/- WERE TOWARDS INTEREST ON BORROWINGS FOR SETTING UP THE PROJECT. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 8 8. AFTER EXAMINING THE CLAIM OF THE ASSESSEE THE ASSESSING OFFICER FOUND THAT THE ASSESSEE WAS IN TH E PROCESS OF SETTING UP A UNIT FOR PRODUCING A NEW PRODUCT. SUBSTANTIAL INTEREST ON BORROWINGS MADE F OR SETTING UP THE UNIT HAD BEEN INCURRED SINCE 1997-98 . HOWEVER THE ASSESSEE HAD BEEN GIVING DUAL TREATMEN T TO THE INTEREST PAYABLE ON LOAN BORROWED FROM EXIM BANK. WHILE ENTIRE INTEREST AMOUNT HAD BEEN KEPT UNDER UNALLOCATED CAPITAL EXPENDITURE FOR FUTURE CAPITALISATION IN RESPECT OF THE UNIT BEING SET UP FOR INCOME-TAX PURPOSES DEDUCTION OF RS. 2 27 84 040/- WAS CLAIMED IN ASSESSMENT YEAR 2002-03 IN THE COMPUTATION OF INCOME. REFERRING TO THE DECISION I N THE CASE OF JCT LTD. VS. ACIT (65 ITD 169) HE FELT THAT SUCH DUAL TREATMENT MAY NOT BE POSSIBLE AS PER THE PROVISIONS OF THE ACT AS THERE WAS NO SPECIFIC REAS ON FOR THE SAME. HE FURTHER NOTED THAT THE INTEREST EXPENDITURE SO INCURRED FOR BORROWINGS IN EARLIER Y EARS HAD NOT BEEN CLAIMED IN EARLIER YEARS AND THE ASSES SEE HAS CHOSEN CAPITALISE THE SAME. IN THE ASSESSMENT YEAR UNDER APPEAL HOWEVER THE ASSESSEE CHOSE TO CLAIM THE INTEREST PAYMENT THOUGH INCURRED IN RESP ECT OF ACQUISITION OF CAPITAL ASSET AS A REDUCTION WHI LE COMPUTING TOTAL INCOME. HE FELT THAT THERE WAS NO CONSISTENCY IN THE ACCOUNTING POLICY ADOPTED BY THE ASSESSEE IN RESPECT OF TREATMENT GIVEN FOR THE INTE REST PAYMENTS ON BORROWINGS FOR THE PURPOSE OF SETTING U P OF PROJECT. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 9 9. THE ASSESSING OFFICER FURTHER FELT THAT THE CLAIM FOR DEDUCTION OF INTEREST U/S. 36(1)(III) READ WITH SECTION 37 COULD NOT BE ACCEPTED AS THE SUBSECTION 36(1)(III) STATES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF THE BUSINESS OR FOR PROFESSION SHOULD BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE INCOME REFERRED TO IN SECTION 28. THOUGH THE ASSESSEES REPRESENTATIVE H AD TRIED TO EXPLAIN THAT THE CAPITAL BORROWED WAS ONLY FOR THE EXPANSION OF THE BUSINESS AND THEREFORE THE EXPENDITURE WAS COVERED BY THE SAID PROVISION THE ASSESSING OFFICER FELT THAT EXPLANATION-8 TO SECTIO N 43(1) STATES THAT WHERE ANY AMOUNT OF INTEREST IS P AID OR IS PAYABLE IN CONNECTION WITH ACQUISITION OF ANY ASSET SO MUCH OF SUCH AMOUNT AS IS RELATABLE TO AN Y PERIOD AFTER SUCH ASSET IS PUT TO USE SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET. HE FELT THAT IF THE ARGUMENT OF THE REPRESENTATIVE THAT INTEREST ON BORROWED CAPITAL FOR ACQUISITION OF FIXED ASSETS AL SO COMES INTO THE AMBIT OF SECTION 36(1)(III) IS ACCE PTED THEN THE EXPLANATION-8 TO SECTION 43(1) WOULD BECOM E SUPERFLUOUS. HE FELT THAT THE LEGISLATIVE INTENTIO N IS THAT INTEREST IN RESPECT OF BORROWED FUNDS USED FOR BUSINESS PURPOSE ONLY SHOULD BE ALLOWED AS PER SECTION 36(1)(III) AND THE INTEREST INCURRED IN RES PECT OF BORROWED FUNDS FOR ACQUISITION OF CAPITAL ASSETS WO ULD NOT COME INTO THE AMBIT OF THAT PROVISION. IN VIEW OF THESE OBSERVATIONS THE CLAIM FOR DEDUCTION OF INTE REST OF RS. 2 27 84 040/- WAS REJECTED. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 10 10. THE LEARNED DR SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR NEW PROJECT AND NO T FOR EXPANSION OF ALREADY EXISTING PROJECT. FURTHER THE ASSESSEE HAD GIVEN A DUAL TREATMENT IN RESPECT OF INTEREST PAYABLE BY THEM ON LOAN BORROWED FROM EXIM BANK. THE ASSESSEE KEPT THE ENTIRE INTEREST AMOUNT UNALLOCATED CAPITAL EXPENDITURE FOR FUTURE CAPITALISATION IN RESPECT OF THE UNIT BEING SET UP. HOWEVER FOR THE PURPOSE OF INCOME-TAX THE ASSESSEE CLAIMED DEDUCTION OF THIS INTEREST IN THE COMPUTATI ON OF INCOME AND THERE IS NO REASON FOR THE ASSESSEE T O GIVE DUAL TREATMENT FOR THE SAME EXPENDITURE ONE IN THE BOOKS OF ACCOUNT AND ANOTHER FOR THE INCOME-TAX PURPOSES. HE RELIED ON THE JUDGEMENT IN THE CASE O F JCT LTD. VS. ACIT (65 ITD 169) WHEREIN IT WAS HELD THAT: ..... IT IS CLEAR THAT AN ASSESSEE AFTER HAVING MADE ENTRIES IN THE BOOKS OF ACCOUNT CONSISTENT WITH THE METHOD FOLLOWED BY HIM CANNOT BE PERMITTED TO SEEK ASSESSMENT OF HIS INCOME FOR INCOME-TAX PURPOSE ON A DIFFERENT BASIS ON THE GROUND THAT ANOTHER BASIS MAY ALSO BE PERMISSIBLE UNDER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE OR HAS BEEN UPHELD IN CERTAIN JUDGEMENTS OF A HIGH COURT OR SUPREME COURT. TO THIS EXTENT THE ENTRIES MADE IN HIS BOOKS OF ACCOUNT ARE AS MUCH BINDING AS THE METHOD OF ACCOUNTING ITSELF. IT IS ONLY WHEN THE ENTRIES MADE IN THE BOOKS OF ACCOUNT ARE ERRONEOUS OR CONTRARY TO THE CORRECT LEGAL POSITION THE SAME ARE NOT CONCLUSIVE OR DECISIVE OF THE MATTER AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING COMPANY LIMITED VS. CIT (82 ITR PAGE 363) AND SEVERAL OTHER JUDGEMENTS. THIS POSITION IS I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 11 ALSO IN BUILT IN THE PROVISIONS OF SECTION 145(1) ITSELF THAT WHERE THE METHOD OF ACCOUNTING IS FOLLOWED IS SUCH THAT INCOME CANNOT BE PROPERLY DEDUCED THERE FROM THE ASSESSING OFFICER MAY COMPUTE INCOME UPON SUCH BASIS AND IN SUCH MANNER AS THE ASSESSING OFFICER MAY DETERMINE. IN SHORT FOR OBTAINING A TREATMENT IN THE ASSESSMENT PROCEEDINGS AT VARIANCE WITH THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE IT HAS TO BE NECESSARILY SHOWN THAT THE TREATMENT AS GIVEN OR ENTRIES AS MADE IN THE BOOKS OF ACCOUNT ARE EITHER ERRONEOUS OR CONTRARY TO THE CORRECT LEGAL POSITION. 11. HE SUBMITTED THAT THE ASSESSEE IN EARLIER YEAR NOT CLAIMED THIS INTEREST INCURRED AS REVENUE EXPENDITURE AND CHOSE TO CAPITALISE THE SAME AND CONTINUED THIS AMOUNT IN THE UNALLOCATED EXPENDITUR E. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WITHOUT ANY VALID REASON CHOSE TO CLAIM THIS EXPENDITURE AS REVENUE EXPENDITURE. THUS THERE IS INCONSISTENCY IN ADOPTING THE ACCOUNTING POLICY. FURTHER HE DREW O UR ATTENTION TO EXPLANATION-8 TO SECTION 43(1) OF THE ACT WHICH SAYS THAT WHERE ANY AMOUNT OF INTEREST IS PAI D OR PAYABLE IN CONNECTION WITH ACQUISITION OF ANY AS SETS SO MUCH OF SUCH AMOUNT IS RELATABLE TO ANY PERIOD AFTER SUCH ASSET IS PUT TO USE SHALL NOT BE INCLUDE D IN THE ACTUAL COST OF THE ASSETS. ACCORDING TO THE LE ARNED DR IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED AN D DEDUCTION ALLOWED U/S. 36(1)(III) THE PROVISIONS O F EXPLANATION-8 TO SECTION 43(1) BECOME INFRUCTUOUS. 12. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT INTEREST PAID IS ALLOWABLE AS I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 12 DEDUCTION U/S. 36(1)(III) OF THE ACT. WHEN MONEY W AS BORROWED AND UTILISED IN ACQUISITION OF NEW PLANT A ND MACHINERY OR CAPITAL ASSET THOUGH SUCH ASSETS HAVE NOT BEEN PUT TO USE OR WHEN THE BORROWINGS WERE UTILISED FOR THE PURPOSE OF EXPANSION OF THE BUSINE SS OR ESTABLISHING A UNIT WHICH IS IN THE SAME BUSINES S IS ALLOWABLE AS DEDUCTION. FOR THIS PURPOSE HE RELIED ON THE FOLLOWING DECISIONS: A) DCIT VS. CORE HEALTH CARE LTD. 298 ITR 194 (SC). B) ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377 (SC). C) STANDARD REFINERY & DISTILLERIES LTD. VS. CIT 79 ITR 589 (SC). D) CIT VS. HINDUSTAN ZINC LTD. 269 ITR 369 (RAJ.) E) CIT VS. WESTERN BENGAL COALFIELDS LTD. 233 ITR 139 (CAL.). F) CIT VS. USHA IRON & FERRO METAL CORPORATION LTD. 296 ITR 140 (DEL.) G) CIT VS. INDIAN TELEPHONE INDUSTRIES LTD. 175 ITR 215 (KARN.) H) CIT VS. EXPENDED METAL MANUFACTURERS 189 ITR 317 (ALL.) I) KANHIRAM RAM GOPAL VS. CIT 170 ITR 41 (MP). J) GLAND PHARMA LTD. VS. JCIT ITAT HYDERABAD BENCH A IN ITA NOS. 35 36 54 AND 55/HYD/01 AND ITA NOS. 177/HYD/2002 AND 953/HYD/2003. K) SRI RAMA MULTI TECH LTD. VS. ACIT 92 TTJ 568 (ITAT AHMEDABAD BENCH). L) DCIT VS. TATA SPONGE IRON LTD. 90 ITD 138 (ITAT CUTTACK BENCH) I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 13 M) CORE HEALTH LTD. VS. DCIT 78 ITD 1 (ITAT AHMEDABAD BENCH). N) INSPECTING ASST. COMMISSIONER VS. COROMANDEL FERTILISERS LTD. 29 ITD 455 (ITAT HYDERABAD B BENCH). O) STERLITE INDUSTRIES LTD. VS. ADDL. CIT 102 TTJ 53 (ITAT MUMBAI D BENCH). P) MANGALAM CEMENTS LTD. 92 ITD 44 (ITAT JAIPUR BENCH) (TM). 13. REGARDING EXPLANATION TO SECTION 36(1)(III) THE LEARNED AR SUBMITTED THAT THE SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD. REPORTED IN 298 ITR 194 HELD THAT THE PROVISO INSERTED U/S. 36(1)(III) BY THE FINANCE ACT 2003 W.E.F. 01.04.2 004 IS ONLY PROSPECTIVE IN OPERATION. IT IS NOT RETROSPEC TIVE IN NATURE. THE LEARNED COUNSEL FOR THE ASSESSEE FURT HER CITED THE DECISION OF THE DELHI HIGH COURT IN THE C ASE OF CIT VS. GOOD YEAR INDIA LTD. REPORTED IN 243 IT R 239. IN THE SAID CASE THE ASSESSEE ENTERED INTO AGREEMENT WITH AN AMERICAN COMPANY FOR ENLARGING THE RANGE OF EXISTING PRODUCTS AND ACQUIRED THE RIG HT TO MANUFACTURE THE NEW PRODUCTS IN THE SAME LINE OF BUSINESS. IT IS HELD THAT IT IS REVENUE IN NATURE AND DIRECTED TO ALLOW THE EXPENDITURE THEREON. 14. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ENTRIES MADE IN THE BOOKS OF ACCOUNT CANNOT BE THE BASIS TO DECIDE WHETHER A RECEIPT IS TAXABLE OR NOT AND IS WHETHER THE EXPENS ES ARE ALLOWABLE AS DEDUCTION OR NOT. HE SUBMITTED THA T THE SUPREME COURT IN THE CASE OF KEDARNATH JUNE I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 14 MANUFACTURING CO. LTD. VS. CIT 82 ITR 363 HELD THA T WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF L AW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN BE THE EXISTENCE OR ABSENCE OF ENTRIES IN HIS BOOKS OF ACC OUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. HE FURTHE R RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. INDIA DISCOUNT COMPANY LTD. 75 ITR 191 WHEREIN THE APEX COURT HELD THAT THOUGH AN AMOUNT I S CREDITED IN THE BOOKS OF ACCOUNT IT DOES NOT REPRES ENT THE INCOME OF THE ASSESSEE. THE ENTRIES MADE IN TH E BOOKS ARE NOT RELEVANT. HE FURTHER RELIED ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS. USHA IRON & FERRO METAL CORPORATION LTD. 296 ITR 140 AND ON THE DECISION OF THE ITAT MUMBAI BENCH B IN THE CASE OF SITU ELECTRO INSTRUMENTS PVT. LTD. V S. ITO MUMBAI IN 19 SOT 13. THE LEARNED COUNSEL FO R THE ASSESSEE FURTHER RELIED ON THE COMMON ORDER OF THIS TRIBUNAL A BENCH IN I.T.A. NOS. 35 AND 36/HYD/2001 I.T.A. NOS. 54 & 55/HYD/2001 AND I.T.A. NOS. 177/HYD/2002 AND 953/HYD/2003 ORDER DATED 28 TH FEBRUARY 2007 IN THE CASE OF GLAND PHARMA LTD. HYDERABAD. 14.1 HE SUBMITTED THAT THE COMPANY IS CARRYING ON THE BUSINESS OF MANUFACTURING AND SALE OF AMORPHOUS AND CRGO TRANSFORMERS AND ITS RELATED PRODUCTS. AMORPHOUS METAL IS ONE OF THE MAIN RAW MATERIAL FOR MANUFACTURING OF AMORPHOUS TRANSFORMERS WHICH IS I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 15 BEING IMPORTED. THE COMPANY IN THE PROCESS OF BACKWARD INTEGRATION COMMENCED THE SETTING UP OF TH E PLANT FOR MANUFACTURING AMORPHOUS METAL FOR ITS CAPTIVE CONSUMPTION AT ITS EXISTING MANUFACTURING FACILITIES AT RUDRARAM MEDAK DISTRICT. 14.2 ACCORDING TO THE AR DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002-03 THE COMPANY HAD INCURRED AN AMOUNT OF RS. 2 27 84 040/- TOWARDS INTEREST ON THE AMOUNTS BORROWED IN THE NAME OF THE COMPANY FOR SETTING UP AMORPHOUS METAL PLANT AND CLAIMED AS DEDUCTION/S. 36(1)(III) OF THE INCOME-TA X ACT 1961. THE NEW UNIT WAS ONLY EXPANSION OF THE EXISTING BUSINESS CONSTITUTING THE SAME BUSINESS ON THE BASIS OF TESTS AS LAID DOWN BY THE HONBLE SUPR EME COURT. 14.3 HE FURTHER SUBMITTED THAT AS THE TESTS FOR UNIT OF MANAGEMENT CONTROL AND FINANCES HAVE BEEN SATISFIED IN REGARD TO THE AM PLANT THE EXPENDITURE INCURRED ON THE AM PLANT REPRESENTING INTEREST IS ALLOWABLE AS DEDUCTION U/S. 36(1)(III) OF THE I.T. ACT 1961 AG AINST THE PROFITS OF THE COMPANY. THE HONBLE SUPREME COURT IN THE CASE OF STANDARD REFINERY AND DISTILLE RY LIMITED (79 ITR 589) LAID DOWN THE FOLLOWING CRITER IA OF DECIDING THE ISSUE OF SAME BUSINESS AND HE DREW OUR ATTENTION TO THE CRITERIA LAID DOWN BY THE HONBLE SUPREME COURT WHICH ARE ENUMERATED BELOW: (A) UNIT OF CONTROL : THE SAME BOARD OF DIRECTORS AND WHOLE TIME DIRECTORS CONTROLLED DISTRIBUTION I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 16 TRANSFORMERS UNITS ALONG WITH THE AMDT PLANT. THE ENTIRE TOP MANAGEMENT WAS ALSO THE SAME. NOT ONLY THE CHAIRMAN AND MANAGING DIRECTOR BUT EVEN THE VIC E PRESIDENT (MARKETING) GENERAL MANAGER (FINANCE) V ICE PRESIDENT (PRODUCTION) AND MANAGER (PURCHASE) WERE ALL COMMON. THEREFORE THE TEST OF UNIT OF CONTROL IS SATISFIED. (B) EXISTENCE OF COMMON MANAGEMENT : THE MANAGEMENT OF FINANCES PURCHASE PRODUCTION AND MARKETING WERE ALSO UNDER THE COMMON MANAGEMENT FOR ALL THE UNITS INCLUDING THE AMDT PLANT AS ALL T HE DECISIONS WERE TAKEN AT THE HEAD OFFICE LEVEL BY TH E DEPARTMENTAL HEADS UNDER OVERALL GUIDANCE AND CONTROL OF THE MANAGING DIRECTOR. HENCE THE TEST OF EXISTENCE OF COMMON MANAGEMENT IS SATISFIED. (C) COMMON ADMINISTRATION : THE HEAD OFFICE CONTROLS THE TOTAL ADMINISTRATION OF UNITS. THE HEAD OFFICE ISSUED THE APPOINTMENT LETTERS FOR THE STAFF OF ALL THE UNITS INCLUDING THE AMDT PLANT. HENCE THE TEST OF COMMON ADMINISTRATION IS ALSO SATISFIED. (D) COMMON FUNDS: THE ASSESSEE SUBMITS THAT PAYMENTS FOR AMDT PLANT WERE MADE FROM THE SAME BANK ACCOUNT OUT OF THE COMMON FUNDS. HENCE THE TEST OF COMMON FUNDS IS SATISFIED. (E) COMMON PLACE OF BUSINESS : THE HEAD OFFICE OF THE COMPANY AT THAT TIME IS SITUATED AT PLOT NO. 28 ID A BALANAGAR HYDERABAD-500 037. THE HEAD OFFICE I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 17 CONTROLS ALL THE UNITS SUCH AS TRANSFORMERS UNITS AT BALANAGAR AND RUDRARAM AND AMDT PLANT AT RUDRARAM. HENCE THE TEST OF COMMON PLACE OF BUSINESS IS SATISFIED. 14.4 ACCORDING TO THE AR AS ALL THE CRITERIA LAID DOWN BY THE HONBLE SUPREME COURT HAVE BEEN SATISFIED T HE AMOUNT OF INTEREST INCURRED ON THE AMORPHOUS METAL PROJECT CLAIMED AS DEDUCTION U/S. 36(1)(III) OF I.T . ACT 1961 IS ALLOWABLE AS REVENUE EXPENDITURE. THOUGH T HE INTEREST HAS BEEN IN THE EXPENDITURE PENDING CAPITALISATION IN THE BOOKS OF ACCOUNT THE SAME IS ALLOWABLE AS REVENUE EXPENDITURE U/S. 36(1)(III) OF IT ACT 1961. THIS STAND IS SUPPORTED BY THE RECENT DECISION OF THE HONBLE SUPREME COURT OF INDIA IN T HE CASE OF UNITED COMMERCIAL BANK VS. COMMISSIONER OF INCOME-TAX REPORTED IN (1999) 106 TAXMAN 601. 14.5 HE SUBMITTED THAT THE ABOVE STAND IS ALSO FURTHER REPORTED BY THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING COMPANY LIMITED VS. CIT REPORTED IN 82 ITR 363 AND IN THE CASE OF INDIA CEMENTS LIMITED VS. CIT REPORT ED IN 60 ITR 52. THE SAME STAND HAD BEEN TAKEN BY THE HONBLE HYDERABAD TRIBUNAL IN THE CASE OF IAC VS. COROMANDEL FERTILIZERS LIMITED REPORTED IN 29 ITD 4 55. THE ABOVE STAND IS SUPPORTED BY THE DECISION OF THE HONBLE ITAT PUNE BENCH IN THE CASE OF KALYANI STE EL LIMITED VS. DY. COMMISSIONER OF INCOME-TAX REPORTED IN 62 ITD 233. THE DECISIONS IN THE FOLLOWING CASE S ARE ALSO SUPPORTED THAT INTEREST AND FINANCE CHARGE S I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 18 INCURRED ON AM PLANT IS ALLOWABLE AS DEDUCTION U/S. 36(1)(III) OF THE IT ACT 1961: - KANHIRAM RAMGOPAL VS. CIT 170 ITR 41 (MP) - CIT VS. WESTERN BENGAL COAL FIELDS LTD. 233 ITR 139 (CAL.) - CIT VS. INDIAN TELEPHONE INDUSTRIES LTD. 175 ITR 215 (KAR) - CIT VS. EXPANDED METAL MANUFACTURERS 89 ITR 317 (ALL). - IAC VS. COROMANDAL FERTILIZERS LTD. 29 ITD 455 (HYD ITAT) - KALYANI STEELS LTD. VS. DY CIT 62 ITD 233 (PUNE ITAT) - CIT VS. TATA CHEMICALS LTD. 256 ITR 395 (BOMBAY HIGH COURT) - SPARTEK CERAMICS LTD. VS. DY. CIT 76 ITD 407 (ITAT HYD). 14.6 HE FURTHER SUBMITTED THAT INTEREST AND FINANCE CHARGES INCURRED ON AMORPHOUS METAL WERE ALLOWED AS DEDUCTION IN OUR OWN CASE BY THE THEN LEARNED COMMISSIONER OF INCOME-TAX FOR THE ASSESSMENT YEAR 1996-97 VIDE ORDER NO. ITA NO. 35/TR/JC.SR-5/CIT(A) - II/1999-2000 DATED 5.12.2000. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WHERE THE ASSESSEE BORROWS MONEY FOR EXPANSION OF ITS EXISTING BUSINES S THE INTEREST IS ALLOWABLE U/S. 36(1)(III) OF THE I. T. ACT. HOWEVER WHEN THE MONEY IS BORROWED BESIDES EXISTIN G BUSINESS MONEYS BORROWED FOR SETTING UP OF A NEW ACTIVITY OR UNIT WE HAVE TO SEE WHETHER THE NEW ACTIVITY OR UNIT AND THE EXISTING BUSINESS CONSTITU TE I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 19 THE SAME BUSINESS OR THEY ARE ENTIRELY SEPARATE A ND DISTINCT BUSINESS ALTOGETHER. IF IT IS ENTIRELY SE PARATE AND DISTINCT BUSINESS THE INTEREST IS NOT ALLOWABLE UNLESS THE NEW UNIT GOES INTO PRODUCTION. IN THE PRESENT CASE ASSESSEE IS ENGAGED IN MANUFACTURING AND SALE OF AMORPHOUS AND CRGO TRANSFORMERS AND THEIR RELATED PRODUCTS. AMORPHOUS METAL IS ONE OF THE MAIN RAW MATERIAL FOR MANUFACTURING OF AMORPHOUS TRANSFORMERS WHICH IS BEING IMPORTED. THE COMPANY IN THE PROCESS OF BACKWARD INTEGRATION COMMENCED TH E SETTING UP OF THE PLANT FOR MANUFACTURING AMORPHOUS METAL FOR ITS CAPTIVE CONSUMPTION AT ITS EXISTING MANUFACTURING FACILITIES AT RUDRARAM MEDAK DISTRIC T. IN THE ASSESSMENT YEAR UNDER CONSIDERATION ASSESSEE BORROWED FUNDS IN THE NAME OF THE COMPANY FOR SETTI NG OF AN AMORPHOUS METAL PLANT. THE SETTING UP OF AMORPHOUS METAL PLAN CANNOT BE SAID THAT IT IS A DIFFERENT UNIT FROM THE EXISTING UNIT. FURTHER IN OUR OPINION THE TEST FOR UNITY OF CONTROL AND COMMON MANAGEMENT IS EXISTING SINCE THE AMORPHOUS UNIT WAS CONTROLLED BY SAME MANAGEMENT. FURTHER THERE WAS INTERLACING AND INTERRELATED FUND AND ADMINISTRATIO N. 16. IN THE CASE OF STANDARD REFINERY & DISTILLERY LTD. (79 ITR 9) THE HONBLE SUPREME COURT HAS LAID DOWN THE PRINCIPLES WHICH SHOULD BE CONSIDERED IN DETERMINING WHETHER TWO LINES OF BUSINESS CONSTITUT E THE SAME BUSINESS. THOSE PRINCIPLES ARE INTER- CONNECTION INTERLACING INTER-DEPENDENT AND UNITY FURNISHED BY THE EXISTENCE OF COMMON MANAGEMENT I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 20 COMMON BUSINESS ORGANISATION COMMON ADMINISTRATION COMMON FUND AND COMMON PLACE OF BUSINESS. IN THE PRESENT CASE THE AMORPHOUS METAL PLANT IS PART AND PARCEL OF SAME MANAGEMENT CONTROLLED BY SAME BOARD OF DIRECTORS AND HEADED BY SINGLE MANAGING DIRECTOR. THE FUNDS FOR ALL THE DIVISIONS ARE COMMON. AS NARRATED BY THE LEARNED A R BUSINESS IS CARRIED ON AT COMMON PLACE AT PLOT NO. 28 IDA BALANAGAR HYDERABAD-500 037. THE PRODUCT MANUFACTURED BY AMORPHOUS METAL PLANT IS FOR CAPTIV E CONSUMPTION AT ITS EXISTING MANUFACTURING UNIT SINC E AMORPHOUS METAL IS ONE OF THE RAW MATERIALS FOR MANUFACTURING OF AMORPHOUS TRANSFORMERS. BEING SO THIS IS NOTHING BUT ANCILLARY UNIT OF THE ASSESSEE FOR FACILITATING SMOOTH FUNCTIONING OF THE ASSESSEES U NIT. BEING SO IT IS NOT POSSIBLE TO HOLD THAT AMORPHOUS METAL PLANT IS INDEPENDENT AND DISTINCT UNIT. IN O UR OPINION THIS UNIT IS INTER-DEPENDENT WITH THE MAIN UNIT OF THE ASSESSEE AND IT IS TO BE TREATED AS AN EXTENSION OF THE ASSESSEES EXISTING LINE OF BUSINE SS AND AS A NEW UNIT. ACCORDINGLY THE INTEREST INCU RRED ON THE BORROWING TO SET UP AMORPHOUS METAL PLANT IS TO BE ALLOWED AS REVENUE EXPENDITURE. THIS GROUND OF THE REVENUE IS DISMISSED. 17. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO DELETION OF ADDITION MADE ON ACCOUNT OF PROVISION F OR DOUBTFUL DEBTS IN COMPUTING BOOK PROFIT U/S. 115JB OF THE ACT. ACCORDING TO THE ASSESSING OFFICER THIS W OULD BE A PROVISION FOR LIABILITY AND THEREFORE EXPLA NATION I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 21 (C) TO SECTION 115JB IS APPLICABLE. THIS ISSUE CAM E UP FOR CONSIDERATION IN I.T.A. NO. 935/HYD/08 WHEREIN THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE. SIMILARLY WE FIND THAT THE SAME VIEW HAS BEEN TAKE N IN THE CASE OF CIT VS. EICHER LTD. 287 ITR 170 (DE L.) CIT VS. HCL COMNET SYSTEMS AND SERVICES 292 ITR 299. FURTHER SUPREME COURT CONFIRMED THE ABOVE VIEW IN THE CASE OF CIT VS. HCL COMNET SYSTEMS AND SERVICES 305 ITR 409 WHEREIN THE SUPREME COURT HELD AS UNDER: WHILE RESORTING TO THE PROVISIONS OF SECTION 115JA OF THE INCOME-TAX ACT 1961 ON THE BASIS THAT THE TOTAL INCOME OF THE COMPANY AS COMPUTED UNDER THE ACT IS LESS THAN 30 PER CENT OF ITS BOOK PROFITS THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS MAINTAINED BY THE COMPANY IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT 1956 WHICH ARE CERTIFIED BY THE AUDITORS AND PASSED BY THE COMPANY IN GENERAL MEETING. THE ASSESSING OFFICER HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE DULY CERTIFIED AND WHETHER SUCH BOOKS HAVE BEEN PROPERTY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEYOND THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLANATION TO SECTION 115JA. THE EXPLANATION HAS PROVIDED SIX ITEMS VIZ. ITEMS (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. THE PROVISION FOR BAD AND DOUBTFUL DEBTS CAN BE ADDED BACK TO THE NET PROFIT ONLY IF ITEM (C) OF THE EXPLANATION IS ATTRACTED. ITEM (C) DEALS WITH AMOUNTS SET ASIDE FOR MEETING LIABILITIES I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 22 OTHER THAN ASCERTAINED LIABILITIES. THE ASSESSEES CASE CAN FALL WITHIN THE AMBIT OF ITEM (C) ONLY IF THE AMOUNT (I) IS SET ASIDE AS A PROVISION (II) THE PROVISION IS MADE FOR MEETING A LIABILITY AND (III) THE PROVISION SHOULD BE FOR OTHER THAN AN ASCERTAINED LIABILITY I.E. IT SHOULD BE FOR AN UNASCERTAINED LIABILITY. ITEM (C) OF THE EXPLANATION TO SECTION 115JA IS NOT ATTRACTED TO THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS. THE PROVISION FOR BAD AND DOUBTFUL DEBTS IS MADE TO COVER UP PROBABLE DIMINUTION IN THE VALUE OF THE ASSETS I.E. A DEBT WHICH IS AN AMOUNT RECEIVABLE BY THE ASSESSEE. SUCH A PROVISION CANNOT BE SAID TO BE A PROVISION FOR A LIABILITY BECAUSE EVEN IF THE DEBT IS NOT RECOVERABLE NO LIABILITY CAN BE FASTENED ON THE ASSESSEE. ANY PROVISION MADE TOWARDS IRRECOVERABILITY OF A DEBT CANNOT BE SAID TO BE A PROVISION FOR LIABILITY. DECISION OF THE DELHI HIGH COURT IN CIT VS. HCL COMNET SYSTEMS AND SERVICES LTD. (2007) 292 ITR 299 AFFIRMED. 18. IN VIEW OF THIS THE ISSUE STANDS SETTLED AGAINST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 19. THE LAST GROUND IN I.T.A. NO. 809/HYD/2008 IS WITH REGARD TO ALLOWING DEDUCTION U/S. 80HHC WHILE COMPUTING BOOK PROFIT U/S. 115JB OF THE ACT. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF AJANT A PHARMA LTD. VS. CIT 327 ITR 305 WHEREIN IT WAS HE LD AS FOLLOWS: THE ASSESSEE A COMPANY PAYING MINIMUM ALTERNATE TAX AT THE RELEVANT TIME FILED ITS RETURN FOR THE ASSESSMENT YEAR 2001-02 I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 23 CLAIMING DEDUCTION UNDER SECTION 80HHC OF THE INCOME-TAX ACT 1961. IN COMPUTING THE BOOK PROFITS IT CLAIMED REDUCTION OF 100 PER CENT OF THE EXPORT PROFITS UNDER CLAUSE (IV) OF THE EXPLANATION TO SECTION 115JB. BUT THE ASSESSING OFFICER ALLOWED ONLY 80 PER CENT OF THE EXPORT PROFITS IN TERMS OF SECTION 80HHC(1B). ON APPEAL THE COMMISSIONER (APPEALS) HELD THAT 100 PER CENT OF THE EXPORT PROFITS EARNED BY THE ASSESSEE AS COMPUTED UNDER SECTION 80HHC(3) WAS ELIGIBLE FOR REDUCTION UNDER CLAUSE (IV) OF THE EXPLANATION TO SECTION 115JB. THE APPELLATE TRIBUNAL UPHELD THE ORDER OF THE COMMISSIONER (APPEALS). THE HIGH COURT ALLOWED THE DEPARTMENTS APPEAL. THE ASSESSEE APPEALED TO THE SUPREME COURT: HELD REVERSING THE DECISION OF THE HIGH COURT AND RESTORING THAT OF THE APPELLATE TRIBUNAL (I) THAT SECTION 115JA WAS A SELF- CONTAINED CODE AND APPLIED NOTWITHSTANDING ANY PROVISION IN THE ACT. SECTION 115JB IS THE SUCCESSOR SECTION TO SECTION 115JA. SECTION 115JB CONTINUES TO REMAIN A SELF CONTAINED CODE. (II) THAT ALL ASSESSABLE ENTITIES WERE NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC(1B). SIMILARLY ONLY ELIGIBLE GOODS WERE ENTITLED TO SUCH SPECIAL DEDUCTION UNDER SECTION 80HHC(1). SECTION 80HHC(3) WAS GEARED TO THE EXPORTS WHEREAS THE LEVY UNDER SECTION 115JB WAS ON THE DEEMED INCOME. THE IDEA WAS TO EXCLUDE EXPORT PROFITS FROM THE COMPUTATION OF BOOK PROFITS UNDER SECTION 115JB. (III) THAT IF THE DICHOTOMY BETWEEN ELIGIBILITY OF PROFITS AND DEDUCTIBILITY OF PROFITS WAS NOT KEPT IN MIND SECTION 115JB WOULD CEASE TO BE A SELF-CONTAINED CODE. (IV) THAT THEREFORE THE APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT 100 PER CENT OF THE I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 24 EXPORT PROFITS EARNED BY THE ASSESSEE AS COMPUTED UNDER SECTION 80HHC(3) WAS ELIGIBLE FOR REDUCTION UNDER CLAUSE (IV) OF THE EXPLANATION TO SECTION 115JB. DECISION OF THE BOMBAY HIGH COURT IN CIT VS. AJANTA PHARMA LTD. (2009) 318 ITR 252 REVERSED. 20. IN VIEW OF THE ABOVE THE DEDUCTION U/S. 80HHC HAS TO BE COMPUTED ON THE ADJUSTED BOOK PROFIT COMPUTED U/S. 115JA ACCORDINGLY WE DISMISS THE GROUND TAKEN BY THE REVENUE. IN THE RESULT REVENU E APPEAL IN I.T.A. NO. 809/HYD/2008 STANDS DISMISSED. I.T.A. NO. 936/HYD/2008 (BY REVENUE): 21. THE SOLE GROUND IN THIS APPEAL IS WITH REGARD TO ALLOWABILITY OF DEPRECIATION ON COMPUTER PERIPHERAL S AT 60% INSTEAD OF 25% BY TREATING IT AS A PLANT AND MACHINERY. 22. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR OPINION COMPUTER AND PERIPHERALS ATTACHED WITH THE COMPUTER WOULD BE ENTITLED FOR DEPRECIATION UNDER ITEM III (5) DEPRECIATION SCHEDULE AS LAID DOWN IN APPENDIX-I TO INCOME-TAX RULES 1962 AS PER WHICH 60% DEPRECIATION IS ALLOWABLE. FOR THIS PURPOSE WE PLACE RELIANCE ON THE ORDER OF THE TRIBUNAL KOLKATA BENCH IN THE CASE OF ITO VS. SAMIRAN MAJUMDAR 280 ITR (AT) 74 (KOL.). THIS GROUND OF THE REVENUE IS DISMISSED. IN THE RESULT REVENUE APPEAL IN I.T.A. NO. 936/HYD/2008 IS DISMISSED. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 25 I.T.A. NOS. 239 & 845/HYD/09 & 1462/HYD/2010: 23. THE NEXT COMMON GROUND IN I.T.A. NO. 239/HYD/09 845/HYD/09 AND 1462/HYD/2010 IS WITH REGARD TO DISALLOWANCE OF USANCE INTEREST ON IMPORT BILL ON THE GROUND THAT THE TAX HAS NOT BEEN DEDUCTED FROM THE AMOUNT PAID TO FOREIGN SUPPLIER A S PER THE PROVISIONS OF SECTION 195 OF THE INCOME-TAX ACT 1961. 24. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F TRANSFORMERS BESIDES EXECUTING WORKS ON CONTRACT H AS INCURRED INTEREST IN THESE ASSESSMENT YEARS AS A PAYMENT TO FOREIGN SUPPLIER FOR USANCE PERIOD RANG ING FROM 60 TO 180 DAYS. THE ASSESSEE HAD NOT DEDUCTED ANY TDS THEREON CONTENDING THAT NO TDS IS REQUIRED TO BE DEDUCTED THEREON IN VIEW OF THE JUDGEMENT IN THE CASE OF CIT V. VISAKHAPATNAM PORT TRUST 144 ITR 14 6 (AP). HOWEVER THE ASSESSING OFFICER WAS OF THE OPINION THAT THE SAID JUDGEMENT OF THE JURISDICTION AL HIGH COURT WAS NOT APPLICABLE TO THE FACTS OF THE C ASE AS THE SAME HAS BEEN RENDERED PRIOR TO THE INTRODUCTION OF SECTION 9(1)(V) WITH EFFECT FROM 1.6.1976. IT WAS RENDERED AT A TIME WHEN THE TERM INTEREST HAD NOT BEEN DEFINED IN THE ACT AND THE SAID TERM WAS DEFINED ONLY BY THE FINANCE ACT 1976 WITH EFFECT FROM 1.6.1976 BY INSERTING SECTION 2(28A). ACCORDING TO THE ASSESSING OFFICER WHATEVER INCOME BY I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 26 WAY OF INTEREST PAYABLE BY A RESIDENT DOES NOT RELA TE TO CARRYING ON BUSINESS OUTSIDE INDIA SUCH INTEREST WOULD BE DEEMED TO HAVE ACCRUED OR AROSE IN INDIA. THEREFORE EVEN IF IT IS PAYABLE OUTSIDE INDIA THE SOURCE OF INCOME BEING IN INDIA WOULD BE DEEMED TO ACCRUE OR ARISE TO THE NON-RESIDENT IN INDIA IN A PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR AND WILL BE A PART OF THE TOTAL INCOME. THE ASSESSING OFFICER ALSO NOTED THAT SINCE SUCH INTEREST WILL FORM PART OF TH E TOTAL INCOME OF THE PREVIOUS YEAR OF SUCH NON-RESID ENT TDS WILL BE REQUIRED TO BE MADE THEREON U/S. 195(1) OF THE ACT. ACCORDING TO THE ASSESSING OFFICER USANCE INTEREST PAID BY THE ASSESSEE WAS NOT ANY PART OF T HE PURCHASE PRICE AND WAS IN FACT INTEREST WITHIN THE MEANING OF THE DEFINITION OF THE TERM INTEREST U/ S. 2(28A). ACCORDINGLY IT WAS CONCLUDED THAT THE ASSESSEE WAS LIABLE TO DEDUCT TDS ON THE USANCE INTEREST. SINCE TDS WAS NOT MADE ON THE USANCE INTEREST WHILE MAKING PAYMENT THE ASSESSING OFFICE R DISALLOWED THE INTEREST WHILE COMPUTING THE INCOME. ON APPEAL THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. AGAINST THIS THE ASSESSEE IS I N APPEAL BEFORE US. 25. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE WAS A CONDITION LAID DOWN BY THE SUPPLIE R OF THE GOODS TO THE ASSESSEE THAT WHERE THE PAYMENT OF PURCHASE PRICE WAS DELAYED BEYOND 45 DAYS THE ASSESSEE IS LIABLE TO PAY USANCE INTEREST. ACCORDI NG TO THE ASSESSEES COUNSEL THE PAYMENT OF THIS INTEREST I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 27 CANNOT BE EQUATED WITH INTEREST ON LOAN AND HENCE DEDUCTION OF TAX AT SOURCE WAS NOT ATTRACTED. HENC E THERE IS NO APPLICATION OF SECTION 40(A)(I) OF THE ACT. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE T HIS INTEREST IS PART AND PARCEL OF THE PURCHASE PRICE. HE RELIED ON THE DECISION IN THE CASE OF CIT VS. INDIA PISTONS LTD. 282 ITR 632 AND THE JUDGEMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. VISAKHAPATNAM PORT TRUST (SUPRA) WHICH IS APPLICABL E TO THE FACTS OF THE CASE. HE RELIED ON THE JUDGEME NT OF SUPREME COURT IN THE CASE OF VIJAYA SHIP BREAKING CORPORATION & ORS. VS. CIT 314 ITR 309. 26. ON THE OTHER HAND THE LEARNED DR SUBMITTED THAT THE JUDGEMENT RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THE CASE OF VISAKHAPATNAM PORT TRUS T (SUPRA) WAS RENDERED IN THE CONTEXT OF LIABILITY TO PAY TAX ON THE BASIS OF DTAA AND THE CASE OF THE GERMAN COMPANY WAS THAT IT HAD NO PERMANENT ESTABLISHMENT IN INDIA AND THEREFORE SINCE SECTIO N 9(1)(I) OF THE SAID ACT WAS SUBJECT TO THE DTAA IT WAS NOT TAXABLE IN INDIA BUT IN THE OTHER CONTRACTING STATE. THE ASSESSMENTS IN THAT CASE RELATED TO THE YEARS P RIOR TO THE INTRODUCTION OF SECTION 9(1)(V) IN THE ACT W .E.F. 1.6.1976 UNDER WHICH BY A DEEMING FICTION INTEREST SUCH AS USANCE INTEREST PAYABLE BY A RESIDENT WOULD BE DEEMED TO ACCRUE AND ARISE IN INDIA. SECTION 9(1 )(V) OF INCOME-TAX ACT 1961 IS REPRODUCED AS UNDER: SECTION 9. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 28 (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO HAVE ACCRUE OR ARISE IN INDIA; ............ (V) INCOME BY WAY OF INTEREST PAYABLE BY A) THE GOVERNMENT; OR B) A PERSON WHO IS A RESIDENT EXCEPT WHERE THE INTEREST IS PAYABLE IN RESPECT OF ANY DEBT INCURRED OR MONEYS BORROWED AND USED FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; OR C) A PERSON WHO IS A NON-RESIDENT WHERE THE INTEREST IS PAYABLE IN RESPECT OF ANY DEBT INCURRED OR MONEYS BORROWED AND USED FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA. 27. HE SUBMITTED THAT THE ABOVE CLAUSE (V) TO SECTION 9(1) WAS INTRODUCED BY FINANCE ACT 1976 W.E.F. 01.06.1976 SUBSEQUENT TO WHICH IN ALL CASES WHERE THE INCOME BY WAY OF INTEREST PAYABLE DOES NOT RELA TE TO CARRYING ON BUSINESS OUTSIDE INDIA SUCH INCOME PAYABLE BY WAY OF INTEREST WOULD BE DEEMED TO ACCRU E OR ARISE IN INDIA. IN OTHER WORDS WHEREVER INCOME BY WAY OF INTEREST IS PAYABLE BY THE RESIDENT IT SHAL L BE DEEMED TO ACCRUE OR ARISE IN INDIA I.E. THE SOURC E OF SUCH INCOME WILL BE FROM INDIAN EVEN IF IT IS PAYAB LE OUTSIDE INDIA. SUCH INTEREST INCOME WHICH IS DEEME D TO ACCRUE OR ARISE TO THE NON-RESIDENT IN INDIA IN A I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 29 PREVIOUS YEAR WILL BE PART OF THE TOTAL INCOME OF T HAT PREVIOUS YEAR OR SUCH NON-RESIDENT BY VIRTUE OF SEC TION 5(2)(B) OF THE ACT. THUS ALL INCOME FROM WHATEVER SOURCE DERIVED WHETHER ACTUALLY RECEIVED OR DEEMED TO HAVE BEEN RECEIVED OR WHETHER ACTUALLY ACCRUED OR ARISEN OR DEEMED TO HAVE BEEN ACCRUED OR ARISEN TO A NON-RESIDENT IN INDIA IN A PREVIOUS YEAR WILL BE CONSIDERED TO BE PART OF HIS TOTAL INCOME IN RESP ECT OF WHICH INCOME-TAX SHALL BE CHARGED FOR THAT YEAR AS ENVISAGED BY SECTION 4(2) OF THE ACT. SECTION 4(2) SPECIFICALLY PROVIDES THAT IN RESPECT OF INCOME SO CHARGEABLE UNDER SUBSECTION (1) INCOME-TAX SHALL B E DEDUCTED AT SOURCE. IF THAT BE SO INCOME-TAX THER EON SHALL BE DEDUCTIBLE AT SOURCE U/S. 195(1) OF THE AC T. 28. ACCORDING TO THE DR SUCH LIABILITY OF THE ASSESSEE TO DEDUCT TAX AT SOURCE FROM INTEREST SO PAYABLE CANNOT DEPEND UPON ANY PARTICULAR MODE THAT MAY BE ADOPTED BY THE ASSESSEE FOR MAKING PAYMENT. THUS WITH THE INTRODUCTION OF SECTION 9(1)(V) W.E. F. 1.6.1976 THE SAID DECISION OF THE ANDHRA PRADESH HIGH COURT CANNOT ASSIST THE ASSESSEE. FURTHER TH E ABOVE DECISION OF A.P. HIGH COURT WAS GIVEN IN RESP ECT OF THE A.YS. 1970-71 TO 1974-75 WHEN THE TERM INTEREST HAD NOT BEEN DEFINED IN THE ACT. SECTIO N 2(28A) WAS INSERTED BY THE FINANCE ACT 1976 W.E.F . 1.6.1976 DEFINING THE TERM INTEREST AS UNDER: 28(A) ... INTEREST MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A DEPOSIT CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 30 OTHER CHARGE IN RESPECT OF THE MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILISED. 29. HE CONTENDED THAT CONSEQUENT TO THE ABOVE INSERTION INTEREST IS TREATED AS A DISTINCT ITEM. THE VALIDITY AND APPLICABILITY OF JUDICIAL PRONOUNCEMEN TS IS ESSENTIALLY RESTRICTED TO THE PERIOD TO WHICH A PRO VISION FINDS PLACE IN THE STATUTE. WHEN THE LEGISLATURE AMENDS DELETES OR ADDS TO A PROVISION THE EARLIER JUDICIAL PRONOUNCEMENTS CEASE TO BE APPLICABLE FOR SUBSEQUENT PERIODS IF THEIR RELEVANCE IS BOUND TO P RIOR PERIODS. THEREFORE THE RELIANCE PLACED BY THE ASS ESSEE ON THE DECISION OF THE ANDHRA PRADESH HIGH COURT IN CIT V. VISAKHAPATNAM PORT TRUST REPORTED IN 144 ITR 156 IS MISCONCEIVED. 30. THE DR TRIED TO DISTINGUISH THE JUDGEMENT IN THE CASE OF CIT VS. INDIA PISTONS LTD. (MAD.) 282 ITR 6 23 WHEREIN THE HONBLE HIGH COURT HELD AS UNDER IN PAR A 5 ON PAGE 634: IT COULD BE FOUND THAT THE CONDITIONS FOR SUPPLY OF GOODS BY THE NON-RESIDENT TO THE ASSESSEE WERE THAT THE PAYMENT OF PURCHASE PRICE IN INSTALMENTS WAS TO BE MADE WITH THE CONDITION THAT ASSESSEE WILL COMPENSATE THE SUPPLIER BY MEANS OF INTEREST ON THE UNPAID INSTALMENTS. THE UNPAID INSTALMENTS WERE NOT THE SAME AS LOAN AND HENCE DEDUCTION OF TAX AT SOURCE WAS NOT ATTRACTED. SINCE IT IS NOT THE CASE OF THE REVENUE THAT INTEREST WAS PAID WITH REFERENCE TO LOAN SO THAT THE REQUIREMENT OF TAX DEDUCTION AT SOURCE WOULD HAVE BEEN I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 31 ATTRACTED NO DISALLOWANCE UNDER SECTION 40(A)(I) CAN BE MADE. ... 31. IN THE INSTANT CASE THE ASSESSEE HAS PAID USANCE INTEREST ON LETTERS OF CREDIT. IN IMPORT TRANSACTI ONS MAXIMUM CREDIT PERIOD IS GENERALLY AVAILED TO TAKE THE BENEFIT OF LOW INTERNATIONAL INTEREST RATES. THE I NTEREST PAID FOR AVAILING SUCH CREDIT IS CALLED AS USANCE INTEREST. THEREFORE IT IS CLEAR THAT THE FACTS O F THE INSTANT CASE ARE DIFFERENT FROM INDIA PISTONS (SUPR A) CASE WHERE INTEREST PAYMENT WAS MADE ON UNPAID PURCHASE PRICE. USANCE INTEREST IS COVERED BY THE DEEMING CLAUSE OF SECTION 9(1)(V) AS INCOME DEEMED TO ACCRUE OR ARISE IN INDIA AND ALSO QUALIFIES AS INT EREST FOR THE PURPOSE OF MAKING TAX DEDUCTION AT SOURCE A S PER REQUIREMENTS OF SECTION 195(1). 32. THE GUJARAT HIGH COURT DEALT WITH THE ABOVE MATTER AT LENGTH AND HAS ENUNCIATED THE PRINCIPLES REGARDING THE APPLICABILITY OF SECTION 195(1) TO US ANCE INTEREST IN THE CASE OF CIT V. VIJAY SHIP BREAKING CORPORATION 261 ITR 113 THE ESSENCE OF WHICH IS DISCUSSED IN THE FOLLOWING PARAS. THOUGH THE ITAT IN THE CASE OF VIJAY SHIP BREAKING CORPORATION V. DCIT 86 ITD 497 / 76 TTJ 169 DELIVERED ITS DECISION IN T HE ABOVE CASE FOR THE A.Y. 1995-96 STATING THAT THE DISALLOWANCE U/S. 40(A)(I) IS UNWARRANTED THE GUJA RAT HIGH COURT QUASHED THE ITAT ORDER AND UPHELD THE DISALLOWANCE. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 32 33. HE DREW OUR ATTENTION TO THE GROUNDS RAISED BEFORE THE HONBLE GUJARAT HIGH COURT WHICH ARE AS FOLLOWS: (1) WHETHER THE USANCE INTEREST PAID BY THE ASSESSEE APART FROM THE PURCHASE PRICE OF THE SHIP WOULD FALL WITHIN THE SCOPE OF DEFINITION OF TERM INTEREST U/S. 2(28A) OF THE INCOME-TAX ACT 1961? (2) WHETHER APPELLATE TRIBUNAL WAS RIGHT IN LAW AND ON THE FACTS IN DELETING THE DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT FOR THE FAILURE ON THE PART OF THE ASSESSEE TO DEDUCT TAX AT SOURCE FROM USANCE INTEREST PAID TO A NON-RESIDENT UNDER SECTION 195(1) OF THE ACT? (3) WHETHER THE APPELLATE TRIBUNAL WAS RIGHT IN LAW AND ON FACTS IN HOLDING THAT USANCE INTEREST PARTAKES THE CHARACTER OF PURCHASE PRICE AND THEREFORE NOT LIABLE TO DEDUCTION AT SOURCE U/S. 195(1) OF THE ACT. 34. WHILE DECIDING ON THE GROUNDS OF APPEALS MENTIONED ABOVE THE GUJARAT HIGH COURT HELD AS UNDER: ... THE MEANING OF THE TERM INTEREST IS VERY WIDE AND WOULD INCLUDE INTEREST ON UNPAID PURCHASE PRICE PAYABLE IN ANY MANNER WHICH WOULD INCLUDE AMOUNTS PAYABLE BY MEANS OF IRREVOCABLE LETTER OF CREDIT. THE WORD DEBT IS DEFINED IN SECTION 2(C) OF THE INTEREST TAX 1978 INTER ALIA TO MEAN ANY LIABILITY FOR AN ASCERTAINED SUM OF MONEY. ACCORDING TO THE ACCOUNTING STANDARD REVENUE FROM SALE OF GOODS IS RECOGNISED WHEN THE SELLER TRANSFERS THE GOODS TO THE BUYER FOR CONSIDERATION. INTEREST REVENUE IS RECOGNISED ON A TIME PROPORTIONATE BASIS USING THE EFFECTIVE INTEREST RATE. THE PROVISIONS OF SECTION I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 33 9(1)(V)(B) R.W.S. 5(2) AND SECTION 4(1) & (2) OF THE IT ACT LEAVE NO ROOM FOR DOUBT THAT THE INCOME PAYABLE BY WAY OF INTEREST BY A RESIDENT TO A NON-RESIDENT (WHICH IS NOT PAYABLE FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF SUCH RESIDENT OUTSIDE INDIA OR FOR EARNING INCOME FROM ANY SOURCE OUTSIDE INDIA) WOULD BE DEEMED TO HAVE ACCRUED OR ARISEN TO SUCH NON-RESIDENT IN INDIA AND WILL BE PART OF HIS TOTAL INCOME THAT WOULD BE CHARGEABLE TO INCOME-TAX WHICH SHALL BE DEDUCTED AT SOURCE OR PAID IN ADVANCE WHEN IT IS SO DEDUCTIBLE AT SOURCE OR PAYABLE IN ADVANCE UNDER THE PROVISIONS OF THE ACT. EVEN IF THIS SUM WHICH WAS PAYABLE TO THE NON-RESIDENT BY THE RESIDENT ASSESSEE IS PAID BY THE MODE OF RELEASING A LETTER OF CREDIT AND RECEIVED BY THE NON-RESIDENT OUTSIDE INDIA FROM THE NEGOTIATING / INTERMEDIARY BANK SUCH SUM WOULD BE NONETHELESS INCOME DEEMED TO BE ACCRUING OR ARISING TO THE NON-RESIDENT IN INDIA (EMPHASIS SUPPLIED). THE LETTER OF CREDIT IS A DOCUMENT ISSUED BY A BANK AS PER INSTRUCTIONS BY A BUYER OF THE GOODS AUTHORISING THE SELLER TO DRAW A SPECIFIED SUM OF MONEY UNDER SPECIFIED TERMS USUALLY RECEIVED BY THE BANK OF CERTAIN DOCUMENTS WITHIN A GIVEN TIME. ACCEPTANCE BY THE SELLER OF COMMERCIAL CREDIT CONSTITUTING ABSOLUTE PAYMENT WHICH WOULD DEBAR HIM FROM HIS ORDINARY RIGHT TO PURSUE THE BUYER IF THE SELLER DID NOT RECEIVE PAYMENT UNDER THE CREDIT HAS TO BE EXPRESSED IN CLEAR TERMS IN THE ABSENCE OF WHICH THE SELLERS RIGHTS AGAINST THE BUYER ARE NOT EXHAUSTED BY THE ISSUE OF CREDIT. AN IRREVOCABLE CREDIT CONSTITUTES AN INDEPENDENT CONTRACT BETWEEN THE ISSUING BANKER AND THE SELLER AND IT IS NOT QUALIFIED BY OR SUBJECT TO THE TERMS OF THE CONTRACT OF SALE OR THE CONTRACT BETWEEN THE ISSUING BANKER AND THE BUYER. IT IS ONLY A BANKING ARRANGEMENT TO EFFECT PAYMENT AND HAS NOTHING TO DO WITH THE STATUTORY OBLIGATIONS I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 34 OF THE BUYER WHICH CONTINUE TO BIND THE BUYER IN RESPECT OF THE INCOME BY A.Y. OF INTEREST AND OTHER SUMS THAT ARE DEEMED TO ACCRUE OR ARISE IN INDIA IN FAVOUR OF THE NON- RESIDENT SELLER. THE BUYER DOES NOT GET ABSOLVED FROM HIS CONTRACTUAL LIABILITIES UNDER THE CONTRACT OF SALE OR FROM HIS STATUTORY LIABILITIES SUCH AS OF MAKING DEDUCTION OF TAX AT SOURCE UNDER SECTION 195(1) OF THE ACT WHILE MAKING PAYMENT BY THE MODE OF A LETTER OF CREDIT. 35. THE DR CRYSTALLISED THE QUESTIONS OF LAW WHICH WERE DECIDED BY THE HONBLE GUJARAT HIGH COURT AS FOLLOWS: (1) THE USANCE INTEREST PAID BY THE ASSESSEE WAS NOT ANY PART OF THE PURCHASE PRICE OF THE SHIPS AND WAS INTEREST WITHIN THE MEANING OF THE DEFINITION OF THE TERM INTEREST U/S. 2(28A) OF THE INCOME-TAX ACT 1961. (2) THE ASSESSEES WHO DID NOT DEDUCT TAX AT SOURCE U/S. 195(1) OF THE INCOME-TAX ACT 1961 ON THE USANCE INTEREST PAYABLE OUTSIDE INDIA AND ON WHICH TAX HAD NOT BEEN PAID ARE NOT ENTITLED TO DEDUCT THE AMOUNTS OF SUCH USANCE INTEREST IN COMPUTING THEIR INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE TRIBUNAL WAS THEREFORE WRONG IN DELETING THE DISALLOWANCE U/S. 40(A)(I) OF THE ACT FOR FAILURE ON THE PART OF THE ASSESSEES TO I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 35 DEDUCT TAX AT SOURCE FROM USANCE INTEREST PAID TO THE NON-RESIDENTS U/S. 195(1) OF THE ACT. (3) THE ASSESSEES BEING RESPONSIBLE FOR PAYING TO THE NON-RESIDENTS USANCE INTEREST WHICH WAS CHARGEABLE UNDER THE PROVISIONS OF THE INCOME-TAX ACT 1961 WERE LIABLE TO DEDUCT INCOME-TAX THEREON UNDER SECTION 195(1) THEREOF. THE TRIBUNAL WAS THEREFORE WRONG IN HOLDING THAT THE USANCE INTEREST PARTOOK THE CHARACTER OF PURCHASE PRICE AND THEREFORE NOT LIABLE TO DEDUCTION AT SOURCE UNDER SECTION 195(1) OF THE ACT. 36. THUS IN LINE WITH THE CATEGORICAL ASSERTION IN THE ABOVE JUDGEMENT THAT USANCE INTEREST IS INTEREST WITHIN THE MEANING OF THE DEFINITION OF THE TERM INTEREST UNDER SECTION 2(28A) OF THE INCOME-TAX A CT 1961 THE RELIANCE OF THE ASSESSEE ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF INDIA PISTONS LTD. IS NOT JUSTIFIED. 37. HE SUBMITTED THAT ANY EXEMPTION OF INCOME UNDER SECTION 10(15)(IV)(C) IS ALLOWABLE ONLY TO D EBT INCURRED BY AN INDUSTRIAL UNDERTAKING IN INDIA BEFO RE THE 1 ST DAY OF JUNE 2001 IN A FOREIGN COUNTRY. AS THE USANCE INTEREST PAID RELATES TO FY 2006-07 AND NOT BEFORE 01.06.2001 THE EXEMPTION U/S. 10(15)(IV)(C) OF THE INCOME-TAX ACT 1961 IS ALSO NOT APPLICABLE. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 36 38. HE DREW OUR ATTENTION TO EXPLANATION 2 TO SECTION 10(15)(IV)(C) INSERTED BY THE TAXATION LAWS (AMENDMENT) ACT 2003 W.E.F. 01.04.1962 AND SUBMITTED THAT IT IS ALSO OF NO HELP TO THE ASSESSE E- COMPANY AS THE SAID EXPLANATION IS APPLICABLE ONLY TO AN UNDERTAKING ENGAGED IN THE BUSINESS OF SHIP BREAKING IN RESPECT OF PURCHASE OF A SHIP FROM OUTS IDE INDIA. THE APPLICABILITY OF THE EXPLANATION 2 TO S ECTION 10(15)(IV)(C) WAS ALSO CONSIDERED BY THE SUPREME CO URT IN VIJAY SHIP BREAKING CORPORATION & OTHERS V. CIT AHMEDABAD (314 ITR 309) WHEREIN THE SUPREME COURT HELD AS BELOW: ON READING THAT EXPLANATION IT IS CLEAR THAT USANCE INTEREST IS EXEMPT FROM PAYMENT OF INCOME-TAX IF PAID IN RESPECT OF SHIP BREAKING ACTIVITY. THIS AMENDMENT CAME INTO FORCE ONLY AFTER THE IMPUGNED JUDGEMENT (GUJARAT HIGH COURT JUDGEMENT IN 261 ITR 113 DT. MARCH 20 2003). IT WAS NOT THERE WHEN THE IMPUGNED JUDGEMENT WAS DELIVERED. 39. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE AND PERUSED THE MATERIAL ON RECORD. THE ISSUE BEFORE U S IS WHETHER THE ASSESSEE IS LIABLE TO DEDUCT TAX AT SOU RCE ON THE USANCE INTEREST U/S. 195 OF THE I.T. ACT ON THE CREDIT AVAILED BY IT FOR PURCHASING FROM A NON-RESI DENT UNDER LETTER OF CREDIT OPENED IN FAVOUR OF THE NON- RESIDENT. THIS ISSUE CAME FOR CONSIDERATION IN THE CASE OF VIJAY SHIP BREAKING CORPORATION VS. DCIT (86 ITD 497) (RAJKOT) WHERE THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND HELD THAT USANCE INTERES T DID NOT FALL WITHIN THE TERM OF INTEREST AS GIVEN IN I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 37 SECTION 2(28A) AND IT WILL TAKE CHARACTER OF PURCHA SE PRICE AND THEREFORE ASSESSEE WAS NOT LIABLE TO DE DUCT TAX AT SOURED FROM THE SAID PAYMENT OF INTEREST AND HENCE DISALLOWANCE OF INTEREST MADE U/S. 40(A)(I) W AS NOT ATTRACTED. HOWEVER THIS VIEW WAS REVERSED BY GUJARAT HIGH COURT IN THE CASE OF CIT VS. VIJAY SHI P BREAKING CORPORATION (SUPRA) AND HELD THAT THE USAN CE INTEREST PAID BY THE ASSESSEE WAS CHARGEABLE UNDER THE PROVISIONS OF THE I.T. ACT 1961 AND SINCE THE ASSESSEE WAS RESPONSIBLE OF PAYING TO NON-RESIDENT THEY WERE LIABLE TO DEDUCT THE INCOME TAX U/S. 195 OF THE ACT. IT WAS HELD THAT USANCE INTEREST WAS NOT ANY PART OF THE PURCHASE PRICE AND WAS IN FACT INTEREST WITHIN THE MEANING OF DEFINITION OF THE TERM INTER EST U/S. 2(28A) OF THE I.T. ACT. HOWEVER THIS JUDGEME NT OF GUJARAT HIGH COURT WAS REVERSED BY THE SUPREME COURT IN THE CASE OF VIJAY SHIP BREAKING CORPORATIO N & ORS. VS. CIT (314 ITR 309) WHEREIN IT WAS HELD THE HONBLE HIGH COURT DELIVERED THIS JUDGEMENT ON 20 TH MARCH 2003 THE INCOME-TAX ACT WAS AMENDED ON 18 TH SEPTEMBER 2003 WITH EFFECT FROM 1 ST APRIL 1983. BY REASON OF SUCH AMENDMENT EXPLANATION 2 WAS ADDED TO SECTION 10(15)(IV)(C) WHICH READS AS FOLL OWS: EXPLANATION 2. FOR THE REMOVAL OF DOUBTS IT IS HEREBY DECLARED THAT THE USANCE INTEREST PAYABLE OUTSIDE INDIA BY AN UNDERTAKING ENGAGED IN THE BUSINESS OF SHIP-BREAKING IN RESPECT OF PURCHASE OF A SHIP FROM OUTSIDE INDIA SHALL BE DEEMED TO BE THE INTEREST PAYABLE ON A DEBT INCURRED IN A FOREIGN COUNTRY IN RESPECT OF THE PURCHASE OUTSIDE INDIA. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 38 40. FINALLY IT WAS HELD BY THE HONBLE SUPREME COURT THAT IN VIEW OF THE ABOVE EXPLANATION THE ASSESSEE IS NOT BOUND TO DEDUCT TAX AT SOURCE SINCE THE ASSESSE E IS NOT LIABLE TO PAY TAX AS THE INTEREST PAYABLE ON DEBT WAS INCURRED IN A FOREIGN COUNTRY IN RESPECT OF THE PURCHASE OUTSIDE INDIA. IN VIEW OF THE ABOVE JUDGEMENT OF THE HONBLE SUPREME COURT WE FIND THA T THE ASSESSEE CASE ALSO COMES UNDER THAT PARAMETER AND THE INTEREST PAID BY THE ASSESSEE ON PURCHASE FROM OUTSIDE THE COUNTRY CANNOT BE CONSIDERED AS INTEREST U/S. 2(28A) OF THE I.T. ACT. AND IT TAKES CHARACTER OF PURCHASE PRICE OF SUPPLIES. FURTHER JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. VISAKHAPATNAM PORT TRUST (AP) (144 ITR 146) HELD AS FOLLOWS: THE AGREEMENT BETWEEN THE GERMAN COMPANY AND THE POONA COMPANY DID NOT ALSO AMOUNT TO THE GERMAN COMPANY HAVING A PERMANENT ESTABLISHMENT IN INDIA. THE ORIGINAL CONTRACT BETWEEN THE GERMAN COMPANY AND THE PORT TRUST CONTEMPLATED THE EMPLOYMENT OF A SUB-CONTRACTOR OR SUB- SUPPLIER. THE POONA COMPANY WAS SO EMPLOYER LATER. THERE WAS NEITHER ANY IDENTITY OF INTEREST NOR IDENTITY OF CHARACTER NOR OF PERSONALITY NOR WAS THERE ANY UNITY IN PROFIT MAKING BETWEEN THE POONA COMPANY AND THE GERMAN COMPANY SO THAT THE FORMER MAY BE TREATED AS AN INDIAN AGENT OF THE LATTER; AND (IV) THAT THE PROVISIONS OF ART. III OF THE INDO- GERMAN AGREEMENT INDICATED THAT WHILE INDUSTRIAL OR COMMERCIAL INCOME OF THE FOREIGN ENTERPRISE WAS NOT TAXABLE IN INDIA THE RENTS ROYALTIES INTEREST DIVIDENDS ETC. DERIVED BY THE FOREIGN ENTERPRISE FROM I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 39 SOURCES IN INDIA WERE TAXABLE. THE ITEMS RENTS ROYALTIES DIVIDENDS ETC. WERE TAXABLE ONLY IF THEY SATISFIED HE CONDITIONS MENTIONED FOR THEIR LIABILITY TO TAX AS ENVISAGED IN THE VARIOUS SPECIFIC ARTICLES ART. VIII REFERRED TO TAXABILITY OF INTEREST IN INDIA. INTEREST WOULD BE TAXABLE IF IT AROSE OUT OF INDEBTEDNESS. THE WORDS ANY OTHER FORM OF INDEBTEDNESS FROM SOURCES IN THE OTHER TERRITORY COULD ONLY MEAN INTEREST ARISING OR ACCRUING AS A SEPARATE SOURCE OF INCOME. IT WOULD NOT INCLUDE INTEREST PAYABLE ON THE UNPAID PURCHASE MONEY AGREED TO BE PART OF THE SALE CONSIDERATION. THERE WAS NOTHING IN THE INITIAL CONTRACT BY WAY OF NOVATION CONVERTING THE BALANCE OF CONSIDERATION INTO A LOAN. HENCE THE INTEREST RECEIVED BY THE SELLER CANNOT BE REGARDED AS INTEREST ON MONEY LENT NOTWITHSTANDING THE NOMENCLATURE ADOPTED BY THE PARTIES. THE ASSESSEE WAS IMMUNE FROM LIABILITY EITHER WHOLLY OR PARTLY TO INCOME-TAX IN VIEW OF THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN THE FEDERAL REPUBLIC OF GERMANY AND INDIA. 41. ACCORDINGLY THE ASSESSEE IS NOT LIABLE TO DEDUCT TDS ON THAT USANCE INTEREST AND THE PROVISIONS OF SECITON195 R.W.S. 40(A)(IA) ARE NOT APPLICABLE. ACCORDINGLY WE ALLOW THE GROUND TAKEN BY THE ASSESSEE IN THESE APPEALS. FURTHER THE LEVY OF INT EREST U/S. 234B AND 234C IT SHOULD BE CONSEQUENTIAL AND MANDATORY IN NATURE IS TO BE COMPUTED ACCORDINGLY. IN THE RESULT APPEALS OF THE ASSESSEE IN I.T.A. NO S. 239/HYD/09 845/HYD/09 AND 1462/HYD/2010 ARE ALLOWED. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 40 I.T.A. NO. 1072/HYD/04 (BY ASSESSEE): 42. THE FIRST GROUND IS WITH REGARD TO DISALLOWANCE OF INTEREST AND FINANCE CHARGES INCURRED ON BORROWING FOR EXPANSION OF BUSINESS BY SETTING UP OF AMORPHOUS METAL TRANSFORMERS. THIS ISSUE CAME UP FOR CONSIDERATION IN I.T.A. NO. 809/HYD/2008 AND IT WAS DECIDED IN PARA NO. 15 AND 16 OF THIS ORDER IN FAVO UR OF THE ASSESSEE. ACCORDINGLY IN THIS YEAR ALSO THIS G ROUND IS ALLOWED IN FAVOUR OF THE ASSESEE ON THE SAME REASONS GIVEN THEREIN. 43. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF NOTIONAL VALUE OF UNUTILISED IMPORT ENTITLEMENTS WHICH ARE DERECOGNISED DUE TO CHANGE I N ACCOUNTING POLICY TO BE IN LINE WITH THE GENERALLY ACCEPTED ACCOUNTING POLICIES BEING FOLLOWED IN INDI A WHILE COMPUTING BOOK PROFIT AS WELL AS NORMAL TAXAB LE INCOME. 43.1 BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE CHANGED THE ACCOUNTING POLICY FOR THIS YEAR CONSEQUENT TO WHICH THE PROFITS OF THE YEAR ARE UNDERSTATED. THE ASSES SEE- COMPANY IS ENTITLED FOR IMPORT LICENCE FOR IMPORTIN G RAW MATERIAL IN VIEW OF THE EXPORTS MADE. THE ASSESSEE-COMPANY ESTIMATED THE IMPORT ENTITLEMENTS AND OFFERED AS INCOME FOR EARLIER YEAR. THE BENEFI T REALISABLE IS SHOWN AS AN ASSET IN THE BALANCE SHEE T. SUBSEQUENTLY WHEN ENTITLEMENTS ARE UTILISED THE VALUE OF THE BENEFIT IS REDUCED FROM THE ASSET AND THE I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 41 RAW MATERIAL COST IS INCREASED TO THAT EXTENT. THE ASSESSEE SUBMITTED THAT THE COMPANY CHANGED THE ACCOUNTING POLICY FROM THIS ASSESSMENT YEAR AND STOPPED RECOGNISING THE VALUE OF THE IMPORT ENTITLEMENTS AS INCOME OF THE YEAR. FURTHER THE ASSESSEE REVERSED THE ENTRIES MADE IN THE EARLIER Y EAR BY REMOVING THE VALUE OF THE ASSET FROM THE BALANCE SHEET AND INCREASING THE VALUE OF THE RAW MATERIALS TO THIS EXTENT. THE UNUTILISED IMPORT ENTITLEMENTS TO THE EXTENT OF RS. 2 17 73 575/- IS ADJUSTED ACCORDINGLY . THE ASSESSING OFFICER HELD THAT THE CHANGE IN THE ACCOUNTING POLICY IS PROSPECTIVE AND THE ASSESSEE I S NOT CORRECT IN DERECOGNISING THE VALUE OF THE IMPOR T ENTITLEMENTS ALREADY TAKEN AS INCOME IN THE EARLIER YEAR. THE ASSESSING OFFICER HELD THAT THE INCREASE IN THE VALUE OF THE PURCHASES TO THE EXTENT OF RS. 2 17 73 575/- CONSEQUENT TO THIS ADJUSTMENT IS NOT AN ALLOWABLE DEDUCTION. THE ASSESSING OFFICER DISALLO WED THE ASSESSEES CLAIM. 44. WITH REGARD TO NORMAL COMPUTATION OF INCOME ON THE IMPUGNED ISSUE HE SUBMITTED THAT THE ASSESSING OFFICER ERRED IN DISALLOWING AN AMOUNT OF RS. 2 17 73 575/- STATING THAT THE ADJUSTMENT MADE BY THE ASSESSEE IS NOT CORRECT. IT IS SUBMITTED THAT DUE TO THE CHANGE IN THE ACCOUNTING POLICY THE ADVANCE LICENSING BENEFITS RECOGNISED AS INCOME IN THE EARL IER YEARS IS WRITTEN OFF. IT IS SUBMITTED THAT THE ASS ESSING OFFICER HAS NOT DISPUTED THE CHANGE IN THE ACCOUNTI NG POLICY BUT DISALLOWED THE ASSESSEES CLAIM. IT IS I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 42 CONTENTED THAT THE CLAIM OF THE ASSESSEE IS ALLOWAB LE AND THE LEARNED COUNSEL FOR THE ASSESSEE ACCORDINGL Y PRAYED THAT THE CLAIM BE ALLOWED. 45. WITH REGARD TO COMPUTATION OF BOOK PROFIT ON THIS ISSUE HE SUBMITTED THAT THE ASSESSING OFFICER ERR ED IN ADDING THE AMOUNT OF RS. 2 17 73 575 TO THE BOOK PROFITS. IT IS SUBMITTED THAT THERE IS A CHANGE IN THE ACCOUNTING POLICY AND HENCE THE BENEFIT RECOGNISED IN THE EARLIER YEARS IS WRITTEN OFF. IT IS SUBMITTED THAT THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER DO NOT FA LL WITHIN THE PURVIEW OF SEC. 211 OF THE COMPANIES ACT OR EXPLANATION TO SECTION 115JB. IT IS PRAYED THAT THE ADDITION MADE BE DELETED. 46. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). THE DR SUBMITTED THAT THE ASSESSEE-COMPANY IS ENTITLED FOR IMPORT ENTITLEMENTS OF RAW MATERIAL AT DUTY CONCESSION IN VIEW OF THE EXPORTS MADE. THE VALUE OF THESE IMPORT ENTITLEMENTS WERE SHOWN AS AN INCOME I N THE EARLIER YEAR AND THIS VALUE IS SHOWN AS AN ASSE T IN THE BALANCE SHEET. THE ASSESSEE STATED THAT THE ACCOUNTING POLICY IS CHANGED FOR THIS YEAR AND HENC E THE ENTRY IN THE EARLIER YEAR IS REVERSED. THE ASS ESSEE IS REMOVING THE VALUE OF THE IMPORT ENTITLEMENTS SH OWN AS AN ASSET IN THE BALANCE SHEET AND THE RAW MATERI AL COST IS INCREASED TO THIS EXTENT. CONSEQUENTLY TH E PURCHASES CLAIMED AS AN EXPENDITURE IN THE P&L ACCOUNT IS HIGHER BY RS. 2 17 44 451/-. IT IS SEEN THAT THESE ENTITLEMENTS ARE UTILISED BY THE ASSESSEE- COMPANY IN THE SUBSEQUENT YEARS FOR MAKING IMPORT O F I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 43 RAW MATERIAL AT CONCESSIONAL RATE OF DUTY. THE CHA NGE IN THE ACCOUNTING POLICY BROUGHT ABOUT BY THE ASSES SEE HAS NO LEGAL BASIS. FURTHER THE POLICY ADOPTED CA N HAVE PROSPECTIVE APPLICATION AND NOT RETROSPECTIVE APPLICATION. THE ACCOUNTS FOR THE PERIOD ENDING 31.3.2000 ARE ALREADY CLOSED BASED UPON THE EARLIER ACCOUNTING POLICY. THESE ACCOUNTS WERE PRESENTED BEFORE THE SHARE HOLDERS OF THE COMPANY AND THE AGM AND APPROVED. THE ASSESSEE-COMPANY IS NOT FREE TO CHANGE THE FINANCIAL RESULTS PRESENTED TO THE SHAREHOLDERS FOR THE PERIOD ENDING 31.3.2000 BY MAKING FICTIONAL ADJUSTMENTS HAVING AN ADVERSE IMPACT ON THE INCOME COMPUTED FOR THIS YEAR. THE INCREASE IN THE VALUE OF THE PURCHASES TO THE EXTEN T OF RS. 2 17 44 451/- IS NOT REAL BUT IS INFLATED DUE TO THE FICTIONAL CHANGE OF ACCOUNTING POLICY. THIS CHANGE OF ACCOUNTING POLICY ADVERSELY AFFECTING THE COMPUTATI ON OF INCOME TO A SUBSTANTIAL EXTENT IS NOT ACCEPTABLE . THE CLAIM OF PURCHASES TO THIS EXTENT BEING UNREAL IS NOT ALLOWABLE. THE ASSESSING OFFICER IS CORRECT AS PER LAW IN DISALLOWING THE CLAIM OF THE ASSESSEE AND MAKING THE ADDITION TO THE INCOME RETURNED. 47. THE LD. DR DREW OUR ATTENTION TO THE PROVISIONS OF THE SECTION 115JB AND SUBMITTED THAT FOR THE PURPOS E OF COMPUTING BOOK PROFIT U/S. 115JB THE ASSESSEE I S REQUIRED TO FURNISH P & L ACCOUNT AS PER PART-II AN D III OF SCHEDULE-VI OF THE COMPANIES ACT. THE REQUIREME NT AS PER PART-II IN CLAUSE-2 READS AS UNDER: (B) SHALL DISCLOSE EVERY MATERIAL FEATURE INCLUDING CREDITS OR RECEIPTS AND DEBITS OR I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 44 EXPENSES IN RESPECT OF NON-RECURRING TRANSACTIONS OR TRANSACTIONS OF AN EXCEPTIONAL NATURE. 48. HE SUBMITTED THAT THE ASSESSEE COMPANY CLAIMS THAT THERE IS A CHANGE IN THE ACCOUNTING POLICY CONSEQUENT TO WHICH THE VALUE OF THE IMPORT ENTITLEMENTS RECOGNISED AS INCOME IN THE EARLIER YE AR IS REVERSED. CONSEQUENT TO THIS ADJUSTMENT THE EXPENDITURE TOWARDS PURCHASES DEBITED TO THE P & L ACCOUNT IS HIGHER BY RS. 2 17 73 575/-. THE RAW MATERIAL CONSUMPTION AS PER SCHEDULE-14 OF THE P & L ACCOUNT IS AS UNDER: OPENING STOCK 7 07 52 977 ADD: PURCHASES 68 29 52 703 ----------------- 75 37 05 680 LESS: CLOSING STOCK RS. 4 48 60 104 SAKES RS. 75 08 501 -------------------- 5 23 68 605 ----------------- 70 13 37 075 =========== 49. IT IS CLEAR FROM THESE DETAILS THAT THE EFFECT OF T HE CHANGE IN ACCOUNTING POLICY IS SIGNIFICANT ON THE P & L ACCOUNT. HOWEVER IN THE SCHEDULE THE EFFECT OF INCREASE IN THE VALUE OF THE PURCHASES TO THE EXTEN T OF RS. 2 17 73 575/- IS NOT CLEARLY REFLECTED. THIS I S AGAINST THE DISCLOSURE NORMS TO BE FOLLOWED AS PER PART-II AND III OF THE SCHEDULE VI OF THE COMPANIES ACT. THE P & L ACCOUNT PREPARED BY THE ASSESSEE IS HENCE DEFECTIVE AND IS NOT IN TERMS OF SCHEDULE VI OF THE COMPANIES ACT. DUE TO THE CHANGE OF THE ACCOUNTING POLICY THE PURCHASES DEBITED IS INCREASED BY RS. I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 45 2 17 73 575/- AND CONSEQUENTLY INCOME TO THAT EXTEN T IS UNDERSTATED. THE P & L ACCOUNT DOES NOT SHOW A CORRECT PICTURE SINCE IT IS NOT PREPARED IN TERMS OF SCHEDULE VI. THE FIGURE OF PURCHASES IS REQUIRED T O BE TAKEN CORRECTLY ON THE BASIS OF BOOKS OF ACCOUNTS WITHOUT TAKING INTO ACCOUNT THE ADJUSTMENTS MADE BY THE ASSESSEE IN THE IMPORT ENTITLEMENTS ACCOUNT. T HE P & L ACCOUNT IS TO BE ADJUSTED REGARDING IMPORT ENTITLEMENT ACCOUNTING TO ARRIVE AT THE CORRECT P & L ACCOUNT AS PER SCHEDULE VI WHICH WILL FORM THE BASI S FOR COMPUTING THE BOOK PROFIT U/S. 115JB. THE RESU LTS REFLECTED BY THE ASSESSEE BEING ERRONEOUS AND NOT I N TERMS OF SCHEDULE VI OF THE COMPANIES ACT THE ASSESSING OFFICER IS CORRECT AS PER LAW IN TAKING T HE CORRECT NET PROFIT BY ADDING THE AMOUNT OF RS. 2 17 73 575/-. 50. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THE ABOVE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER WHILE COMPUTING THE BOOK PROFIT U/S. 115JB OF THE ACT. U/S. 115JB THE ASSESSING OFFICER IS EMPOWERED TO MAKE ADJUSTMENTS AS PRESCRIBED IN EXPLANATION (1) TO SECTION 115JB(2). IT MEANS FOR THE PURPOSE OF COMPUTING BOOK PROFIT NET PROFIT AS SHOW N IN THE PROFIT AND LOSS A/C. FOR THE RELEVANT YEAR PREPARED UNDER SUBSECTION (2) OF SECTION 115JB AS INCREASED BY (A) TO (I). (A) THE AMOUNT OF INCOME-TAX PAID OR PAYABLE AND THE PROVISION THEREFOR; OR I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 46 (B) THE AMOUNTS CARRIED TO ANY RESERVES BY WHATEVER NAME CALLED [ OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33AC]; OR (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS MADE FOR MEETING LIABILITIES OTHER THAN ASCERTAINED LIABILITIES; OR (D) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF SUBSIDIARY COMPANIES; OR (E) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PROPOSED ; OR (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH [SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE ( 38 ) THEREOF) OR [***] SECTION 11 OR SECTION 12 APPLY; OR] (G) THE AMOUNT OF DEPRECIATION ] (H) THE AMOUNT OF DEFERRED TAX AND THE PROVISION THEREFOR (I) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET 51. IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (I) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT AND AS REDUC ED BY (I) TO (VIII). (I) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVISION (EXCLUDING A RESERVE CREATED BEFORE THE 1ST DAY OF APRIL 1997 OTHERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT) IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT: PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO AN ASSESSEE IN ANY PREVIOUS YEAR THE AMOUNT WITHDRAWN FROM RESERVES CREATED OR PROVISIONS MADE IN A PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL 1997 SHALL NOT BE REDUCED FROM THE BOOK PROFIT UNLESS THE BOOK PROFIT OF SUCH YEAR HAS BEEN INCREASED BY THOSE RESERVES OR I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 47 PROVISIONS (OUT OF WHICH THE SAID AMOUNT WAS WITHDRAWN) UNDER THIS EXPLANATION OR EXPLANATION BELOW THE SECOND PROVISO TO SECTION 115JA AS THE CASE MAY BE; OR] (II) THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVISIONS OF [ SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE ( 38 ) THEREOF )] OR [***] SECTION 11 OR SECTION 12 APPLY IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT; OR ( IIA ) THE AMOUNT OF DEPRECIATION DEBITED TO THE PROFIT AND LOSS ACCOUNT (EXCLUDING THE DEPRECIATION ON ACCOUNT OF REVALUATION OF ASSETS); OR ( IIB ) THE AMOUNT WITHDRAWN FROM REVALUATION RESERVE AND CREDITED TO THE PROFIT AND LOSS ACCOUNT TO THE EXTENT IT DOES NOT EXCEED THE AMOUNT OF DEPRECIATION ON ACCOUNT OF REVALUATION OF ASSETS REFERRED TO IN CLAUSE ( IIA ); OR] [( III ) THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT. EXPLANATION .FOR THE PURPOSES OF THIS CLAUSE ( A ) THE LOSS SHALL NOT INCLUDE DEPRECIATION; ( B ) THE PROVISIONS OF THIS CLAUSE SHALL NOT APPLY IF THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION IS NIL; OR] ( IV ) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OF SUBS- SECTION (3) OR SUB-SECTION (3A) AS THE SAME MAY BE OF THAT SECTION AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR (V) THE AMOUNT OF PROFITS AS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHE COMPUTED UNDER SUB- SECTION(3) OR SUBSECTION (3A) AS THE CASE MAY BE OF THAT SECTION AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 48 (VI) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHF COMPUTED UNDER SUB- SECTION (3) OF THAT SECTION AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR ( VII ) THE AMOUNT OF PROFITS OF SICK INDUSTRIAL COMPANY FOR THE ASSESSMENT YEAR COMMENCING ON AND FROM THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE SAID COMPANY HAS BECOME A SICK INDUSTRIAL COMPANY UNDER SUB-SECTION (1) OF SECTION 17 OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT 1985 (1 OF 1986) AND ENDING WITH THE ASSESSMENT YEAR DURING WHICH THE ENTIRE NET WORTH OF SUCH COMPANY BECOMES EQUAL TO OR EXCEEDS THE ACCUMULATED LOSSES. EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE NET WORTH SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE ( GA ) OF SUB-SECTION (1) OF SECTION 3 OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT 1985 (1 OF 1986); OR ( VIII ) THE AMOUNT OF DEFERRED TAX IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT.] 51.1. THE ASSESSING OFFICER CANNOT MAKE ANY ADJUSTMENT OTHER THAN THE ABOVE TO THE BOOK PROFIT SHOWN IN THE PROFIT AND LOSS A/C. IF THE ASSESSEE PREPARED THE PROFIT AND LOSS A/C. IN ACCORDANCE WIT H THE PROVISIONS OF PART II AND III OF SCHEDULE VI OF COMPANIES ACT 1956. FURTHER THERE IS A CONDITION THAT THE PROFIT AND LOSS A/C. THUS PREPARED SHALL B E ON THE SAME BASIS AS PREPARED AND PRESENTED BEFORE THE ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT 195 6. BEFORE US THE REVENUE AUTHORITIES ARE NOT ABLE TO S HOW THE PROFIT AND LOSS A/C. IS PREPARED BY THE ASSESSE E I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 49 FOR INCOME-TAX PURPOSE IS NOT PREPARED IN ACCORDANC E WITH THE PROVISIONS OF PART II AND PART III OF SCHE DULE VI OF COMPANIES ACT 1956. ONCE THE REVENUE AUTHORITIES HAVING ACCEPTED THE PROFIT AND LOSS A/C . WHICH IS PREPARED IN ACCORDANCE WITH PART II AND PA RT III OF SCHEDULE VI OF THE COMPANIES ACT THE REVENU E AUTHORITIES HAVE NO POWER TO RECOMPUTE THE PROFIT I N THE PROFIT AND LOSS A/C. BY INCLUDING THE UNUTILISE D IMPORT ENTITLEMENTS IN THE PURCHASE ACCOUNT AS IT W AS HELD IN THE CASE OF APOLLO TYRES LTD. VS. CIT 255 ITR 273 THAT THE BOOK PROFIT SHOULD BE STRICTLY CONSTRUED AS THAT WHICH IS COMPUTED IN TERMS OF SCHEDULE VI OF T HE COMPANIES ACT. HOWEVER WHILE COMPUTING THE NORMAL INCOME UNDER THE ACT THE ASSESSING OFFICER IS AT L IBERTY TO DISALLOW THE SAME PROVIDED THE IMPUGNED AMOUNT HAS NOT BEEN OFFERED TO TAX IN EARLIER YEAR. HOWEVER IF T HE IMPUGNED AMOUNT WAS OFFERED TO TAX IN EARLIER YEAR AND IT WAS NOT REALISED IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND IN THAT EVENT IF IT WAS WRITTEN OFF BY THE ASSESSEE AS UNREALISABLE THE CLAIM OF THE ASSESSEE IS TO BE EXAMINED ON MERIT BY THE ASSESSING OFFICER. 52. GROUND NO. 3 IS WITH REGARD TO CLAIM FOR DEDUCTION U/S. 80HHC WHILE COMPUTING BOOK PROFIT U/S. 115JB. ACCORDING TO THE ASSESSEE DEDUCTION U/S . 80HHC IS TO BE COMPUTED ON THE BASIS OF THE PROFIT OF THIS YEAR BEFORE SET OFF OF CARRY FORWARD LOSS. THE ASSESSEE ALSO CONTENDED THAT DEDUCTION U/S. 80HHC I S REQUIRED TO BE COMPUTED BASED UPON THE BOOK PROFIT COMPUTED U/S. 115JB. ACCORDING TO THE ASSESSEE THE CIT(A) ERRED IN CONFIRMING THE CALCULATION OF PROFI T ON I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 50 EXPORT TURNOVER FOR THE PURPOSE OF BOOK PROFIT U/S . 115JB OF THE I.T. ACT. 53. IN OUR OPINION THE ABOVE GROUND IS COVERED IN EARLIER PARA NO. 19 OF THIS ORDER IN I.T.A. NO. 809/HYD/08 WHEREIN WE PLACED RELIANCE ON THE JUDGEMENT IN THE CASE OF AJANTA PHARMA LTD. VS. CI T (327 ITR 305) AND DECIDED IN FAVOUR OF THE ASSESSEE . ACCORDINGLY THIS GROUND IS ALLOWED IN FAVOUR OF THE ASSESSEE. 54. IN THE RESULT ASSESSEE APPEALS IN I.T.A. NOS. 236 845/09 AND 1462/HYD/2010 ARE ALLOWED AND 1072/HYD/04 IS PARTLY ALLOWED. REVENUES APPEALS IN I.T. A. NOS. 809/HYD/08 935 AND 936/HYD/08 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JULY 2011. SD/- SD/- S/-/- (G.C. GUPTA) VICE PRESIDENT SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD DATED _22 ND JULY 2011 TPRAO I.T.A. NO. 1072/HYD/2004 & ORS. M/S. VIJAI ELECTRICALS LTD. ========================= 51 COPY FORWARDED TO: 1. M/S. VIJAI ELECTRICALS LTD. C/O. MR. S. RAMA RA O ADVOCATE FLAT NO. 102 SHRIYAS RESIDENCY ROAD NO. 9 HIMAYATHNAGAR HYDERABAD. THE ASST. CIT CIRCLE-3(4) HYDERABAD. 2. THE ADD. CIT RANGE 3 HYDERABAD. THE DCIT CIRCLE-3(3) I.T. TOWERS A.C. GUARDS HYDERABAD. 3. THE CIT(A)-IV HYDERABAD THE CIT A.P.-I HYDERABAD. 4 THE CIT-III HYDERABAD 5. THE DR B BENCH ITAT HYDERABAD