TMI Blog2008 (12) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the reasons as follows: "Reasons for reopening of case under s. 147 r/w s. 148 of the IT Act, 1961. Return declaring loss of Rs. 24,43,73,550 was filed by the assessee on 29th Nov., 2003 and the same was processed under s. 143(1) on 20th Jan., 2004. Subsequently, the assessee filed revised return on 31st March, 2004 declaring loss of Rs. 26,22,91,189. A perusal of the balance sheet filed with the return shows reserve fund amounting to Rs. 25,49,13,868.52 as on 31st March, 2003 as against Rs. 34,13,698.52 as on 31st March, 2002. The increase of Rs. 25,15,00,000 (Rupees twenty five crores fifteeen lakhs) in the general reserve fund account represents the conversion of RDF loan into grant-in-aid by Sugarfed Punjab, Chandigarh, which was granted to the Sugarfed Punjab, Chandigarh by the Punjab Rural Development Board, Chandigarh, vide its letter No. PRDB/A/3/2-3/1625, dt. 31st Dec., 2002. The grant-in-aid of the total amount or RDF loan along with interest was given to the assessee as per letter No. PSEB/ALV.F.123/89, dt.3rd Jan., 2003 by the Executive Director, Punjab, Sugarfed, Chandigarh, wherein, it was communicated that the RDF loan given to the co-operative sugar mills has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i M.R. Sharma, vide letter dated nil, which reads as follows: (a) That the perusal of the reasons recorded would reveal that the loan converted into grant-in-aid is proposed to be added to the income of the assessee under the provisions of sub-s. (iv) of s. 28 of the IT Act. The provisions of the said sub-section read as under: "The value of any benefit or perquisite, whether the convertible into money or not arising from business or exercise of a profession." (b) The intention of the legislature in enacting this provision is very clear when it provides for that it is non-monatory benefit or perquisites which are covered under this sub-clause. I am enclosing herewith the photocopies of the letter of sanction of loan by the Punjab Rural Development Board, Chandigarh, which has been further transferred to the abovenoted assessee. The perusal of the sanction orders would reveal that the amounts were disbursed to the abovenoted assessee as loans during the period from 1991-91 to 2001-02. A statement issued by the Punjab Rural Development Board, dt. 31st Dec., 2002 vide which the loans already granted during the abovenoted period have been converted into grant-in-aid reads as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. This fact is evident from the perusal of the assessment records of the abovenoted assessee. As far as the loan part is concerned the same was standing as liability payable to the Rural Development Board through the Sugarfed as per the books of account and since the loans were converted into grants-in-aid as such, these do not call for treatment as revenue receipts and is thus capital receipt. Since the amounts have actually been received during the financial years relevant to the asst. yrs. 1992-93 to 2002-03 and that too in the form of interest bearing loans as such if at all these were business transactions and related to the business, the same was possible in the respective years alone and not in the year under consideration. I am also enclosing herewith the letter No. Ends. No. PRDB-92/l05, dt. 24th April, 1992 for Rs. 20 crores; No. PSF/Acctts/2762, dt. 19th April, 1996 for Rs. 25 crores; No. PSF/Accts/96/7443, dt. 3rd Dec., 1996 for Rs. 21 crores; No. PSF/A-4/RDF/2225, dt. 26th May, 1999 for Rs. 9 crores; No. PSF/AA4/RDF/2168, dt. 17th May, 2000 for Rs. 15 crores; No. PSF/A-4/153(3), dt. 8th June, 2001 Rs. 25 crores and No. PSF/01/A-4/153(3)/4745, dt. 14th Sept., 2001 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails on record being compensatory in nature of price increase. (f) That further perusal of the above documents would reveal that the Rural Development Board has converted the loan into grant which is capital in nature as far as loan part is concerned but since the interest is in the nature of the revenue expenses having been charged to the P L a/c the same has been offered as revenue receipt which fact is evident from the perusal of the assessment record. In the reasons recorded, it is mentioned that the grants-in-aid which are in the form of conversion of the loan amount being capital receipt into grant-in-aid and as such these do not in any way can be treated as benefit or perquisite arising from the business as contemplated under sub-s. (iv) of s. 28 of the IT Act. (g) That in the case of Chengalrayan Co-operative Sugar Mills Ltd. vs. Dy. CIT (1998) 60 TTJ (Mad) 734 : {1998} 65 ITD 475 (Mad) it has been held that at the time of grant neither it was a subsidy or rebate or concession given to recoup revenue expenditure and thus cannot be termed as revenue receipts. The Hon'ble Gujarat High Court in CIT vs. Alchemic (P) Ltd. (1981) 20 CTR (Guj) 83 : (1981) 130 ITR 168 (Guj) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28(iv) of the IT Act can be invoked only where the benefit or perquisite is other than cash. Similarly the Hon'ble Supreme Court of India in the case of CIT vs. Mafatlal Gangabhai Co. (P) Ltd. (1996) 132 CTR (SC) 248 : (1996) 219 ITR 644 (SC) has while considering the allowability of the business expenditure held that payments made in cash are not covered by s. 40(a)(v) and s. 40A(5) of the IT Act. Thus, by no stretch of imagination the provisions of sub-s. (iv) s. 28 can be attracted and the amount which was a loan when converted into the grant cannot be brought within the ambit of the abovenoted provisions of the law. Thus, in view of the various decisions referred to above the reopening of assessment for the purpose of reassessment is bad and does not conform to the provision as contained under the relevant law. (h) That the issue with regard to conversion of loan into grant is covered by the decision of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom). 2. (a) That the perusal of the reasons supplied would reveal that it is proposed to disallow an amount of Rs. 3,87,637 on account of depreciation c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture." From the above, it is apparent that the legislature felt that keeping the details with regard to each and every depreciable asset was time consuming both for the assessee and AO. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual case. The block of assets has also been defined to include the group of assets falling within the same class of assets. Thus, if user of each and every asset is essential and if one asset within a block is not used depreciation on that asset is not to be allowed then the assessee will require to maintain the details of each asset separately. That will frustrate the whole idea of the amended provision. The reopening of assessment for the purpose of reassessment is illegal and do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in view of this position, the reopening of assessment already completed for the purpose of assessment is illegal and does not conform to the provision as contained under the relevant law. 5. That the perusal of the details of the reasons recorded for reopening case reveals that out of the financial charges of Rs. 4,62,23,358 an amount of Rs. 86,56,981 stated to be pertaining to the year under consideration is proposed to be disallowed for the reason that these financial expenses relate to the distillery unit which did not carry out business operations during the year under consideration. The perusal of the schedule of financial charges as Annex. XII to the balance sheet filed along with the return of income would reveal that the assessee has incurred total expenditure of Rs. 4,40,07,888 during the year under consideration. Under the said head, during the financial year relevant to the asst. yr. 2002-03, the said expenses were at Rs. 3,53,50,907. While recording the reasons the difference of these two figures have been taken as the expenditure on account of interest on working capital loan attributable to the distillery unit which in fact is incorrect because even if it is taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard in carried AC's order forward -------------------------------------------------------- 1. 1995-96 2,16,61,150 2,23,41,848 6,80,698 2. 1996-97 3,15,44,048 3,46,80,345 31,36,297 3. 1999-2000 3,01,94,202 3,41,84,202 90,00,000 -------------------------------------------------------- It is submitted that in the asst. yr. 1995-95 amount of Rs. 6,80,698 shown as profit in our return filed has already been adjusted against loss. This needs to be corrected in these facts and circumstances. Regarding the asst. yr. 1996-97, loss of Rs. 3,43,79,950 has been carried forward as per assessment order dt. 16th July, 1999, hence the same has been incorrectly allowed to the appellant. With regard to the asst. yr. 1999-2000. it is submitted that Rs. 3,91,44,202 needs to be allowed and not Rs. 3,01,94,202 as allowed while completing the assessment. 7. That the perusal of the assessment records would reveal that the accounts of the appellant assessee are statutorily audited by the office of the Chief Auditor Co-operative Societies under the provisions of the Punjab Co-operative Societies Act, 1961. Further, the same are also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation is bad in law and needs to be set aside. (b) That the order of the AO as upheld by the CIT(A) in not allowing the benefit of depreciation loss as assessed being admissible for carried forward as per the provision of s. 32(2) of the IT Act as per facts and circumstances of the case being the statutory deduction is bad in law and is against the judicial decisions in this behalf. 4. That the order of the AO as upheld by the CIT(A) while completing the assessment not considering the statutory deduction under the provisions of s. 80P(2)(a)(iii) of the IT Act to the appellant and thereby not allowing the same is bad in law and needs to be set aside. 4. The learned counsel for the assessee submitted that Punjab Rural Development Board, Chandigarh, has originally granted loan to the assessee to the tune of Rs. 190 crores. Later, it was converted into grant-in-aid. At the time of granting the said amount as loan, it carries particular rate of interest. It was advanced during the period 1991-92 to 2001-02. As per sanction letter, it is a capital receipt and not a revenue receipt. As granting of loan is a capital receipt and it was converted into grant-in-aid, it is also capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid. He relied on the order of Tribunal, Hyderabad Bench, in the case of APR Ltd. vs. Dy. CIT (2003) 87 ITD 618 (Hyd). Further, he relied on the order of the Tribunal, Chennai Bench, in the case of Fidelity Textiles (P) Ltd. vs. Asstt. CIT (2008) 305 ITR 97 (Chennai)(AT). Further, he submitted that at the time of sanctioning grant-in-aid, it is neither subsidy nor rebate nor concession given to recoup revenue expenditure and this cannot be termed as revenue receipt. He further relied on the decision in Chengalrayan Co-operative Sugar Mills Ltd. vs. Dy. CIT. There is no remission of liability on account of grant-in-aid as it cannot be a revenue receipt. He relied on judgment of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. vs. CIT. Grant-in-aid was given for the purpose of repayment of loan. As such, this is an incentive in the nature of capital receipt. He relied on the judgment of Hon'ble Madras High Court in the case of CIT vs. Ponni Sugars Chemicals Ltd. By receiving grant-in-aid, the assessee not received any perquisite in cash or money, it is non-monetary benefit and s. 28(iv) is not attracted. He further relied on the judgment of Hon'ble Gujarat High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board, Chandigarh, vide its letter No. PRDB/A-3/2003/1625, dt. 31st Dec., 2002. The grant-in-aid was given by converting the total amount of RDF loan and interest thereon. Consequently, the assessee had written off its liability on account of interest of RDF loan pertaining to earlier year upto 31st March, 2002 and shown it as cessation of liability under s. 41(1) of the Act and it had taken the remaining amount of principal portion to its general reserve account in the balance sheet. He submitted that it was questioned why the amount was taken to the general reserve account instead of showing as revenue receipt, the assessee claimed that it was a capital receipt. He submitted that the assessee has claimed grant-in-aid as capital receipt on the basis of minutes of the meeting presided over by the Hon'ble Chief Minister, Punjab, Chandigarh, circulated under No. Credit/CA.2/CCSM/179/17645-59, dt. 5th Dec., 2002, by the Joint Registrar (Banking) Co-operative Societies, Punjab, Chandigarh, in which meeting decision to give grant-in-aid to the sugar mills in Punjab was taken. He drew our attention to the minutes of the meeting. In the minutes, the corresponding proceedings appear as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g guarantee to their availing cash credit limits from co-operative banks. Actually, the Government is required to stand guarantee to the loan availed by the co-operative society from the co-operative bank. In view of the inability of the Government to stand guarantee to the loans availed by the co-operative society and also to make net worth of the co-operative society positive. the Government decided to give grant-in-aid to run the business of the co-operative society smoothly and converted the RDF loan and interest thereon into grant-in-aid. He submitted that grant-in-aid was given to assist the assessee to carry its business on its own and it was not given at the time of commencement of the business as it was not the case of the assessee. He relied on the judgment of Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd. Anr. vs. CIT (1997) 142 CTR (SC) 261 : (1997) 228 ITR 253 (SC), wherein it has been held as under: "Held, dismissing the appeal, that, under the notification in question, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government order has made payment to the various sugarcane growers, which resulted in losses to the assessee and the sugar mill sought for the waiver of the RDF loan originally granted and interest thereon. On hearing the plea of the assessee. Government of Punjab sanctioned grant-in-aid and converted RDF loan as grant-in-aid. The assessee treated the waiver of the interest as trading receipt and offered to tax. However, the grant-in-aid received towards principal portion of loan was carried to the general reserves. The RDF loan was given basically to meet the additional expenses of payment of higher prices to the sugarcane growers. The sugar mills suffered financial problem on account of excess payment made by them to the farmers over and above the statutory minimum price fixed by the Government of India. The sugar mills were supposed to pay higher prices over and above the statutory minimum price fixed by the Government to the farmers as per Government direction. To cope up with this loss, the facilities were given to avail loan from the Rural Development Board and because of this loan, the net worth of the assessee co-operative society gone negative. To make financial position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the additional payment made to the farmers over and above the statutory minimum price fixed of sugarcane by the Government. The sugarcane being the raw material supplied to the assessee company and for which the assessee company is paying more than the statutory minimum price, on that reason, the assessee incurred revenue loss/trading loss. The payment for raw material is on revenue account. To compensate this, the assessee got the RDF loan. Later on, the RDF loan and interest thereon were converted into grant-in-aid. From this point of view, grant-in-aid is nothing but revenue receipt as RDF loan was given to meet expenses on account of raw material. For this purpose, we place reliance on the judgment of Hon'ble Madras High Court in the case of Triplicane Urban Co-operative Society Ltd. vs. CIT, wherein it has been held as under: "That where the assessee received subsidy to meet additional expenses on staff and rent under scheme of the Government for the purpose of stabilizing the prices of import commodities, the subsidy was to be taxed as revenue receipt." Further, reliance is placed on the judgment of Hon'ble Punjab Haryana High Court in the case of Ludhiana Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence any new asset. The subsides were granted year after year, only after the setting upon of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly." The amounts received by the assessee are not in the nature of the receipts, which would augment its profit or loss account, but the receipts are to enable its function. This is evident from the minutes of the meeting held on 6th Nov., 2002 which was headed by the Chief Minister of Punjab. If the payments had been made by the Government to enable the assessee either to augment its P L a/c, they could have been treated as trading receipt or revenue receipt, hence taxable. In the present case, the amounts were given to the assessee on account of incurring loss due to payment of extra sugarcane prices to the sugarcane growers and because of this assessee incurred loss and on account of this the loan was not repaid by the assessee in time and that loan was converted into grant-in-aid and the grant-in-aid was given to the assessee not to acquire any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. The situation is not different in the present case. The amount outstanding as RDF loan ceased to exist on receipt of grant-in-aid and the assessee transferred this grant-in-aid to the general reserve account, obviously treating them to be the profits. Therefore, in our opinion, the Hon'ble Supreme Court's decision cited supra applies in all force. In that view of the matter, we are of the opinion that the credit balance written off and transfer of the grant-in-aid to general reserve are to be treated as income of the assessee chargeable to income-tax. Sec. 28(iv) refers to the benefit or perquisite, when it is arising from business or it does not apply to the benefit in cash or money. In the present case, it is admittedly, the benefit arising to the assessee from the business and it is not in the form of cash or money. The loan availed by the assessee not for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied by the learned Authorised Representative has no relevance. In that case, there had been running current account maintained by the company with a firm, whose partners were directors of the company, for adjusting liabilities of the firm. The Hon'ble High Court has held that there was no nexus which is an essential prerequisite to bring to charge the benefit between the transactions and the business of the assessee. The facts of the assessee's case are totally different. Hence, this ratio cannot be applied. In the case of CIT vs. Anand Co., wherein it has been held that in case cash assistance received from a private body which has nothing to do with any service rendered by the assessee to the private body is not a revenue receipt. In the present case, loan already granted for the purpose of meeting trading liability was converted into grant-in-aid for the purpose of smooth functioning of the business of the assessee. Hence, grant-in-aid has direct nexus with the business of the assessee. Hence, this case law cannot be applied in favour of assessee. Further, in the case of CIT vs. Rajaram Maize Products (1998) 144 CTR (MP) 267 : (1998) 234 ITR 667 (MP), it has been held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case, the distillery unit was closed in the assessment year under consideration. It was not functioning. The assessee was maintaining separate sets of books for distillery unit and sugar unit. Separate profit and loss, balance sheet, manufacturing and trading accounts have been prepared. As the distillery unit was closed since 1997, there was no production whatsoever. In spite of this, the assessee claimed expenditure relating to distillery unit. The contention of the assessee is that the distillery unit and sugar unit are inter-linked and inter-laced and it is an integral part of assessee's business. This contention of the assessee cannot be accepted. There is no business activity of the distillery unit and separate sets of books of account are maintained. Being there is no business activity of the distillery unit and since it has been closed, no expenditure can be allowed. The expenditure incurred cannot be said to be incurred wholly and exclusively for the purposes of business. Accordingly, this ground of the assessee is also rejected. 9. The next ground relates to disallowance of Rs. 3,87,637 out of the depreciation of the distillery unit. The learned CIT(A) disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance-Whether as no money whatsoever was payable to assessee on handing over ponds constructed on leased land to owners of land, there could be no amount whatsoever that could be reduced from block of assets and, hence block continued at its WDV-Held, yes-Whether once an asset forms part of block, it loses its identity and question of assigning any value to particular asset forming part of block does not arise and, consequently, depreciation cannot be disallowed on that part of block on ground that a particular asset forming part of block has been discarded or not owned or used by assessee-Held, yes-Whether, therefore, in view of interpretation of concept of 'block of assets', depreciation on ponds which formed part of block of assets had to be allowed as deduction even though those ponds were discarded and not used and not owned by it during assessment years in question, as assessee was not entitled to any scrap value whatsoever consequent to discarding-Held, yes." 10.1 In the present case, the assessee is maintaining separate sets of books of account for distillery unit and sugar unit and separate balance sheet and P L a/c have been drawn and different block asset is appeari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per s. 32(1)(iii) or taxing the balancing charge as per s. 41(2) of the IT Act necessitates the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture." Here also, there is no question of block of assets. 11. The last ground in assessee's appeal is regarding disallowance of deduction under s. 80P(2)(a)(iii) of the IT Act, 1961. The assessee in this case is buying sugarcane from the agriculturists, crushing the same and then selling the sugar. The benefit of deduction under s. 80P(2)(a)(iii) is available to a co-operative society, which is engaged in the marketing of agricultural produce grown by its members. On similar facts, the Hon'ble Punjab Haryana High Court in the case of Karnal Co-operative Sugar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f total income.-(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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