9911796707
TMI Blog2006 (3) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... 18th Dec., 2000. On the basis of this return a refund of Rs. 39,80,007 was found due under s. 143(1) on 18th Dec., 2000. The refund was accordingly issued. The AO did not issue any notice under s. 143(2) within the prescribed time-limit. Thereafter a notice under s. 148 was issued on 27th Oct., 2003 and served on the assessee on 21st Nov., 2003. This notice under s. 148 was issued after recording reasons in writing on 27th Oct., 2003 for initiating proceedings under s. 147 of the Act. This action was taken by the AO in the wake of assessment proceedings in the case of the assessee company for asst. yr. 2001-02 on the basis that the assessee had shown inflated income by charging @ Rs. 3.72 per unit for captive consumption of power as against Rs. 2.32 per unit charged from State Electricity Board with a view to claim reduction of book profit by a higher amount worked out as profits derived from the business of generation and distribution of power. According to the AO if the amount charged to captive consumption of power was taken at the same rate at which the assessee supplied power to State Electricity Board, the assessee's deduction on account of the business of power generati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, claimed depreciation on these turbines at Rs. 3,80,50,138 @ 25 per cent on the basis of WDV. The learned AO disallowed the assessee's claim of depreciation to the extent of Rs. 2,21,40,131 on the basis of his working of admissible depreciation. The basis for this disallowance has been stated by the learned AO in the reasons recorded in writing also for initiating proceedings under s. 147 of the Act. 5. After having made disallowance out of the assessee's claim of depreciation, as abovementioned, the learned AO proceeded to make certain further disallowances and additions based on the facts and materials brought on record during the course of assessment proceedings under s. 147. The same are as under: 1. Disallowance out of air journey expenses 2,00,000 2. Disallowance on account of alleged sales-tax liability payable to Jindal Strips Ltd. 45,25,628 3. Disallowance of depreciation on hydraulic excavator 14,92,626 4. Disallowance of interest on loan 3,68,219 5. Addition on account of alleged undervaluation of closing stock 3,98,193 In addition, the learned AO also made a disallowance of Rs. 15.23 lakhs from out of commission expenses claimed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee committed a breach of statutory provisions that provided for depreciation under straightline method for an industrial undertaking carrying on power generation/distribution. There was, thus, escapement of income on account of assessee's omission to declare all material facts relevant for assessment for the assessment year. The learned CIT(A), therefore, held that proceedings under s. 147 had been validly initiated. 8. The assessee further argued before the learned CIT(A) that as per the reasons recorded for initiation of proceedings under s. 147 there were only two issues. The first issue pertained to the assessment under the general provisions of the Act and there the case of the AO was that the assessee had claimed excess depreciation by following WDV method instead of straightline method in relation to business of power generation and distribution. The second issue pertained to computation of tax liability under s. 115JA and there the case of the AO was that an inflated amount was excluded by way of profits of the assessee in the business of power generation and distribution. In the assessment order under s. 143(3) r/w s. 147 the AO had made a number of disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Vipan Khanna deserved a reconsideration by the Hon'ble High Court. However, the judgment being binding upon him the learned CIT(A) chose to follow it. Hence, following the judgment in the case of Vipan Khanna, the learned CIT(A) found himself compelled to hold that the additions of Rs. 2,00,000 on account of air journey expenses; of Rs. 45,25,628 on account of sales-tax liability payable to M/s Jindal Strips Ltd.; disallowance of Rs. 14,92,626 pertaining to depreciation on hydraulic excavator; disallowance of Rs. 3,68,219 on account of assessee's claim of interest on loan; addition on account of alleged undervaluation of closing stock and disallowance of Rs. 15,23,000 on account of commission payments could not have been made by the AO in the impugned assessment order under s. 147. The learned CIT(A), therefore, deleted those additions/disallowances. However, he did so subject to his directions/findings under s. 150(1) of the Act. 9. On merits, the learned CIT(A) held that disallowance of depreciation of Rs. 2,21,40,131 had rightly been made by the learned AO because the assessee had failed to furnish an option as required under r. 5(1A). As to the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) the deemed income under s. 115JA computed by the learned AO at Rs. 9,10,21,594 instead of Rs. 3,23,94,230 declared by the assessee. The assessee argued that in terms of cl. (iv) of Explanation to s. 115JA of the Act profit derived by the power plant as determined/computed, recorded in the books of accounts of the assessee was required to be deducted and it was not permissible to tinker with/recompute the same in any manner. Without prejudice, the assessee argued that the AO erred on facts and in law in substituting the recorded price at which power was sold by the captive power plants to the other units at the price at which power was supplied to the State Electricity Board. The assessee argued that the rate at which price of power was charged from the assessee's own units was fixed being the rate at which State Electricity Board charged price of power from industrial consumers. The learned CIT(A) held that sub-cl. (iv) of Explanation to s. 115JA did not speak of book profit. It referred to "profits derived". Therefore, the AO was not required to accept the profits as recorded in the books of accounts of the assessee and was required to correctly compute the profits derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o asst. yr. 1999-2000. Asst. yr. 1999-2000 being the first year of operation of the power generating undertaking, depreciation was calculated and claimed at the rates specified in Appen. I to IT Rules, 1962. The said return of income was processed under s. 143(1) vide intimation dt. 29th Sept., 2000. Thus, the claim of the assessee was impliedly allowed in asst. yr. 1999-2000. The assessee having once exercised the option available under the second proviso to r. 5(1A) continued to claim depreciation on WDV basis for the subsequent assessment years in accordance with the mandatory requirement of the third proviso to r. 5(1A). Consequently for asst. yr. 2000-01 the assessee claimed depreciation on the fixed assets of the power generating undertaking on WDV basis. The learned counsel argued that as the assessee's claim of depreciation was perfectly in accordance with law, there was no understatement of income as alleged by the AO. There was no force in the contention of the learned CIT(A) that assessee had not exercised the option within the meaning of r. 5(1A). There was no prescribed form or procedure for exercise of the option by the assessee. The deduction claimed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Madhya Pradesh State Electricity Board was determined and dictated by the electricity board under the power purchase agreement. The acceptance of such rate by the assessee company and sale of power to the State Electricity Board was a condition precedent for their permission to the assessee to generate power in the first instance. That rate, by no stretch of imagination, could be termed as the market value of power. It was not the price at which power would normally be purchased or sold in the open market. Since the assessee was not entitled to sell power to third parties in the open market, the market value of power used for captive consumption could only be determined on the basis of the rate at which power was supplied by the State Electricity Board to its industrial customers. The learned counsel referred to the decision of Tribunal. Kolkata in the case of Assam Carbon Products Ltd. vs. Asstt. CIT in ITA No. 11/Gau/2004 [reported at (2006) 100 TTJ (Kol) 224-Ed.]. In that case the assessee company used NH coke for manufacture of electrographized carbon blocks. The company had been importing the material from its collaborators in the UK. Subsequently, the assessee entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O on 27th Oct., 2003, whereas the assessment order was passed on 26th March, 2004. Even otherwise, the reasons were unsustainable on the facts and in the circumstances of the case. 14. During the course of arguments the learned counsel for the assessee argued that the fact that the earlier assessment was made under s. 143(1) without issue of notice under s. 143(2) could not justify initiation of proceedings under s. 147 in the absence of any fresh material on record. That showed that the assessment was reopened for making roving or fishing enquiries. In support of this contention reliance was placed on the decision of Tribunal, Chandigarh in the case of Manish Ajmera vs. Asstt. CIT (2005) 96 TTJ (Chd) 896 : (2005) 95 ITD 111 (Chd). 15. The learned counsel vehemently opposed the action of the learned CIT(A) of announcing findings and directions under s. 150(1) in respect of the following additions made in the assessment order under s. 147: Rs. (i) Expenditure on aircraft 2,00,000 (ii) Amount refundable to Jindal Strips 45,25,628 (iii) Depreciation on hydraulic excavator 14,92,626 (iv) Interest on term loan 3,68,219 (v) Alleged undervaluation of closi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the end of the relevant assessment year i.e. 31st March, 2005. The impugned order of the learned CIT(A) itself was made on 31st May, 2005. On that date no further notice could be validly issued by the AO under s. 148. To circumvent the time-limit provided under s. 149 and to somehow bring to tax alleged incomes/additions which the learned CIT(A) had deleted following the ratio of binding judgment in the case of Vipan Khanna, he issued so-called directions under s. 150(1). This action of the learned CIT(A) was contrary to law. For that purpose, the learned counsel placed reliance on the decision of Tribunal, Kolkata, in the case of Plastic Concern vs. Asstt. CIT (1998) 61 TTJ (Cal) 87, wherein relying upon the decision of Hon'ble Madras High Court in N. Naganatha Iyer vs. CIT (1966) 60 ITR 647 (Mad), the Tribunal, had held that what the AO could not do directly, could not be done indirectly through the medium of appellate/revisionary orders. In support of these contentions, the learned counsel for the assessee also relied upon the judgments in the cases of CIT vs. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB), Windson Electronics (P) Ltd. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to that effect. 18. During the course of proceedings before us, the learned counsel for the assessee also addressed us at length on the merit of the disallowances/additions in respect of which the learned CIT(A) has given the alleged findings/directions under the provisions of s. 150(1). 19. In relation to ground of appeal No. 11 the learned counsel for the assessee argued that the provisions of s. 115JA created a legal fiction by which the total income is deemed to be 30 per cent of the book profit. It was trite proposition in law that a legal fiction has to be strictly construed. Liability to pay tax under s. 115JA arose only if the total income computed under the general provisions of the Act was less than 30 per cent of the book profit. Such event could not take place prior to the completion of assessment by the AO and certainly not at the time when the advance tax instalments become due. In this view of the matter provisions of ss. 234B and 234C levying interest could not be invoked in relation to tax liability determined under s. 115JA. In support of these contentions the learned counsel placed reliance on the following Tribunal decisions: (i) Dy. CIT vs. Samir Dia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed reasons in writing. He pointed out escapement of income from assessment both under the general provisions of the Act and under the provisions of s. 115JA of the Act. Thus, all the conditions laid down for initiation of proceedings under s. 147 were duly satisfied and the assessee's challenge to initiation of proceedings under s. 147 was uncalled for. The assessee's challenge to initiation of proceedings under s. 147 was confined to his arguments on the merits of the reasons recorded by the learned AO. Relying upon the Supreme Court judgments in Phool Chand Bajrang Lal & Anr. vs. ITO (1993) 113 CTR (SC) 436 : (1993) 203 ITR 456 (SC) and CIT vs. N. Kishore Settlement (1999) 152 CTR (SC) 515 : (1999) 236 ITR 35 (SC), the learned Departmental Representative argued that sufficiency or adequacy of reasons recorded by the AO was not justiciable. Reasons as recorded by the AO could be subject to challenge only on the ground of irrationality or having been based on no material at all. In the present case the learned AO's finding of escapement of income from assessment was based on the facts not disputed by the assessee. It was also not the case of the assessee that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power was supplied by the assessee to SEB. As far as the assessee was concerned, the market price was the price charged from the third party i.e. SEB. Hence the same price was required to be considered as price of power consumption by. the manufacturing units of the assessee. 23. The learned Departmental Representative argued that the AO was not bound by the unreasonable entries made by the assessee in its books of accounts. Clause (iv) of Explanation appended to s. 115JA required the AO to reduce from the book profit, "the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power". There was nothing in cl. (iv) to suggest that the AO was fettered by the profit worked out in the assessee's books of accounts. The AO was required to reduce the amount of profit actually derived by the assessee from business of generation and distribution of power and not the artificially inflated profit worked out in the accounts of the assessee with an eye on the tax liability under the provisions of s. 115JA. 24. The learned Departmental Representative strongly defended the action of the learned CIT(A) in relation to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome in the assessment order under s. 147 fails, such failure would invalidate the reasons as recorded by the AO. To put it differently the case of the assessee before us is that the AO should not only entertain belief that assessee's income chargeable to tax has escaped assessment, his reasons for such belief should stand the test of ultimate appeal as well. In our humble opinion, that is not the correct legal position. At the stage of issue of notice under s. 148 the AO only initiates the proceedings for assessment and he does not make any assessment at all. After having recorded the reasons the hands of the AO are not tied and he has a discretion to examine the explanation of the assessee on merits and if convinced, not to assess the amount that he believed at the time of initiation of assessment proceedings as having been escaped assessment. To hold otherwise would render proceedings after service of notice under s. 148 on the assessee to be an empty formality. 27. In the case of Calcutta Discount Company Ltd. vs. ITO, the Hon'ble Supreme Court have stated the legal position relating to "reasons to believe" in the following words: "The expression 'reason to beli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression 'reason to believe' in s. 34 of the IT Act does not mean a purely subjective satisfaction on the part of the ITO. The belief must be held in good faith: it cannot be merely a pretence." 30. In the case of ITO vs. Lakhmani Mewal Dass 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC), the Hon'ble Supreme Court have elucidated the legal position in relation to "reasons to believe" recorded by an AO in the following words: "Once there exist reasonable grounds for the ITO to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the Court to investigate. The sufficiency of the grounds which induce the ITO to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the ITO did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings under s. 147. It is not the case of the assessee that the inferences drawn by the AO are not based on facts and circumstances of the case. The assessee has also not been able to show that the reasons recorded by the learned AO are mere pretence and the view taken by him is such that no person reasonably instructed in law would take. On the contrary, we found animated debate on the contentions of the learned AO during the course of proceedings before us. We, therefore, hold that reasons to believe as recorded by the learned AO meet the requirements of provisions of s. 147. We, therefore, reject assessee's ground of appeal disputing initiation of proceedings under s. 147. 32. Ground of appeal No. 2 is directed against the disallowance of depreciation on turbines to the extent of Rs. 2,21,40,1312 out of Rs. 3,80,50,138 claimed by the assessee on the ground that the assessee was entitled to depreciation on straightline basis and not on the WDV basis. The learned AO held that under rules various power generating turbines put to use during the financial year 1998-99 were entitled to depreciation on straightline method. During the course of proceedings before the learned CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing so the assessee could find the occasion to exercise his option while filing the return of income for asst. yr. 1999-2000. We do not appreciate the logic of the contention of the learned counsel CIT(A) that even after having claimed depreciation under the general provisions of Appen. I, the assessee had not exercised his option as contemplated in the second proviso. We, therefore, allow assessee's ground of appeal No. 2 and direct the learned AO to allow the assessee depreciation as admissible to the assessee under sub-r. (1) of r. 5 r/w Appen. I. 33. Ground of appeal No. 3 is directed against the assessee being allowed reduction under cl. (iv) of Explanation appended to s. 115JA at Rs. 19,83,59,705 instead of Rs. 78,78,91,075 as worked out in the books of accounts of the assessee. Facts of the case in this behalf have already been briefly stated by us earlier in this order. The dispute has arisen because the assessee has worked out transfer pricing of power supplied to its industrial units from captive power generation plants at the rate at which State Electricity Board was supplying power for industrial units. According to the learned AO, the assessee has inflated the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of expression under the provisions of the Companies Act. Their Lordships have observed: "A comparison may be made with the language employed in s. 3(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, wherein a distinction is made between 'accumulated loss' and 'cash loss'. Learned senior counsel also referred to Garden Silk Weaving Factory vs. CIT (1991) 94 CTR (SC) 136 : (1991) 189 ITR 512 (SC), wherein this Court has held that unabsorbed depreciation was part of loss. Learned counsel also referred to s. 349(4)(1) of the Companies Act which uses the expression 'excess of expenditure over income' which is narrower in scope and excludes depreciation. We find substance in the submission. There is no reason to assign to the term 'loss' as occurring in s. 205, proviso cl. (b), of the Companies Act, a meaning different from the one in which it is understood therein solely because it is being read along with s. 115J of the IT Act. Sec. 115J, Explanation, cl. (iv), is a piece of legislation by incorporation. Dealing with the subject, Justice G.P. Singh states in Principles of Statutory Interpretation (7th Edn., 1999): 'Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporating the provisions of s. 115J by virtue of doctrine of incorporation various provisions of the Companies Act, 1956 should be held applicable. In other words for the purpose of quantification of the amount to be excluded from the book profit by virtue of cl. (iv) of Explanation, it is the provisions of the Companies Act, 1956 that would apply. If the amount of profit pertaining to the business of power generation and distribution as provided for in the books of account of the assessee is not in accordance with the provisions of the Companies Act, then for the purpose of adjustment as per cl. (iv) the amount of profit as computed in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act has to be substituted. Conversely, if the amount provided in the books of accounts of the assessee is found to be correctly provided in accordance with the provisions of the Companies Act, 1956, the amount as provided in the books of accounts cannot be ignored and substituted by what in the opinion of the AO is the correct amount of profit of the assessee from the business of power generation and distribution. 37. In the case of Krishna Oil Extraction Ltd. vs. CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of book profit within the meaning of the provisions of s. 115J, the AO under the IT Act has to accept the authenticity of accounts with reference to the provisions of Companies Act as certified by the statutory auditors. The Hon'ble Supreme Court have stated the legal position in the following words: "The above speech shows that the IT authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that s. 115J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, s. 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words 'in accordance with the provisions of Parts II and ill of 8ch. VI to the Companies Act' was made for the limited purpose of empowering the assessing aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO'. In the absence of the same and on the language of s. 115J, it will have to be held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J." 39. In view of the discussion in the foregoing paras, we hold that for the purpose of adjustment as provided in Expln. (iv) to s. 115JA, the AO cannot substitute the amount of profit derived by an industrial undertaking from the business of generation or generation and distribution of power as certified by the auditors of the company to be in accordance with the provisions of Parts II and III of Sch. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y later on be made to the assessee's returned income. In our opinion, it amounts to circumvent the effect of a binding judgment of jurisdictional High Court that cannot be permitted. To put it simply an assessment order or any of its part is either legally tenable or not legally tenable, it cannot be both. We, therefore, hold that the impugned order of the learned CIT(A) in this respect is self-contradictory. According to the learned CIT(A), following the judgment of the jurisdictional High Court in the case of Vipan Khanna, proceedings under s. 147 as initiated by the AO, could not be misused for making roving and fishing enquiries so as to explore further items of income having escaped assessment. He, therefore, deletes the additions in due deference to the judicial pronouncement of the jurisdictional High Court. How can the learned CIT(A) then issue any finding or direction to the AO to initiate proceedings under s. 147 afresh for assessment of those very additions. In other words, according to the learned CIT(A) while the proceedings under s. 147 cannot be misused for the purpose of making fishing and roving enquiries, nonetheless proceedings under s. 147 can be misused for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Karim Tharuvi Tea Estates Ltd. vs. Dy. CIT (2000) 163 CTR (Ker) 565, of Hon'ble Gauhati High Court in the case of Assam Bengal Carriers Ltd. vs. CIT (2000) 162 CTR (Gau) 170 : (1999) 239 ITR 862 (Gau) of Hon'ble Madhya Pradesh High Court in the case of Itarsi Oils & Flours (P) Ltd. vs. CIT (2001) 170 CTR (MP) 158 : (2001) 250 ITR 686 (MP) and of Hon'ble Bombay High Court in CIT vs. Kotak Mahindra Finance Ltd. (2003) 183 CTR (Bom) 491 : (2004) 265 ITR 119 (Bom). There is of course a contrary judgment of Hon'ble Karnataka High Court in favour of the assessee and against the Revenue on the same point in the case of Kwality Biscuits Ltd. vs. CIT. However, preponderance of the judicial opinion is in favour of Revenue. In the case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC), Hon'ble Supreme Court have held that preponderance of judicial opinion should be respected. We, therefore, decide this ground of appeal in favour of Revenue and against the assessee. 44. Ground of appeal No. 12 is directed against levy of interest under s. 234D of the Act. The contention of the assessee is that the provisions of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
