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2015 (4) TMI 182

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..... for disallowing the amounts of ₹ 5,84,80,000/- on amount of interest payable to IDBI and on ₹ 985.39 Lakhs on amounts payable to IFCI, which were indeed converted into equity cannot be approved. Addition of liquidated damages - CIT gave a finding that an amount of ₹ 194.63 Lakhs representing liquidated damages were allowed in earlier years as a deduction and hence provisions of Section 41(1) applies to the above amount - Held that:- we are unable to understand how Ld. CIT could give a finding that liquidated damages were allowed. Provisions of I.T.Act do not permit payment of interest or any penalty thereon in the form of liquidated damages, unless they are paid under the provisions of Section 43B. As seen from the computation of earlier years, out of total claim payable by assessee, assessee charged part amounts in the P&L A/c under the head 'Financial Expenses' and part of it was deferred. The amounts were disallowed in the computation of Income Tax as ‘the amounts not paid’. As seen from the order of CIT, he has not given any finding that the interest was allowed in earlier years. Therefore, we are of the opinion that his finding of ‘liquidated da .....

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..... party in favour of assessee for statistical purposes. - I.T.A. No. 877/HYD/2012 - - - Dated:- 11-3-2015 - Shri B. Ramakotaiah And Shri Saktijit Dey JJ. For the Appellant : Shri P. Murali Mohan Rao, AR For the Respondent : Shri D.Sudhakar Rao, DR ORDER Per B. Ramakotaiah, A.M. : This is an appeal by assessee filed against the order of the Commissioner of Income Tax-III, Hyderabad dated 29-03-2012 u/s.263 of the Income Tax Act (Act). Assessee has raised various grounds running to 15 in number contesting not only the jurisdiction to initiate proceedings u/s.263 but also various proposed additions/directions give by the CIT in the order. Assessee also filed precise grounds of appeal which are as under: 1. The Commissioner of Income Tax erred while proposing the addition of Liquidate damages ₹ 194.63 Lacs as a prior period item by way of crediting to P L A/c U/s.41(1) under normal provision of the Income Tax Act, 1961. 2. The Commissioner of Income Tax erred while proposing the addition of prior period items ₹ 2,828.32 Lacs to book profit U/s.115JB of the Income Tax Act, 1961. 3. The Commissioner of Income Tax erred while proposin .....

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..... does not acquire jurisdiction by mere changing of opinion. It was contended that the order cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is un-sustainable in law. 4. Ld.CIT however did not accept the same. As far as jurisdiction is concerned, he has rejected the same on the basis of the decision of full bench of the Gauhati High Court in the case of CIT Vs. Shri Jawahar Bhattacharjee in ITA No.02/2008 dt. 07-02-2012 [ 2012 (4) TMI 222 (Gau.) (HC)] Vide para 7 8 of the order of Ld.CIT discussed that assessee did not adduce any documentary evidence in support of its contentions and therefore he held that the objections of assessee against assumption of jurisdiction are devoid of merit. 5. Coming to the issues taken up by Ld.CIT, on the issue of taxability of prior period income of ₹ 28,28,29,474/- and u/s.41(1), the CIT directed that an amount of ₹ 194.63 Lakhs representing liquidated damages should be brought to tax under the normal provisions of the IT Act. However, the CIT gave direction to include the entire amount of prior period income for the purpose of Section 115JB computation .....

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..... ar's profit is according to the provisions of the Act. Further, it was submitted that assessee did not make any claim or got any benefit in earlier years as most of the amounts were treated as 'Deferred Revenue Expenditure' and there is no impact on computation of 115JB in earlier years. Consequently, the treatment of the above amount as prior period income during the year should not affect the computation of 115JB. 10. At our instance, Ld.Counsel also placed on record the computations, annual reports of earlier three years so as to examine the claims of not claiming the amounts treated as prior period income during the year. 11. Ld.DR however, defended the order of the CIT both on the facts and on law. 12. We have considered the rival contentions and perused the Paper Book placed on record. As far as the issue of expenditure of interest is concerned, the Assessing Officer has enquired vide his letter dt.03-07- 2009 and assessee replied vide letter dt.09-07-2009 including the detailed note on the claim of interest u/s.43B. Submissions of assessee are as under: The claim of Interest ₹ 584 lacs paid to IDBI for the asst. year 2006-07 previous year 2005 .....

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..... 880.79 Total Interest debited Out of the above IDBI had converted the interest of ₹ 584.80 into CRPS/Equity of the company. Regarding payment of interest to IFCI Limited of ₹ 985.39, IFCI while restructuring the term liabilities vide their letter No.HRO.E.129/2006/2006-688 dt. 21.07.2006, the interest out standing up to the cut off date i.e., February, 2006 was reduced to ₹ 1200 lacs and the same be converted into Optional Fully convertible Debentures (OFCD) which are subsequently be converted into Equity shares of the company. Accordingly the interest liability as follows: Interest for the asst. yr.2005-06 7,27,16,470 Interest for the asst. yr.2006-07 9,85,39,389 Total interest payable 17,12,55,859 IFCI agreed interest dues 12,00,00,000 Interest claimed as expenditure in asst. year 2006-07 9,85,39,859 To be claimed 2,14,60,141 .....

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..... 43B. As seen from the computation of earlier years, out of total claim payable by assessee, assessee charged part amounts in the P L A/c under the head 'Financial Expenses' and part of it was deferred. The amounts were disallowed in the computation of Income Tax as the amounts not paid . As seen from the order of CIT, he has not given any finding that the interest was allowed in earlier years. Therefore, we are of the opinion that his finding of liquidated damages were allowed is without any merit. As seen from the statement filed before us, we prima facie agree with assessee that no claim of liquidated damages were allowed in earlier years. However, we could not give any clear finding on this issue as assessee converted part interests into deferred revenue expenditure and claimed only part in the P L A/c and disallowed the amounts. These amounts require reconciliation year-wise and as more than three years are involved, we cannot delete the same outrightly. Therefore, we modify the order of the CIT i.e., the direction to Assessing Officer to disallow the amount outright to a direction to the Assessing Officer to examine the amounts and to consider the amounts which were .....

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..... er considering extra ordinary items and prior period adjustments). In fact the Schedule does not speak of the appropriation account at all. It is only as a matter of presentation that most of the companies segregate to reflect as to what has been appropriated out of the profits earned by them. Further, sub-cls.(a) and (b) of cl.(viii) of Note II in para 3 of Part II of Sch.VI specifically provide that the aggregate amounts set aside or proposed to be set aside to reserves should be distinctly shown in the P L a/c. Similarly, sub-cl(b) and sub-cls(a) and (b) of cls.(xii) and (xiii) respectively in Note II of part II of Sch. VI provide that profits or losses in respect of transactions not usually undertaken or undertaken in exceptional circumstances or which are of nonrecurring nature should be shown in the P L a/c. The aggregate amount of dividends paid and proposed is also to be shown in the P L a/c. All the above items discussed above are classified in the appropriation account and are necessarily to be included in the P L a/c prepared as per Parts II and II of Sch. VI to Companies Act. 10.1 Therefore, the starting point for computation of book profits for the purposes of s.115 .....

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..... of 115JB should not start from the profit for the year but from the final balance in the P L A/c carried to balance sheet . The case law relied upon by Ld.CIT in para 10.1 is directly on the issue. Hon'ble Delhi High Court in the case of CIT Vs. Khaitan Chemicals and Fertilizers Ltd., reported in 307 ITR 150 has held as under: Accounting starndards are recommended by the Institute of Chartered Accountants of India. Accounting Standard (A-5) stipulates that prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e., the period relavant for the purpose of computing the net profit or loss. Prior period items are to be included in the determination of net profit or loss. If a prior period item is an expense, it would go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as be income o .....

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..... items in the statement of profit and loss after determination of current net profit or loss, did not mean that these items were not to be taken into account in computing the net profit as envisaged in section 115JA. Thus, what the assessee had done was only to indicate the prior period items/extraordinary items separately. This did not mean that the figure of net profit was to be arrived at de hors these items. Thus, the Tribunal was correct in law in holding that the Assessing Officer had failed to appreciate that the net profit for the purpose of section 115JA was to be computed only after deducting the prior period expenses/extraordinary items. expenses/extraordinary items . Not only that even the principles laid down by the Hon'ble Supreme Court in the case of Apollo Tyres Vs. CIT [255 ITR 273] (SC) and followed by the Hon'ble Madras High Court in the case of Tamil Nadu Cements Corporation Ltd., Vs. JCIT [349 ITR 58] (Mad) also supports the above. In fact in the above referred later case, while examining the issue whether the claim of prior period expenses are disallowable u/s.115JB, the Hon'ble Madras High Court held as under: In Apollo Tyres V. CIT [2002] 2 .....

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..... e consequently modify the direction of the CIT and direct the Assessing Officer to recompute the book profits of the assessee-company, by following the provisions of 115JB, strictly after giving due opportunity to assessee. To that extent, CIT's order u/s.263 was upheld on the principle of computation of 115JB, but not the direction on computation which stands modified. Assessing Officer is directed to recompute the entire working as per the provisions of law. Assessee should be given due opportunity to make submissions, which should be examined and properly considered. 20. Consequential order passed as per the direct ions of Ld.CIT is also set aside so as to modify the same as per the above directions. 21. Ld.Counsel in the course of arguments relied on the decision of ITAT Bench 'B' in the case of Bartronics India Ltd., Vs. ACIT [22 Taxmann.com 5 (Hyd)] for the proposition that once the accounts were referred to special audit u/s.142(2A) and Assessing Officer accepting the same, Ld.CIT has no jurisdiction to revise the order. 22. We have perused the order of the co-ordinate bench in the above referred case and noticed that the facts in the above case are diff .....

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