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TMI Blog2016 (10) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... s/2015 (A.Y. 2006-07): (Assessee's appeal): 3. The assessee has raised several grounds in its appeal, however, the cruxes of the issues are as follows:- "(i) The learned Commissioner of Income Tax (Appeals) has erred in partly sustaining the order of the learned Assessing Officer in regard to disallowance of bad debts to the extent of 4/5th of the total claim of Rs.1,02,00,000/- under section 35D of the Act." "(ii) The learned Commissioner of Income Tax (Appeals) has erred in confirming the order of the learned Assessing Officer who had disallowed Rs.42,95,568/- being compensation payment made for delayed commissioning of windmills." ITA No.1823/Mds/2015 (A.Y. 2006-07): (Revenue's appeal): 4. The Revenue has raised several grounds in its appeal, however, the cruxes of the issues are as follows:- i) The learned Commissioner of Income Tax (Appeals) has erred in allowing the claim of bad debt in respect of advances made to M/s. Soprano Holdings Pvt. Ltd. ii) The learned Commissioner of Income Tax (Appeals) has erred in allowing 1/5th of the expenses being advance made for the project to M/s. Cicon which is not recoverable. iii) The learned Commissioner of Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment proceedings, it was observed by the learned Assessing Officer that the assessee had claimed bad debts aggregating to Rs.1,00,00,000/- against the irrecoverable advances made to M/s. Cicon Environment Technologies P.Ltd.. It was explained by the assessee that it had advanced an amount of Rs.1.00 crore to M/s. Cicon Environmental Technologies Ltd., in order to identify locations, conduct service and for getting permissions from the applicable Government agencies with respect to the assessee's project for development of alternate power. To secure the advance, M/s. Cicon Environmental Technologies Ltd., had given bank guarantee. The deadline demarcated for the services to be rendered by M/s. Cicon Environmental Technologies Ltd., had expired on 30.04.2004. However, no constructive services were rendered. Hence, the assessee requested for refund which was denied by M/s. Cicon Environmental Technologies Ltd. The bank also refused to honor the bank guarantee. The suit filed for recovery of the advances was pending before the Hon'ble High Court of Bombay. In these circumstances, the assessee decided to write off the amount advanced to M/s. Cicon Environmental Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee also failed in the 'arbitration award', the above amount of Rs.l,02,00,000/- is eligible for write off @ 20% (or 1/5th J per year starting from the present A.Y. 2006- 07. Accordingly, the Assessing Officer is directed to allow Rs.20,40,000/- (being I/5th of Rs.l,02,00,000/- as an allowable deduction u/s.35D in the present A.Y. 2006-07 and the balance amount in the next (following) four successive assessment years." 8.5. Before us, the learned Authorized Representative submitted that though the assessee had made advances to M/s. Cicon Environment Technologies Ltd., for the purpose of conducting surveys, preparation of project reports, commercial and financial viability report etc., which was related to the current business of the assessee and therefore, the loss arising out of the same is a business loss and therefore it may be allowed as deduction. 8.6. The learned Departmental Representative on the other hand, vehemently argued in support of the order of the learned Assessing Officer. 8.7. We have heard the rival submissions and perused the materials on record. From the facts of the case, it is apparent that the loss arising due to the non recoverability of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company had received substantial amount from M/s. Indonet Global Ltd, otherwise the assessee company would have availed financial facilities from banks etc., and ended up paying substantial interests. The Ld.CIT(A), following the decision for the assessment year 2004-05 by the first appellate authority in ITA No.629/2006-07 held that the payments cannot be considered as compensation for delay in commissioning the windmill but can be considered as interest payment for the advance received from M/s. Indonet Global Ltd. The Ld.CIT(A) further held that the interest @ 12% per annum on the advances received from M/s. Indonet Global Ltd., is reasonable and worked out the same at Rs.22,04,432/- and allowed it as deduction, while as the balance payment of Rs.42,95,567/- was disallowed. The gist of the order of the learned Commissioner of Income Tax (Appeals) is reproduced herein below for reference:- "4.2.2 I have considered the assessee's submissions carefully. The present issue of disallowance the compensation for delay in commissioning of wind mills is a recurring issue. A similar issue also cropped up in the appeals of the assessee's A.Y.2004-0S. In that year (A.Y.2004-0S) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized Representative reiterated his submissions made before the revenue authorities stating that the entire payment of Rs.65.00 lakhs was made as compensation towards delayed commissioning of windmill which also included the benefit enjoyed by the assessee towards interest free advances received from M/s. Indonet Global Ltd. Therefore it was argued that the entire expenses incurred by the assessee for Rs.65.00 lakhs should be allowed as deduction. 9.4. The learned Departmental Representative on the other hand vehemently argued in support of the orders of the Revenue. 9.5. We have heard the rival submissions and perused the materials on record. From the facts of the case, we find merit in the contention of the learned Authorized Representative. The amount of Rs.65.00 lakhs paid by the assessee to its client was due to the delay in commissioning of the project and in order to compensate for the loss of profit. Further, the assessee had also received an amount of Rs.3.00 crores as interest free advances for the execution of the project which is also required to be compensated. Considering all these facts and as a result of mutual agreement between the assessee and its client, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4.1.4 Against the assessment order of the A.Y.2004-05 the assessee filed an appeal. The Commissioner of Income Tax (Appeals) held that the advance was made during the course of regular business and hence allowable as bad debt u/s.28 of the Act. Even the ITAT, vide its order in ITA No.2085 & 2086/Mds/2008 dated 10.07.2009, had confirmed the order of CIT(A)." 10.3 The learned Commissioner of Income Tax (Appeals) thereafter following the decision of the Tribunal for the assessment year 2004-05 held as follows:- "4.1.5 The facts of the present assessment year are exactly identical to those of A.Y. 2004-05. In fact, it is the same advance which is written off in phased manner in these years. Hence, the above decision of the CIT(A) and ITAT is equally applicable for the present assessment year 2006-07 under consideration. therefore, respectfully following the above decision of the ITAT in the assessee's own case of A.Y. 2004- 05, I hold that the assessee's claim of bad debt written off, on account of advance made to M/s. Soprano Holdings P. Ltd., is allowable u/s.28 of the Act. The Assessing Officer is directed to allow the same." 10.4 Since the learned Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vehemently argued in support of the order of the Revenue authorities. 12.5 After hearing both sides, we are of the considered view that the assessee has incurred loss during the course of its regular business and therefore it is entitled to claim the same as business loss. Therefore, we hereby direct the learned Assessing Officer to delete the addition made for Rs.1,47,00,000/- in the hands of the assessee. Ground No.2: Addition of Rs.4,78,44,777/- being rupee fluctuation loss on foreign currency convertible bonds: 13.1 It was observed by the learned Assessing Officer that the assessee had claimed deduction of Rs.4,78,44,777/- towards rupee fluctuation loss on the foreign exchange bonds of 30 million US $ issued during the month of December, 2007. The unutilized amount out of 30 million US $ received by the assessee in Indian rupees was placed in fixed deposits which earned interest of Rs.1,18,63,903/- and the same was offered to tax. It was therefore explained by the assessee that the loss of Rs.4,78,44,777/- arising out of foreign exchange fluctuation on the outstanding liability of 30 million US $ ought to be allowed as deduction. However, the learned Assessing Officer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Standard 11 clearly stipulates that the monetary items such debtors, creditors and loans should be converted at the closing rate and reported as such in the balance sheet by charging the same to the profit & loss account. Accounting Standards are nothing but tools to determine the actual profit or loss incurred by the assessee during the relevant year. Further, the Hon'ble Apex Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd., reported in 179 Taxman 326 has clearly held that an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any differences, loss or gain arising on conversion of such liability at closing rate should be recognized in the profit & loss account for the reporting period. Therefore, we are of the considered view that the assessee would be entitled for deduction towards the loss incurred by it for Rs.4,78,44,777/- provided the provisions of section 43A of the Act relating to change in rate of exchange of currency is not applicable in the case of the assessee. Hence, we hereby direct the learned Assessing Officer to examine the applicability of section 43A of the Act in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed from the beginning. However, the assessee's windmills include two types, i.e. new windmills and second hand windmills. The company has been treating all the windmills (i.e. both new windmills as well as the second hand ones) alike and providing depreciation @ 5.28% in its books of account all along. Suddenly, during the financial year 2007-08, the company realized that in the case of second hand windmills, the lifespan of the windmills is less than 20 years (i.e. to the extent of the number of years for which these windmills were used by the previous owners) and hence the depreciation has to be claimed considering the balance of the lifespan of these windmills in the hands of the assessee. But the assessee has been claiming the depreciation on these second hand windmills also @ 5.28% as if these windmills are also going to last for 20 years. Actually, the depreciation of the second hand windmills (or for that matter, any other asset) should be spread over the remaining lifespan of the windmills in the hands of the assessee. For example, if the assessee purchases a second hand windmill of 15 years old for Rs.I0 lakhs, the cost has to be written off, by way of depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of applicability of the Schedule. However, if on the basis of a bonafide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual accounts. 4.2.4 Further, for the purpose of section 115JB of the Act, the assessee is required to prepare the P&L account as per the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Thereafter, the book profit for the purpose of section 115JB is to be determined by adopting the net profit as shown in the said P&L account and as increased by the items contained in clauses (a) to (i) of the explanation-1 of section 115JB; and as reduced by items contained in clauses (i) to (viii) of the explanation-1 of section 115JB. The Assessing Officer cannot make any other adjustments (i.e. increasing or decreasing) other than those specified in the clauses of Explanation-1 of section 115JB of the Act. The provisions of section 115JB of the Act are as under: Special provision (or payment o(tax by certain companies. Sec.115JB. (I) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Explanation-1 to section 115JB are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous year, for the purpose of section 115JB. 4.4.6 Thus, the Explanation-1 to section 115JB has provided nine clauses, i.e., clauses (a) to (i) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In the instant case, we are concerned with the claim of depreciation claimed at higher rates than what is prescribed in the Companies Act. The claim would fall within the ambit of clauses (a) to (i), only if the amounts are the ones specified under these clauses. The present claim of "depreciation at higher rates", which has actually been debited in the P&L account, is an actual charge on the assets and also permitted under the Companies Act read with the circular issued by the Finance Ministry. Therefore, the assessee's claim of "depreciation at high rates" debited in the P&L account, will not fall under the ambit of clauses (a) to (i) of the Explanation 1 to section 115JB. 4.4.7 Therefore, none of the clauses (a) to (i) of the Explanation-1 to section 115JB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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