TMI Blog2022 (12) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... ments referred to thereat, was that it is the increased liability/s as on 31/5/2005, i.e., in the opening statement of assets and liabilities (balance-sheet) as on 01/6/2005, to the extent modified by GoMP, that stands claimed by the assessee through debit to the profit loss account, i.e., the operating statement, for the relevant year. The same, even as also observed by the Bench during hearing, are capital liabilities, of course at net of capital assets. As even, notwithstanding the fact that they stand to the extent modified or varied, intimated and confirmed by GoMP only later, so that they could not be co-opted in the books of account on 31/5/2005 (31/3/2005), but only later, i.e., on 12/6/2008 (31/3/2008), would be of no consequence inasmuch as the same does not alter the nature of the liability (asset) as on capital account, but only its quantum. The interest liability for the 22 month period, i.e., from 01/6/2005 to 31/3/2007, would, in the given facts and circumstances of the case, stand to arise to the assessee only on 12/6/2008, i.e., during fy 2008-09, corresponding to AY 2009-10. Assessee following mercantile system of accounting, with prudence and conservati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility as excluded (as per (b)) against income, if any, arising to the assessee from the separate, dedicated funding provided by GoMP in respect of the proportionate GPF. If not, the said excluded amount cannot be setoff by regarding it as the liability of the assessee s business. (d) Likewise for the interest cost on loan for Rs. 1318.75 cr. (as against earlier figure of Rs. 1379 cr.), i.e., as per (a). It would though need to be clarified as to how the interest liability (which is to be in terms of underlying agreement/s) arises; the final loan (capital borrowed), rather than exhibiting an increase with reference to the provisional sum, stands decreased by Rs. 6025.44 lacs in the final opening balance sheet (as on 01/6/2005). There ought to be thus, on the contrary, a reversal of the interest provided on the excess loan for the preceding two years, resulting in a prior period income, i.e., on the same basis and principle as the increased liability results in an additional interest cost/liability. The adjudication, thus, though in agreement with the assessee s stand in principle, would need to be determined on quantum, and which may though result in an income, qua which the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not consistent with the working u/s. 32(1) r/w s. 43(6), of course, upon allowing the assessee an opportunity to present and explain itself working. Reference in this context be made to Maharana Mills (P.) Ltd [ 1959 (4) TMI 7 - SUPREME COURT] - We are conscious that the fixed assets as finally allotted to the assessee are at an increase (i.e., by Rs. 252.74 lacs, after adjusting the capital WIP), rather than a decrease, over that initially assigned, and which should therefore result in an enhanced charge for depreciation. So, however, the methodology adopted, which is to be in terms of s. 32(1) r/w s. 43(6), would coalesce the charge of depreciation for the current year to a single sum, obviating the need for any reversal of, or additional, charge for depreciation for the current year. - I.T.A. No. 146/JAB/2016 - - - Dated:- 9-12-2022 - Shri Sanjay Arora, Hon ble Accountant Member And Shri Manomohan Das, Hon'ble Judicial Member For the Appellant : Shri Shravan Kumar Gotru, CIT-DR For the Respondent : Shri Manoj Jain, FCA ORDER PER SANJAY ARORA, AM: This is an Appeal by the Revenue against the Order by the Commissioner of Income Tax (Appeals)-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 847 LOAN FROM MPSEB 835 REGULATORY ASSET TOWARDS PENSION LIABILITY 3,910 CURRENT LIABILITIES STAFF RELATED LIABILITIES 20 INTEREST ACCRUED BUT NOT DUE 13 PENSION LIABILITY CURRENT ASSET PROVISON FOR PENSION 3447 STOCK 66 PROVISION FOR GRATUITY 463 6,154 6,154 These assets and liabilities were co-opted in the books of the assessee-company in 31/3/2005 inasmuch as it s books for fy 2004-05 had not been closed as on 31/5/2005. Subsequently, vide Notifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment proceedings the assessee was asked to explain as per point No.14 of notes to accounts where it has been mentioned that loss of the year has been overstated by Rs. 4754.76 lakhs. Give details of same with year-wise breakup and give reasons why the same should not be added back to income of assessee. Assessee vide its reply dated 04/10/2010 submitted that sum of Rs. 4754.70 lacs was charged to P/L a/c to give effect of final opening balance sheet provided by Govt. of MP on 12/06/2008 and hence the same cannot be classified as prior item. Therefore, it could not be added back to income. The same situation is being explained in note No.14 of notes to accounts. The arguments of the assessee is not acceptable as the statutory Auditor has specifically qualified it as prior period item, also the said expenses does not pertain to asstt. year 2008-09 and the hence amount so claimed is disallowed and added to the total income of the assessee. It may be relevant to reproduce the said Note to the assessee s final accounts for the relevant previous year, i.e., fy 2007-08: (PB-I, pg.49) 14. As per AS-5 (Prior Period Items) Para no.16 the terms prior period items as define ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t so claimed is disallowed and added to the total income of the assessee. 6.1.4 I have carefully considered the facts of the case and the finds of the Assessing Officer as well as the arguments advanced on behalf of the appellant. I have also gone through details furnished on behalf of the appellant as per accounting Standards AS-4 and AS-5. Obviously the appellant company has done its accounting and hence not treated final Opening Balance Sheet adjustments as prior period items as they were not known to the company previously. Final opening balance sheet was notified by the State Government in the Official Gazette vide notification no. 292 dated 12th June 2008, i.e., in the FY 2008-09, as the books of the company for FY 2007-08 were not closed by that date. In this back-ground, the appellant company's giving full effect of change in opening balance in the year 2007-08 itself following mercantile system of accounting and following Accounting Standard 4, Contingencies and Events Occurring after the Balance Sheet date issued by Institute of Chartered Accountants of India, does not appear to be incorrect or inadmissible. In this regard, the following legal propositions may be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before us. 3.2. Before us, both the sides would rely on the orders by the authority below, i.e., as favourable to it. Shri Jain, the ld. counsel for the assessee, would, on enquiry, clarify during hearing that the General Provident Fund (GPF), as indeed gratuity/pension, is not only in respect of the assessee s employees but those of other entities as well; the assessee having been assigned the said liability on restructuring of MPSEB, and for which reference was made by him to cl.(k) of the Notification dated 12/6/2008 (PB-I, pg.65 PB-II, pg.14), which reads as under:- (k) The past unfunded pension liabilities of pensioners and employees of MPSEB existing as on 31st may 2005 are to be assessed by Actuarial valuation and is therefore retained with Residual MPSEB for the time being. The actual pension/gratuity payments shall be claimed by MP Power Transmission Co. Ltd. in its ARR till requisite fund equivalent to the past unfunded liabilities is built up in the manner provided in Rule 10 11 notified earlier vide No. 4003-FRS-17-13-2002 dated 13th June 2005. He would also take us to both the statutory auditor s report and the tax-audit report (PB-II, pg.160), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuing further, while the AO relied on the statutory auditor s report, further stating that the impugned expenditure does not relate to the current assessment year, the ld. CIT(A) has allowed relief on the basis that the liability has crystalized only during the year under consideration. In fact, the sense that we got on hearing the parties, as indeed the documents referred to thereat, was that it is the increased liability/s as on 31/5/2005, i.e., in the opening statement of assets and liabilities (balance-sheet) as on 01/6/2005, to the extent modified by GoMP, that stands claimed by the assessee through debit to the profit loss account, i.e., the operating statement, for the relevant year. The same, even as also observed by the Bench during hearing, are capital liabilities, of course at net of capital assets. As even, notwithstanding the fact that they stand to the extent modified or varied, intimated and confirmed by GoMP only later, so that they could not be co-opted in the books of account on 31/5/2005 (31/3/2005), but only later, i.e., on 12/6/2008 (31/3/2008), would be of no consequence inasmuch as the same does not alter the nature of the liability (asset) as on capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning balance-sheet as on 01/6/2005. 4.4 So, however, as we have seen (paras 4.1 4.2), the assessee has duly accounted for the assets and liabilities at the original and the revised values, as balance-sheet items. The first component (of the impugned sum) is the interest liability on the increased values to the extent they relate to the two preceding years that stand lapsed in the interim, i.e., the delay in notifying the correct assets and liabilities to be taken-over, or the correct values thereof, being fys. 2005-06 2006-07. The same, sure, relate to these years and, accordingly, classified by the Auditor as a prior period expenditure. Also, the same stand accrued during the said preceding years. The accounting of interest liability in their respect would only be in terms of underlying arrangement/s, i.e., under which the interest obligation on these liabilities arises. Interest being a function of time, would stand to accrue on the basis of time. The same, thus, though accounted for during the current year, stands since accrued, i.e., during the fys. 2005-06 2006-07. The question before us is if the same could be regarded as the assessee s liability/s arising to it for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation for the period prior to 01/6/2005, i.e., the period prior to the transfer date, as, as afore-explained, it is a capital liability in the assessee s hands, and which stands incorporated at its value as on 31/5/2005. The foregoing is, further, subject to a caveat, i.e., qua interest on GPF. It is only the interest (for the period 01/6/2005 to 31/3/2007) to the extent it relates to the assessee s employees that would stand to be regarded as the assessee s trading liability, and not on the GPF in respect of the employees of the other entities that along with the assessee succeeded MPSEB or the residuary entity (Board). Even if the assessee s obligation under the terms the restructure/reorganisation of MPSEB, the same cannot be regarded as the liability, capital or, as the case may be, revenue, of the assessee s business, profits and gains of which, representing a source of income, are assessable to tax. The accounts, it may be appreciated, are in respect of the assessee s business. It is the income which by definition is net of expenditure, of this business that would stand to be provided and taken into account. The expenditure on the salary or GPF of the employees of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The adjudication, thus, though in agreement with the assessee s stand in principle, would need to be determined on quantum, and which may though result in an income, qua which the AO shall of course seek clarification, and issue clear and definite finding/s. e). the interest as per (a) and (d) shall be allowable u/s. 36(1)(iii) (loan) or s. 37(1) (GPF), in computing the assessee s business income. However, the interest liability shall, where and to the extent subject to the condition of tax deduction at source and/or of payment, its deductibility would subject to relevant provisions, viz. s. 40(a)(ia); 43B, et. al. Needless to add, the requisite data, information and explanation/s for the purpose shall be furnished by the assessee, as also the necessary working. The AO shall make necessary verification in the manner deemed proper and, in case of any difference, extend reasonable opportunity to the assessee to present and explain it s working, deciding as per law issuing clear findings of fact. We decide accordingly. 4.7 The second component of the impugned sum is the liability in respect of the terminal benefits, being pension and gratuity, provided at defined rates f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djusting the capital WIP), rather than a decrease, over that initially assigned, and which should therefore result in an enhanced charge for depreciation. So, however, the methodology adopted, which is to be in terms of s. 32(1) r/w s. 43(6), would coalesce the charge of depreciation for the current year to a single sum, obviating the need for any reversal of, or additional, charge for depreciation for the current year. We decide accordingly. 4.9 Before parting with our order, we may clarify two things. We have stated that the AO shall cause verification of the assessee s claims as deemed proper. This is as, though there is nothing on record to exhibit the same, it may well be that the AO had in the original proceedings called for and examined the relevant agreements (for interest on Loan and GPF, and qua provision for gratuity and pension), as well as the satisfaction of the relevant provisions of law. Two, the assessee s argument alluding to the tax audit report (para 3.2), though inconsistent with the proved facts and, in fact, rendered inconsequential in view of our adjudication, is also without any basis in law inasmuch as the statutory audit report (PB-I, pgs. 25-32) is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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