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2015 (4) TMI 182 - ITAT HYDERABAD

2015 (4) TMI 182 - ITAT HYDERABAD - TMI - Revision u/s 263 - certain interest to financial institutions claimed by assessee should have been disallowed u/s.43B - Held that:- As can be seen from the replies given by assessee during the course of scrutiny, the claim of allowance u/s.43B the amounts stated to have been converted to equity was examined by the Assessing Officer and allowed. The reliance of Ld.CIT on the Board circular is not correct as the Board circular refers to conversion of outst .....

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can only be considered as change of opinion. Therefore, to that extent of direction of the CIT given to Assessing Officer 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 d .....

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e 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. However, we could not give any clear finding on this issue as assessee converted part interests into deferred revenue expenditure .....

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directed to examine the amounts claimed in the P&L A/c and disallowed in the computation of income, then only arrive at any addition u/s.41(1) to the extent of amounts allowed in earlier years. To that extent, CIT's direction is modified and assessee's ground is allowed for statistical purposes

Inclusion of prior period income under the provisions of Sec.115JB - Held that:- Having approved the principles to be adopted while computing the book profits u/s.115JB, we however, cou .....

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essing Officer in consequential order has blindly followed the same. Since this amount is also not correct as per the provisions of law, we 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 st .....

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h, 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 .....

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under Section. 43B of the Income Tax Act, 1961. 4. The assessee may add, alter, or modify or substitute any other points to the Grounds of appeal at any time before or at the time of hearing of the appeal". 2. Briefly stated, assessee-company filed its return of income admitting income at ₹ 1,79,90,895/- (before set-off of loss) under the normal provisions of Income Tax Act, 1961 and income of ₹ 17,05,76,352/- under the provisions of Section 115JB of the Act. Assessing Officer c .....

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es and disallowance u/s.40(a). 3. Ld.CIT after examining the assessment record has come to a conclusion that order passed by Assessing Officer is erroneous and prejudicial to the interest of Revenue as Assessing Officer had not verified the credit of prior period expenditure which should have been considered under the provisions of Section 41(1) and also under the provisions of Section 115JB. He also noticed that certain interest to financial institutions claimed by assessee should have been dis .....

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the above two heads. Assessee relied on the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd., Vs. CIT [243 ITR 83] for the proposition that assessee having submitted the required details asked for and accordingly assessment order has been passed, CIT 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 .....

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ns 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 and direc .....

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/s.43B, relying on the CDBT Circular No.7/2006 dt.17-07-2006. Assessee is in appeal against the directions given by CIT both under normal computation as well as under the provisions of Section 115JB. 7. Ld.Counsel referring to the Paper Book filed in this regard stated that company's Books of Accounts were audited under the Companies Act. Further Assessing Officer has directed a special audit under the provisions of I.T. Act and also issued show cause notices and assessee clarified the amoun .....

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equity, Ld.Counsel pointed out that the Board circular referred to by the CIT is applicable only when the amounts payable are converted to loans or borrowings and not into equity. It was submitted that the banks have converted the amounts into equity and since the same were allotted to the said banks, the interest to that extent has to be considered as 'actual payment' under the provisions of Section 43B. It was submitted that this issue was also examined by the Assessing Officer and the .....

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aim 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 per .....

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#8377; 584 lacs paid to IDBI for the asst. year 2006-07 previous year 2005-06. The Company had debited an amount of ₹ 27,63,75,174/- to Profit & Loss Account during the previous year 2004-05 for Assessment Year 2005-06 towards interest and other financial charges including interest on term loans and not claimed in Income tax return under Sec.43B due to non payment of the same. IDBI on Term Loan 15,13,41,984 IDBI on working capital 5,23,16,720 IFCI 7,27,16,470 27,63,75,174 The company h .....

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, the interest for the financial year 1.4.04 to 31.3.05 (AY 05-06) has been worked out to ₹ 5,84,80,000 lacs @ 8% p.a as against 1513.42 lacs and the same has been converted into equity capital of the company by IDBI and the excess of interest over 8% was waived. A copy of the sanction of restructuring of liabilities vide letter dt.28.05.2005 and 29.10.2005 is enclosed herewith for your information. As such during the assessment year 06-07, the interest paid to IDBI to ₹ 584.80 lac p .....

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4.80 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 fo .....

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The reliance of Ld.CIT on the Board circular is not correct as the Board circular refers to conversion of outstanding interest payable into loans or borrowings, but not to equity. The explanation 3C to Section 43B also refers conversion to loans and borrowings but not to equity. In view of this, the CIT's reliance on the Board circular so as to reject assessee's claims of constructive payment of above amounts cannot be approved. Since this issue was also examined by the Assessing Officer .....

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n para 11 & 12 of Ld.CIT are set aside. 14. Coming to the issue of addition of liquidated damages, Ld.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. It was the contention of assessee that this amount has never been claimed as deduction. It was further submitted that interest and liquidated damages were levied by the bank together and those .....

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rovisions 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 .....

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nd 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 allowed as deduction earlier years as income u/s.41(1) in this year. To that extent, CIT's direction is modified and assesse .....

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e CIT on the inclusion of prior period income of ₹ 28,28,29,474/- under the provisions of Sec.115JB. During the year, assessee got waiver of interest and also conversion of some of the outstanding amounts to equity under the restructuring scheme with the banks. Consequently, assessee has written back an amount of ₹ 28,28,29,474/- in the P&L A/c as prior period income, generally known as below the line adjustments. Assessee's profit before taxation as per P&L A/c stood at .....

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m the brought forward profit of ₹ 80,81,17,143/-, profit available for appropriation was arrived at ₹ 56,99,99,569/-. Ld.CIT after discussing the issue on legal principles directed the Assessing Officer to adopt the amount at ₹ 37,78,82,427/- in his order at para 10 as under: "10. With regard to the issue of taxability of prior period income of ₹ 28,28,29,474/- under the specific provisions of section 115 JB of the I.T.Act, 1961, the contention of the assessee is not .....

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ies 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 us .....

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es of s.115JB should be the final balance in the P&L a/c carried to balance sheet (after considering prior period adjustments and extra ordinary items). For the above proposition, reliance is placed on jurisdictional ITAT's decision in the case of Gulf Oil Corporation Ltd Vs. ACIT reported in 111 ITD at pp.124 and the decision of Hon'ble Delhi High Court in the case of CIT Vs. Khaitan Chemicals and Fertilizers Ltd (2008) reported in 307 ITR at Pp.150. 10.2 It may also be noted from t .....

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or decrease of the book profits by extraordinary items and prior period adjustments. The AS-5 merely says that prior period and extraordinary items should be separately disclosed along with their nature so that their impact on the operating results can be properly gauged. It does not say that they are not part of the P&L a/c. Similarly, the Guidance Note issued by the ICAI also does not help the case of the assessee, as it merely says that sometimes, appropriation account is included as a se .....

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icer is directed to recompute book profits of the assessee company by adopting ₹ 37,78,82,427/- as the starting point and the same is to be increased by the items specified in clauses (a) to (f) and has to be reduced by the items specified in clauses (i) to (vii) given in the explanation". 17. As far as principle of law is concerned, we have to uphold the order of the CIT that the computation for the purpose of 115JB should not start from the profit for the year but from the final bal .....

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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 t .....

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tely disclosed in the statement of profit and loss in a manner that their impact on the "current" profit or loss can be perceived. Two approaches have been indicated in paragraph 19 of the said Accounting Standard (AS-5). The normal approach is to include the prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of the current net profit or loss. The ob .....

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According to the assessee, the net profit was to be computed on the basis of the profit and loss account which, in turn, was to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The assessee contended that such a computation of net profit, in view of the prescribed Accounting Standard (AS-5) required the prior period expenses/extraordinary items to be shown separately. This did not mean that because these items were shown separately they did not .....

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he alternative approach of showing such 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 hold .....

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upports 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] 255 ITR 273 (SC) the Supreme Court pointed out that sub-section (1A) of section 115J of the Income-tax Act, 1961, does not empower the Assessing Officer to embark upon a fresh inquiry with regard to the entries made in the books of accounts of the company. .....

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he book profit for assessment. No exception could be taken to the course adopted by the assessee in adjusting the prior period expenses in computing the net profit". 18. In view of the above, it is very clear that the computation has to start from the final figure of P&L A/c and necessary adjustments as provided in Explanation to Section 115JB has to be considered, while computing the book profit for the purpose of 115JB. Thus, in the given case, the amount to be considered for starting .....

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r, could not understand the directions of the CIT in directing the Assessing Officer to adopt the amount at ₹ 37,78,82,427/-. Ld.Counsel also expressed surprise how this amount was arrived at by Ld.CIT. If one were to consider that amount of ₹ 28,28,29,474/- i.e., prior period income was added to the base figure of ₹ 17,05,76,352/-, the amount should come to ₹ 45,34,05,826/-. Surprisingly, CIT determined the amount at ₹ 37,78,82,427/- without any explanation. Even t .....

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