TMI Blog2014 (7) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... t Revenue. Validity of re-assessment proceedings u/s 147/148 of the Act - Deduction incurred on payment of compensation for re-rating of shares – Held that:- The AO has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation - Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147 - reasons u/s 148 was duly recorded for escapement of the income in respect of unabsorbed depreciation - section 147 of the Income Tax Act talks of AO not of the appellate authority - there is no illegality as per the provision of section 147 of the Income Tax Act – Decided against Assessee. Amortization of expenses u/s 35DD of the Act – Held that:- The true nature of the expenditure is that the company has compensated the lenders as they agreed to take the shares in ICCL at a higher price than what was proposed by them in their structured settlement during the year 2003 - expenditure so incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of Sec.32(2) as they existed from 01.04.97 to 31.03.02 and has also not followed the decision of the Hon'ble ITAT, Spl. Bench 'E' Mumbai in the case of DCIT Vs Times Guarantee Ltd reported in 2010-TIOL-340-ITAT-MUM-SB, 131 TTJ 257 in which the same issue was examined in detail. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in accepting the contention of the assessee without giving the AO a reasonable opportunity in violation of Rule 46A. 2. In the C.O. the assessee has taken as many as eleven grounds of appeal. Ground no. 1 to 7 since not pressed therefore, stands dismissed as not pressed. Now there remains following grounds survived:- 8. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of ₹ 7.41 crores incurred in connection with de-rating of shares without appreciating that neither the said item of income formed part of the reasons recorded by the assessing officer for initiating re-assessment proceedings under section 147/148 of the Act, nor was such expenditure connected with the issue of deduction for unabsorbed depreciation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard of balance depreciation amounting to ₹ 319,41,24,000/-. When the matter went before the CIT(A) the CIT(A) took the view that the denial of the benefit of carry forward of unabsorbed depreciation relating the assessment year 1990-91 to 1992-93 was not in accordance with the law and accordingly directed the assessing officer to allow unabsorbed depreciation of ₹ 182,74,22,000/- relating to these years for the purpose of carry forward. The revenue went in appeal before the ITAT on 29.11.2010. In the mean time the Assessing Officer by issuing the notice u/s 148 dated 28.10.2010, re-opened the assessment invoking the provision of section 147 on the reason to believe that the entire unabsorbed depreciation allowance beginning from the assessment year 1990-91 to the assessment year 1997-98 aggregating to ₹ 42578.02 lakh has lapsed before the assessment year 2006-07 and therefore, this was not eligible for the purpose of set off and carry forward in the impugned assessment year as depreciation allowance pertaining to the earlier previous years which remains unabsorbed at the beginning of the previous year relevant for the assessment year 1997-98 could be carried forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. [Para 31] So, the unabsorbed depreciation allowance of assessment year 1996-97 would be added to the allowance of assessment year 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from assessment year 1997-98. [Para 32] The provision of section 32(2) was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. [Para 34] The said CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and, accordingly, the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. This amendment has become applicable from assessment year 2002-03 and subsequent years meaning tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next year. Where there is current depreciation for such succeeding year, the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from assessment year 1997-98 up to the assessment year 2001-02 got clarified forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e de-rating proposal. The assessee claimed that since the said amount was wholly and exclusively incurred in connection with the business of IMFA and was provided for liquidating recurring claim the expenditure has to be allowed as revenue expenditure during the financial year 2005-06. Alternate plea was taken that such expenditure was incurred wholly and exclusively for the purpose of amalgamation, atleast 1/5th of the expenditure u/s 35DD starting from assessment year 2006-07 should be allowed. The assessing officer took the view since the long term debt was basically capital in nature, such compensation would retain the character of original lending i.e capital borrowing. He also told that the expenditure was not as a result of amalgamation therefore, this is not an expenditure wholly and exclusively incurred for the purpose of amalgamation. The structured settlement was done in 2003 whereas amalgamation took place w.e.f 1.4.2005. Amalgamation and de-rating of the shares both were the results of the structured settlement. The assessing officer thus rejected the claim. The assessee went in appeal before the CIT(A), CIT(A) after considering the submission of the assessee confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoters company IMFA and ICCL should derated its existing share capital by 95%. The share holders of ICCL did not accept the proposed de-rating and requested the lenders to reduce the de-rating from 95% to 50% through ICCL. The ICCL made a request to the IDBI. As agreed, the compensation of ₹ 7,41,74,113/- was paid to lenders and part of the settlement amount due to the lenders was converted into equity shares. As the said amount is wholly and exclusively in connection with the business of IMFA and has been provided for liquidating recurring claims, IMFA (ICCL since merged with effect from 1, April 2005) treated the expenditure on compensation against reduction of de-rating amounting to ₹ 7,41,74,113/- as revenue expenditure during the FY 2005-06. The said expenditure have been incurred wholly and exclusively for the purpose of the business of the assessee. The expense being incurred under a condition stipulated in the settlement with the lenders, in order to complete the process of amalgamation for improving the business functioning of IMFA, the same should be treated therefore as revenue expenditure. The expenditure has wrongly been treated by the revenue as capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same along with the orders of tax authorities below. So far the technical issue relating to the power of the assessing officer in respect of addition made by disallowing compensation paid to the lenders for de-rating is concerned, we noted that in this case the assessing officer has made the addition in respect of the income for which reasons for escapement of assessment were recorded by him i.e. unabsorbed depreciation. Merely the additions so made stand deleted by the CIT(A) will not make the action of the assessing officer illegal if he has added any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of the proceedings u/s 147. We have gone through the decisions of Delhi High Court in the case of Ranbaxy Laboratories Ltd vs CIT (supra) and that of Mumbai High Court in the case of CIT vs Jet Airways (I) Ltd, 331 ITR 236. We noted that in both these decisions no addition has been made by the assessing officer on the basis of the reasons recorded by him that the income chargeable to tax has escaped assessment. In view of this fact Hon ble High Court deleted the additions which were made in respect of the issues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This in our opinion is the true nature of the transaction. For deciding the issue we have to look into the true nature of the transaction not to the nomenclature or colour of the transaction what the assessee would have given to it. The compensation, therefore, so paid to the lenders amounting to ₹ 7,41,74,113/- therefore can by no stretch of imagination be regarded to be on revenue account. This amount has been paid in our opinion to compensate the lenders because they got shares in ICCL on conversion of debt at a higher price. Consequently, at the time of amalgamation the lenders will get less shares in IMFA as in place of 14 equity shares of ICCL, one equity share of IMFA was allotted. In case the shares would have been de-rated by 95%, the lenders would have got more shares in ICCL on conversion of part of the debt into equity. In consequence thereof on amalgamation, the lenders would have got more shares in IMFA in exchange of shares in ICCL. No person of ordinary prudence what to talk of lenders have agreed to such amendment until and unless they have been compensated for the loss arising due to the less value of the shares received by them. The expenditure so incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by an arbitration award on a dispute between the parties. The question involved relate to whether the loss suffered by the assessee was a loss incurred in a speculative transaction. Thus, this decision will not apply to the facts of the case. The decision of Delhi High Court in CIT vs Desiccant Rotors International Pvt. Ltd (supra) will also not apply with the facts of the case as the amount was paid for settlement of suit for infringement of patent. The issue was whether the amount so paid is penalty or business expenditure. In the case of CIT vs Karamchand Premchand Pvt. Ltd. [1993] 200 ITR 281 (Guj) the issue relate to the payment made for securing or augmenting electrical power supply whether it is a revenue expenditure or capital expenditure. The Hon ble Court took the view that the expenditure has been incurred for profit making apparatus and due to its profit making structure can be operated with greater productivity therefore, payment will take the character of revenue expenditure. The compensation in the case of the assessee has not been made for profit apparatus or for increase in production but for compensating the share capital. This decision therefore is not applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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