2010 (1) TMI 1220 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation for CAN Plant.
2. Addition as deemed dividend under section 2(22)(a) of the Income Tax Act.
3. Disallowance of claim for deduction of unutilized credits under DEPB and irrecoverable amounts due from Export Credit and Guarantee Corporation (ECGC).
4. Disallowance of bad debts.
5. Denial of claim for carry-forward of loss on transfer of capital assets.
6. Addition to book profit under section 115JB of the Act.
7. Exclusion of certain receipts from the profits of business for computing deduction under section 80HHC.

Detailed Analysis:

1. Disallowance of Depreciation for CAN Plant:
The first ground of appeal for the assessment year 2004-05 is against the disallowance of depreciation of Rs. 68,799/- in respect of CAN Plant. The learned AR for the assessee conceded that the issue was decided against the assessee by the Ahmedabad Bench of the Tribunal in the assessee's own case for the assessment year 2003-04. Consequently, the disallowance was upheld.

2. Addition as Deemed Dividend under Section 2(22)(a):
The second ground of appeal for AY 2004-05 and the only ground for AY 2000-01 is against the order confirming the addition as deemed dividend under section 2(22)(a) of the Act. The CIT(A) upheld the addition made by the AO, albeit on different grounds, concluding that the benefit could be covered under section 2(22)(a). The Tribunal noted that the provisions of section 2(22)(a) require a distribution out of accumulated profits coupled with the release of any part of the assets of the company. Since there was no release of any assets by YIPL to the assessee and no findings that the distribution was out of accumulated profits, the addition under section 2(22)(a) was deleted.

3. Disallowance of Claim for Deduction of Unutilized Credits under DEPB and Irrecoverable Amounts Due from ECGC:
The next grounds of appeal for AY 2004-05 involve the disallowance of a claim for deduction of Rs. 29,37,576/- being unutilized credits under DEPB and irrecoverable amounts due from ECGC. The CIT(A) held that these claims were not in the nature of bad debts but business losses, which could only be allowed in the hands of the amalgamating company in the year in which the claims were time-barred. The Tribunal, however, held that since the amounts written off were earlier offered as income and taxed accordingly, they should be allowed as business losses. Consequently, the disallowance of Rs. 29,37,576/- was deleted.

4. Disallowance of Bad Debts:
The next grounds of appeal for AY 2004-05 involve the disallowance of bad debts in respect of Bhogyeshwar Dye Chem (Rs. 1,67,104) and Oscar Chemicals Ltd (Rs. 14,772). The Tribunal found that the transactions with Bhogyeshwar Dye Chem during FY 2003-04 were only to the extent of transferring deposits held in their account to the debts account and reversing the entries. Therefore, the net amount was considered to be bad. In respect of Oscar Chemicals Ltd, the Tribunal held that the amount was not bad debt in the strict sense but a credit note issued against a bill, and thus allowable as a business loss.

5. Denial of Claim for Carry-Forward of Loss on Transfer of Capital Assets:
The assessee claimed long-term capital loss on the sale of equity shares and units of UTI. The AO held that the loss from such transfer would not form part of the total income. The CIT(A) dismissed the claim, following the decision of the Hon. Madras High Court in the case of CIT V/s Thiagarajan. The Tribunal held that while the loss on sale of shares is allowable to be carried forward under section 74 of the Act, the loss on transfer of units of UTI is not allowable to be carried forward as it does not form part of the total income.

6. Addition to Book Profit under Section 115JB:
The next grounds of appeal for AY 2004-05 involve the addition to book profit computed under section 115JB of the Act, being the provision for gratuity and deemed dividend added under section 2(22) while computing the income under regular provisions of the Act. The Tribunal held that the provision for gratuity on the basis of actuarial valuation is an ascertained liability and should not be added to the book profit. Similarly, the deemed dividend taxed under section 2(22)(a) did not form part of the book profit computed as per Part II and III of Schedule VI to the Companies Act, 1956, and thus no adjustment was called for.

7. Exclusion of Certain Receipts from the Profits of Business for Computing Deduction under Section 80HHC:
The AO held that certain receipts should not form part of the "profits of business" as per Clause (baa) of Explanation to Section 80HHC and hence 90% thereof should be reduced from the computation of "profits of business." The Tribunal, following the decision of the Mumbai Bench of the Tribunal in the case of Star India Limited, held that conversion charges, miscellaneous sales, insurance claims, foreign currency exchange fluctuation gains, sales tax refunds, and miscellaneous scrap sales should not be excluded while computing the profit of business under clause (baa) of Explanation to section 80HHC.

Conclusion:
In summary, the appeal of the assessee for AY 2004-05 is partly allowed, the appeal of the revenue for AY 2004-05 is allowed, and the appeal of the assessee for AY 2000-01 is also allowed. The Tribunal's order pronounced on 29.1.2010 addresses each issue comprehensively, ensuring that the legal principles and relevant provisions of the Income Tax Act are meticulously applied.