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2015 (3) TMI 838 - ITAT AHMEDABAD

2015 (3) TMI 838 - ITAT AHMEDABAD - TMI - Addition on account of extra ordinary item i.e. flood, cyclone fire etc - CIT(A) deleted the addition - Asstt.Year 2006-07 - Held that:- The assessee has not furnished any details and explanation about the expenditure of ₹ 3,53,90,000/- being loss due to flood, cyclone, fire. The assessee could not justify its claim on the basis of material evidences with respect to the particular assets and its extent. It also could not justify and did not make an .....

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Therefore also the claim is not allowable. - Decided against assessee.

Disallowance of deduction for repairing of assets damaged due to floods - CIT(A) vacated the disallowance on the ground that the assessee had received financial assistance of ₹ 929 lakhs for repairing of its assets damaged due to flood and the assessee has claimed deduction of ₹ 353.90 lakhs on account of expenses incurred on repairs of flood damaged assets and the balance amount was shown as income in .....

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ssessee. The CIT(A) deleted the disallowance on the ground that the accounts of the assessee was audited by the C&AG and without verifying the details of loss and write off by the assessee. Thus, in our considered view orders of both the authorities below cannot be sustained. We, therefore, in the interest of justice remit the matter back to the file of the AO for adjudication of the issue afresh after allowing the assessee reasonable opportunity of producing the details of expenses incurred or .....

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ht to exploit a commercial technology or process, and neither was the benefit "enduring", since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such short lived benefit could not be categorized as “enduring”. Hence, inclined to the view that the payment of guarantee commission was revenue expenditure. Quite apart from the other sound reasons for treating the expenditure as revenue, it would be un .....

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t:- It is not in dispute that the amount was paid by the assessee as guarantee commission for unsecured loans. Therefore, respectfully following the decision of the Hon’ble Gujarat High Court in the case of Mihir Textile Ltd. (2000 (8) TMI 20 - GUJARAT High Court), we confirm the order of the CIT(A) and dismiss this ground of the Revenue for both the years under consideration. - Decided against revenue.

Guarantee fees and Premium on debt restructuring - CIT(A) deleted the disallowance .....

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fully following the decision we confirm the order of the CIT(A) and dismiss the ground of appeal of the assessee. - Decided against revenue.

Addition on account of Employee’s PF contribution - employees contribution to PF paid beyond the due date - CIT(A) deleted addition - Held that:- AR of the assessee submitted that the AO has disallowed the deduction simply because the payments were not made to the credit of PF authorities within the due date prescribed under the PF Act. He submit .....

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’ grace period allowed under the PF Act.Thus set aside the orders of the lower authorities and remand the matter back to the file of the AO for adjudication of the issue afresh in the light of the discussion made hereinabove after providing reasonable opportunity to the assessee - Decided in favour of revenue for statistical purposes.

Treatment of the provision for gratuity as unascertained liability and in enhancing the book profit by this amount - Held that:- DR could cite any contr .....

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Decided against revenue.

Exclude the amount withdrawn from reserve in the computation of book profit u/s.115B -CIT(A) allowed the appeal of the assessee by observing that the profit carried to the balance sheet in the reserve account were those profit, which were arrived at after deducting tax and that under the proviso it was not necessary that the amount withdrawn from the reserve should be credited to the profit & loss account of the same year - Held that:- as per Explanation-1 be .....

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uded in the net profit as per the profit & loss account of the year. The CIT(A) deleted the addition without recording any finding whether the amount was included in the net profit of the year or not. Before us, copy of the audited profit and loss account was not filed by either of the party. In the absence of the same, we are not in a position to adjudicate the issue completely. We, therefore, in the interest of justice restore this issue back to the file of AO for adjudicating the same afresh .....

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rofit disclosed by such audited accounts can be made which are specified in Explanation to section 115JB. The depreciation not being a specified item in Explanation to section 115JB at the relevant time, we do not find any error in the order of the CIT(A) in directing the AO to recomputed the book profit for MAT by not reducing the claim for depreciation of ₹ 1.75 crores. - Decided against revenue.

Disallowance under Section 14A read with rule 8D - Held that:- It was mandatory f .....

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ni, ACCOUNTANT MEMBER: 1. ITA No.1823/Ahd/2010 is filed by the Revenue against the order of the CIT(A)-I, Baroda dated 24.2.2010 for the Asstt.Year 2006-07. 2. ITA No.1824/Ahd/2010 and ITA No.1873/Ahd/2010 are crossappeals filed by the Revenue and the assessee against the order of the CIT(A)-I, Baroda dated 24.2.2010 for the Asstt.Year 2007-08. 3. The ground no.1 of the Revenue s appeal for A.Y.2006-07 and Ground no.2 of the Revenue for the A.Y.2007-08 are against the order of the CIT(A) in dele .....

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due to Floods 92900000 121499000 Less: Expenses Loss due to flood, cyclone, fire 35390000 (86109000) During the course of assessment proceedings, the assessee was requested to justify its claim of extra ordinary items and was specifically asked to show cause why the expenditure booked under the head Extraordinary Items may not be disallowed: In response, the assessee submitted its reply as under vide letter dated 8-8-2008: "During the year the Company has booked extra ordinary income amount .....

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as the income has been received during the year, the same is accounted and offered for taxation. Similarly during the year under review, the Company's claim amounting to ₹ 283.65 lacs (Rs.192.33 lacs + ₹ 91.27 lacs) regarding quality of coal supplied in past have been settled. Hence, the same has been offered for taxation during the year under review." From the above, it is seen that the assessee has not furnished any details and explanation about the expenditure of ₹ .....

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d and added back to its total income.- Without prejudice to the above, such claim in absence of details furnished, may be for the revival of assets damaged / destroyed during the natural calamities therefore, such claim is of capital nature. Therefore also the claim is not allowable. 5. Similarly, in Asstt.Year 2007-08, the AO made addition as follows: As per the P&L account the assessee has debited ₹ 2,95,13,000/- under the head 'extraordinary items' as under: Loss due to cycl .....

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assets of the company. Further, the assessee vide its reply dated 09.07.09 submitted that the loss due to flood was incurred for revival and repair of assets damaged and the sundry debits was on account of written off of deferred revenue expenditure. However, assessee has not submitted any details such as nature of loss, how the amount of loss quantified, date when the asset was purchased, depreciation claimed/allowed, WDV, etc. In the absence of such details, assessee's claim could not be e .....

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under the head extra ordinary items is disallowed and added back to the total income. 6. On appeal, the CIT(A) deleted the addition for Asstt.Year 2006-07 by observing as under: 4.2 I have considered the submissions of the Id. AR and the facts of the case. The disallowance has been made only on the ground that the assessee could not substantiate that it had incurred expenditure of ₹ 353.90 lacs on repairing its assets damaged due to flood. It is seen that the assessee had received financia .....

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& AG. As per the accounts furnished to C & AG, the expenses incurred on repair of "flood damaged" assets amounted to ₹ 353.90 lacs. The C & AG has certified the expenditure. No further evidence in this regard would ordinarily be necessary. If, however, it was felt that the expenses were over-state an independent enquiry could have been made to ascertain the correct expenses. However, this has not been done. Looking to the circumstances and also the fact that the exce .....

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ebits : ₹ 25,21.000/- ₹ 2,95,13,000/- The disallowance of loss due to flood, etc., has been made only on the ground that the assessee could not substantiate that it had incurred expenditure of ₹ 186.99 lacs on repairing its assets damaged due to flood. It is seen that the assessee had received financial assistance amounting to ₹ 929 lacs for this purpose. This is evident from the Government of Gujarat Resolution Nos GUV-1105-2724-K1 dated 4.7.2005, 10.10.2005 and 13.10.20 .....

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ertified the expenditure. No further evidence in this regard would ordinarily be necessary. If, however, it was felt that the expenses were over-stated, an independent enquiry could have been made to ascertain the correct expenses. However, this has not been done. Looking to the circumstances and also the fact that the excess subsidy received has been included in the taxable income, it is held that the AO was not justified in making the addition of ₹ 1,86,99,000/-, which is directed to be .....

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treated as loss of material after detailed analysis and approved by the Competent Authority. Looking to the no. of transactions and values percentage of shortages is very low. The main reasons for shortages are as under: - Weight difference - Difference is occurred due to change of mode of measurement i.e., material received in MT while issued as per no. of bags as well as in piecemeal etc. -Due to physical properties of material. - Transaction of breakable items damaged during handling. - Inte .....

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ng track of small consumable spares and stores with perfect accuracy is not always possible. At the time of annual stock taking, some items were found to be in excess of the number/quantity recorded in the stock register; whereas certain other items were found to be short in number/ quantity. The net effect is shortage of ₹ 82.93 lacs. As compared to the turnover, such loss is less than 1/10th of 1%. This is quite negligible. The assessee has accounted for both gains as well as losses in r .....

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o submit the details and evidences with respect to particular asset and the extent to which the repairs were done. On appeal, the CIT(A) vacated the disallowance on the ground that the assessee had received financial assistance of ₹ 929 lakhs for repairing of its assets damaged due to flood and the assessee has claimed deduction of ₹ 353.90 lakhs on account of expenses incurred on repairs of flood damaged assets and the balance amount was shown as income in the year under considerati .....

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s actual expenditure incurred on account of damages by flood in the Asstt.Year 2006-07 and ₹ 186.99 in Asstt.Year 2007-08. The assessee also claimed ₹ 82.93 lakhs as Misc. write off in Asstt.Year 2007-08. The AO disallowed the entire amount of loss claimed by the assessee on account of loss due to flood and Misc. write off on the ground that the details of expenditure incurred were not available before him. In our considered view, the fact that the assessee suffered loss has not been .....

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was audited by the C&AG and without verifying the details of loss and write off by the assessee. Thus, in our considered view orders of both the authorities below cannot be sustained. We, therefore, in the interest of justice remit the matter back to the file of the AO for adjudication of the issue afresh after allowing the assessee reasonable opportunity of producing the details of expenses incurred or loss suffered as well as details of amount write off and after verification of details s .....

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6-07 and ₹ 1650.87 lakhs for the Asstt.Year 2007-08 on account of fees paid to Government of Gujarat to guarantee repayment of unsecured loan. The AO disallowed the claim of the assessee for the Asstt.Year 2006-07 holding as under: 4. Guarantee fees and Premium on debt restructuring: During the financial year under consideration the assessee has paid guarantee fees of ₹ 20,57,03,000/- to the Government of Gujarat in consideration of it issuing guarantee for repayment of unsecured loa .....

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ts, the assessee was asked to show cause as to why the premium for restructuring debts and the guarantee fees should not be disallowed as capital expenditure. In reply the assessee vide letter dated 8.8.2008 stated as under:- "The company raised loans from banks and financial institution and offered guarantee for, repayment of loan and interest thereon as security. Moreover, during the year under review, the assets and liability; of erstwhile Gujarat Electricity Board was transferred to the .....

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the same reduces the cost of interest expenditure, it is requested to allow the same as revenue expenditure.'' I have gone through the submission of the assessee. It is clear from the details in this respect that the assessee is going to derive all the benefits in the form of restructuring of the debt, rescheduling of repayment schedule, reduction in interest etc. over a long period of time which are in the range of more than..5 years. It means that the assessee will derive advantage of .....

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ing benefit need not be of an everlasting character, it should not at the same time be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. What is the extent durability, or permanence should depend on the facts of each case. The expression "Enduring Advantage" is a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of terms upon which it can be acquired. . The abo .....

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tal income. 12. The AO disallowed the claim of deduction for guarantee fee for the Asstt.Year 2007-08 holding as under: Guarantee Fees- During the financial year under consideration the assessee has paid guarantee fees of ₹ 16,50,87,000/- to the Government of Gujarat in consideration of guarantee issued by it for repayment of unsecured loans. Thus the assessee has claimed expenses and also it has obtained several advantages as a result of restructuring of loans and in view of guarantee of .....

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of repayment schedule, reduction in interest etc. over a long period of time which are in the range of more than 5 years. It means that the assessee will derive advantage of enduring nature as a result of restructuring of loans, therefore, the expenses pertaining to the same in the form of premium for restructuring debts have resulted into advantage or benefit of enduring nature to the assessee. It is pertinent here to mention "enduring benefits" has been discussed as under - The Honor .....

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a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of terms upon which it can be acquired. The above views were again expressed by the Honorable Supreme Court in the case of Devidas Vitthaldas & Co. Vs. CIT (1972) reported in 84 ITR 277. Therefore, having regard to that discussion and facts of the case as discussed above, the entire expenditure pertaining to CDR is held as capital expenditure. Accordingly, the total amoun .....

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paid to the Government of Gujarat. The AO called upon the assessee to show cause why the same should not be disallowed as capital expenditure. The assessee explained that the guarantee fees were payable to the Government of Gujarat for guarantees extended in respect of various loans obtained by the appellant company. The Government of Gujarat guaranteed the repayment of the by the assessee. For this guarantee a fee @ 1% of the amount of loans outstanding at the beginning of the year was charged. .....

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of the seven resulting companies out of the demerger of the erstwhile GEB. In the past GEB had issued bonds and other financial instruments for raising funds from the public and from financial institutions. The Government of Gujarat guaranteed to the public and the financial institutions that in case of failure on the part of GEB to redeem the bonds and other financial instruments, the same would be made good by the Government of Gujarat. In lieu of this, commission @ 1% of the outstanding valu .....

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of the impugned expenditure results in the acquisition or creation of any new asset. Where no such asset is created, it would be indicative of an expenditure which was not capital in nature. Another test relates to the principle of "enduring benefit". "Enduring benefit" may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercia .....

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sion paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt. Ltd. (ITA No. 738/Ahd/2009) for AY 2006-07, the Tribunal held, vide order dt. 5.6.2009, following the decision of the Rajasthan High Court in CITv Metalising Equipment Co. Pvt. Ltd, 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, qu .....

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of ₹ 1,72,71,000/- in respect of restructuring of loans. The AO found that this premium had been paid to financial institutions from whom loans had been taken at higher rate of interest and in respect of which the debts were retired and rolled over at lower rate of interest, on the ground that the same represented capital expenditure. 6.1 In appeal, it was submitted by the Id. AR that the premium paid for retiring the higher cost debt could not be considered as capital since by the incurr .....

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et, test of enduring benefit, test of fixed and circulating capital, etc. However, the general view is that the test of enduring benefit is not a certain or conclusive test and it cannot be applied without regard to the particular facts and circumstances of each case. It has been generally agreed that where the laying out of such expenditure confers an advantage to the assessee which constitutes of merely facilitating the assessee's trading operations or enabling the management or conduct of .....

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tions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or an advantage of an enduring nature" was evolved to emphasize the element of a sufficient degree of durability appropriate to the context. " In my opinion, the laying out of these expenses does not confer any enduring benefit .....

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estructuring of loans was a revenue expense and therefore the disallowance of this amount is directed to be deleted. 14. For the asstt.year 2007-08, the CIT(A) has decided the issue by observing as under: 7.2 I have considered the submission. I find that vide order dtd.24-2-2010 in Appeal No.CAB-I/348/08-09, the disallowance has been deleted. The facts and issue for determination are identical in this year also. Accordingly, following my order dt. 24- 2-2010, the disallowance of ₹ 16,50,87 .....

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mount as capital expenditure. The order passed by the AO is unreasoned and therefore, unsustainable. 16. On appeal, the CIT(A) has allowed the claim of the assessee on the ground that benefits derived from the payment of commission lasted for one year only. 17. The DR has relied on the order of the AO. 18. On the other hand, AR of the assessee placed reliance on the decision of Hon ble Gujarat High Court in the case of Mihir Textile Ltd.Vs. CIT, 252 ITR 686 (Guj) wherein it was held that guarant .....

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so directed against the order of the CIT(A) in deleting the disallowance of premium claim on restructuring of loan of ₹ 172.71 lakhs. The AO disallowed the claim of premium claim on restructuring of loans by holding as under: 4. Guarantee fees and Premium on debt restructuring: During the financial year under consideration the assessee has paid guarantee fees of ₹ 20,57,03,000/- to the Government of Gujarat in consideration of it issuing guarantee for repayment of unsecured loans. Fu .....

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e assessee was asked to show cause as to why the premium for restructuring debts and the guarantee fees should not be disallowed as capital expenditure. In reply the assessee vide letter dated 8.8.2008 stated as under:- "The company raised loans from banks and financial institution and offered guarantee for, repayment of loan and interest thereon as security. Moreover, during the year under review, the assets and liability; of erstwhile Gujarat Electricity Board was transferred to the compa .....

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me reduces the cost of interest expenditure, it is requested to allow the same as revenue expenditure.'' I have gone through the submission of the assessee. It is clear from the details in this respect that the assessee is going to derive all the benefits in the form of restructuring of the debt, rescheduling of repayment schedule, reduction in interest etc. over a long period of time which are in the range of more than..5 years. It means that the assessee will derive advantage of enduri .....

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fit need not be of an everlasting character, it should not at the same time be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. What is the extent durability, or permanence should depend on the facts of each case. The expression "Enduring Advantage" is a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of terms upon which it can be acquired. . The above views .....

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me. 21. The CIT(A) has decided the issue by observing as under: 6.2 I have considered the submissions of the Id. AR and the facts of the case. The courts have been repeatedly called upon to pronounce on the issue of capital vs revenue expenditure. The concurrence of judicial opinion now is that there are a number of tests for determining the nature of an expenditure, viz., test of bringing into existence an asset, test of enduring benefit, test of fixed and circulating capital, etc. However, the .....

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e leaving the fixed capital untouched, the expenditure would be in the revenue account even though the advantage may endure for the indefinite future. As observed by the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v CIT, 111 ITR 377, "the idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital .....

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been held that where expenditure is incurred which results in saving of recurring revenue expenditure, such an expense would itself be a revenue item and not a capital item. In my opinion, the laying out of the impugned expenses did not confer any enduring benefit but merely facilitated the carrying on of business in a more efficient manner. Accordingly, it is held that the payment of ₹ 1,72,71,000/- on restructuring of loans was a revenue expense and therefore the disallowance of this amo .....

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e by treating it as capital expenditure. 23. On appeal, the CIT(A) deleted the disallowance on the ground that it does not confer any enduring benefit and merely facilitate the assessee s business in more efficient manner. 24. DR relied on the order of the AO. 25. On the other hand, AR of the assessee relied of the decision of the Hon ble Gujarat High Court in the case of DCIT Vs. Gujarat Narmada Valley Fertilizers Ltd., 356 ITR 460 (Guj) wherein it was held that the expenditure incurred by the .....

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IT(A) in confirming the addition on account of Employee s PF contribution of ₹ 37.31 lakhs for Asstt.Year 2006-07 and ₹ 5.23 lakhs in Asstt.Year 2007-08. 27. In the Asstt.Year 2006-07, the CIT(A) has held as under: 7. Ground No. 4 relates to the disallowance of ₹ 37,31,520/- being employees contribution to PF on the ground that the same was paid beyond the due date. Details in this regard are-available at page-5 of the assessment order. 7.1 In appeal, it was submitted by the Id .....

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hi High Court has held in the case of CIT v Aimil Ltd., ITA Nos 1063 of 2006, 755, 1214 & 1246 of 2008 and 50, 78 & 204 of 2009 that the employees contribution towards PF/ESI deposited after the due date prescribed under the relevant Act/Rules but before the due date of filing of return would be allowable u/s 43B. In this case the delay is of a few days only. It is, therefore, held that the AO was not justified in disallowing ₹ 37,31,520/-, which is directed to be deleted. 28. In t .....

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xplanation that 19th & 20th of August 2006 were Saturday & Sunday and therefore, the payment could be made only on 21st August was not accepted by the A.O. 4.1 In appeal, it was submitted that the delay is only of one day. Further, relying on the decision of Delhi High Court in the case of CIT vs. AIMIL Ltd. (ITA No. 1063 of 2006), it was pleaded that the deduction may be allowed since the payment was made before the due date for filing of return of income. 4.2 I have considered the subm .....

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e, the payment has been made before the prescribed due date for filing the return of income. Accordingly, the disallowance of ₹ 5,23,892/- is directed to be deleted. 29. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO disallowed deduction for employees contribution to PF of ₹ 37,31,520/- in Asstt.Year 2006-07 and ₹ 5,23,892/.- in the Asstt.Year 2007-08, as the assessee failed to deposi .....

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ct. 31. The DR submitted before us that the issue is now covered in favour of the Revenue by the decision of the Hon ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation, 366 ITR 170 (Guj) wherein it was held that if the assessee has not credited the employee s contribution to the employees account in the relevant fund or funds on or before the due date mentioned in Explanation to s. 36(1)(va), the assessee shall not be entitled to deductions of such amount in c .....

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rding to this provision of the PF Act. He, therefore, submitted that the matter should be remitted back to the file of the AO for verification, and thereafter making the disallowance of payments, which are made beyond 15 days from the payment of salary to the employees plus 5 days grace period allowed under the PF Act. 33. DR did not object to this submission of the AR of the assessee. We, therefore, set aside the orders of the lower authorities and remand the matter back to the file of the AO f .....

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ear 2006-07 and ₹ 401.16 lakhs in the Asstt.Year 2007-08. 35. The CIT(A) in the Asstt.Year 2006-07 has decided the issue as under: 8.1 Ground No. 5.1 pertains to the treatment by the AO of the provision for gratuity amounting to ₹ 3,68,000/- as unascertained liability and in enhancing the book profit by this amount. 8.1.1 The Id. AR submitted in appeal that, as held by various judicial authorities, if the provision for gratuity was made on acturial valuation, the same should not be c .....

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ashment. The principle laid down by the Court was that where the liability could be computed along scientific lines and on a scientific basis regularly from year to year, the provision towards the same could not be said to represent an unascertained liability. Here the assessee has got the computation done through LIC of India on a scientific basis, i.e. following acturial valuation principles. The ITAT, in the case of Etcher Motors Ltd v DCIT, 82 TTJ 61 has also held that provision for gratuity .....

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vision for gratuity. 36. In the Asstt.Year 2007-08 the CIT(A) decided the issue as under: 11. Ground No. 10(i) relates to the enhancement of Book profit under Section 115JB by the provision for gratuity amounting to ₹ 4,01,16,000/-, treating the same as unascertained liabilities. This issue has been dealt with in my appellate order dt. 24-2- 2010 in respect of A.Y. 2006-07. Since the facts and issue for determination remain the same this year as well, following the rationale of my earlier .....

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it was an unascertained liability. 38. On appeal, the CIT(A) allowed the appeal of the assessee and directed the AO to exclude the provision of gratuity while computing the book profit under section 115JB by following the decision in the case of Etcher Motors Ltd. Vs. DCIT, 82 TTJ 61 wherein it was held that provision for gratuity based on actuarial valuation was not an unascertained liability which could be added back in computing the book profit under section 115JB of the Act. 39. DR supported .....

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that the provision for gratuity in the instant case was made by the assessee on actuarial valuation. Therefore, following the decision o the Hon ble Gujarat High Court in the case of DCIT Vs. Inox Leisure (supra), we dismiss this ground of the Revenue. 41. The ground no.5 in the Asstt.Year 2006-07 is directed against the order of the CIT(A) directing the AO to exclude the amount withdrawn from reserve of ₹ 8990.87 lakhs in the computation of book profit u/s.115B. 42. The CIT(A) has held as .....

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not been increased by such amount. Accordingly, the AO denied the reduction of the impugned amount while computing profits u/s 115JB(2) of the Act. 8.2.1 In appeal, it was submitted by the Id. AR as under: It is submitted that as a result of restructuring of erstwhile GEB, the expenditure/write offs arising on 1-4-2005 pertaining to the transferred undertakings under the transfer schemes were charged/adjusted during the year against the balance lying in the Profit & Loss Account under the he .....

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e Profit & Loss Account of each year. Thus such balance has already been taxed in earlier years. This is because while computing the total taxable income of a particular year the Net Profits After Taxes are taken into consideration which is always prior to the Net Profits available for Appropriations. Generally the components of the Profit & Loss Account are as under: I. Income II. Expenditure III. Profit Before Tax IV. Profit After Tax V. Profit for the Year (including Balance brought f .....

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mpany has claimed a deduction of ₹ 8890.87 lacs under the provisions of clause (i) to Explanation - 1 to sub-section (2) to section 115JB of the I T Act while working out the book profits under section 115JB of the IT Act. The learned Assessing Officer has, however, disallowed the said deduction taking the view that the profit & loss account of the year under consideration has not been increased by the amount withdrawn from the reserve and has misinterpreted the proviso to clause (i) t .....

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withdrawn). From the above, it is clear that only such transfers (from the reserves of earlier years) shall be reduced from the book profits which have already been taxed in earlier years. Thus as explained in preceeding paras, the company has already offered the income for tax in the respective years in which the same was transferred to the Reserves. Out of the same Reserves, the company has withdrawn the amount during the year which are allowable as deduction while computing the bookprofits. T .....

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o the clause would be applicable. In terms of the proviso, the book profits would be allowed to be reduced to the extent of amount withdrawn from reserves only if the book profits such year had been increased by those reserves out of which the said amount was withdrawn. In response to querry raised regarding the quantum of profits carried to reserves, the following table was furnished: STATEMENT SHOWING BALANCES TRANSFERRED TO RESERVES Particulars FY FY FY FY FY FY FY FY 2005-06 2004-05 2003-04 .....

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2 14,128.71 13,913.73 12,544.32 15,177.96 7,215.82 2,12,430 Other adjustments 5,207.31 0.08 2.18 -44.03 -8,190.51 -1,157.43 -413.58 -37629 Profit C/F to Balance Sheet 27,517.35 15,262.22 14,128.71 13,913.73 12,544.32 15,177.96 7,215.82 21,243 8.2.3 From the table, it is clear that in the earlier years the reserves had been created after profits earned during the year were credited to the profit and loss account and had duly suffered taxation. It is noteworthy that the profits carried to balance .....

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er clause (i) of Explanation 1, proviso would be available to the assessee. Accordingly, the AO is directed to recompute the book profits u/s 115JB by allowing the same to be reduced by the impugned amount of ₹ 88,90,87,000/- 43. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee has reduced ₹ 8890.87 lakhs from the book profit under the clause (i) of Explanation to section 115JB of the A .....

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under the proviso it was not necessary that the amount withdrawn from the reserve should be credited to the profit & loss account of the same year. 45. DR supported the order on the AO, whereas the AR of the assessee relied o the order of the CIT(A). 46. In our considered opinion, as per Explanation-1 below section 115JB(2) clause (i) the profit as shown in the profit & loss account for the relevant previous year has to be reduced by the amount withdrawn from any reserve or provision, i .....

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profit of the year or not. Before us, copy of the audited profit and loss account was not filed by either of the party. In the absence of the same, we are not in a position to adjudicate the issue completely. We, therefore, in the interest of justice restore this issue back to the file of AO for adjudicating the same afresh after verifying the amount withdrawn from the reserve was credited in the profit & loss account of the year, and consequently included the net profit or not. Thus, this g .....

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noted from the audited annual accounts that the C&AG had made a remark to the effect that the profits were under-stated by ₹ 1.75 crores, due to higher claim of depreciation of this amount. The assessee was asked to show cause why the quantum of reduction under clause (ii)(a) in respect of depreciation should not be correspondingly reduced while computing the book profit. In reply, the assessee submitted that the rate of depreciation was claimed as per Central Electricity Regulatory C .....

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y could not adopt for the year 2005- 06. The same were applied in the subsequent years. Further the alleged understatement of profit is only due to the accounting entries made in the books of account on account of excess and/or short provision of depreciation. Thus there is no question of adding back the said amount to the net profits. Further since the accounts for the year under consideration were the first accounts after unbundling of GEB, the amount of ₹ 1.30 crore was left to be unadj .....

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ax Act, 1961. The term "Book Profit" has been defined in the Explanation to section 115JA(2) of the Act to mean net profit as reflected in the P & L A/c of a company prepared for the relevant previous year, as drawn up as per parts I and III of Sch.VI to the Companies Act subject to certain adjustment by way of increase in respect of certain sums as referred to in clause (a) to (f) of the said Explanation and deduction in respect of certain sums as referred to in clause (i) to (ix) .....

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t the profit & loss account for the purpose of section 115JB of the I T Act and can only make specific adjustments as provided in the Explanation below section 115JB. The appellant invites reference to the Circular No:2 dated 7-3-2009 issued by the Department of Company Affairs which clarified the position that the rates of depreciation prescribed in Schedule XIV could be viewed as minimum rates and that on the basis of a bona-flde technological evaluation, if justified, higher rates of depr .....

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er higher rates. The appellant invites your honour's kind attention to case of Apollo Tyres Ltd. (255 ITR 273) -wherein -while determining its book profits for the relevant year, the arrears of depreciation of prior periods were charged against the profits of the current year which according to the Revenue was not in accordance with Part II and Part III of Schedule VI of the Companies Act, 1956. The AO recomputed the book profits and excluded the provisions made in respect of arrears of depr .....

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after, has limited power of making increases and reductions as provided for in the explanation to section 115J. The AO does not have the jurisdiction to go behind the net profits shown in the P&L A/c except to the extent provided in the explanation. The use of the •words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the AO to rely upon the authentic statement of account .....

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that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (lA) of section 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. " (Underlined emphasized by us). The appellant also invites reference to the Supreme Court decision in case of Malyala Manorama Co. Ltd. vs. Cit, reported at 168 Taxman 471 wherein on similar issue the Supreme Court has affirmed t .....

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ciation but the Commissioner exercised powers under section 263 and held that the rate of depreciation claimed under the Income-tax Rules was in excess of the rate under the Companies Act and that the excess was required to be disallowed. On further appeal to the Tribunal, the Tribunal held that the Circular of the CLB lays down minimum rate of depreciation for the purpose of distribution of dividend and the company may decide to claim higher depreciation on the basis of a bona fide technologica .....

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e on the basis of income-tax records and debited to the profit and loss account would not be violative of the provisions of the Companies Act and cancelled the order passed by the Commissioner under section 263. On appeal, the Gujarat High Court affirmed the order passed by the Tribunal. The gist of the decision is as under : "Section 115J, read with section 263, of the Income-tax Act, 1961 and Schedule IV, Parts II and III, of the Companies Act, 1956 - Zero-tax companies - Assessee calcula .....

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dend and company may decide to claim higher depreciation on basis of a bona fide technological evaluation and proper disclosure is to be made by way of a note forming part of annual accounts - Tribunal further held that, in instant case, proper disclosure was made by way of a note to annual statement of accounts and rates claimed on basis of income-tax records were based on bonafide information of Board of Directors as contained in aforesaid minutes of meeting of Board of Directors -Whether Trib .....

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th Parts II and III, of Schedule VI and Schedule XIV to the Companies Act, 1956 - Book profits - Special provisions relating to certain companies - Assessment year 1989-90 - On account of introduction of uniform previous year, assessee- company filed return of income for 18 months from 1-10-1987 to 31-3-1989 declaring a loss - It also furnished computation of book profits for purpose of section 115J which amounted to nil - For computing the booh profits the assessee charged depreciation at lower .....

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and, therefore, the Assessing Officer was unjustified in applying the lower rates and working out the book profit for purpose of section 115J in this manner -Held, yes ". The appellant invites reference to the decision of IT AT, Delhi 'F' Bench in case of Bhushan Steels & Strips Ltd. Vs. Dy. CIT, reported at 91 TTJ 108 wherein the AO added back the arrears of deprecation of earlier years provided during the year while computing the Book Profits under section 115JA of the Act on .....

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Delhi Bench allowed the claim of the assessee holding that while working out the book profit under section 115JA, the arrears of depreciation have to be excluded from current year's profit. The appellant also relies on the decision of ITATMumbai in case of Sterlite Industries (Ind.) Ltd. Vs. Addl. CIT, reported at 102 TTJ 53 wherein on exactly cases and following the Supreme Court judgement in case of Apollo Tyres Ltd. (Supra) it was held that while determining the 'book profit' unde .....

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. The appellant, therefore, prays that the adjustment made on this count while calculating the book profits under section 115JB of the I T Act may be deleted." Reliance was placed on the decisions of the Supreme Court in Apollo Tyres Ltd v CIT, 225 ITR 273 and of the jurisdictional High Court of Gujarat in DCIT v Vardhman Fabrics (P) Ltd., 122 Taxman 375. 8.3.2 I have considered the submissions of the Id. AR and the facts of the case. Section 115JB (2) provides that - "Every assessee, .....

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g the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):" (Emphasis supplied) Thus, what is material for the purposes of section 115JB is not the profit & loss account prepared in terms of the Income-tax Act but that prepared in terms of Schedule-VI of the Companie .....

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issued Circular dt. 7.3.2009 which allows depreciation to be claimed at higher rates on the basis of bonaflde technological evaluation. It has been clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part A to the notes (wherein accounting policies have been disclosed) it is seen from item-xi relating to depreciation, that up to FY 2003-04 the company was providing depreciation as per Rules framed under the Electricity (Supply Act), 1948. Sub .....

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respect of plant and machinery utlised for generating power needed to be provided at higher rates. Hence the assesse has complied with the provisions of Schedule-VI of Companies Act while preparing its accounts. 8.3.3 The Supreme Court has held very clearly in Apollo (supra) as well as Malayala Manorama Co Ltd v CIT, 168 Taxman 471 that the power to make enhancement and reduction u/s 115J is limited only to the specific items provided under clauses (a) to (i) and (i) to (viii). The AO has only t .....

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pany could claim higher depreciation on the basis of a bonafide technological evaluation and proper disclosure thereof in the notes forming part of annual accounts. In the instant case, from the facts as above, I am of the opinion that the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIV and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence the AO's action in reducing the claim of depreciation under item (ii)(a) by .....

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the AO, the assessee submitted that rate of depreciation was claimed as per the Central Electricity Regulatory Commission s guidelines. However, this explanation was not accepted by the AO and book profit was enhanced by ₹ 1.75 crores. 50. On appeal, the CIT(A) allowed the appeal of the assessee on the ground that as per the notification of CERC No.23.2/2005 R&R dt.6.1.2006 issued by the Ministry of Power, Govt. of India, higher rate of depreciation has been prescribed as compared to t .....

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hat power to make enhancement and reduction u/s.115J is limited only to the specific items provided under clauses (a) to (i) and (i) to (viii). The AO has to satisfy himself that the provisions of Companies Act have been complied with while preparing the accounts. The CIT(A) also held that on similar facts, the Hon ble Gujarat High Court in the case of DCIT Vs. Vardhman Fabrics P. Ltd., 122 Taxman 375 after considering the circular of the Company Law Board which clarified that the rates prescrib .....

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f Apollo Tyres Ltd. (supra) only those adjustments from net profit disclosed by such audited accounts can be made which are specified in Explanation to section 115JB. The depreciation not being a specified item in Explanation to section 115JB at the relevant time, we do not find any error in the order of the CIT(A), which is confirmed and therefore, the ground of the Revenue is dismissed. ITA No.1873/Ahd/2010 : Asstt.Year 2007-08 (Assessee s Appeal) 52. The ground no.1 of the appeal of the asses .....

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nd. Following the decision of the ITAT, Mumbai, ITA No. 8057/MUM/2003 in the case of Daga Capital Management Pvt. Ltd., the disallowance under Section 14A read with rule 8D was quantified at ₹ 113.55 lacs. 5.1 In appeal, the ratio in the case of Daga Capital Management Pvt. Ltd. was sought to be distinguished and it was submitted that on similar facts, no disallowance was made in the earlier years. It was further submitted that without prejudice to the assessee's claim that Section 14A .....

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onsidered the submission and facts of the case. I find that the similar issue came in appeal in the case of Gujarat Urja Vikas Nigam Limited (GUVNL) (Appeal No CAB-I/348/08-09) in the A Y 2006-07. In that appeal, vide order dtd. 24-2-2010, it has been held that, following the decision in Daga Capital Management Pvt. Ltd, it was mandatory for the A.O. to apply rule 8D while computing the disallowance under 14A, The facts are exactly identical to the appellant's case. Accordingly, following th .....

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ng of such exempt income in its computation of income. Hence, he disallowed ₹ 103.32 lakhs on account of interest expenditure and ₹ 10.26 lakhs on account of administrative expenses and made a total disallowance of ₹ 113.55 lakhs by invoking the provisions of section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, 1962. 55. On appeal, the CIT(A) observed that the Hon ble Gujarat High Court in the case of Gujarat Urja Vikas Nigam Ltd. (supra) following the d .....

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that the Hon ble Bombay High Court in the case of Godrej and Boyce, 328 ITR 81 (Bom) overruled the decision of the Special Bench in the case of ITO Vs. Daga Capital Management Pvt. Ltd., 117 ITD 169 (Mum)(SB) and restored the matter back to the file of the AO to adjudicate the issue afresh as per the guidelines of the Hon ble Bombay High Court. He submitted that the directions given by the CIT(A) should be modified accordingly. 57. We find that the AR could not point out any specific error in t .....

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f the Tribunal or of any other High Courts. Thus, we do not find any error in the order of the CIT(A), therefore, this ground of appeal of the assessee is dismissed. 58. The ground no.2 of the appeal of the assessee for the Asstt.Year 2007-08 is directed against the order of the CIT(A) confirming the disallowance out of extra ordinary items of ₹ 25.21 lakhs. The AO has made disallowance in observing as under: As per the P&L account the assessee has debited ₹ 2,95,13,000/- under t .....

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miscellaneous write off represents loss on obsolescence of fixed assets of the company. Further, the assessee vide its reply dated 09.07.09 submitted that the loss due to flood was incurred for revival and repair of assets damaged and the sundry debits was on account of written off of deferred revenue expenditure. However, assessee has not submitted any details such as nature of loss, how the amount of loss quantified, date when the asset was purchased, depreciation claimed/allowed, WDV, etc. In .....

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view of the above, the assessee s claim of ₹ 2,95,13,000/- under the head extra ordinary items is disallowed and added back to the total income. 59. On appeal the CIT(A) held as under: 6.5 With regard to the other sundry debits aggregating to ₹ 25.21 lacs, the assessee's explanation is that it was on account of deferred revenue expenditure written off during the year. The expenditure related to restoration of coal handling plant at Sikka, Dist. Jamanagar. 6.6 The amount written o .....

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on of coal handling plant. 60. We have considered rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO disallowed the deduction of ₹ 25.21 lakhs on account of sundry debits, which was on account of writing off of the deferred revenue expenditure for the reason that no details were submitted by the assessee, and therefore, he could not verify the same. 61. On appeal before the CIT(A), it was submitted that the amount .....

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ught on record. No material could be brought before us by the AR to show that the expenses in question was the revenue expenditure of the assessee of the year under consideration. We find that the system of accounting followed by the assessee is mercantile. Therefore, the revenue expenditure is deductible in its entirety in the year in which the same has been incurred, even though the assessee for keeping its books of accounts treated the same as deferred revenue expenditure in its books of acco .....

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depreciation after such reduction by invoking the provisions of section 43(1) of the I.T.Act. 64. At the time of hearing, the AR of the assessee submitted that CIT(A) has not adjudicated this ground of the appeal taken before him. He pointed out that from the ground of appeal taken before the CIT(A) this ground was taken as ground no.8 of the appeal filed before the CIT(A). 65. In view of above submissions of the AR of the assessee, we restore this issue to the file of the CIT(A) for adjudicatio .....

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