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2015 (5) TMI 926 - ITAT AHMEDABAD

2015 (5) TMI 926 - ITAT AHMEDABAD - TMI - Disallowance of extra-ordinary items being loss due to cyclone, flood, fire, etc. - assessee could not substantiate that it had incurred expenditure on repairing its assets damaged due to flood - CIT(A) deleted the addition - Held that:- It is seen that the assessee had receivd finaicial assistance amounting to ₹ 16,01,00,000/- for this purpose. This is evident from the Government of Gujarat Resolution NOs.GUV-1105-2724-K1 dated 4.7.2005, 10.10.200 .....

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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 ₹ 1,48,54,169/-, which is directed to be deleted - De .....

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actly one year only. Such shortlived benefit cannot be categorized as “enduring”. Hence, inclined to the view that the payment of guarantee commission was a revenue expenditure. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of CIT v. Metalising Equipment Co.Pvt.Ltd [2001 (2) TMI 21 - RAJASTHAN High Court] that the payment of commission for guarantee .....

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with perfect accuracy is not always possible. At the time of annual stock verification, some items were found to be in excess or short of the number/quantity recorded in the stock register. Where the quantum was found in excess, the value of stock has been enhanced by such excess and where some items were found short, the value of shortage had been written off. The net effect during the year was shortage of the value of ₹ 3,13,53,470/-. As compared to the turnover such loss is less than 1/ .....

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entered the expenditure incurred on rates and taxes under the accounting hear ‘Penalties on Statutory Levies’. From the supporting documents filed it is seen that the payments actually pertained to rates and taxes being in the nature of land revenue. Hence the discrepancy stands explained. There was no penal payment involved. Accordingly, it is held that the AO was not justified in making the disallowance - Decided in favour of assesse.

Recomputation of book profit u/s.115JB of the A .....

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clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part B (wherein notes to the accounts have been disclosed) it is seen at item- 5(vii) relating to depreciation, that the company provides depreciation as per the rates notified by CERC, a regulatory commission by virtue of section 76 of Electricity Act, 2003, which are different from the rates prescribed under the Companies Act, 1956. During the year such rates were reduced, which could not .....

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preciation under item (ii)(a) is held to be unjustified. The AO is directed to recompute the book profit for MAT by allowing the depreciation claimed - Decided against revenue.

Disallowance of the expenditure being the provision made for employees cost for arrears - Held that:- In the present case, the ld.CIT(A) has recorded the fact that the Gujarat Government accepted the 6th Pay Commission in December- 2008. Therefore, respectfully following the ratio laid down in the case of CIT v .....

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r : These three appeals; one appeal by the Revenue for AY 2006-07 and the other two appeals are cross-appeals by the Assessee and Revenue have been filed pertaining to Asstt.Year (AY) 2007-08. Since all these appeals pertain to the same assessee (arising out of separate two orders passed by the ld.CIT(A)-I, Baroda dated 30/03/2010 for AY 2006-07 and dated 18/08/2010 for AY 2007-08), these appeals were heard together and are being disposed of by way of this consolidated order for the sake of conv .....

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On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in deleting the addition of ₹ 8,39,04,550/- made on account of disallowance of claim of guarantee fees paid to Government of Gujarat. The disallowance was made by disallowing the claim as revenue expenditure as it is of enduring nature in the assessee s business and hence capital in nature. 3. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in deleting the additio .....

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e of loss of material through pilferage, shortage of material in transit, shortage arising on physical verification, etc. The ld.CIT(Appeals) erred in not appreciating the fact that the addition was made due to the reason that the assessee had failed to substantiate their claim documentary evidence. 5. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of ₹ 6,29,000/- made on account of disallowance of claim under the head penal .....

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31/-. 7. The appellant craves leave to add to add to amend or alter the above grounds as may be deemed necessary. Relief Claimed in Appeal The order of the CIT(Appeals) on the above issue may be set aside and that of the Assessing Officer be restored. 2.1 Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as the Act ) was framed vide order dated 26/12/2008, thereby the Asse .....

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claimed in P&L A/c. as miscellaneous losses and write offs amounting to ₹ 3,13,53,470/-. Further, the AO made disallowance of ₹ 1,48,94,500/- claimed on expenditure incurred on registration fees paid to ROC and stamping charges for increase in the authorized capital of the company. The AO made disallowance of ₹ 6.29 lacs claim on account of penalty expenses. The AO further made disallowance of ₹ 58,82,406/- on account of preliminary and incidental expenses and of  .....

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red an appeal before the ld.CIT(A), who after considering the submissions of the assessee deleted the addition of ₹ 1,48,54,169/- claimed on account of losses due to flood, cyclone, fire, etc. The ld.CIT(A) also deleted the disallowance of ₹ 8,39,04,550/- claimed on account of guarantee fees paid to Government of Gujarat. The ld.CIT(A) deleted the disallowance of ₹ 45,24,582/- claimed to have been incurred for cost of raising finance treated as capital expenditure. The ld.CIT(A .....

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laimed by the assessee. The ld.CIT(A) further deleted the disallowance of ₹ 57,43,80,598/- made by invoking the provisions of section 43B of the Act. The ld.CIT(A) further held that the claim of depreciation while computing the book profit reduction by the AO was not justified. The ld.CIT(A) further held that the addition made by the AO while computing the book profit of ₹ 1,54,000/- on account of wealth tax was not justified and the same was deleted. Against this, the Revenue is in .....

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fore, the same was allowed as revenue expenditure. 3.1. On the contrary, the ld.counsel for the assessee supported the order of the ld.CIT(A) and submitted that during the year under consideration there were floods during the period June/July-2005 which caused severe damage to the transmission system of electrical energy. For the restoration and repair work, the company incurred an expenditure of ₹ 1,48,54,169/- at various Circle and Division Offices all over the Gujarat which was purely o .....

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. The assessee company being engaged in the production of an essential commodity, i.e. power, immediately took steps to repair its damaged assets and to restore generation of electricity. For this purpose, for full recoupment of the expenditure due to damage, it sought financial help from Government of Gujarat and received a subsidy against loss due to flood amounting to ₹ 16,01,00,000/-. Subsequently, the cost of repair of damaged assets was found to be ₹ 1,48,54,169/- only. Both th .....

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ts of the case. The disallowance has been made only on the ground that the assessee could not substantiate that it had incurred expenditure of ₹ 1,48,54,169/- on repairing its assets damaged due to flood. It is seen that the assessee had receivd finaicial assistance amounting to ₹ 16,01,00,000/- 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 13.10.2005 issued by the Principal Secretary, Energy & Petr .....

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d 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 ₹ 1,48,54,169/-, which is directed to be deleted. 4.1. This finding on fact is not controverted by the Rev .....

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g finance are concerned, the CIT-DR submitted that the ld.CIT(A) was not justified in deleting the disallowance/addition. He submitted that the AO treated the expenditure as capital expenditure. He submitted that the expenditure is essentially capital in nature, therefore, the ld.CIT(A) was not justified in deleting the same. 5.1. On the contrary, the ld.counsel for the assessee submitted that there is no infirmity in the order of the ld.CIT(A). He submitted that it is settled position of law th .....

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the capital or the revenue field has exercised the courts in numerous cases. From an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition of 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 en .....

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gorized as enduring . Hence, I am inclined to the view that the payment of guarantee commission was a revenue expenditure. 5.3. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission 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 CIT v. Meta .....

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s, I am of the opinion that the AO was not justified in treating the payment of guarantee commission (Rs.8,39,04,550/-) as capital in nature. The addition is directed to be deleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of expenditure incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spe .....

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sessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance of ₹ 45,24,582/-, which is directed to be deleted. 6.1 The ld.CIT(A) has followed the decision of the Tribunal passed in ITA No.738/Ahd/2009 for AY 2006-07 in the case of Himalaya Mahcinery Pvt.Ltd., dated 5.6.2009 and in the case of Shri Rama Multi Tech vs. ACI .....

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ted the order of the ld.CIT(A) and submitted that the ld.CIT(A) has verified from the records that there was pilferage, shortage of material in transit, shortage arising on physical verification, etc. 9. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has given a finding in para-7.2 of his order, which is reproduced hereunder:- 7.2. I have considered the submissions of the ld.AR and the .....

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items were found short, the value of shortage had been written off. The net effect during the year was shortage of the value of ₹ 3,13,53,470/-. As compared to the turnover such loss is less than 1/20th of 1%. This is quite negligible. The assessee has accounted for both gains as well as losses in respect of consumable stores ad spares in a consistent manner. Accordingly, it is held that the disallowance made was not justified and is directed to be deleted. 9.1. This finding of the ld.CIT( .....

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not justified in allowing the same. 10.1 On the contrary, ld.counsel for the assessee supported the order of the ld.CIT(A) and submitted that there is not infirmity in the order of the ld.CIT(A). He submitted that the expenditure was wrongly booked as under the head penalty expenses. This fact was pointed out by the ld.CIT(A), therefore the ld.CIT(A) was justified in deleting the addition. 11. We have heard the rival submissions, perused the material available on record and gone through the orde .....

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nts actually pertained to rates and taxes being in the nature of land revenue. Hence the discrepancy stands explained. There was no penal payment involved. Accordingly, it is held that the AO was not justified in making the disallowance of ₹ 6,29,000/-, which is directed to be deleted. 11.1. This finding of the ld.CIT(A) is not controverted by the ld.CIT-DR by placing any contrary material on record, therefore, we do not see any reason to interfere with the order of the ld.CIT(A), same is .....

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d submitted that ld.CIT(A) has followed the decision of Hon ble Jurisdictional High Court rendered in the case of DCIT vs. Vardhman Fabrics (P) Ltd. reported at 122 Taxman 375. 13. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue in paras-12.3 & 12.4 of his order, which are reproduced hereunder:- 12.3 Thus, what is material for the purposes of section 115JB is .....

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both in terms of written down value (WDV) and straight line method (SLM). At the same time, the Department of Company Affairs has issued Circular dt. 7.3.2009 which allows depreciation to be claimed at higher rates on the basis of bona fide technological evaluation. It has been clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part B (wherein notes to the accounts have been disclosed) it is seen at item- 5(vii) relating to depreciation, th .....

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nts. 12.4 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 to satisfy himself that the provisions of the Companies Act have been complied with while preparing the accounts. The provisions of Income-tax Act with regard to depreciation etc., would not be material to the .....

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e, I am of the opinion that the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIY 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 ₹ 14,32,02,331/- is held to be unjustified. The AO is directed to recompute the book profit for MAT by allowing the depreciation claimed. 13.1. The ld.CIT(A) has applied the ratio laid down in the judg .....

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t, Revenue s appeal in ITA No.1931/Ahd/2010 for AY 2006-07 is dismissed. 15. Now, we take up the Assessee s appeal in ITA No.2974/Ahd/2010 for AY 2007-08, wherein following grounds have been raised:- 1.0. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the disallowance of the expenditure of ₹ 61,00,00,000/- being the provision made for employees cost for arrears payable upto 31st March, 2007 without considering the facts that such expenditure wa .....

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leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal. 15.1. First ground of assessee s appeal is against confirming the disallowance of the expenditure of ₹ 61,00,00,000/- being the provision made for employees cost for arrears. The ld.counsel for the assessee submitted that this issue is squarely covered in favour of assessee by the judgement of Hon ble Kerala High Court rendered in the case of CIT vs. Kerala State Fi .....

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ng the year under consideration since the final decision to pay the same was still awaited. There was not liability fastened upon the assessee to pay the arrears of 6th pay commission. Since the assessee is following mercantile system of accounting and the liability to pay arrears of 6th pay commission had actually not been crystallized during the year under consideration, a sum of ₹ 61,00,00,000/- is disallowed and added back to total income being contingent liability. The ld.CIT(A) confi .....

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fact Government of Madhya Pradesh constituted Pay Commission of its own, to reframe the recommendations. In other words, without acceptance of the report the liability cannot be said to have accrued or crystallized. Crystallization of employee cost liability is contingent upon approval or otherwise from Gujarat Government. The Gujarat Government accepted the six Pay Commission Report in December-2008. In view thereof, in my humble opinion for AY 07-08 the provision towards employees cost for arr .....

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as deduction, the Supreme Court observed as follows in Metal Box Company of India Ltd. v. Their Workmen, 73 (1969) ITR 53: - "The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present va .....

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y to do so in order to ascertain the true profits." In Bharat Earth Movers (supra) (decided by the Supreme Court), the question which the Court had to consider was whether the provision for meeting earned-leave-encashment by the employee was an admissible deduction in the hands of the employer. The Court reiterated and applied its previous decision in Metal Box' case (supra) and held as follows: "(I)f a business liability has definitely arisen in the accounting year, the deduction .....

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ity shall have to be discharged is not certain. " 15.3. Further, the High Court held as under:- 6. In this case, the Tribunal had noticed that there was no dispute as regards the terms of employment of the workers and officers. The only question was the exact quantification of the compensation or wage revision. The Tribunal also held that provision for wage revision was based on past experience, interim Pay Commission of government employees, previous Pay Commission's reports of public .....

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ions. Its liability could not be characterized as contingent but was in fact ascertained; the quantification, however, had not happened. 15.4. The Hon ble Kerala High Court in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) held as under:- 3. Even though learned standing counsel for the Revenue contended that contractual liability arises only on the date of signing the agreement, we are unable to accept this argument in this case. In the normal course, an agreement called sett .....

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ty for wage increase really accrued for the respondent assessee w.e.f. 1st Aug., 1992. The assessee is entitled to claim deduction of such wage increase attributable upto the end of the previous year, no matter exact amount was ascertained and payment made later. In the decision of the Supreme Court referred to above, it is made very clear that what is to be considered is whether the liability is attributable to the previous year or not and it is immaterial if the actual liability was ascertaine .....

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ssee. 15.5. In the present case, the ld.CIT(A) has recorded the fact that the Gujarat Government accepted the 6th Pay Commission in December- 2008. Therefore, respectfully following the ratio laid down in the judgement of Hon ble High Court of Kerala in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) and in the judgement of Hon ble High Court of Delhi in the case of CIT vs. Bharat Heavy Electrical Ltd.(supra), the disallowance made by the AO is hereby deleted. Thus, ground of .....

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te Financial Enterprises Ltd.(supra) and the judgement of Hon ble Delhi High Court in the case of CIT vs. Bharat Heavy Electrical Ltd.(supra). 17. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. Since we have allowed the ground No.1 of assessee s appeal(supra) by following the judgement of Hon ble High Court of Kerala in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) and the judgement of Hon b .....

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d in the circumstances of the case and in law, the ld.CIT(Appeals) erred in deleting the addition of ₹ 679.95 lacs made on account of disallowance of claim of guarantee fees paid to Government of Gujarat. The disallowance was made by disallowing the claim as revenue expenditure as it is of enduring nature in the assessee s business and hence capital in nature. 2. On the facts and I the circumstances of the case and in law, the ld.CIT(Appeals) erred in deleting the addition of ₹ 16.38 .....

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