TMI Blog2013 (6) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... as admissible deduction referred to the another decision of Metal Box Company of India Ltd. V Their Workmen (1968 (8) TMI 53 - SUPREME Court). Thus the principles laid down in these cases show that the provision for leave encashment would constitute a liability and if the same has been determined on the basis of actuarial valuation then same cannot be considered as unascertained liability. Provision for staff incentive - whether unascertained liability or not? - Held that:- As no evidence has been filed before AO in respect of particular policy followed by the assessee- company in respect of staff incentive. The copy of scheme has also not been filed before us. However, at the same time the AO also rejected the issue summarily without asking for the scheme for incentive claimed from the assessee and the ld. CIT(A) has allowed the relief without examining the scheme. Therefore remand the matter back to the file of AO with a direction to re-examine the issue after obtaining the scheme of staff incentive from the assessee. Adjustments for working the book profit u/s 115 JB by adding Advance Against Depreciation to the book profits - Held that:- As the issue was decided in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff filing fee from HPSEB, damage of transfer sale of scrap, interest received from staff and interest received from HPSEB etc. and deduct ion u/s 80IA of the Act was claimed on these amounts. It was held that these income items are not derived from eligible under taking and accordingly deduct ion u/s 80IA was denied. 5 On appeal it was submitted that as far as interest amounting to Rs. 24,18,42,351/ - which was received from HPSEB on late payment of power sales dues. It was further pointed out that the said interest accrued from contract of sale of power dues and not from other separate contract and therefore, such interest should be treated as addition to the sale revenue. Such interest has a direct nexus with the sale of power and therefore, has direct nexus with the revenue derived from eligible business of power generation. 6 The ld. CIT(A) after examining the submissions observed that the interest was received from HPSEB on account of delayed payments of the power bills and therefore, such interest income is inextricable linked to the supply of power to HPSEB. Therefore, this receipt is distinctly part of sale revenue and is directly derived from the eligible business of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied rate would be charged on the unpaid sale price and added to the outstanding till the point of time of realization, or (b) that in case of delay the payment for sale of products worth Rs. 100 to carry the sale price of Rs. 102 for the first month s delay, Rs. 104 for the second month s delay, Rs. 106 for the third month s delay and so on. In sum and substance these are only two modes of realizing sale consideration, the object being to realize the sale proceeds at the earliest and without delay. The purchaser pays a higher sale price if it delays payment of the sale proceeds. In other words, this is a converse situation to offering a cash discount . Thus, in principle, in reality, the transaction remains the same and there is no distinct ion as to the source. While computing the special deduct ion under section 80-I , interest received from trade debtors towards late payment of sale consideration is to be included in the profits of the industrial undertaking. Similarly Hon'ble Punjab Haryana High Court has observed in case of Phatela Cotgin Industries P. Ltd. V CIT (supra) has observed in para 10 as under:- The interest which is received on delayed payments on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the ld. CIT(A). 15 After hearing both the parties we find that the Hon'ble Supreme Court in case of Bharat Earth Movers v CIT ( supra) wherein the Court was considering the issue where provision for leave encashment was allowable as admissible deduct ion refer red to the another decision of Hon'ble Apex Court in case of Metal Box Company of India Ltd. V Their Workmen (1969) 73 ITR 53 (S.C) and extracted the following principles:- (i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduct ion while working out the prof its and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduct ion is permissibly only in the case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment , so also liabilities accrued due would be taken into account while working out the prof its and gains of the business; (iii) A condition subsequent the fulfillment of which may result in the reduction or even extinct ion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 19 The ld. CIT(A) after examining the submissions observed that ( in Assessment year 2004-05) that staff incentive is declared in accordance with existing policies and directly relates to the work done by the employees during the year and accordingly the same was held to be as curtained liability during the year. The ld. CIT(A) following the order for Assessment year 2004-05 held that this amount pertains to ascertain liability and cannot be added to the book prof its u/ s 115 JB of the Act. 20 Before us, the ld. DR for the revenue submitted that the findings have been given by the ld. CIT(A) without examining and specifying what was the policy in respect of staff incentives. 21 On the other hand, the ld. counsel of the asses see submitted that incentive has been paid on pre-determined scheme formulated by the Government. Staff incentive is paid in addition to normal bonus paid by the company. This amount is paid to increase the efficiency of employees. However , in response to question from the Bench he admitted that copy of scheme was not asked by the Assessing Officer and was not filed before him or the ld. CIT(A). 22 After considering the rival submissions we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve case observed that in order to make an addition under clause (b) of Explanation 1 to sect ion 115JB, two conditions must be jointly satisfied: (a) there must be a debit of the amount to the prof it and loss account ; and (b) the amount so debited must be carried to the reserve. Since the amount of AAD is reduced from sales, there is not debit to the profit and loss account and the amount did not enter the stream of income for the purpose of determination of net prof it at all. Hence, clause (b) of the Explanation 1 is not applicable to AAD. However , the Assessing Officer did not agree with the same and he referred to the latter decision of Hon'ble Supreme Court in case of Dynamic Orthopedics (P) Ltd V CIT, 321 ITR 300 and also to the decision of Special Bench of the Tribunal at Hyderabad in Rain Commodities Ltd. V DCIT, ITA No. 673/Hyd/2009 dated 2.7.2010 wherein it was held that if the accounts were not prepared in accordance with provision of Parts II III of Schedule VI of Companies Act then some adjustment can be made and on that basis he added this amount to the book profits. 25 On appeal the issue was decided in favour of the assessee by following the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly shows that the issue has been decided on the basis of the decision of Hon'ble Supreme Court in case of National Hydro Electric Power Corporation V CIT ( supra) . The decision is directly on the issue of advance against depreciation and whether the same is required to be added u/ s 115 JB of the Act to the book profits. Since the decision (or the law laid down) of Hon'ble Supreme Court is the Law of land and therefore, we are bound to follow the same. Accordingly we find nothing wrong with the order of the ld. CIT(A) which has been rendered on the basis of above decision. 29 In view of the above discussion on various issues which have been raised by the Revenue in all the three appeals before us, appeals of the revenue are partly allowed. ITAs No. 685 686/Chd/2012 Assessee s appeals 30 During the course of hearing the asses see sought permission to withdraw these appeals for which the ld. DR for the revenue had no objection. Therefore, these appeals are dismissed as withdrawn. ITA No. 1125/Chd/2012 Assessee s appeal Cross-object ions No. 21 22/Chd/2012 31 In this appeal and the Cross-objections first common issue raised by the assessee is regarding upholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is liable to be set off against the interest expenditure. Alternatively, the appellant has argued that permitted investments are an integral part of the working capital of its power generation business which is only temporarily invested for a short period within the tight schedule of priority cash flow application. Therefore they bear a direct and first degree nexus with the power generation business. The said arguments of the appellant, however, are not found to be carrying any force. A close perusal of the TRA agreement makes it amply clear that the said agreement is entered into to protect the respective interests of the secured parties( lenders) as well as the borrower (the appellant). Under this agreement, the Account Bank essentially acts as a trustee for the Secured Parties as well as the Borrower. This kind of agreement is necessitated in view of the huge financing of the project by banks and financial institutions and in order to ensure a safe and regulated service of the said debt by the borrower. But there is nothing in the terms and conditions of the said TRA which is oppressive for the appellant. The TRA lays down a broad frame work of the management of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, the Account Bank invests the funds only on the instructions of the Borrower (the appellant) The Account Bank does not have any discretion regarding the fund management. It primarily manages the funds on the instructions of the Borrower, and only in the case of a default on the part of the Borrower, does it manage the account on the instructions of the Lender. A reading of the TRA makes it amply clear that the Account Bank is like any other Bank, and acts as a trustee of the account holder Therefore, it cannot take any decisions on behalf of the 'appellant regarding investment(s) or the liquidation/disposal thereof. 15.13 Under every Financing agreement, the borrower is required to safeguard the interest of the lender by way of prior pledging /hypothecation of valuable assets or by way of creating his lien on the future cash f lows from the project /asset financed and the future investments there from, or by way of a combination of various such methods. But this requirement does not have the effect of negating the income, if any, earned by the borrower. It simply places certain fetters on the borrower's spending and disposal of income /assets temporarily till the time the bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces even though the interest income is earned by utilizing the idle borrowed capital. In the instant case, as already mentioned, the source of investment in the fixed deposits from which interest has been earned by the appellant is not the borrowed capital but its own surplus funds. 15.16 The appellant's alternative plea that the interest on the Permitted Investments bears a direct and first degree nexus with the power generation business has also been duly considered. As already mentioned, the appellant is under no Obligation to invest its Surplus funds m fixed deposits or any other instrument under Permitted investments. It is as a part of prudent financial management that the appellant takes stock of its surplus funds and opts to make investments which could yield it maximum return The investment of surplus funds with a view to maximize returns according to prudent norms cannot be said to be having an immediate and first degree nexus with the eligible business of power generation. The surplus earned by the appellant after all has to be invested somewhere. If a certain income is given exemption from taxation at the first point of its earning /accrual and the said income gives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o doubt that the decision in case of Pandian Chemical s Ltd. V. CIT ( supra) has been rendered u/s 80HH of the Act , however , the judgment has been rendered mainly because of the express ion used derived from . Perusal of Section 80IA(1) of the Act would show that in this provision also the expression has been used a s derived by an under taking , therefore, the same principle would be applicable in case of deduction u/ s 80IA of the Act. Accordingly we confirm the order of ld. CIT(A). 38 The assessee has also raised another object ion on other aspect of this issue through Cross-object ions No. 2 which reads as under: That in any case the ld. CIT(A) has also erred in not allowing deduct ion of interest paid from the aforesaid interest income of Rs. 2,70,95,301/- while reducing the same from the profits of the eligible business for computing deduct ion u/s 8IA. Accordingly as interest paid far exceeds interest income, as such too, no exclusion of interest income is war ranted for computing deduct ion u/s 80IA. 39 This issue has been adjudicated by the ld. CIT(A) vide para 15.15. 40 Before us, the ld. counsel of the assessee did not make any arguments in respect of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been raised in Cross-objections that is in respect of sale of scrap from prof its for the purpose of deduct ion u/s 80IA of the Act. 44 After hearing both the parties we find that as observed earlier various items of income which were included in the business profit to the tune of Rs. 27,43,88,709/ - were held to be not includible in the business profit for the purpose of deduct ion u/s 80IA of the Act because the same was not derived from eligible business. One of the item excluded is sale of scrap. 45 On appeal, it was mainly submitted that scrap was generated during the course of manufacture and therefore, same should be treated as derived from industrial under taking. 46 The ld. CIT(A) did not find force in the submissions and rejected the claim vide para 16.4 which is as under :- 16.4 As regards the income from sale of scrap amounting to Rs. 11,10,169/- it is noted that the scrap sold was not generated in the course of the regular business of power generation of the appellant. The same was admittedly generated out of stores and spares and repairs of plant and machinery, the exact break-up of which was not furnished by the appellant. It is not the appellant s case tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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