TMI Blog2020 (9) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... be found fault with. In view of this, we confirm the actions of the lower authorities in disallowing the expenditure of ₹ 33.92 crore is claimed by the assessee in this assessment year i.e. assessment year 2013 14 as it does not pertaining to this year. Accordingly, ground of the appeal is dismissed. Disallowance of utilization of the provisions for obsolescence - assessee has reduced in the computation of total income sum from its income on account of users of provision for obsolescence claimed to have been offered to tax in the prior years - HELD THAT:- As before the AO the assessee has not furnished the details of treatment given to it to the provision of obsolescence created by the assessee and utilized by the assessee. Assessee also did not substantiate with adequate evidence about the disallowance of the provision made in the earlier years. Also not established that how the utilization of provision of the inventory is allowable as deduction in this year - provision has been made by the assessee for obsolescence of inventory applying the provisions of the accounting standard 29 related to the provisions, contingent liabilities and assets. It is also required to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 158,076,996 against the returned loss of ₹ 533,036,855 was determined. This appeal is heard through videoconferencing as per the consent of the assessee. 2. The assessee has raised the following grounds of appeal:- Ground no. 1: Deduction of payment to Vista Information Systems Pvt Ltd ( Vista‟) 1.1. On facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the order of the learned AO in disallowing payment of INR 33,92,00,000 made to Vista, claimed by Appellant in the return of income for the subject year. 1.1.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) as well' as the learned AO failed to appreciate that the liability for the aforesaid expense accrued in the subject year and hence, the Appellant had rightly claimed the deduction for the same in the return of income for the subject AY. Ground no. 2: Deduction of Actual Usage of Provision of Obsolescence 2.1. On facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not holding that there has been violation of principles of natural justice as the learned AO did not provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 271(1 )(c) of the Act for the subject year. 3. Briefly, fact shows that the assessee is a subsidiary of Nortel Networks Mauritius Ltd, engaged in providing installation, testing, commissioning and repair and maintenance services in relation to Telecom equipment supplied by Nortel group companies and marketing and after sale support services to Nortel group of companies. 4. Assessee filed its return of income on 30 November 2013 declaring loss of ₹ 533,036,855. The case of the assessee was selected for scrutiny by issue of notice u/s 143 (2) of the act. During the course of assessment proceedings the various issues were examined and ultimately the assessment order u/s 143 (3) of the act was passed on 21st of March 2016 wherein the learned assessing officer made following additions which are the subject matter of dispute in this appeal :- i. Disallowance of expenses of ₹ 33.92 crore claimed by the assessee through computation of total income though not accounted in this year but in preceding previous year as well as held by the assessing officer that the claim of the above deduction pertains to assessment year 2012 13 and not to the year under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings, the ground raised by the assessee, she held that it is premature and dismissed. Thus, appeal was dismissed. Thus, assessee aggrieved with the order of the learned CIT A preferred this appeal before us. 6. First ground of appeal is with respect to the disallowance confirmed by the learned CIT A of INR 33,92,00,000 of payment made to Vista Information Systems private limited. Facts show that assessee due to global bankruptcy of Nortel group, sold its various businesses to various entities. Some of its business was sold to kapsch. The AMC and sale of spares related to business sold to that group was given to Kapsch India entity Vista Information systems Limited. As the contract was for AMC and supply of parts post warranty period, the assessee was to pay ₹ 33.92 Cr to Vista Information Pvt Ltd for performing the AMC and sale of parts to Telecom Consultants of India Limited. This sum was accounted for in the books of the assessee for the year ended on 31.3.2012. It was also claimed as deduction in that year i.e. AY 2012.13. The return for AY 2012-13 was not filed in time so LD AO disallowed the loss for that year. However, during assessment proceeding f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sum is allowable as deduction in this year. He also referred to page number 111 and 112, which describes the transaction for the financial statements. He also referred to the financial statement for assessment year 2013 14 and note number 36 to state that the claim of the assessee is allowable for assessment year 2013 14 only. He therefore stated that the lower authorities are not correct in disallowing the above claim. 8. The learned departmental representative vehemently supported the order of the learned assessing officer, referred Para number 3.5 of the assessment order, and stated that the above sum accrues in assessment year 2012 13. He further referred to the agreement dated 30 December 2011 placed at page number 136 180 of the paper book and stated that the claim of the assessee is allowable for assessment year 2012 13 only. As assessee has filed belatedly return of income for that year and therefore such sum could not have been allowed to be carried forward to the next year and therefore the assessee is claiming that the same should be allowed for assessment year 2013 14. He further referred to page number 256 of the paper book where the amount provided f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ay 2013-14 but simply says that when assessee does not claim an expenditure the loss needs to be reduced. He also submitted that accounts were also not revised. He therefore submitted that there is no error in the orders of the lower authorities on this issue. 9. The learned authorized representative in rejoinder submitted that the assessee was in liquidation therefore the provision was made in assessment year 2012 13 but there is no reason for revision of accounts of the assessment year 2013 14 to incorporate the above entries. Even otherwise, he relied on the decision of the honourable Supreme Court in case of Kedarnath Jute mills Ltd 82 ITR 365 and Sutlej Cotton Mills Limited 116 ITR 01 to submit that the manner of treatment in the accounts of particular sum cannot be determinative of the allowability of the expenditure. 10. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also gone through a paper books submitted by assessee where in annual accounts, correspondences and agreements are placed. Brief facts of these expenditure is that assessee has entered into service contract with Telecommunications Consultant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply, installation, testing and commissioning of mobile crane radio communication system and there were some publications pending to be performed in respect of the said contract. These obligations included entering into an annual maintenance contract (AMC) with TCIL to supply and guarantee the availability of maintenance papers for the network. It was stated by the assessee that in the light of insolvency proceedings filed by the Nortel group and the subsequent sale of Nortel groups business across locations, the assessee company entered into a contract with Vista Information Systems private limited (Vista) whereby the assessee company was to pay to be stern amount of ₹ 33.92 crore is for taking over the residual obligation from the assessee company. 3.3 The assessee further intimated that the agreement between the Assessee Company and Vista was dated 30/12/2011 and the payment was made to Vista on 8/5/2012. It was stated that the assessee has claimed deduction of ₹ 33.92 crore is in assessment year 2012 13 but later sought to withdraw the claim vide written submission dated 28/11/2013 filed during the assessment proceedings for assessment year 2012 13, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginal agreement, the tripartite agreement had to be executed on or before 29/2/2012, i.e. within financial year 2011 12 relevant to assessment year 2012 13 unless the date was extended by agreement in accordance with clause 7 of the agreement. 3.7 The assessee‟s claim of deduction of ₹ 33.92 crore could thus only pertain to assessment year 2012 13 and not to the year under consideration. The claim cannot be allowed to be shifted from assessment year 2012 13 to assessment year 2013 14 merely because of the fact that the assessee‟s return of loss for assessment year 2012 13 was not filed u/s 139 (3) of the act and the assessee could not avail the loss resulted from the impugned claim in assessment year 2012 13. 3.8 In view of the above facts and circumstances of the case, the assessee is impugned claim of deduction of ₹ 33.92 crore is not admissible for the year under consideration and the same is disallowed and added to the assessee is taxable income. 12. Aggrieved with the above addition, assessee challenged the same as per ground number [1] before the learned CIT A. The learned CIT A in Para number 5.1 dealt with the whole issue as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Nortel Networks Corp, Canada, (the ultimate holding company) and its certain Canadian subsidiaries have sought creditors protection Under the Company‟s creditors arrangement act (CCAA) in Canada. Also certain US subsidiaries of Nortel network Corporation Canada including Nortel Networks incorporation and Nortel Networks capital Corporation, have filed voluntary petitions in the United States Under chapter 11 of the US bankruptcy code , and certain of Europe, Middle East and Africa subsidiaries of the ultimate holding company have also made consequential filings. Subsequently, on July 14, 2009, Nortel Networks (CALA) incorporation (NCCI), a U.S.-based subsidiary that operates in the CALA region, also filed a voluntary petition for relief Under chapter 11 in the United States bankruptcy Court for the District of Delaware (US court) and became a party to the Chapter 11 proceedings. On July 17, 2009, this US court entered a further order of joint administration that provided for the joint administration of NN CALA‟s case with the pre-existing case of its debtor affiliates. As part of business and financial restructuring plans, the ultimate holding company to date, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to implement the sale of inventory related to CVAS business, the company has sold and transferred inventory to GEnband for a consideration of ₹ 11036328/ which has been paid by Genband and received by the company in the previous year. - Pursuant to above and in order to implement the sale of inventory and assignment of MSS contracts and purchase orders related to the MSS business of the company to the purchaser (Ericsson India private limited), the company had entered into an asset sale agreement dated March 31, 2011 (which is also the effective date), whereby the company agreed to sell inventory at a consideration of Rs. to 717000 to the purchaser. Further, as part of the said asset sale agreement the company agreed to pay ₹ 1 2616768 to the purchaser for accepting liabilities of assignment of M is as contracts and purchase order as per the details and terms contained in the asset sale agreement. - Pursuant to above, the company discussed and entered into a tripartite agreement dated 9 December 2011 with Bharat Sanchar Nigam Ltd (BSNL) and Ericsson India private limited (Ericsson) whereby Ericsson has entered into new AMC contracts with BSNL for phase IV a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting and recognizes income and expenditure on accrual basis except those with significant uncertainties. 16. Based on the above financial statements the assessee furnished its return of income and in the computation of total income claimed the above expenditure of ₹ 33.92 crore for assessment year 2012 13. The assessee filed his return of income on 2 January 2013 declaring total income at Rs. nil and also claimed the current year‟s loss of ₹ 735615769/ including unabsorbed depreciation of ₹ 43720911/ . As the above return was filed belatedly i.e. not within the due date prescribed u/s 139 (1) of the act, the assessment order was passed u/s 143 (3) of the act on 24th of March 2015 wherein the learned assessing officer after raising the query on the carry forward u/s 72 of the act of the losses, disallowed the business loss of ₹ 6 91894858/ and assessed the income of the assessee at a loss of ₹ 43720911/ (i.e. Unabsorbed depreciation) . Thus it is apparent that the learned assessing officer has allowed assessee carry forward of unabsorbed depreciation of ₹ 43720911/ and disallowed the business loss of ₹ 6 91894858/ i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e return of income and claiming the above expenditure, the assessee claimed before the assessing officer that above expenditure of ₹ 33.92 crore does not relate to that year ( i.e. AY 2012-13) as the liability with respect to the payment of in the subsequent financial year. Before us, also assessee produced the letter dated November 28, 2013, which was filed before the assessing officer on 29 November 2013. According to the paragraph number (1) of that letter about the claim of payment made to Vista Information Systems private limited, the assessee submitted as under:- In the return of income for the subject a while, Nortel India has erroneously claimed expenses of ₹ 33.92 crores in respect of payment made to Vista. Further, since Nortel India had filed a belated return for the subject AY, the same cannot be revised now to withdraw the aforesaid claim. Therefore, Nortel India hereby wishes to withdraw the claim of the aforesaid expenses in the subject assessment year. Nortel India, however, reserves the right to claim the aforesaid expenses in the relevant subsequent year in which the liability of the said expenses actually arose. 18. The learned Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shown that the amount of ₹ 33.92 crore is pertaining to previous year i.e. 31st of March 2012. 22. In note number 36 to the financial statement placed at page number 254 of the paper book there is no change as compared to the note number 37 for financial year 31/3/2012. 23. Now it is important to examine how the liability on the assessee has arose and in which year. The assessee has submitted the copy of the agreement between Nortel and Vista Information Systems Ltd dated 30 December 2011 placed at page number 136 180 of the paper book. This agreement has been entered into between Nortel Networks (India) private limited, Nortel Networks Singapore Pte Ltd and Vista Information Systems private limited. The preamble to the agreement shows that Nortel companies i.e. India and Singapore has entered into supply and service contract with Telecommunication Consultants India Ltd [TCIL] dated 28 September 2004 pursuant to tender issued by Eastern Railways for design, manufacture, supply, installation, testing and commissioning of mobile train radio communication system on Howrah Section of the Eastern Railway. Nortel Singapore was awarded supply contract whereas Nortel India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nortel group to Kaspch, the necessary annual maintenance of that particular business are also to be transferred to that group through an Indian entity of that group i.e. Vista Information Systems Ltd. This was also necessary because Nortel has also filed for insolvency proceedings worldwide. Naturally , when Nortel group has sold certain products and also provided services with respect to those products then, if Nortel is exiting that business, somebody else who is reliable and capable of performing that work was required to be appointed for carrying out the annual maintenance etc and supply of spare for that particular product. Apparently, it was part of the global group‟s sale of the business of the assessee as it is evident as per the notes to accounts of the assessee for the year ended on 31 March 2012 and 2013. 25. On reading paragraph number [3] of the agreement which is titled as new AMC contract, it is apparent that a fresh contract are required to be entered into by the telecommunication consultants India Ltd with Vista which would be facilitated by Nortel group. The contract of annual maintenance would also be similar to what Nortel was performing till now. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2012 13. 28. This finding of fact is also corroborated by the reason that the financial statements prepared by the assessee for that year has shown that above liability accrue on the assessee in assessment year 2012 13. Financial statements are always prepared by the assessee; auditor merely expresses an opinion on them. These accounts were never found to be or never stated by the assessee to be incorrect. Further, the claim made by the assessee is only required to be tested on the principle that whether the liability accrue during the year or not. The manner of payment of such accrued liability in subsequent year cannot defer the accrual of such liability. The payment is merely a discharge of the liability already accrued. Further, if the accounts are maintained as per the correct accounting principles, they cannot be disregarded. The accounting entries can only be rejected if they are not in conformity with the proper accounting principles. Mandate of the decision of the Honourable Supreme Court in case of Sutlej cotton mills Ltd versus CIT (116 ITR1 ) has also held that:- But it is now well settled that the way in which entries are made by an assessee in his b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st of March 2013 31st of March 2012 31st of March 2011 Opening balance 25851322 32283826 64061570 Additional provisions made during the year Nil Nil 31000171 Usage of provisions during the year 25851322 6432504 62777915 Release/reversal during the year Nil Nil Nil Closing balance Nil 25851322 32283826 30. The above provision was with related to inventory was dealt with by the assessee in its computation of total income for respective years as Under:- Particulars 31st of March 2013 (assessment year 13 14) 31st of March 2012 (assessment year 2012 13) 31st of March 2011 (assessment year 2011 12) Amount of provision added to the total income created during the year nil Ni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the income the item number [4] has been added to the total income of the assessee amounting to ₹ 31000171 and similarly at page number 306 while computing the book profit u/s 115JB of the income tax act the above provision for obsolescence has also been added to the book loss of the assessee. He further referred to the letter dated November 4, 2015 submitted to the assessing officer, which is placed at page number 275 of the paper book where in item number [4] assessee has given the details and submitted that Nortel India did not create any provision for obsolescence further. Year wise movement of the provision for obsolescence was also submitted as per annexure seven. He referred to page number 277 of the paper book wherein the details of Year wise movement of provision for obsolescence made by the assessee from financial year 2008 09 to financial year 2012 13 was tabulated. In view of this he submitted that the provision created by the assessee of ₹ 3.10 crore was disallowed for financial year 2010 11 for assessment year 11 12 and therefore for assessment year 2013 14 the claim of the assessee should have been allowed. 32. The learned departmental r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n utilized by the assessee during the year claimed as deduction in the computation of total income of ₹ 25851322/ has been offered for taxation in earlier years or not. The above claim of expenditure is dealt with by the learned assessing officer in Para number four of his order as Under:- 4. Usage of provision for obsolescence 4.1 It was observed from the computation of income that the assessee has deducted on amount of ₹ 25851322/ from its income on account of usage of provision for obsolescence claim to have been offered to tax in the prior years. Accordingly, wide a questionnaire dated 1/2/2016, the assessee was asked to justify the admissibility of this amount along with supporting evidences and was asked to intimate the corresponding income on account of provision returned back credited to the profit and loss account with supporting evidence. 4.2 In response to show cause, the AR of the assessee furnished reply dated 12/2/2016 filed on 19/2/2016, wherein copies of relevant extracts of financial statements and computation of income for assessment year 2012 13 and assessment year 2013 14 were attached as annexure 13. Perusal of the same reveals tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to accounts for assessment year 2013 14 that the assessee has used the entire provision in assessment year 2012 13 and nothing was left to be carried forward. In absence of offering the amount of ₹ 2585322/ to tax in the earlier years as claimed by the assessee, the assessee‟s act of reducing the amount of ₹ 25851322/ from its income, in the computation of income for assessment year 2013 14, on account of usage of provisions for obsolescence is not justified. 6.2 Thus allegation of natural justice is misplaced and is rejected as arriving at any conclusion contrary to plea/contentions of the appellant does not result in cannot give rise to violation of natural justice. It is most disheartening to note and observe such grounds of appeal. Nevertheless, on merits of the matter, this office is of firm view that the addition made by the AO is in order. The appellant has also to note that once appellant claims that it‟s following any policy, the detection of anomaly therein by revenue cannot be wished away/explained showing/reflecting figures as net of utilization in next year‟s opening balance, as is being sought to be done by the appellant in in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the file of the learned assessing officer with a direction to the assessee to substantiate that the amount of ₹ 25,851,322/ claimed by the assessee on account of actual users of provision for obsolescence is allowable for deduction and the original provision created by the assessee has not been claimed as a deduction in earlier years by the assessee. The AO may examine the issue after giving assessee proper opportunity of hearing and decided on merits. Accordingly, ground number two of the appeal of the assessee is allowed with above direction. 37. Ground number [3] of the appeal is with respect to the confirmation of the addition of ₹ 8208537/ on account of differential interest income as per profit and loss account and amount as per Form No 26 AS for the subject year. The learned assessing officer during the course of assessment proceedings examined form number 26 AS and directed the assessee to reconcile this income with income shown in the profit and loss account. Assessee furnished its reply on 24th of February 2016. The AO noted that interest income from ICICI bank and Citibank NA was shown at ₹ 20403911/ and ₹ 72449672/ respectively aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income appearing in form number 26 AS has been offered to tax by Nortel India in subsequent years. The assessee also gave the explanation that excess interest income has been booked in subsequent year as per page number 311 of the paper book. While referring to the second letter dated March 28, 2016 it was submitted that incorrect party was details of interest income is booked in the profit and loss account for the year and was submitted by letter dated February 24, 2016. The assessee submitted the correct party was details of interest showing that the interest income as per profit and loss account of ICICI bank was ₹ 20651703/ and the same interest income as per form number 26AS for that year‟s 20700119/ . Similarly it was submitted that for Citibank NA the interest income as per the books of account is ₹ 80362091/ and the identical amount has been shown in form number 26 AS. He further submitted that this letter was submitted before the assessing officer on 28th of March 2016 which was not considered by the AO and the learned CIT A. 40. The learned departmental representative vehemently supported the order of the lower authorities and submitted that when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 24th of February 2016 the assessee has stated that short interest booked in this year has been booked in subsequent year. Specific reference is required to be looked into at page number 310 of the paper book submitted by the assessee. It is also clear that neither the learned assessing officer nor the learned CIT A examined the letter dated 28th of March 2016. Further, it is. That the interest income is chargeable to tax in the year in which it accrues. It cannot be an excuse that assessee has offered the income in subsequent assessment year. Therefore, as there is no clarity that what is the amount of interest income booked by the assessee with respect to all the parties from womb interest has been earned and which has disclosed in form number 26AS before the subject assessment year, we set aside the whole issue to the file of the learned assessing officer with a direction to the assessee to show with proper evidence that what is the amount of income that has been credited in the books of account for the subject assessment year and what is the amount of interest shown in form number 26AS for the subject AY. The AO is directed to examine the same, after giving the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
