TMI Blog2016 (9) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... r of assessee Disallowance of depreciation U/s 43(1) - Held that:- A bare reading of the Explanation 10 of Section 43 of the Act, which clearly provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government in the form of a subsidy or grant or reimbursement, then, so much of the subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Admittedly, the amount has been received by the assessee in the form of grant/reimbursement/subsidy from the state Government therefore, in our view, the order passed by the ld CIT(A) is required to be upheld and the value of the assets shall be taken by the ld Assessing Officer after adjusting the subsidy/grant/reimbursement from the State Govt. or the other government departments. Accordingly, this issue is decided against the assessee and in favour of the revenue. MAT U/s 115JB applacability - Held that:- As gone through the contention raised by the assessee as well as the order passed by the Advance Rulings in the matter of Jodhpur Vidyut Vitran Nigam [2009 (11) TMI 20 - AUTHORITY FOR ADVANCE RUL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the facts and circumstances of the case, the Ld. CIT(A), Ajmer has erred in : 1. Restricting the disallowance of ₹ 11,63,37,224/- on non existing assets as against disallowance of ₹ 18,99,41,047/- made by the A.O. U/s 43(1) of the I.T. Act which is to be taken for calculation of book profit U/s 115JB. Grounds of assessee s appeal (ITA No. 284/JP/2009 A.Y. 2003-04):- Under the facts and the circumstances of the case the ld CIT(A), has erred in making the full additions/actions confirmed:- 1. That confirming the validity of issue of notice U/s 147/148. 2. Disallowance the depreciation of ₹ 16,20,20,005/- on non existing assets. 3. Disallowance of depreciation of ₹ 17,75,49,581/- U/s 43(1) explanation 10 of Income Tax Act. 4. That further under the given circumstances the provisions of MAT (sec. 115JB of Income Tax Act, 1961) are also not applicable. Further alternatively the quantum of depreciating considered for disallowance should also be considered as per books as claimed and not as per Income Tax returns/rates. 5. That further in view of decision of M/s Kwality Biscuits Ltd. Vs. CIT (284 ITR 434 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain observations and directions. We deem it appropriate to reproduce the same, which is as under:- We have heard the ld. DR and perused the written submissions by the assessee placed on record. The objection of the A.O. is that no physical existence of the fixed assets worth ₹ 115.21 crore is available and amount of ₹ 6.95 crore has been capitalized in the current year. The explanation of the assessee is that the assessee took the assets through Financial Restructuring Plan as on and were basis and fixed assets register of the assessee is under consideration of being completed. It appears that list of fixed assets on physical verification is yet to be finalized by the assessee. It is not the depreciation only which has the effect but the necessary entries, if required for loss of fixed assets have also to be passed. There is nothing on record in this respect, therefore, it is pre-mature for the A.O. to disallow depreciation in the absence of anything on record that the assets are not used for the purpose of the assessee. Therefore, the A.O. is directed to take into consideration the list of the fixed assets prepared on physical verification and examine whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rected by the Hon ble ITAT therefore depreciation claimed against non existing assets is not allowable. During assessment proceedings in the A.Y. 2005-06 the ld AR has submitted depreciation chart in respect of assets of ₹ 115.21 Crores as under: A.Y. Rate of Depreciation Amount (Rs.) 2001-02 25% 288035564 2002-03 25% 216026673 2003-04 25% 162020005 2004-05 25% 121515004 2005-06 25% 91136253 2006-07 15% 41011314 2007-08 15% 34859617 Looking to the facts and circumstances of the case and no cooperative attitude adopted by the assessee I am inclined to add the depreciation as calculated above by the A.R. ₹ 16,20,20,005/- to the total income of the assessee. Thus, looking the past history of the case addition of ₹ 16,20,20,005/- i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m s accounting policy. Hence no physical existence possible in respect of these amounts. 3.5 In such a situation, it is not clear as to on what basis the Chief Accounts Officer has filed a certificate to the effect that all the fixed assets have been verified and no loss of assets is found during such verification. Since the appellant failed to furnish the fixed assets register before the AO, it was not possible for the AO to verify whether the claim of the appellant is correct or not. I, therefore, hold that the AO has rightly made the disallowance of ₹ 16,20,20,005/- and the same is confirmed. Ground No.1 is thus dismissed. 7. Now the assessee is in appeal before us. The ld AR of the assessee has submitted that the assessee company was incorporated on 19.04.2000 as per Rajasthan State Extra Ordinary Gazette Dated 18.01.2002 whereby for Rajasthan Power Sector Reforms Transfer Scheme 2000 came into effect. The Erstwhile Rajasthan State Electricity (RSEB) was unbundled into various companies, including the assessee. When these companies were formed certain assets and liability and income and expenditure were transferred to these companies of erstwhile RSEB which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the AO for fresh adjudication but after providing the adequate opportunities of being heard to the assessee. Thus the directions of Hon'ble ITAT on the issue for A.Y. 2003-04 were very specific that the disallowance of depreciation can be made only on those fixed assets for which loss has been claimed in value in the books otherwise the depreciation is not disallowable. The A.O. without considering the fact that the direction of ITAT was to verify from books regarding the loss claimed for fixed assets and then consider the disallowance of depreciation prorata however the A.O. only insisted to submit list of assets as claimed physically verified and for this reason disallowed the depreciation. Thus the A.O. has wrongly interpreted the directions of ITAT wherein even the ITAT has accepted the block of fixed assets however they have directed to disallow the depreciation only on those assets which for loss of asset claimed in the books. The assessee Company submitted the certificate of verification of fixed assets of all circles by CSE and the same cannot be denied. It is worth to note that as per Audited Accounts as per Statutory Auditors Report it is clear that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 Even otherwise Section 80 of the Electricity Supply Act, 1948 provides as under:- 80. Provision relating to Income Tax and Super Tax.- (1) For the purposes of the Indian Income-tax Act, 1922 (XI of 1922), 4 the Board shall be deemed to be a company within the meaning of that Act and shall be liable to income tax and super tax accordingly on its income, profits and gains. (2) The State Government shall not be entitled to any refund of any such taxes paid by the Board. In view of the specific provisions under the Electricity Supply Act, 1948, a Board constituted under the said Act and the Board is liable to pay tax under the provisions of Income Tax Act, 1961 and therefore, the Board was required to file income tax return and the judgment passed by the Hon ble Rajasthan High Court in the case of Rajasthan State Electricity Board Vs. DCIT (1993) 200 ITR 434 clearly deals that the Rajasthan State Electricity Board is a government company assessable under the I.T. Act. Further in the matter of CIT Vs. Rajasthan State Electricity Board (2007) 160 taxman 19, the Hon ble Jurisdictional High Court has dealt Rajasthan State Electricity Board as a government company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court in the case of Dalmia Ceramic Industries Ltd. Vs. CIT (2005) 277 ITR 219 has held that what would be the actual cost of the transferee company on the date of transfer is indicated in Section 43(1), explanation-6, thus the actual cost of transferee company will be written down value of the holding company. 9.4 Since the original cost of acquisition of the transferor company, is determined, similarly, the written down value of the transferor company is also available with the Assessing Officer, therefore, the ld Assessing Officer was only required to allow the application depreciation on the written down value of the assets acquired by the assessee from the transferor company (RACB). The relevant portion of the judgment is reproduced hereinbelow: 8. The only issue before this court is whether the written down value of the holding company is to be taken as actual cost of the assessee or the amount paid by the assessee to the holding company? Chapter IV of the Act refers to computation of business income and section 43 is required to be examined for the purpose of deciding this matter. Section 43(1) of the Act which defines actual cost reads as under: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the question. We will now have to turn to Explanation 6 to section 43(1) which reads as under : Explanation 6.-When any capital asset is transferred by a hold ing company to its subsidiary company, or by a subsidiary company to its holding company, then, if the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied, the actual cost of the transferred capital asset to the transferee-company shall be taken to be the same as it would have been if the transferor-company had continued to hold the capital asset for the purposes of its business. 12. It is clear that what would be the actual cost to the transferee company on the date of transfer is indicated in section 43(1), Explanation 6. Thus, the actual cost to the transferee-company will be the WDV of the holding company (transferor-company). 13. The assessee based its submission relying on Maharana Mills P. Ltd. v. ITO [1959] 36 ITR 350 (SC) and Saharanpur Electric Supply Co. Ltd. v. CIT [1992] 194 ITR 294 (SC). The assessee has also relied on Ciba of India Ltd. v. CIT [1993] 202 ITR 1 (Bom) as also on CIT v. Hides and Leather Products P. Ltd. [1975] 101 ITR 61 (Guj). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctioning of the electricity distribution business and other activities of the assessee. We fail to appreciate that despite the issuance of direction by the Tribunal way back on 20/6/2008 till date the fixed assets register have not been maintained and physical verification of the assets have not been done. Though we have held that the assessee is entitled for deprecation on the written down value of the transferred assets but nonetheless it is the duty of the assessee to maintain and keep the fixed assets register. We will appreciate if the assessee completes this exercise of maintaining the fixed assets register by actual verification of the assets within a period of one year from today. If the physical verification of the assets are not done by the assessee, then the assessee shall be living in fools paradise with lot of assets on papers but nothing on ground. We deem it appropriate that the said state of affairs of not maintaining up to date fixed assets register of the assessee, be brought to the notice of the CMD of the assessee. We expect that the ld CMD of the assessee shall make an endeavour to ensure the maintenance of fixed assets register within a period of 365 days from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 In the present case in appeal before me the appellant has charged depreciation on ₹ 120/-. If the assessee had chosen the first method then as per the companies Act and accounting standards, assessee has either to charge depreciation on actual cost' i.e. ₹ 60/- as per example in P L account and excess depreciation on account of these reserves as deferred income over the useful period of life in systematic and rational basis, or of an amount equal to additional depreciation (excess) due to creation of these reserves has to be credited to P L account from these reserves; if the appellant had chosen the second method, it was required to change depreciation on actual cost only in all three cases, the effect of depreciation on gross amount would have been only that ii will transfer these reserves to general reserves, while leaving the profit untouched. In the instant case the assessee has charged depreciation on fictitious cost directly to P L, neither considering these reserves as deferred income over the useful period of life in systematic and rational basis, nor crediting an equal amount of excess depreciation from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Capital Assets The Grants/ contribution received from State Govt. / Other Govt. Departments towards the cost of fixes assets is shown separately under the heads Contributions, Grants, Subsidies towards cost of Capital Assets and is neither deducted from the gross value of the assets nor it is treated as a deferred income on the systematic and rational basis over the useful life of the asset. Thus both the fixed assets and grants are overstated by the amount of grants; this should have been taken as per the provisions of AS-12. (2) In case replacement of assets. WDV of the asset discarded should be reduced from the total fixed assets and losses arising from the retirement or gains or losses arising from disposal of the fixed assets, which is carried at cost should be recognized in the Profit Loss Account. However this is not being done. Also scrap is accounted for at nil value and net realizable value while as per the provisions of AS- 10 clause-24 material items from active use and held for disposal should be stated at the lower of their net books value and net book value and shown separately in the financial statements. The same has not been done thus leading to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consumer Contribution 30 Cost Variance Reserve 20 In the present case in appeal before me the appellant has charged depreciation on ₹ 120/-. If the assessee had chosen the first method then as per the Companies Act and Accounting Standards, assessee has either to charge depreciation on 'Actual Cost' i.e. ₹ 60/- as per example in P L account and excess depreciation on account or these reserves as deferred income over the useful period of life in systematic and rational basis, or of an amount equal to additional depreciation (excess) due to creation of these reserves has to be credited to P L account from these reserves: if the appellant had chosen the second method, it was required to change depreciation on actual cost only in all three cases, the effect of depreciation on gross amount would have been only that it will transfer these reserves to general reserves, while leaving the profit untouched. In the instant case the assessee has charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be charged in the normal course on the 'full cost' of the Asset. b. That the Reserves Surpluses in which these Grants, Subsidies, Contribution are credited are in form of deposits from customers are in actual the liabilities and could not be reduced from the cost of assets for the purpose of calculation of depreciation since they are in the nature of CAPITAL RECEIPT . c. Further these Capital Receipts are not directly relatable to the assets acquired out of which the same deducted to reduce the block. Further already adhoc disallowance of fixed assets out of FRP transfers already made of 20% of assets without any breakup as above and further disallowance of depreciation on the same block of assets is a DOUBLE DISALLOWANCE / DOUBLE ADDITION . d. That the Company has to follow the instruction of Accounting as approved and the accounts has been prepared on the basis and as per the bye laws the treatment of Consumers Contribution, Subsidies and Grants has been made in the books accordingly by creating the Reserves and the A.O. has erred to reduce the same from the cost and disallow portion depreciation. The Company cannot act beyond the Accounting Norms approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the contribution / grant in the form of subsidy were received from the State Govt./other department towards the cost of capital asset and for replacement of the assets. Explanation 10 to Section 43 of the Act provides as under:- [Explanation 10.- Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee : Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g standard AS- 12 , AS-6, AS-2, AS-1 and various defects have been also noticed by the statutory auditor Shri S.K. Bakliwal vide his report dated 29.07.2006. In such circumstances the book profit has to be calculated in accordance with accounting standard. In view of the above the assessee was asked during the assessment proceedings for the A.Y. 2005-06; to calculate the depreciation for all year starting from A.Y. 2001-02 by considering this accounting standard i.e. reducing the increase in Consumer Contribution towards service connection and line, Subsidies and Grants towards Cost of Capital Assets, Cost Variance Reserve etc. from the value of fixed assets. Vide reply dated 27.12.2007 and 28.12.2007 assessee has shown his inability to submit the same in such a short period. During the A.Y. 2006- 07 the assessee has not submitted any calculation and enclosed photocopy of the calculation made by the A.O. as in the A.Y. 2005-06. 16. Being aggrieved by the order of the ld Assessing Officer, the assessee carried the matter before the ld CIT(A), who had partly allowed the appeal after discussing the provisions by observing as under:- 5.6 The appellant furnished complete chart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Provision of MAT u/sec. 115JB are as under: - (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, [2012], is less than [eighteen and one-half per cent] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of [eighteen and one-half per cent], (2) Every assessee - (a) being a company, other than a company referred to in clause (b) shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956) or (c) being a company, to which the proviso to subsection (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years 2005-06 and 2006-07 and not being income under section 10(38) from the assessment year 2007-08] or 10A or 10B or 11 or 12 apply; or g. From the assessment year 2007-08), the amount or depreciation. NEGATIVE ADJUSTMENTS - Net profit as shown in the profit and loss account (prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act) is to be reduced by the following amounts: a. the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account; or b. the amount of income to which any of the provisions of section 10[not being income under section 10(23G) for assessment year 2005-06 and 2006-07 and not being long term capital gain under section 10(38) (from the assessment year 2007-08 onwards], 10A or 10B or 11 or 12 apply, if any such amount is credited to the profit and loss account; or c. depreciation debited to P L A/c (except depreciation on revaluation of asset) [applicable from the assessment year 2007-081: or d. the amount withdrawn from revaluation reserve credited to P L A/c to the extent it does not exceed the amount of depreciation on account of revalua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es under the Companies Act as having being properly maintain in accordance with the Companies Act and that he does not have the jurisdiction to go behind the Net Profit shown in Profit Loss A/c except to the extent provided in adjustments above. Refer case of INDIAN OILTANKING LTD. V/S ITO (2009) as reported in 308 ITR 217 (MUMBAI) held that if the assessee follows mandate regarding Accounting Policies and Standards of ICAI and Companies Act the claimed expenses are not disallowable and addable to Book Profit. (2) Thus the assessee has complied with the Accounting Standard as applicable to it as per the RSEB Annual Accounts Guidelines and the Profit Loss Accounts has been prepared as per Schedule VI of the Companies Act and there is no defect in the books which are properly Audited the book results cannot be disturbed. The auditor has further commented vide para in audit report that As per company is governed by the Electricity Supply Act. 1948, the provision of that act have prevail wherever the provisions of Companies Act. 1956 are in consistent with the said Electricity Supply Act. (Pg. 77 of Paper Book or Pg 20 of Annual Accounts for the F.Y. 2002-03). Thus when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter of Jodhpur Vidyut Vitran Nigam Limited, which is situated on the same pedestal as that of the assessee, have been accepted by the revenue and the revenue has not insisted for application of provisions of MAT U/s 115JB of the Act. Therefore respectfully following the order passed by the Advance Rulings (Income Tax), New Delhi and applying the same to the present facts and circumstance of the case, we decide the issues in favour of the assessee. We also held that the benefit as has been given to Jodhpur Vidyut Vitran Nigam Limited under the provisions of the Electricity Act and the Companies Act be also extend it to the assessee without insisting for the application of Section 115JB of the Act In the light of the above, the issue is decided in favour of the assessee and against the revenue. Accordingly, this ground of appeal of the assessee is allowed. ITA No. 549/JP/2009 20. Ground No. 1 of the revenue s appeal ITA No. 549/JP/2009 for the A.Y. 2006-07 is against deleting the disallowance of ₹ 9,32,66,120/- on account of prior period expenses. On this ground, the ld CIT(A) had allowed the appeal of the assessee by observing as under:- 3.3 From the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or was in the nature of income and the same was offered as such by the assessee in the return. However, the AO has mistakenly treated the same as expenditure and disallowed the same, which resulted in double addition of the same amount. The Id CIT(A) observed further that probably this mistake has occurred because in the immediately preceding year, item under the same head was in the nature of expenditure. Under these material facts and circumstances, we are of the view that Id CIT(A) has rightly directed the AO to delete the addition of ₹ 66,87,891/- which has already been included by the assessee in its return of income. The first appellate order is thus upheld. The ground is accordingly rejected. Respectfully following above decision, the AO is directed to delete the addition of ₹ 9,32,66,120/- out of prior period expenses. From the assessment order it is found that the AO asked the appellant to produce vouchers for prior period expenses of ₹ 1,08,84,667/-. The appellant produced vouchers for total amount of ₹ 3,76,18,547/-. The AO therefore, concluded that the remaining sum of ₹ 9,32,66,120/- is not allowable within the meaning of section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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