TMI Blog2013 (9) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80IA shall be the price at which the assessee purchases electricity from Electricity Board and not the one which is fixed by the legislative mandate – Decided in favour of Assessee. Adjustments u/s 145A - Addition on Account of Modvat Credit in Opening Stock and Closing Stock – Held that:- Section 145A has been amended and as per Section all the taxes or cess whatever name it was called is to be added in the valuation of the closing stock in preparing the accounts of the appellant – Following COMMISSIONER OF INCOME TAX Versus MAHAVIR ALLUMINIMUM LTD. [2007 (11) TMI 41 - HIGH COURT, DELHI] - The A.O. only added excise duty / modvat credit in purchase, sale and closing stock but had not allowed any adjustment in opening stock – decided in favour of Assessee. Addition of Book Profits u/s 115JB – Dividend Stripping u/s 94(7) – Held that:- As per Section 94(7), any loss on security or unit was to be ignored for the purposes of the computing his income chargeable to tax where the transactions made within a period of 3 months prior to the recorded date and sales these securities within 3 months or within 9 months after such date. Ld. A.O. had given details of security purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 filed by the assessee which have emanated from the orders of the learned CIT(A)-I,Surat, dated 01-11-2007 for A.Y. 04-05 24.12.2008 for A.Y. 05-06. These Assessee's appeals C.O. Revenue's appeal were heard together and are being disposed of by way of this common order for the sake of convenience. 2. The effective grounds of ITA No. 220/Ahd/2008 are as under: "1. The learned CIT(A) erred in confirming the action of the assessing officer in disallowing an expenditure of Rs.93,00,000 being commission of Rs.90,00,000 paid to Mr. Praful A. Shah, the Chairman Managing Director and Rs.3,00,000 paid to Mr. Alok P. Shah, the non executive Director of the company under section 37 of the Income-tax Act ("the Act"). 2. The learned CIT(A) erred in confirming the action of the assessing officer in disallowing the deduction of Rs.2,47,57,900 under section 80IA of the Act on the ground that demand charges, time use charges and other charges should not be considered by the Company for determining the transfer value of power. 3. The learned CIT(A) erred in confirming the action of the assessing officer in making an addition of Rs.84,11,949 on account of adjustments under section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 16.11.2006 which was considered by the A.O. The ld. A.O. observed that the appellant has not incurred this expenditure wholly and exclusively for business purpose. Further, Shri Praful A. shah had allowed handsome salary and perquisites. The appellant had not explained that what extra efforts and extra time devoted by him. The company had also other Directors and seniors for the running of the business. Shri Amichand Shah (father of Shri Praful A. Shah) hold control, both, over equity shares and voting power in respect of the Companies belonging to Garden Group. It is, therefore, very much convenient for any member of the family of Shri Amichand Shah to arrange affairs to their mutual benefits in the Board of Directors or even in the meetings of shareholders. The result passed by the Director of the family members of Shri Amichand Shah. Nothing has been brought out as to what extra Shri Praful A. Shah had performed which made him entitled to allow him extra payments/commission to which Mr. Bhensania and other Senior Directors were not entitled. Thus, he held the expenditure of Rs.93 lacs was not incurred wholly and exclusively for the business purposes. 5. Being aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of Rs.1.25 crore was made by the A.O. which has been held in favour of the assessee by observing that the similar commission was allowed by the A.O. in A.Y. 02-03, total turn over had gone up during the year. The Board had increased the salary on the basis of extensive knowledge, business skill, managerial experience and capability increasing in net profit and commercial expediency. The Revenue had not brought any material on record which contradicts the factual finding of the year under consideration to A.Y. 03-04. Thus, we allow the appeal of the assessee on this ground. 8. The second ground of appeal is against not allowing the 80IA deduction of Rs.2,47,57,900/-. The ld. A.O. observed that the assessee had claimed 80IA deduction at Rs.9,91,77,642/- on generation of power. The appellant had generated the power and utilized / transferred the same to its other units. The appellant had charged the transfer value while applying the rate per unit Rs.5.40 and claimed it's as market value. As per tariff chart of GEB, the rate has been classified in the following categories: Energy charge @ Rs. 4.10 Demand charge @ Rs. 0.40 Time use c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the assessee. These charges are not applicable in case of appellant as it had installed the capacity of the power plant as per his requirements and generated electricity as per its requirement, however, GEB generates huge quantity of electricity.The A.O. finally disallowed the demand charge, time use charge and other charge of Rs.2,47,57,900/- and deduction u/s. 80IA was allowed less on this disallowance. 9. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who has dismissed the assessee's appeal by observing as under: "3.5 I have considered the submission made by the appellant and observation of the AO. The facts in this case are clear as stated above. The appellant has generated electricity in a captive power plant and transferred the same to its other units. The appellant has adopted the rate of transfer at the same rate as GEB supplies power to its customers. The AO has stated that the power supplied by GEB consists of four factors three of which are not applicable to the assessee. Only energy charge of Rs.4.1 is applicable which consists of cost of energy supplied. The demand charge consists of additional charge if the custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings given for A.Y. 02-03, 03-04 04-05. The operative portion of the order is as under: "5. We have heard both the parties and have gone through the aforesaid decision of the ITAT We find that while adjudicating a similar issue in the AY 2002-03 , the ITAT vide their aforesaid order dated 8-1-2010 concluded as under:- "12. The Ld. CIT(A) held that Gujarat Electricity Board (GEB) is supplying electricity at an average rate of Rs.5.40 per unit which is inclusive of 8 paise per unit for the electricity duty. Since the assessee is not required to charge electricity duty, therefore, applicable rate would be Rs.5.32 paise per unit. In this regard the Ld. A.R. submitted that the electricity is generated and does not come within the mischief of section 80IA (viii) which covers only goods and services which are produced by one unit and acquired by the other unit. Electricity is neither goods nor services. Further, rates charged by GEB is not a landmark. In any case, if General Unit was to purchase electricity from GEB, it would have paid Rs.5.40 paise per unit, therefore, it cannot be said that the electricity sold by CCP Unit to General Unit was at a price which is more than market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ah Alloys Ltd. (supra). During the year, we do not find any excess charged placed by the appellant for claiming deduction u/s. 80IA as market price of per unit of electricity was build on the basis of GEB charges. The co-ordinate Delhi Bench in case of Jindal Steel Power Ltd. (supra) also decided market rate which postulated by the Section 80IA(viii) of the IT Act. Therefore, respectfully following the Co-ordinate Bench decision, we allow the assessee's appeal on this ground. 12. Ground nos. 3 4 are against addition on account of modvat credit in opening stock and closing stock at Rs.84,11,949/- Rs.1,28,82,687/- respectively. Ld. A.O. observed that the appellant had not added excise duty in opening stock at Rs.84,11,949/-. Therefore, after reducing unutilized modvat credit, the appellant has shown closing stock less by Rs.1,28,82,787/-. Further, the addition also had been made of Rs.84,11,949/- on opening stock. 13. Being aggrieved by the order of the A.O., the assessee carried the matter before CIT(A) who had dismissed the assessee's appeal by relying upon the Co-ordinate Mumbai Bench decision in case of West Coast Paper Mills Ltd. vs. ACIT [286 ITR AT 0252], wherein it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d argued that now Section 145A has been amended and all the valuation of closing as well as opening stock is to be made on the basis of inclusive method. 15. We have heard the rival contentions of the assessee and perused the material on record. Section 145A has been amended and as per Section all the taxes or cess whatever name it is called is to be added in the valuation of the closing stock in preparing the accounts of the appellant. The A.O. only added excise duty / modvat credit in purchase, sale and closing stock but has not allowed any adjustment in opening stock. Therefore, to maintain the consistency in the accounting system, and various case laws cited by the appellant in its favour, bind us to allow the appeal in favour of the appellant.Accordingly, ground nos. 3 4 are allowed in favour of the assessee. 16. Ground no.5 is against making addition of Rs.17,93,339/-. The A.O. observed that the appellant had declared book profit of Rs.2784.34 lacs for the year under consideration. The appellant had incurred loss of Rs. 17.93 lacs u/s. 94(7) of the IT Act. The appellant had also earned dividend on these securities of Rs. 20.05 lacs and had been reduced from the book prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while not offering the dividend income for tax because the dividend income was exempt u/s 10. With a view to consider these two i.e. dividend and the loss together the legislature had provided for disallowance for loss also u/s.94(7). Hence it is very clear that the loss is incurred in relation to earning of the dividend. In fact prior to the insertion of section 94(7) such a transaction has been held to be non- collusive by the Hon'ble ITAT in the case of Walford Shares Stock Brokers Ltd. [96 ITD 1] but after the insertion of section 94(7) it is very clear that the appellant is aware that the legislature has treated both the effects i.e. dividend and loss as relating to each other but still the appellant has entered into this transaction thinking that the loss would be allowed in the calculation of book profit. As stated by the AO in several cases the Hon'ble Supreme Court has held that sometimes the expenditure need not be same as physical delivery of payment. In the case of Nainital Bank Ltd. (supra)the Hon'ble Supreme Court stated that if there are cross claims one by the assessee with money or property and if there are cross claims one by the assessee against a stranger and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Short Term Capital Loss u/s. 94(7) was only the normal provision of the Act. As per Section 115JB of the Act, only expenditure incurred for earning exempt income is required to be added back. There is no provision under the Explanation which justifies the addition of losses while computing the book profit. Ld. A.O. had added back the above loss on account of dividend stripping under clause (f) of the Explanation to Section 115JB. He further relied in case of Apollo Tyres Ltd. (2002) 255 ITR 273 (SC), wherein the Hon'ble Apex Court has held that the A.O. has not power to scrutinize the book profit except as provided inExplanation. He further relied in case of CIT vs. Walfort Share Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC), wherein Hon'ble Supreme Court held that it was established that there was a sale, the assessee received a dividend and that dividend was tax free. The assessee had made use of the provisions of Section 10(33) of the Act and such use could not be said to be "abuse of law". Even assuming that the transaction was pre-planned, there was nothing to impeach the genuineness of the transaction. In the case of assessment before April 1, 2002 i.e. before the insert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant had invested for earning of the dividend and securities were sold within a short period which comes u/s. 94 of the IT Act. The appellant had invested 160 lacs for a short period. The fund was utilized for the above period for earning of the dividend. The appellant had also taken a loan from the banks and financial institutions at a higher rate of interest. The interest on the investment was calculated by the A.O. @ 12% at Rs. 19.2 lacs and same was added back under both the computation of income i.e. normal computation of income as well as book profit u/s. 115JB. 21. Being aggrieved by the order of the A.O., the assessee carried the matter before CIT(A) who had set aside the issue to re-calculate the interest of Rs. 160 lacs by observing as under: "6.3 I have considered the submission made by the appellant and observation of the AO. The AO had clearly asked the appellant to give details of investment with proof of availability of fund on the date of investment. The appellant neither gave these details during the assessment proceedings nor appellate proceedings. The appellant had borrowed funds which were interest bearing. Therefore it can be said that if there were surplu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing section Gas based Power Project situated at Vareli. The depreciation had been recalculated in accordance with the new method from the date of the assets coming into use. Consequently, depreciation for the current year is higher by Rs.1628.11 lacs (including Rs.1101.15 Lacs deficiency in depreciation in respect of previous years) and profit for the year is lower by the same amount. The assessee was given reasonable opportunity of being heard on this issue, which was replied by it vide letter dated 22.12.2006, but, the A.O. had not found convincing to him on the ground that there was no concrete and bonafide reason for change of the method of depreciation. The appellant did not furnish any detail regarding the date on which the machineries were purchased, nature of machineries and reasons provisions of it becoming obsolete the change in method is reducing the tax liability which is violation of Accounting Standard - 6 issued by ICAI. It is a colourable device of the appellant. There is no statute in the IT Act that the appellant can change the method of depreciation. The appellant relied upon Apollo Tyres (supra) before the A.O., but, he did not found applicable in case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had also been shown in the annual accounts and the company hold the financial year relevant toassessment year 2002-03 in respect of other two divisions i.e. Draw Twisting Texturising division Draw Winding division. The said change in method ofaccount for depreciation had been accepted by the Income-tax Department in assessment proceeding for the assessment year 2002-03. The appellant has following in future WDV method for depreciation on new power plants established after year under consideration. Thus, the appellant had been consistently followed in succeeding year also in respect of new power plants established by the company. This change of method on depreciation was as per AS - 3, which allowed the periodical review of depreciation on the ground that technological change, improvement in production method, change in the market demand for the project or service out-put of the assets or legal or other restrictions. The Management had decided to change the method of depreciation on the basis of technological environment, frequent change in the project demand to bring realistic value of the assets. The WDV method adopted on other two divisions, risk of obsolescence of assets. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 115JB itself. Thus, we direct the A.O. to calculate thebook profit u/s. 115JB on the basis of depreciation WDV method. Accordingly,this ground of assessee's appeal is allowed. 28. Ground no.8 is against deferred tax liability has not been pressed by ld. Counsel for the appellant. Therefore, the same is dismissed, as not pressed. 29. The assessee has taken additional ground, which is reproduced as under: "Having held that the Excise Duty can be allowed only if the same is paid before the due date of filing return of income. The C.I.T. (A) ought to have considered the fact that the assessee had infact substantial Cenvat credit and that the duty is in fact paid and this ought to have allowed the Grounds of Appeal." 30. We have heard both the parties and additional ground admitted for hearing in view of the decision of the Hon'ble Apex Court in case of NTPC. Since at the time of hearing, the ld. Counsel did not seriously argue this ground, the same is dismissed. 31. Effective grounds of assessee's appeal C.O. and Revenue's appeal for A.Y. 05-06 are as under: "1. On the facts and circumstances of the case, the CIT(A) erred in confirming disallowance of commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord the work in progress can be worked in the following manner. Beams on 1314 x 50 = 50% of the Rs. 95/- Rs. 31,20,750 Loom each 65700 Kgs same comes per kg. having to 32850 weight of Kgs 50 Kgs. Cloth on In general 50% of the Rs. 15/- Rs. 9,l85,500 loom grey taka is of same come per meter 100 meters to 65700 (1314 x 100 =131400 meters) Polyester 57001 M.T. / 156 MT for 1 Rs. 50/- Rs.78,00,000 Filament 365 = 156.00 days per Kg. Yarn MT per day 156000 Kgs. Closing work 1,19,06,250 in progress Against this, the company has shown Rs.3,42,654/- of stock in progress which clearly indicates mispresentation of facts and suppression of taxable income. The ld. A.O. had worked out the work in progress on scientific method and also relied in case of :- CIT vs. Sarangapur Cotton Mfg. Co. Ltd. (1938) 6 ITR 36 (PC): CIT vs. Achrulal (1983) 6 ITR 255 (Nag.)Roza Textiles Limited Vs. CIT (1972) 86 ITR 673 (All.) Ld. A.O. also analyzed the position on following points: i. Sundery Debtors figure does not match with the balance sheet of corresponding Company. ii. Huge difference between stock declared in the books of accounts and stock statement submitted to banks for securing work in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork-in-progress had been subjected to audit, not only by the appellant internal audit division but also by the Statutory Auditor. Audit conducted u/s. 44AB of the IT Act and has shown by the extract on their respective audit report enclosed. They had all found it to be in order apart from being some consistent basis as in the earlier year. He further argued that ld. A.O. had changed the closing stock but not the valuation of work-in-progress for opening stock. It is not necessary that the work-in-progress is to be found as per installed capacity of the loom and beam. It can be different on last day from the installed capacity. There was no mistake pointed out by the ld. A.O. in the accounts before rejecting the books u/s. 145(3) of the IT Act. The appellant had submitted the copy of the closing stock statement submitted to the Bank as on 25th March, 2005. The ld. A.O. had compared the value of the furnished goods and W.I.P. shown in the annual accounts as on 31.03.2005 with statement submitted to the Bank. The company had shown closing stock as on 31st March, 2005, at Rs. 75 crore as against closing stock on 25 th March, 2005 at Rs. 53.3 crore. The appellant had submitted complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar sale of 467.22 crores. The gross profit had declared @ 8.61% as against the last year gross profit @ 16.93%. The A.O. gave reasonable opportunity of being heard which was replied by the assessee and following defects were pointed out: i. Improper disclosure of work in progress. ii. Sundery Debtors figure does not match with the balance sheet of corresponding Company. iii. Huge difference between stock declared in the books of accounts and stock statement submitted to banks for securing work in capital. iv. Non furnishing of quantitative details for readymade garments. v. No proper disclosure of the person covered u/s. 40A(2)(b). vi. Inter-group transactions. vii. Non furnishing of separate trading accounts. viii. Transfer to General reserve. He further held as under: "I have gone through the above citations submitted by the assessee, however, the facts and the issues dealt in these citations, are not directly or indirectly supports the arguments of the assessee as the issues/discrepancies noticed in the instant case are different. In view of the above discussion and to sum up all discrepancies pointed out above, it can be said that the books of accounts are not rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de garments with reference to opening quantity, purchase quantity, manufacturing quantity, sale quantity and closing stock quantity. Similarly, the work-in-progress had not been matched with the technical requirement of the loom. From the side of the appellant, ld. Sr. A.R. contended that ld. A.O. had not pointed out specific defects in the books of account. The raw material is sub-product of crude oil.Internationally, the crude oil prices had gone up. Therefore, cost of the basic raw material DMT MEG had gone up. Besides this, there is tough competition in this line of business. Therefore, the appellant could not realize the sale price. Accordingly, the CIT(A) order may please be confirmed. 43. We have heard the rival contentions and perused the material on record. It is undisputed fact that the appellant had shown closing sotck in process before the Bank at Rs.3,22,53,000/- whereas enclosing balance as on 31.03.2005 had been disclosed at Rs. 3,42,654/- which has not been re-conciled by the appellant, at any stage. Further, quantity detail of readymade garments were not submitted by the appellant at any stage. The minimum requirement of loom also is a determined factor for pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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