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2015 (10) TMI 2052 - ITAT MUMBAI

2015 (10) TMI 2052 - ITAT MUMBAI - TMI - Validity of reopening of assessment - Held that:- CIT(A) has given a clear finding that the assessing officer has reopened the assessment only on the basis of material facts available with him and not on account of change of opinion. Further, the observation of the AO that the assessee did not produce the relevant materials necessary for completion of assessment at the time of completion of original assessment has also been upheld by the Ld CIT(A). At the .....

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book profit" under that section. As per clause (a) of Explanation 1 to sec. 115JB, what is required 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& .....

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urchase 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 liability and accordingly he was justified in deleting the addition made by the assessing officer. Further, as per the ratio laid down in the case of ICDS (2006 (3) TMI 90 - KARNATAKA High Court) the ga .....

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ance of commission/surcharges paid to SUMO and also the transportation charges made by the AO on the basis of Volkar committee report.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 pric .....

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, AM AND AMARJIT SINGH, JM For The Appelant : Shri Arvind Sonde For The Respondent : Shri Jayant Kumar Per B R Baskaran, AM: These cross appeals are directed against the order dated 25-06-2013 passed by Ld CIT(A)-24, Mumbai and they relate to the assessment year 2002-03. 2. The assessee is in appeal in respect of following issues:- (a) Validity of reopening of assessment. (b) Addition of Provision for Wealth tax‟ for computing Book Profit u/s 115JB. 3. The revenue is in appeal in respect o .....

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neration 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 .....

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s filed this appeal on the issues cited above, which were decided against it. The revenue is challenging the decision of Ld CIT(A) in granting relief in respect of the additions cited above. 5. The first issue in the appeal filed by the assessee relates to the validity of reopening of assessment. We heard the parties and perused the record. We notice that the Ld CIT(A) has given a clear finding that the assessing officer has reopened the assessment only on the basis of material facts available w .....

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sue contested by the assessee relates to the addition of Provision for Wealth tax for the purpose of computation of book profit u/s 115JB of the Act. The assessee did not add the amount relating to Provision for Wealth tax to the Net Profit for computing the amount of Book Profit‟ u/s 115JB of the Act. Before Ld CIT(A), the assessee placed reliance on the decision rendered by Hon‟ble Bombay High Court in the case of CIT Vs. Echaj Forging Pvt ltd (251 ITR 15) in support of its content .....

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rescribed therein only can be added to the net profit for computing the book profit‟ under that section. As per clause (a) of Explanation 1 to sec. 115JB, what is required 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 s .....

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partment, 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 assessee. The expression used in sec. 115JB is para materia with the expression us .....

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this issue are that the assessee issued Foreign Currency Bonds in the year 1996 & 1997 (popularly called as Yankee Bonds ) carrying a coupon rate of interest ranging between 10% to 11% p.a. They were having a maturity period of 30 to 100 years. The interest was payable half yearly intervals and there is no dispute that the assessee has paid interest thereon regularly and it has been allowed as deduction u/s 36(1)(iii) of the Act. After the attack on World Trade Centre located in USA on 11th .....

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The gain/discount gained on buy back of the debentures worked out ₹ 38.80 crores. The assessee treated the said gain as Capital receipt . However, the AO held that the said gain is assessable u/s 41(1) as a profit chargeable to tax. The Ld CIT(A), however, deleted the same and hence the revenue has filed this appeal. 9. We heard the parties on this issue. The AO has invoked the provisions of sec. 41(1) in order to bring the gains arising on repurchase and extinguishment of debentures/bonds .....

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lity 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 a .....

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trading liability . 10. In this case, the assessee had raised funds by issuing bonds/debentures, i.e., the assessee has received the money and hence the same would not fall in the category of Loss or expenditure , since both the terms connote outflow of money. Hence the receipt of money by the assessee would fall in the category of Liability . Under accounting principles, the liability is divided into two categories, viz., Capital liability and trading liability . While no deduction is allowed i .....

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le computing the income and the corresponding amount payable shall be shown as a trading liability in the Balance Sheet. 11. Hence, if the assessee gets some benefit in respect of the trading liability incurred by way of remission or cessation thereof and if the trading liability has been allowed as deduction, then the said benefit is liable to be taxed as income u/s 41(1) of the Act. If the corresponding expenditure relating to trading liability incurred by the assessee was not allowed as deduc .....

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s of sec. 41(1) talks about trading liability only and hence the Capital liability shall not come under the purview of sec. 41(1) of the Act. 13. The impugned gain arose to the assessee, since the assessee could purchase its own debentures at less than its face value. To make it simple, the assessee issued debentures having a face value of say ₹ 100/- with interest rate of 10% to 11%. Due to adverse market conditions, the said debenture was available in the market at a discounted rate of s .....

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ssee 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‟bl .....

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gible to tax and the capital receipts are not taxable under the Act, unless specifically provided for. The Supreme Court, in the above said two cases, laid down the ratio as to when the nature of capital receipt would change into trading receipt. 15. The facts available in the case of Karamchand Thaper & Others (supra) are that the assessee therein acted as del-credere agent of colliery companies and also as agent of the purchasers of coal. The collieries supplied coal directly to the purcha .....

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ith the assessee. After meeting the claims, there was always a sizeable balance left with the assessee, which was transferred by it to the Profit and Loss account under the head Miscellaneous receipts . The assessee claimed that it had held the amount received from Collieries in trust for and behalf of purchasers and hence it was not part of its trading receipts. The Hon‟ble Supreme Court noticed that the assessee had lodged claim with the Collieries without there being any instruction fro .....

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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 .....

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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 receipts only. The said assessee collected certain deposits from its customers in the course of carrying on his business, which were originally treated as capital receipts. Since they were not claimed by some of the customers, it transferred the same to its profit and .....

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sessee. The Hon‟ble Supreme Court noticed that the assessee had taken deposits in the normal course of trade. The said amounts were not retained till the fulfillment of contract, but they were depleted by adjustments made from to time. Under these set of facts, the Hon‟ble Supreme Court held that the unclaimed surplus retained by the assessee would be its trade receipts. The Hon‟ble Apex Court further held that:- …..the assessee itself treated the amount as its trade rec .....

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erent quality. It became definite trade surplus. In the above said case also, the dispute was about the nature of receipt. The question of applicability of provisions of sec. 41(1) was not before Hon‟ble Supreme Court in the above said two cases. 17. A careful perusal of both the decisions would show that the dispute was about the nature of receipt and the impugned amounts received by the assessees were treated as revenue receipts, since they have been received during the course of trading .....

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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 nam .....

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the assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. In the instant case, the assessee had not obtained such allowance or deduction in respect of expenditure or trading liability in the earlier years. It was not disputed that the assessee had paid interest at 6 per cent over a period of 10 years to KJC. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or s .....

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assessee Mahindra and Mahindra Ltd had got loan waiver from American Motor Corporation. The assessee had shown the waiver of amount of ₹ 57,75,064/- as cessation of liability. The assessee prior to the waiver of loan was paying 6% interest annually to the lender. However, the assessee company did not claim this interest expenditure during the currency of loan u/s 36(1)(iii). The Hon‟ble High Court, further held that, even assuming this interest was claimed as deduction, the provisio .....

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lly examained the facts of the assessee and Mahindra and Mahindra‟s case and found that the AR‟s submission is correct. The Ld CIT(A) has observed that the facts of the present case and 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 asses .....

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ucture, 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 corresponding to the assessment years 1984-85, 1985-86 and 1986-87 at the rate of 30%, 30% and 40% respectively. Durin .....

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as under:- …In the instant case, admittedly the assessee had issued debentures which are redeemable after a period of ten years at the face value thereof. Though the debenture holders sold the debentures before the stipulated period at a discounted price to the nominee of the assessee, the consideration paid to those debenture holders was paid by the assessee as reflected in the books of account by a loan advanced to the nominee. Thereafter, on the due dates the assessee has redeemed thos .....

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gh there is no real income or profit derived. Notwithstanding the nomenclature adopted in the balance sheet to depict that amount and the place where it is shown in reality the assessee did not receive the said amount as income. The assessee was only able to discharge its liability at a lesser amount as against the face value of the debentures. It is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. It is wholly unreal and .....

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aid 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 s .....

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t be applied as the amount of surplus is not on account of trading liability and accordingly he was justified in deleting the addition made by the assessing officer. Further, as per the ratio laid down in the case of ICDS (supra) by Hon‟ble Karnataka High Court, the gain realized by the assessee on re-purchase and extinguishment of debentures cannot be considered as income u/s 2(24) of the Act. 21. The next issue relates to the disallowance of commission/surcharges paid to SUMO, Iraq Gover .....

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e in ITA No.1347/Mu/2011 and the Tribunal, vide its order dated 24.4.2015, has upheld the relief granted by Ld CIT(A). The relevant discussions made by the co-ordinate bench of Tribunal and the decision taken by it are extracted below, for the sake of convenience:- 23. The facts relating to the above said issue are set out in brief. Consequent to the invasion of Iraq into Kuwait, UN Security Council imposed economic sanctions on Iraq Government. However, on humanitarian grounds, a scheme called .....

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e UN Security General appointed an independent Enquiry Committee (called Volcker Committee) to investigate the administration and management of Oil for Food programme. The Volckar Committee Report observed that the Iraqi official awarded the contract to various companies to favour them by making illicit payment of surcharge. According to the AO, the name of the assessee herein, viz., M/s Reliance Petroleum Ltd figured as one of the beneficiaries in Volcker committee Report. It was stated that 19 .....

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ts 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 orde .....

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ainst the appellant and states that the commission/ surcharge has been paid by Alcon to the credit of Iraqi government and referred the Appellant as non-contractual beneficiary as it had received the supply of goods from Alcon. There is no evidence on' record which is referred in Volcker Committee Report to suggest that the appellant has paid the purchase price inclusive of a part of it as onwards payment of illicit commission/surcharge to Iraqi government. The AO has also not brought on rec .....

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reed price per barrel at the prevailing international market rate. There was no purchase from Iraqi Government or any Iraq Government agency and the contract signed between Alcon and assessee categorically states that Alcon has not paid any surcharge to Government or their agency for procuring the crude. (iv) The price paid by assessee to Alcon is the consolidated price for the goods purchased and cannot be split for part of it as representing surcharged alleged to have been paid by Alcon to Ira .....

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