TMI Blog2012 (12) TMI 687X X X X Extracts X X X X X X X X Extracts X X X X ..... l export profits as the eligible profits for the purposes of book profits tax and no phasing is required to be carried out - in favour of assessee. Deferred tax provision pursuant to AS 22 - unascertained liability hence warrants adjustments by way of addition to the book profits - Held that:- After insertion of clause (h) in the Explanation-1 to section 115JB with retrospective effect vide Finance Act, 2008 with effect from 1.4.2001, this issue has to be decided against the assessee as in view this clause the book profit shown in the Profit and Loss Account in the relevant previous year prepared under subsection (2) of section 115JB to be increased, inter alia by the amount of deferred tax and the provisions therefor - against assessee. Reopening of assessment - excess grant of deduction u/s 80HHC - Held that:- Though the original assessments have been completed u/s 143(3) of the Act. The assessing officer has considered all the materials available on the record at the time of completing the original assessment and granted deduction u/s 80HHC. The AO is precluded to reconsider the same after four years from the expiry of the original assessment year to consider the same to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction u/s 36(1)(iii)? Held that:- As decuided in DCIT vs. Core Health Care Ltd. [2008 (2) TMI 8 - SUPREME COURT OF INDIA] Section 36(1)(iii)it is a code by itself. It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business - in favour of assessee. Provisions for unascertained liabilities - Held that:- In view of the retrospective amendment vide Finance Act, 2009 wherein there is an insertion of clause (i) with retrospective amendment from 1.4.2001 wherein the amount or amounts set aside as provision for diminution in the value of revenue assets has to be added to the book profit. In view of this, this issue is decided against the assessee. DEPB benefits accrued - whether deducted for computing export profits both u/s 80HHC and clause (iv) of Explanation to sec. 115JB - Held that:- As decided in Topman Exports v CIT [2012 (2) TMI 100 - SUPREME COURT OF INDIA] the face value would be assessable under 28(iiib) and the profit under 28(iiid) and in case the exporter (having export turnover in excess of Rs. 10 crores) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable on record and the Assessing Officer in the re-assessment proceedings has simply taken a computation filed by the assessee as the basis and reworked out the deduction u/s 80HHC of the Income-tax Act, 1961 and worked out the book profit u/s 115JB of the Act. He submitted that there is no fresh material came to the possession of the Assessing Officer. The assessee duly filed a certificate from the chartered accountant in Form 10CCAC for claiming deduction u/s 80HHC of the Act. According to the AR from the date of the assessment order till the date of issue of notice u/s 148 of the Act, no new material came to the possession of the Assessing Officer. Being so, there is no question of reopening of the assessments. He submitted that the re-assessment is not covered by sub-clause (iv), clause (c) of Explanation to section 147 since the main ingredient should be "reason to believe". Even to form this reason, there should be tangible material. The existence of tangible material is exactly the requisite condition laid down by the Supreme Court in the case of CIT vs. Kelvinator (India) Ltd. (320 ITR 561). The Supreme Court discussed at length on various issues including the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dhakjee Ltd. vs. DCIT in I.T.A. No. 4613/Mum/05 dated 12th May, 2010. 5. On the other hand, the learned DR strongly opposed the argument of the learned counsel for the assessee and submitted that there was no assessment in this case u/s. 143(3) of the Act. Being so, there is non consideration of issue relating to deduction u/s. for export profits under 115 JB of the Act. He relied on the judgement of Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra). Further he relied on the judgement of Madras High Court in the case of Areva T. and D India Ltd. vs. ACIT (294 ITR 233) for the proposition that if there is any procedural irregularities in completing the re-assessment it does not invalidate the assessment order. He also relied on the judgement P H High Court in the case of Sunil Bhaseen vs. CIT (179 Taxman 148) for the proposition that the Department was under no obligation to dispose of objection of the assessee to the initiation of proceedings, by way of separate and independent order unless the findings of the Assessing Officer are not pervert in any manner. He also relied on the order of the Tribunal in the case of Elegant Chemicals Enterprises Vs, AC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, in the present case we are not in a position to apply the ratio laid down by that decision because clause (b) to Explanation 2 to proviso 2 of section 147 clearly authorises the Assessing Officer to reopen the assessment. This provision is to be considered for the purpose of adjudicating this issue. This ground relating to reopening of assessment is decided against the assessee. 8. The next ground in I.T.A. Nos. 835 and 836/Hyd/2005 is that the CIT(A) further erred in holding that the re-assessment order under section 147 is in order though the Assessing Officer did not follow the procedure laid down by the Supreme Court in the case of GKN Drive Shafts (India) Ltd. (2003)(259 ITR 19) thereby rendering the proceedings and the order defective, on the ground that the breach made by the Assessing Officer is a mere procedural error. This ground is not pressed before us and the same is dismissed as not pressed. 9. The next common ground in assessee s appeals in ITA Nos. 835, 836 and 837/Hyd/2005 for A.Ys. 2001-02 to 2003-04 is that the CIT(A) erred in not allowing 100% deduction in respect of export profits under clause (iv) of Explanation to section 115JB while computing book pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided in sub-section (1B) of sec. 80HHC because, 115JB is an independent code and it covers full export profits as the eligible profits for the purposes of book profits tax and no phasing is required to be carried out. This view has been reiterated by the Apex Court in the recent case of CIT v Bhari Information Tech. Sys. P. Ltd in Civil Appeal No. 33750/2009 rendered on 20.10.2011. Thus, this ground in assessee s appeals ITA Nos. 835 to 837/Hyd/05 is allowed and related ground in Revenue appeals in ITA Nos. 930 to 932/Hyd/05 is dismissed. 12. The next ground in ITA No. 837/Hyd/2005 for A.Y. 2003- 04 is that the CIT(A) erred in holding that deferred tax provision made pursuant to Accounting Standard 22 is an unascertained liability and hence warrants adjustments by way of addition to the book profits in terms of clause (c) as well as clause (a) of the Explanation to section s. 115JB of the Act. 13. Brief facts of the issue are that while arriving at the book profits, the assessee did not add back deferred tax of Rs. 14,72,44,834 to the net profit as per profit and loss account, which according to the Assessing Officer is required to be added back in terms of clause (a) of Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 273). 13.2 The Assessing Officer further stated that the assessee in its own case for earlier Asst years has adopted the figure of profit before tax as the starting point for computation and did not reduce the provision for deferred tax for computation of taxable Book Profit u/s 115JB. In response, the AR argued that the Assessing Officer has failed to appreciate that the concept of res judicata does not apply to income tax proceedings, more so when the issue involved is related to deductibility or otherwise of an item of expenditure. 13.3 The Assessing Officer argued that the deferred tax liability is subject to future uncertainties both in taxing statutes as well as the accounting policies to be adopted by the company in future and, therefore, is an unascertained liability covered by clause (c) of Explanation to section 115JB. In response, the AR argued that the Assessing Officer's contention that the provision for deferred tax is an unascertained liability is far from truth. Accounting Standard-22 'Accounting for Taxes on Income' details a comprehensive methodology with regard to computation of deferred tax arising from timing differences on account of taxable income and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation u/s 115JB, without any fresh tangible material warranting the initiation of proceedings u/s 148. It is a mere change of opinion. As held by the Apex Court in the case of CIT vs. Kelvinator of India Ltd (320 ITR 561), the action of the Assessing Officer is not justified, even though the notice u/s 148 was issued before expiry of 04 years from the end of the relevant assessment year. The facts of the case of the assessee are exactly similar to the facts of the cases of CIT vs Kelvinator of India Ltd (Supra) and the Asian Paints Ltd, (308 ITR 195). Therefore, it is prayed that the Hon'ble ITAT be pleased to hold that the proceedings u/s 147 of the Act initiated on 06.02.2008 for the assessment year 2003- 04 are invalid following the ratio laid down by the Supreme Court in the case of CIT vs. Kelvinator of India Ltd (supra). 17.1 It is further submitted that for assessment years 2001-02, 2002-03 and 2003-04, the assessments were re-opened to recompute export profits under clause (iv) of Explanation to Section 115JB by adopting profits of the business under clause (baa) of Section 80HHC in place of book profits. After re-opening the assessment, the Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable on the record at the time of completing the original assessment and granted deduction u/s 80HHC of the Act. The assessments were reopened on account of excess grant of deduction u/s 80HHC of the I.T Act by virtue of non deduction of brought forward business losses. The assessee having furnished these details of brought forward business losses at the time of original assessment and there is no failure on the part of the assessee to disclose these facts to the assessing officer for the purpose of completion of original assessment. The assessing officer is precluded to reconsider the same after four years from the epxiry of the original assessment year to consider the same to bring the escaped income into taxation. Had it been within four years, the assessing officer could have reopened the assessment under clause (b) to explanation 2 to proviso 2 of Section 147 of the I.T. Act. In these assessment years, the assessment was reopened after four years, in our opinion, the reassessment is bad in law. Even otherwise, even on merit the issue raised in the reassessment is decided by various Courts in favour of the assessee which is evident from the various case laws cited by the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance should be reduced while computing deduction towards export profits u/s 80HHC; as against the assessee's claim for pro-rata reduction of the same based on proportion of previous years' losses and allowances attributable to those years' export turnover. 22. The learned AR submitted that the assessee contended that brought forward losses depreciation allowance should first be prorated as between export business and other business of each of the assessment years to which such loss relates, and only then to reduce such prorated export loss / allowance from the profits of the export business for the current assessment year before computing deduction under sec. 80HHC In terms of sub-section (1) of sec. 80HHC an assessee engaged in the business of export of any goods or merchandise other than those specified in sub-sec (2) thereof is permitted deduction of export profits as per the grading specified in sub-section (1 B). The export profits are computed in accordance with the methodology prescribed in sub-section (3). Clause (b) of subsection (3) states that where export relates to trading goods, the profit would be computed by deducting from the sale proceeds of such traded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature. b. From the above, it follows that, deductions under each of the relevant sections of the chapter shall be computed with reference to income derived from the specified nature to be the only amount of income and the assessee cannot claim a higher deduction than what is related to the specified nature of income by including incomes of any other nature. Likewise, it also follows that an assessee is not bound to include negative income of any other nature, which would result in he being entitled to a deduction which is less than the amount of deduction related to the specified nature of income. Further, income for each nature has to be independently computed in accordance with the provisions of the Act, meaning thereby that the provisions of the Act relating to computation including set off are to be applied in respect of each specified income of such nature separately. c. The Hon. Supreme Court in the case of IPCA Laboratories Ltd v DCIT (266 ITR 521) (2004) held that the deduction under sec. 80HHC is with reference to export profits alone and that for the purposes of arriving at the said export profits, the profits earned from selfmanufacturing as well as trading of good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o claim for benefits under Chapter VIA in terms of sub-sec (2) of sec. 80A of the Act. If the gross total income is positive and provided that the assessee has the income of the nature as specified in each of the sections under the head C of Chapter VIA, he would be eligible to claim deduction as conceived by the said section. Reference is invited to the decision of the Supreme Court in the case of Synco Industries Ltd v AO (299 ITR 444) which has laid down the above rationale. Division Bench of ITAT, Mumbai in the case of Meera Cotton and Synthetic Mills P. Ltd v ACIT (318 ITR (AT) 64) (2009) gave a detailed interpretation (in paragraph 10 at page 69 of the ITR(AT)) which supports the position detailed above by the assessee. f. It is submitted that the income eligible for deduction under sec. 80HHC to be considered is only in respect of that derived from export of eligible goods or merchandise. The emphasis in the section is on income derived from export of eligible goods or merchandise clearly differentiating it from income derived from domestic sales of eligible goods or merchandise. On a reading of sec. 80AB which applies to all the sections under Chapter VIA-C, the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of goods. Once the formula as given in sub-section (3) of the section is applied, the domestic profits are isolated. Therefore, it does not concern itself with domestic profits. If the assessee earned huge profits under the head 'profits and gains of business' but if the proportion of exports is lower as compared to total sales, the export profits for the purposes of sec. 80HHC would be computed at a lower figure and vice versa. Madras High Court in the case of CIT v M. Gani and Co. (301 ITR 381) (2008) while approving its own decisions in the case of CIT v Rathore Brothers (254 ITR 656) and CIT v Macmillan India Limited (295 ITR 67) held that where separate accounts are maintained by an assessee for export and domestic activities, the profits I losses from domestic activities would be omitted for the purposes of arriving at the benefit under sec. 80HHC. In the present case too, the formula prescribed under clause of sub-sec (3) is merely to facilitate the derivation of export profits, if assessee maintained composite accounts for both activities. It is submitted that the law would not distinguish in the quantum of relief to be granted under a section of the Act, as between an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the head 'Income from business/ profession 60 5. Gross total income of the year 40 = (60-20) 6. 80HHC deduction allowed by AO (by virtue of arriving at the income under head 'income from business I profession' at Rs. 40 instead of Rs. 60 adopted by Assessee) 16 = ((60- 20)*50/125) 7. Export profit under sub-section (3) of sec. 80HHC as per Assessee 24 = (60x50/125) 8. Loss to be reduced for 80HHC as contended by assessee (by computing prorata loss of the preceding year on the basis of ET/TT of Year 1 and reducing it from 'Income from the (6) = (20x30/100) 9. 80HHC deduction claimed by Assessee (7-8) 18 l. If the working as adopted by the AO is considered the deduction under sec. 80HHC works out to Rs. 16. The AO adopted the Year 2 proportion of ET/TT for reducing the brought forward business loss of Rs. 20. On the other hand the assessee submits that the correct method to be adopted is to first arrive at the profits of the business of the year in terms of clause (baa) and thereafter arrive at the export profits of the year in terms of sub-clause (c) of sub-section (3) of sec. 80HHC. Lastly, in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw. Even though the decision in IPCA Laboratories Ltd. 's case (supra) was on the question as to whether profit in export of goods manufactured by the assessee can be adjusted against loss in export of trading goods, in the same year and thus resulting in net loss and thereby not allowing deduction u/s 80HHC of the Act, Hon'ble Supreme Court had said that provisions of section 80AB would prevail over all the section in chapter VI-A. It means that deduction u/s 80HHC will be allowed on the basis of net profit after adjustment of losses of export against profits of another export business. Thus, whereafter such adjustment of losses from one export business against profit of another export business in the same year, there is a loss, then no deduction u/s 80HHC can be allowable. The question regarding set off of brought forward loss against current year's profit was not, in fact, before Hon'ble supreme Court in IPCA Laboratories Ltd.'s case (supra) but a clear decision is given by the Apex Court that Hon'ble Bombay High Court's decision in Shirke Construction Equipment Ltd. 's case (supra) and Kerala High Court's decision in Smt. TC. Usha's case (supra), which held that section 80HHC i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration. If after such adjustments there is a positive profit, the assessee would be entitled to deduction u/s 80HHC(1). If there a loss, he will not be entitled to any deduction." 21.Thus, what is to be adjusted against export profit is loss from another export. If in current year, only the losses from trading in export has to be adjusted against profits from another export (i.e. manufacturing activity) as per IPCA Laboratories Ltd. 's case (supra), it follows that only brought forward losses from export activity alone can be adjusted against export profits in the current year. Section 80HHC refers to computation of profits from export activity only. Therefore, non-export losses whether of current year or of earlier year's brought forward one, cannot be considered. Section 72 also provides that brought forward losses of the business will be treated as current year's loss for the purposes of set off against current year's income from the same business. This will also be consistent with section 80HHC 3 which provides for computation of "profits derived from such export". In working out profits derived from export one can only adjust losses from the export activity, whether of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he material available on record. This ground doesn t required adjudication as we have already held in earlier paras that the reopening is bad in law in these assessment years. Being so, we refrain ourselves from adjudicating this issue. 30. The next alternate ground in ITA No. 939/Hyd/2010 is as follows: "Alternative to Ground No. 3, the Commissioner erred in confirming the action of the Assessing Officer in reducing the entire brought forward losses/ unabsorbed depreciation allowance of amalgamating companies eligible for set off under sec. 72A while computing relief u/s 80HHC." 31. The learned AR submitted that this appeal of the assessee is against the second reassessment after completion of the first re-assessment. The second notice u/s 148 was issued on 18/03/08 i.e., after expiry of 4 years from the end of the relevant assessment year. The reasons for re-opening are to reduce the entire brought forward losses while computing deduction u/s 80HHC under MAT provisions. Here also, the Assessing Officer is not having any fresh tangible material and it is simply a mere change of opinion. A reference to main computation at page 14 of the assessment order dt 31/03/05 u/s 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statutory definition given in clause (baa) of Explanation to sec. 80HHC, it is only the brought forward depreciation which should be deducted from the profits and gains of business for computing the export relief and the amount of brought forward business loss covered by section 72 read with section 72A should not be reduced for arriving at profits and gains of business both for purposes of classifying under sec. 14 as well as for clause (baa) of sec. 80HHC. 34. He submitted that the CIT (A) at paragraph 7.1 of his order merely referred to the order of his predecessor in the subsequent Assessment year (AY 2004-05) and decided against the Assessee. He has not considered the legal proposition put up by the Assessee before him. Accordingly the Assessee pleaded to allow ground 4 in ITA No. 939/Hyd/10. 35. The DR relied on the order of the CIT(A). 36. We have heard both the parties and perused the material available on record. This ground doesn t required adjudication as we have already held in earlier paras that the reopening is bad in law in these assessment years. Being so, we refrain ourselves from adjudicating this issue. 37. In the result, assessee s appeal in ITA No. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, it is humbly submitted that the other additions and disallowances made by the Assessing Officer in the case of re-assessment proceedings do not survive equally. 42. He invited our attention to the decision of the Delhi High Court in the case of Ranbaxy Laboratories Limited vs. CIT (336 ITR 136), wherein it was held that the Assessing Officer was not justified when the reasons for initiation of the proceedings ceased to survive. Similar view was taken by the Bombay High Court in the case of CIT vs. Jet Airways (331 ITR 236) (Bom). As held by the Bombay High Court in the case of Rallis India Ltd Vs ACIT (323 ITR 54 Bombay) it is well settled that, law as laid down by the Supreme Court is declaratory of the position as it always stood. Decision of Supreme Court in the case of Ajanta Pharma P Ltd (Supra) is a position deemed as it always was. Hence, the main reason to reopen i.e., reworking deduction u/s 80HHC r.w.s 115JB is not permissible at any time and therefore the other issues in the re assessment proceedings automatically fail and cannot survive. 43. Placing reliance on the above three decisions, it was submitted by the AR that since the very reason for re-opening the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal activity and being seasonal has no relevance to the export activities of the assessee. The learned CIT (A) called for the Main objects of the Memorandum of Association of the assessee company and found that they inter alia included manufacture of bulk drugs on behalf of others. He stated in his order that after examining the issue he found that plant and machinery used for the conversion business is the same as used for other business and the same skills are involved. On this basis he directed the AO to include the conversion income without deducting 90% thereof from the profits of business under clause (baa) of sec. 80HHC. The department not being satisfied with this, is before the Tribunal. 48. The Assessee relied on the decision of Bombay High Court in CIT v Bangalore Clothing (2003)(260 ITR 371) as well as the decision of Hyderabad bench of ITAT in ACIT v Biotech Medical (2009)(119 ITD 143). The Assessee also relied on the decision of Karnataka High Court in the case of CIT v Mittal Creations (2011)(13 taxmann.com 237) rendered on 12-04-2011 with similar facts and in relation to deduction under sec. 80HHC. The OR on the contrary relied on the apex Court judgment in R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing all expenditure in relation to earning that income. 51. It is therefore pleaded that while allowing the ground No. 4 of the department in ITA No. 930/05 931/05, the Assessee may be allowed relief by directing that only the net conversion charges be deducted from the profits of business for the purposes of clause (baa) and not the gross conversion charges received. Since the extent of expenditure incurred on the earning of conversion charges has not been quantified the assessee pleads for reverting the matter to the AO for quantifying the extent of 90% of the net conversion income that should be reduced from the eligible profits for computing 80HHC in terms of clause (baa). 52. We have heard both the parties and perused the material available on record. This issue is covered by the judgement of Supreme Court in the case of Ravindranathan Nair (295 ITR 228) wherein the Apex Court held as under: In section 80HHC of the Income-tax Act, 1961, as originally inserted in 1983, the marginal note said deduction in respect of export turnover . The marginal note was later changed to Deduction in respect of profits retained for export business . Therefore, the very basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riving at the business profits in terms of clause (baa) of the Explanation to section 80HHC(3). While arriving at the export profits under section 80HHC(3) as it stood in the assessment year 1993- 94 processing charges are to be included in the total turnover. Decision of the Kerala High Court in CIT v. K. Rajendranathan Nair [2004] 265 ITR 35 reversed. Held,_also, that in arriving at the profit earned from export of self-manufactured goods and trading goods, the profits and losses in both trades have to be taken into consideration. If after the adjustment there was a positive profit, the assessee would be entitled to the deduction under section 80HHC(1). If there was a loss the assessee would not be entitled to any deduction." 53. In view of the above judgement of Supreme Court, 90% of conversion charges has to be reduced from the gross total income to arrive at the business profit and it has to be included in the total turnover in the formula of arriving at the business profit in terms of clause (baa) of the Explanation to section 80HHC(3) of the Act. Accordingly, the Assessing Officer is directed to recompute the deduction u/s. 80HHC of the Act in the light of the judgem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the total turnover under section 80HHC(3) : otherwise the formula becomes unworkable. Decisions of the Madras High Court in CIT v. Sundaram Clayton Ltd. [2006] 281 ITR 425 (Mad) and CIT v. Sri Jayajothi and Co. Ltd. [2007] 290 ITR 660 (Mad) affirmed. [The Supreme Court made it clear that the reasoning in this case is confined to the workability of the formula in section 80HHC as it stood in the assessment year 1993-94.] 56. This ground in Revenue appeals is dismissed. 57. The next ground in ITA Nos. 931 and 932/Hyd/05 is as follows: "6. The learned CIT(A) erred in allowing the interest claim for Rs. 26,47,050 (A.Y. 2002-03) and Rs. 35,28,126 (A.Y. 2003-04) by holding that interest relatable to an acquisition of capital asset would also be a permissible deduction u/s 36(1)(iii)." 58. The learned AR narrated the facts that the Assessing Officer rejected the claim of the assessee in respect of interest expended for acquisition of the capital asset for the purpose of the business on the ground that interest incurred prior to commission of the asset is to be capitalised in terms of Explanation (8) to section 43(1) of the Act. The amount claimed by the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D regarding short-term loan, in view of the Explanation to section 35D(3) which refers only to long-term borrowings, and (c) whether the Tribunal had erred in directing deduction under sections 80HH and 80-I on the miscellaneous income of Rs. 26,64,113 being income on sale of empty containers, were substantial questions of law and the High Court erred in dismissing the application of the Department on those questions and the High Court had to decide them." 60. In view of the above judgement of Supreme Court we are inclined to decide the issue in favour of the assessee and against the Revenue. This ground of the Revenue is rejected. 61. The next ground in ITA Nos. 931 932/Hyd/2005 is that the learned CIT(A) ought to have held that the provisions for unascertained liabilities i.e., provision for diminution in value of investments, provision for gratuity, provision for leave encashment and provision for Rs. 63,36,246 (A.Y. 2002-03) and Rs. 1,75,88,677 (A.Y. 2003-04) attracted the provisions of clause (c) of Explanation to sec. 115JB(2) of the Act. 62. The learned AR submitted that this ground automatically fails in view of the reopening of assessments being bad in law. In ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court's decision is rendered under sec. 115J but it has equal force for the purposes of sec. 115JB as both are pari materia. The Court allowed deduction of provision for bonus, gratuity and doubtful debts for computing book profits. Delhi High Court in CIT v ILPEA Paramount (P.) Ltd., (2010) has permitted deduction of gratuity liability for computing the book profits. The co-ordinate Visakhapatnam bench of ITA T in Eastern Power Distribution Co. Ltd. v ACIT (2011) rendered on 14-3- 2011 has held that gratuity and leave encashment are ascertained liabilities. The Assessee therefore pleads for dismissing the department grounds at No 5 in ITA No. 931/05 and at No. 6 in ITA No. 932/05 and confirming the CIT (A) order except to the extent of provision for doubtful debts of Rs. 20,08,352/- and diminution in investments Rs. 1,42,500/-. 66. We have heard both the parties and perused the material on record. In view of the retrospective amendment vide Finance Act, 2009 wherein there is an insertion of clause (i) with retrospective amendment from 1.4.2001 wherein the amount or amounts set aside as provision for diminution in the value of revenue assets has to be added to the book profit. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PB. The Court therefore held that DEPB is 'cash assistance' and falls under clause (iiib) of sec. 28 even before it is transferred by the assessee. In this case, the Court was required to opine whether the face value and the profit realized from sale of DEPB is to be assessed in the year of transfer under clause (iiid) which would deprive an exporter with over Rs. 10 crore turnover from claiming pro-rata deduction in respect of such benefits under Third Proviso under sub-section (3) of sec. 80HHC, unless he fulfils certain conditions specified therein. After examining the issue in detail, the Court while agreeing with the view of the Special bench of the Mumbai Tribunal in Topman Exports v ITO (318 ITR 87) (AT)) held that the face value would be assessable under 28(iiib) and the profit under 28(iiid) and in case the exporter (having export turnover in excess of Rs 10 crores) is unable to fulfil the conditions specified in Third Proviso it is only the profits earned on the sale of DEPB that would be deprived of higher pro-rata deduction. The Court held that the DEPB benefits to the extent of face value should be allowed to the Assessee in terms of First Proviso under subI. section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause (c) of sec. 43(6) the block of assets is required to be reduced only by the amount of 'moneys payable' in respect of assets sold or discarded or demolished or destroyed during the previous year together with scrap value, if any. The Assessing Officer rejected the claim on the ground that even in a situation of 'block of assets', the depreciation is permissible only if the twin conditions of ownership and actual user is satisfied. He, therefore, reduced the entire written down value of such demolished assets from the relevant 'block of assets'. The amount so reduced by him under the respective blocks is as under: Buildings Rs. 48,38,792 Electrical installations Rs. 21,96,683 Plant Machinery Rs. 28,097 75. By such an adjustment he reduced the depreciation claim of the assessee by Rs. 10,40,050. On appeal, the CIT(A) directed the Assessing Officer to allow the depreciation and for this purpose he relied on the jurisdictional Tribunal's decision in the case of Natco Exports v DCIT (2003) (86 ITD 445) (Hyderabad). 76. The learned DR argued against the relief allowed by the CIT(A) and relied on Delhi Tribunal's decision in Gaurav Khullar v ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m on handing over the ponds constructed on leased land to the owners of land, there can be no amount whatsoever that can be reduced from the block of assets. Hence, the block continues at its written down value. Once an asset has been included in the block, it loses its individual identity and what is relevant is only the WDV of the block and nothing else. To be consistent with this view, the Assessee did not claim revenue loss for assets surrendered, nor short-term capital loss under section 50(2). Accordingly it allowed the claim of the Assessee for depreciation in respect of discarded assets for which 'moneys payable' cannot be ascertained. 79. The AR submitted that since the cases cited by the DR are clearly distinguishable and the case' of the Assessee is on all fours with that of the case before the Hon'ble Hyderabad bench in Natco Exports, the Assessee pleads that the ground No. 2 of the Department in ITA No. 932/05 be dismissed and the order of the CIT(A) in this behalf be confirmed. 80. The learned DR relied on the order of the CIT(A) and also relied on the judgment of Calcutta High Court in the case of CIT Vs. Oriental Coal Co. Ltd. (206 ITR 682) wherein held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India which are utilized in manufacture of exported goods. 84. The AR submitted that the advance license scheme is applicable only in respect of raw materials used for specific goods exported. A company is not permitted to import raw materials for product 'b' when exports are of product 'a'. Internal swapping of raw material products is also not permitted. Similarly the entitlement cannot be traded in the market for money or money's worth. It is only an actual user license to import specified raw material inputs against the License. The entitlement lapses but cannot be traded or sold in the market for a profit. Under the Advance License Scheme, there is no duty draw back or cash assistance which the government will pay to the exporter. Unlike DEPB scheme, the license is also not tradable. The Advance License Scheme is an actual user scheme and would lapse if the imports are not availed. 85. According to AR, under the Advance License Scheme the exports can precede the imports or vice versa. Under each of the two cases, the entitlement or obligation is as under: (a) If the entitlement is awarded against an export already made, the company should import before the License ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase the profit. Similarly if an obligation crystallizes for non-export of goods within the stipulated time, the duty payment would be accounted on cash basis under sec. 43B. Therefore, there is no distortion of profits. Consequently, it is submitted that the method followed by the Assessee in not accounting for contingent benefits and obligations is in line with the provisions of Income Tax Act, 1961 for charging real income to tax as against notional income. The income tax department has accepted the said treatment in all the subsequent years and there is no dispute in this regard. 87. The AR further submitted that under the Income Tax Act, what is taxed is a real income. If an income does not arise or a debt is not created in favour of the assessee, then no income can be recognized even under mercantile method of accounting. In the present case, no debt is created in favour of the company. Contrasting Advance License Scheme (as applicable to Assessee) with the DEPB scheme, it is submitted that in the latter, the Govt. issues a tradable paper which can be used across all materials as well as traded for profit. The Assessee has no dispute with regard to DEPB benefits, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved by Supreme Court in respect of its DEPB benefits. Since the entitlements under Advance License Scheme are not tradable / transferable and user specific and the availment is contingent upon actual import of the inputs and if there is no import, the entitlement evaporates. On these facts, the Assessee contends that there is no real income since no debt has been created in favour of the Assessee unlike a DEPB certificate. 89. The AR contended that the benefits cannot accrue under the scheme until the actual import of raw materials. If the same are accounted prior to that date, as the case in earlier periods, tax is not being levied on real income but on contingent income. As at the year end, the entitlements did not accrue to the Assessee since no debt is created in favour of the Assessee to treat the amount as income. Accrual in the legal sense occurs only when a right to receive the amount had arisen during the year. When such a right is not present, the amount has not accrued. Therefore, even under mercantile method of accounting the amount would not accrue for it to be taxed as income. In this connection, the Assessee relies on the decisions of Hon. Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercantile method of accounting in respect of accounting for import entitlements. What it has done merely is that as against the notional entries passed by it in its books, it has chosen to recognize the benefits only when they accrue. It submits that the entitlements accrue at the time of import of raw material and not earlier. Consequently, the import entitlements arising from Advance Licensing Scheme are accrued in the books of account on import of raw materials at the time of actual payment of duty. The Assessee submits that following the judicial pronouncements of the apex Court there is no accrual of income prior to actual import of these raw materials. The earlier accounting was notional and the same is sought to be changed. In the true sense, it is not a change in method of accounting but to bring in the correct and real profits to tax. Consequently, the Assessee did not include an estimated value of Rs.176,1 0,180 towards the import entitlements it is entitled under Advance License scheme, if imports are made in the subsequent years, as a receivable amount while finalizing the accounts for the year ended 31st March 2003. The Hon'ble CIT(A) has, after a detailed examination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same is been utilized. (b) It is submitted that an assessee is entitled to change the method of accounting provided the same is followed consistently and is bona fide. It is submitted that the Assessing Officer did not make any adverse finding in this behalf. The Assessee has consistently followed the revised basis with regard to accounting for entitlements under advance license scheme in the subsequent years in terms of the assessment record. (c) The change is bona fide since the earlier system was inefficient and considered contingent benefits in respect of which the Assessee is unable to legally enforce the debt. The benefit would lapse if the import of raw materials does not take place. The reasons for not importing could be several like (a) phasing out of the end product due to change in demand (b) lower domestic prices (c) inferior quality (d) favourable terms of supply and credit. Since these are all relevant and important factors considered by a businessman at the time of actual import, the import entitlement, many a time remains unutilized and allowed to lapse. Consequently, the Assessee decided not to follow this basis for accounting of import entitlements under adv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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