TMI Blog2015 (10) TMI 2052X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be added to the Net profit is “the amount of income tax paid or payable, and the provision there for.” This clause provide for addition of only “income tax” and not “wealth tax”. The question as to whether the wealth tax was actually paid or a mere provision was made, in our view, is irrelevant for interpreting the above said provision. The very same issue came for consideration before the Hon‟ble Bombay High Court in the case of Echaj Forging Pvt Ltd (2001 (2) TMI 56 - BOMBAY High Court) and the revenue conceded before the Hon‟ble High Court that the wealth tax could not be added to the Net profit u/s 115J of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the addition of provision for wealth tax while computing book profit u/s 115JB of the Act. - Decided in favour of assessee. Addition of gain arising on re-purchase and extinguishment of debenture bonds - Applicability of section 41(1) - CIT(A) deleted the addition - Held that:- We are of the view that the Ld CIT(A) was right in law in holding that the provisions of section 41(1) cannot be applied as the amount of surplus is not on account of trading liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment agency on the basis of Volker Committee report. (c) Addition of inland transportation fee on the basis of Volker Committee report. 4. The facts relating to the case are stated in brief. The assessee company is engaged in the business of manufacturing of and trading in petrochemicals, polyester fiber intermediaries, textiles, generation and distribution of power, operation of jetties, investment activities etc. The assessment of the year under consideration was completed originally u/s 143(3) of the Act on 28.03.2005. Thereafter, the AO reopened the assessment by issuing notice dated 20-03-2006 u/s 148 of the Act. The assessee asked for the reasons of re-opening and thereafter filed its objections also. It is pertinent to note that the assessment has been re-opened within four years from the end of the assessment year under consideration. The assessing officer rejected the objections by following case law:- (a) Dr. Amin‟s Pathology Laboratory (252 ITR 673) (b) Praful Chunilal Patel / Vasant Chunilal Patel (236 ITR 832) (c) Rakesh Aggarwal (225 ITR 496) Thereafter the assessing officer completed the assessment by making various additions. In the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax paid or payable, and the provision there for. This clause provide for addition of only income tax and not wealth tax . The question as to whether the wealth tax was actually paid or a mere provision was made, in our view, is irrelevant for interpreting the above said provision. The very same issue came for consideration before the Hon‟ble Bombay High Court in the case of Echaj Forging Pvt Ltd (supra) and the revenue conceded before the Hon‟ble High Court that the wealth tax could not be added to the Net profit u/s 115J of the Act. The relevant observations made by the Hon‟ble jurisdictional High Court are extracted below:- (I) ADDITION OF WEALTH TAX PAID BY THE ASSESSEE TO THE NET PROFIT : 6. Mr. Desai, learned Senior Counsel for the Department, fairly concedes that the net profit, an shown in the profit and loss account, will not be increased by the amount of wealth tax paid because under clause (a) of the Explanation to section 115J(1A), what is contemplated is the amount of income tax paid. Under the said clause, payment of wealth tax is not contemplated. Therefore, the net profit shall not be increased by the amount of wealth tax paid by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) the first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profis and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or . A careful perusal of the above said provisions would show that the first and foremost condition for invoking the provisions of sec. 41(1) is that an allowance or deduction of loss, expenditure or trading liability incurred by the assessee should have been made in the assessment for any year. Conversely, if deduction of loss, expenditure or trading liability incurred by the assessee was not made in the assessment for any year, the provisions of sec. 41(1) shall not apply. In respect of liability incurred by the assessee, these provisions shall apply only in respect of trading liability . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to adverse market conditions, the said debenture was available in the market at a discounted rate of say ₹ 70/-. If the debentures are to be redeemed at the maturity period, the assessee would have to pay ₹ 100/-. If they are purchased from the market, it was enough if ₹ 70/- was paid. Hence the assessee, as a prudent businessman, chose to purchase the debentures at ₹ 70/- and extinguish them. In this process the assessee made a gain of ₹ 30/- per debenture. The question is whether the provisions of sec. 41(1) shall apply to the gain of ₹ 30/- made by the assessee on repurchase and extinguishment of its own debentures. We have noticed the principles/conditions governing the provisions of sec. 41(1) of the Act. The foremost condition is that the assessee should have been allowed deduction in respect of the gain realized by the assessee. In this case, this condition was not satisfied and hence there is no question of invoking the provisions of sec. 41(1) of the Act. 14. The assessing officer has placed reliance on the decisions rendered by Hon‟ble Supreme Court in the case of CIT Vs. Karamchand Thaper Others (222 ITR 112) and T.V. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be presumed that money taken to the profit and loss account of the assessee would be its trading receipts. No fact had been brought on record to the contrary. The amount was not kept in a suspense account or shown as a liability the inference should be that the assessee acted in accordance with the law and not contrary to law. The assessee collected the amounts of under charges in advance even before any claim was lodged. He realized the amounts from the colliery company not because any demand was made against him, but possibly, in order to protect himself from the eventuality of any demand being made against him as the del credere agent of the seller .. In the instant case, money in question arose from trading operations. The surplus had arisen out of trading transactions and taken to profit and loss account. It had a definite quality of trading receipt . It can be noticed that the dispute in the case of Karamchand thapar others (supra) was about the nature of receipt, i.e., whether it was capital receipt or trading receipt. 16. In the case of T.V. Sundaram Iyengar sons (supra) also, the question before the Hon‟ble Supreme Court was about the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntures/bonds and they cannot be considered to have been received during the course of trading operations. In any case, the dispute in the instant case was about the applicability of provisions of sec. 41(1) of the Act. Hence both the decisions relied upon by the AO are not applicable to the facts of present case and accordingly, in our view, the AO could not have placed reliance on these decisions. 18. On the contrary, the assessee has placed reliance on the decision rendered by Hon‟ble jurisdictional Bombay High Court in the case of Mahindra and Mahindra Ltd Vs. CIT (261 ITR 501). The fact available in this case was that the assessee purchased tools (dies) from a company named KJC. Subsequently, the KJC gave loan to the assessee to purchase the tools (dies) and the said loan agreement was approved by RBI. Later, the company KJC was taken over by another company named AMC and the principal amount of loan was waived by AMC as a part of takeover arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, it was held that such waiver would not constitute business income. The Hon‟ble Bombay High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Mahindra and Mahindra are identical. In our view, the facts are not identical, but the ratio of the said decision shall squarely apply to the assessee herein, since in the instant case also the amounts raised through debentures cannot be treated as trading liability for the assessee. 19. The assessee has also placed reliance on the decision rendered by Hon‟ble Karnataka High Court in the case of CIT Vs. Industrial Credit and Development Syndicate Ltd (in short ICDS‟). The Hon‟ble Karnataka High Court explained the nature of debentures as under:- A debenture is a certificate of loan or bond evidencing the fact that the company is liable to pay a specific amount with interest and although the money raised by the debentures becomes a part of the company‟s capital structure, it does not become a share capital. A debenture imports an obligation or a convenant to pay. Discharging the liability to the debenture holder who has sold his debentures in effect amounts to repayment of the loan. The assessee, ICDS, issued debentures in the year 1973 at a face value of ₹ 10/- each at par. The debentures were redeemable during the accounting years corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income tax law. Merely because the aforesaid amount was shown as a surplus amount in the profit and loss account, when the assessee did not actually receive any income, we are unable to accede to the submission of Sri Seshachala that it constitutes income under section 2(24) of the Act. Having regard to the reality of the situation, as the assessee has not derived any income, he is entitled not to treat it as an income. Therefore, the Tribunal was fully justified in its conclusion that the said surplus amount reflected in the balance sheet (sic. profit and loss account) cannot be treated as income of the assessee. We do not find any error in the said conclusion reached by the Tribunal. In our view, the facts prevailing in the above said case are almost identical and the ratio of the decision rendered by Hon‟ble Karnataka High Court is fully applicable to the instant case. 20. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was right in law in holding that the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee herein, viz., M/s Reliance Petroleum Ltd figured as one of the beneficiaries in Volcker committee Report. It was stated that 19 million barrels of oil was allotted, of which 15.7 million barrels were lifted by Alcon Petroleum Ltd, a Liechtenstein based energy trading company. Accordingly, the AO took the view that the assessee would have paid commission/surcharge during the year under consideration and estimated the same at ₹ 8,89,36,380/-. Accordingly he added the same to the total income of the assessee. 24. The Ld CIT(A), however, deleted the same with the following observations:- 3.6. I have considered the facts of the case, order of the AO and the submissions made by the appellant and I do not find enough reasons or justification for the addition made by the AO. Whereas the mention as a non-contractual beneficiary in the Volcker Committee Report is the only reason for the addition, following important aspects related to the issue in question supports appellant's case:- (i). The observation in Volcker Committee Report is the only material or evidence for making the addition in the assessment order to the effect that assessee is a non-contractual benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid by assessee to Government 3.7. In view of the above, I hold that the addition made by the AO is not in accordance with the provisions of law and it is cancelled. The ground of appeal is allowed. 25. The Ld A.R submitted that identical disallowances made in the following cases have been deleted by the Tribunal:- (a) Air Pac Exports Vs. ACIT (ITA No.2981-2983/M/12 dated 11.6.14) (b) TIL Ltd Vs. ACIT (16 SOT 33)(Kol) (c) DCIT Vs. Rajrani Exports (P) Ltd (22 taxmann.com)(Kol). 26. The facts prevailing in the instant case show that the assessee has not made any payment directly to Iraqi Government. It has paid purchase price to its supplier M/s Alcon Petroleum Ltd. The Ld CIT(A) has given a categorical finding that there is no evidence or material to support the alleged payment of illicit commission/surcharge over and above the purchase price by the assessee to the Iraq Government. Further, as per the contract signed between the assessee and M/s Alcon Petroleum Ltd, M/s Alcon has also not paid any surcharge to Iraqi Government or their agency for procuring the crude oil. Hence, we are of the view that the Ld CIT(A) was justified in deleting this addition by holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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