9911796707
TMI Blog2024 (1) TMI 1278X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s. 263 of the Act on 23.12.2009. The impugned order, in both the appeals, is a common order though it bears two different DINs. 2. In an assessment framed by Ld. AO u/s 143(3) on 19.12.2006, the returned loss of Rs. 125.71 Crores was determined at income of Rs. 107.68 Crores after certain adjustments and disallowances. In an assessment framed u/s 143(3) r.w.s. 263 on 23.12.2009 consequent to revisionary order dated 17.10.2008, the assessed income of Rs. 107.68 Crores was re-determined at Rs. 109.81 Crores after more adjustments. 3. The assessee assailed both these orders before first appellate authority vide common order dated 22.12.2022 which is in further challenge before us. The assessment framed u/s 143(3) is subject matter of ITA No. 204/Chny/2023 whereas assessment framed u/s 143(3) r.w.s. 263 is subject matter of ITA No. 205/Chny/2023. 4. The grounds raised by the assessee in ITA No. 204/Chny/2023 are as under: - 1. The order of National Faceless Appeal Centre (NFAC), Delhi /CIT(A) is contrary to law, facts and in the circumstances of the case. 2. The CIT(A) / NFAC erred in confirming the disallowance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 2003 and the validity of the Act was challenged before the High Court. Hence should be allowed as ascertained liability. 4.3 The CIT(A) / NFAC ought to have appreciated that the provision was disallowed in the regular computation u/s 43B. Sec 43B applies only to liability which is otherwise allowable and hence the entire amount should be allowed in computing Book Profits. 5. The CIT(A) / NFAC erred in confirming the disallowance of Rs. 5519.30 lakhs out of interest paid on borrowings used for the purpose of Business as being attributable to interest free advances given to Associate Companies. 5.1 The CIT(A) / NFAC ought have appreciated that the advances were made in the course of business hence no disallowance of interest is called for. 5.2 In any event, NFAC having observed that the Appellant has interest free funds of Rs. 117764. 99 Lakhs and advances was only to the extent of Rs. 94910 lakhs (Para 4.7.3.3) ought to have held that investments should be considered as having been made out of interest free funds and hence no disallowance of interest on borrowings is called for and deleted the disallowance. 5.3 The appellant reliance on among other decisions: CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the condition that the appellant pay Rs. 2 Crores. 3.2 The CIT(A) / NFAC ought to have appreciated that the balance amount of Rs. 98,67,181/- debited to P&L account represents the electricity tax imposed on the supply of TNEB power 5% of power cost and 10 paisa per unit on captive power by the Tamilnadu Tax on consumption or sale of Electricity Act,2003 and the validity of the Act was challenged before the High Court. Hence should be allowed as ascertained liability. 3.3 The CIT(A) / NFAC ought to have appreciated that the provision was disallowed in the regular computation u/s 43B. Sec 43B applies only to liability which is otherwise allowable and hence the entire amount should be allowed in computing Book Profits. 4. The CIT(A) / NFAC erred in confirming the disallowance of bad debts written off amounting to Rs. 84,08,789/- in the memo of income which is included in the miscellaneous expenditure of Rs. 1321.73 lakhs amounts to double deduction. 4.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the above provision made in the earlier year which was disallowed. When such debts become irrecoverable the appellant reverses the provision already ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 491) wherein it was held that mere postponement of liability to pay interest does not amount to actual or constructive discharge. Further, the amendment made by Finance Act, 2006 would squarely apply and accordingly, the claim of interest to the extent of Rs. 4199 Lacs was disallowed u/s 43B. 7.2 During appellate proceedings, the assessee reiterated its submissions. In the alternative, the assessee pleaded that the deduction of the same may be allowed in the year of payment or upon reversal of liability. The Ld.CIT(A) concurred with Ld. AO that the aforesaid decision of Hon'ble Apex Court in the case of Gujarat Polycrete Pvt. Ltd. (246 ITR 463) as well as CBDT Circular No. 674 dated 29.12.2003 deals with Sales Tax Deferral Scheme. The decision was rendered before amendment to Sec.43B as brought in by Finance Act, 2006 with retrospective effect from 01.04.1989 and 01.04.1997 respectively. Therefore, the same would not apply to the facts of the present case. The decision of Hon'ble High Court of Madras as relied upon by Ld. AO would apply. Therefore, the action of Ld. AO in making the disallowance was upheld. The alternative submissions were also not accepted since the assessee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the break-up of contractee as per TDS certificates. The assessee could not reconcile the two lists and therefore, it was to be concluded that the income contained in the TDS certificates was not recognized in the Profit & Loss Account. As per accounting policy for revenue recognition, the assessee was recognizing income from longterm contracts on percentage of completion method. However, up-to AY 2002-03, the income on long-term contracts was being recognized on completed contract method and the new method was being followed from AY 2003-04 onwards. It was clear that the projects mentioned in the TDS certificates were long standing contracts, which on all probability, would have attained a considerable percentage of completion which was clear from steep decline in receipt of progress payments. Therefore, the submissions of the assessee were to be rejected. Since the assessee claimed TDS credit in this year, the relevant income embedded therein should have been offered to tax in this year. When all the supply of material and other contract related expenses are debited to the Profit & Loss Account in full, the payments received should likewise be credited to the Profit & Loss Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city Tax under normal provisions and u/s 115JB 9.1 The assessee debited liability of Rs. 298.67 Lacs which include amount of Rs. 200 Lacs deposited as per directions of Hon'ble Court towards self-generation tax as disputed by the company. The remaining amount of Rs. 98.67 Lacs was self-generation tax as per assessee's own working. It transpired that the Tamil Nadu Electricity Board (TNEB) imposed electricity tax demand of Rs. 10.51 Crores relating to consumption of captive power for the period form Jan, 1986 to March, 1994. The same was disputed by the assessee before Hon'ble High Court of Madras which was pending for adjudication. The Hon'ble Court, vide order dated 13.07.2004, stayed the recovery of the demand subject to payment of Rs. 200 Lacs. The assessee paid the same and debited the same to the Profit & Loss account. Regarding the balance amount, the same was as calculated by the assessee as per Tamil Nadu Tax on Consumption / sale of Electricity Tax, 2003 which enabled the government to impose electricity tax on the supply of TNEB power at the rate of 5% of power cost and 10 paisa per unit on captive power. The assessee worked out the tax at Rs. 98.67 Lacs and debited the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43B as well as while computing Book Profits u/s 115JB. Therefore, we confirm the stand of lower authorities and dismiss the grounds raised by the assessee in both the appeals. 10. Interest disallowance 10.1 The assessee claimed interest expenditure of Rs. 15666.03 Lacs against loan liabilities of Rs. 231081.72 Lacs. However, it was noted by Ld. AO that the assessee advanced various sums to group entities against which no interest was received during the year. The same has been tabulated on page No. 15 of the assessment order as under: - No. Name of the Party Amount (In Lacs) 1. Deposits against Equity to SPIC Fertilizers & Chemicals Ltd. (SFCL) 8260.14 2. Indo Jordan Chemicals Ltd. (IJCL) 1435.70 3. Ind-ITAL Chemicals Ltd. (TPL) 10.55 4. SPIC Technologies Ltd. 2200.66 5. SPIC Petrochemicals Ltd. (SPC) 82.39 6. Gulf Bahrain 11.20 7. National Aromatics and Petrochemicals Corp. Ltd. (NAPCL) 1550.57 8. Tuticorin Alkali Chemicals and Fertilizers Ltd. (TAC) 1000 The submissions of the assessee with respect to these entities were as under: - (i) SPIC Petro Chemicals Ltd. (SPC) The assessee had advanced sum of Rs. 30204.72 Lacs to this entity and submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsion of business. The Ld. AO held that these two entities, though subsidiary of the assessee, were separate legal entities. The assessee even bagged contract from one of the subsidiaries and received progress payment of Rs. 261.12 Lacs. It also received substantial income from services implying that all these entities were separate and distinct entities in the eyes of law. Therefore, interest disallowance was attracted. 10.2 Finally, rejecting the submissions of the assessee, Ld. AO held that the assessee resorted to issue of debentures from time to time and always employed interest bearing loan funds in its business. The internal cash accruals, as averred by the assessee, would be minimal in view of huge cash expenditure incurred by the assessee. As per accounting policy, interest bearing funds were diverted to make investments / advances to promoter companies and the interest cost has always been capitalized in the account. Therefore, proportionate interest expenditure was to be disallowed. The Ld. AO also tabulated that the assessee had mixed funds in the shape of shareholders' funds for Rs. 117764.99 Lacs and loan funds of Rs. 231081.72 Lacs. All these funds were utilized to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee were sold to TAC for producing Soda Ash and Ammonia Chloride, produced by TAC being fertilizer grade is marketed by assessee. The advance was given for expanding the soda ash and ammonia chloride capacity. There was business transaction of this entity such as supply of raw material and marketing and sale of product. Accordingly considering the decision of Hon'ble Supreme Court in the case of Hero Cycles Ltd. (379 ITR 347), Ld. AO was directed not to make any interest disallowance. NAPCL was a joint venture of assessee to produce Benzene, orthoxylene, paraxylene and PTA. However, the project failed to commence production. The assessee merely submitted that the project got delayed due to regulatory consents but the same was not sufficient enough to establish business nexus. Therefore, the disallowance was hit by the provisions of Sec. 37(1). M/s SPIC Petrochemicals Ltd. was wholly owned subsidiary of the assessee. The advance was given for implementation of the project which was to be converted into loan once commercial production commenced. However, even after passage of more than 20 years, the project failed to commence production. Though Ld. AO allowed interest expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s substantiate the arguments that investments made by the assessee had direct business nexus and therefore, the test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon'ble Supreme Court in the case of CIT V/s S.A. Builders (288 ITR 1) would favor the case of the assessee. In this decision, it was held by Hon'ble Court that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. In fact, Tribunal in ITA No. 232/Chny/2022 order dated 23.09.2022 for AY 2017-18, in similar issue, quashed revisionary proceedings on the ground that the loss of investments so made by the assessee was a business loss and the same was one of the possible views. Considering the same, the view taken by Ld. AO in allowing the business loss was upheld. To allow the expenditure, it would not be necessary that the project should fructify. Considering all these facts, we would hold that impugned disallowance again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards it share of the expenditure of the project. The investment would ultimately convert into equity shares. All these facts would establish the claim of the assessee that the investment had direct business nexus and therefore, no disallowance could have been made for this investment. Regarding investment in SPC, upon perusal of page No. 182 of the paper-book, it could be noted that the assessee has, in fact, charged interest from this entity. The outstanding loan amount including interest has been converted into equity and bonds which is evident from assessee's financial statements. Therefore, there is no question of disallowing interest against this investment. The Ld. AR has pointed out that there is no investment made by the assessee in SPIC Technologies Ltd. for Rs. 2200.66 Lacs. In fact, the assessee has made investment of Rs. 220.66 Lacs in another entity viz. M/s SPIC Bio technologies Ltd. The Ld. AR has stated that the assessee has surplus net owned funds in the year in which the advances were given. The position of net owned funds has been summarized on page nos. 34 to 37 of paper book-2 along with extract of Balance Sheet, Profit & Loss Account and status of reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee pressed the said company for compensation for the delay. The interest accrued as on 31.03.2002 amounted to Rs. 306.10 Crores which SPC agreed to pay in full and final settlement. The Ld. AO upon perusal of report of statutory auditor as well as directors report, held as under: - 9.3 I have examined the above contentions. As per the agreement dated 03-03-04 entered into between SPIC and SPIC Petro, the shareholders of SPIC had granted approval to subscribe or otherwise invest a sum not exceeding Rs. 266 crores in the equity capital of SPIC Petro. Accordingly, SPIC has made both advances against equity and intercorporate deposit to SPIC Petro and as on 31-03-03, the total deposit and ICD to SPIC Petro aggregated to Rs. 248.54 crores. Since there was delay in allotment of equity shares by SPIC Petro, the assessee pressed the said company for compensation for the delay and the interest accrued as on 31-03-02 amounted to 306.10 crores. SPIC Petro agreed to pay the compensation of Rs. 306.10 crores in full and final settlement. The agreement states in Clause (v) that the assessee had accrued interest in its books of account during the years at prevalent bank rates till the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sesment proceedings are in conflict with the statutory auditor's remarks in the financial accounts, only the observations of the auditors have to be taken into account. Hence, the claim is not allowable on facts and the non-controvertible evidence provided by the audit reports. This would be further clear from the discussion given below: 9.8.1 One of the main contentions of the assessee regarding its claim for reducing Rs. 10573.31 lakhs in the statement of total income is that this interest has already been offered to tax for the asst. years 2001-02 (5726.45 lakhs) and 2002-03(4846.86 lakhs). Let us examine this claim with reference to the printed accounts (For the sake of a fuller appreciation of facts, it is necessary to extensively quote from the above) for the relevant assessment years. 9.8.2 The auditors' report for the year ended 31.3.01(clause f at page 21) states as follows: "The company has been following the accounting policy of capitalising borrowing costs on advances given to a company promoted. by it which is to be adjusted eventually against equity to be issued by that company. Consequent to the AS No. 16 -borrowing costs which has been made mandatory w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otes 1(iii) and 6 of the Notes on Accounts in Schedule 15." 9.8.3 From the above, it is quite clear that the assessee has not been following accounting standard No. 16 but has been following only US GAPP. This would also mean that the assessee has capitalised in its books of account interest liability attributable to funds specifically borrowed for the purpose of investments in/advances to the companies that are promoted by it. The usage of the expression "charged to the P&L account" in the above Notes is significant. In other words, the amount of Rs. 5726.45 lakhs reduced form the total interest and financial charges in Schedule 14 for the year ended 31.3.2001 represents only such capitalisation of a portion of interest liability of the assessee and does not represent any income accrued in the accounts as interest receivable from those promotee companies. Had there not been interest bearing borrowals for the purpose of investment in SPIC Petro, there would not have arisen any necessity to capitalise a portion of the interest charges. Thus the interest and financial charges incurred by the assessee have not been netted against the interest receivable from the promoted companies ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the P& L account" Further, in the directors Report at page 13, it is mentioned as follows: "The interest charged to SPIC Petro ..... on the advance against equity, from the period 1.4.2000 to 31.3.2002, amounting to Rs. 105.73 crores has been written off, during the financial year 2002-03. No interest has also been capitalised for the year 2002-03. Thus the mistake in not following AS No. 16 in the earlier two years (capitalising the borrowing cost) was set right during the year ending 31.3.2003 by passing necessary accounting entry to be in line with AS 16. This had the effect of charging off to the P&L account for the year ending 31.3.2003 an excess interest of Rs. 105.73 crores It follows that, as a consequence, the loss returned for the AY 2003-04 in the original return of income for the year had become greater by the corresponding amount of Rs. 105. 73 crores. Now, the excess charge of Rs. 105. 73 cores happened to be a liability that did not accrue or arise during the relevant accounting year ended 31.3.2003. And the excess liability that related to the earlier years would not be an admissible deduction for the AY 2003-04 in view of the decisions in Kedarnath Jute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of recognition of interest income. It is also crystal clear from the facts narrated above that whatever tax that accrued to the Revenue u/s 115JB for the AY 2001-02 resulted because of the assessee's mistake in not following the mandatory AS No. 16 and not otherwise. The mistake has to be rectified only for the asst. years concerned (i.e. 2001-02 and 2002-03) and not for any other asst. year. Further, it is significant to note that, when the assessee was called upon to furnish the actual accounting entries passed in its books in this regard right from the AY 2001-02 to 2004-05 and to furnish copies of Board's resolutions by this office letter dt.14.11.2006, the assessee avoided a direct answer merely saying that when advance was paid to SPIC Petro, loans and advances account was debited and bank account credited. No Board's resolutions were furnished. 9.10 The assessee filed a further letter dated 18.12.2006 reiterating its earlier contentions. The crux of the assessee's contention in this letter is as follows: "During the AY 2003-04, the interest of Rs. 10573.31 lakhs was written off in the books of accounts which was not claimed as deduction in the IT return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sents only such capitalisation of a portion of interest liability of the assessee and does not represent any income accrued in the accounts as interest receivable from those promotee companies. Had there not been interest bearing borrowals for the purpose of investment in SPIC Petro, there would not have arisen any necessity to capitalize a portion of the interest charges. Thus, the interest and financial charges incurred by the assessee have not been netted against the interest receivable from the promoted companies (as the assessee would have it), but only the interest charges have been reduced to the extent of interest capitalised in the accounts relatable to the borrowed amounts advanced to its associate companies. It is also clear that, in spite of the remarks of the auditors, the company has taken a conscious decision to follow the accounting policy of capitalisation of interest, even if this meant contravention of the mandatory AS-16. The Capitalisation in the books of a portion of interest liability is quite different from admitting as income the interest receivable, though both are deducted / netted off from the interest account in the financial statements. On perusal of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2004-05. Hence, the provisions made in the earlier (but not allowed in those years) was reversed and credited to Profit & Loss Account. The same is, therefore, reduced from the income since it is only a reversal provisions disallowed in earlier years. We are of the considered opinion that the income, if already taxed, could not be taxed twice. The Ld. AO is directed to verify the aforesaid facts as stated by Ld. AR and re-adjudicate this issue keeping in mind the fact that there would be no double taxation of the same income notwithstanding the accounting methodology being followed by the assessee. The corresponding grounds stand allowed for statistical purposes. 14. The appeal stands partly allowed in terms of our above order. ITA No. 205/Chny/2023 15. The assessment so framed by Ld. AO u/s 143(3) was subjected to revision u/s 263 by revisionary authority vide order dated 17.10.2008. Consequently, another assessment was framed u/s 143(3) r.w.s. 263 on 23.12.2009 making some more additions / disallowances which are subject matter of ITA No. 205/Chny/2023. The issue of disallowance of electricity tax u/s 115JB has already been adjudicated by us at appropriate places in earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment would not be justified. Another issue raised in revisionary proceedings was issue of bad debts written off for Rs. 84.09 Lacs. The same was claimed under the head misc. expenditure. However, the assessee again claimed the same in the computation of income. The same resulted into double deduction to the assessee. 16.2 However, rejecting assessee's submissions, the revisionary authority held that the aforesaid provision for doubtful debts was unascertained liability which needed to be adjusted u/s 115JB. The balance amount of Rs. 86.48 Lacs was due mostly from Government departments which could not be considered as bad and doubtful debts. On the issue of bad debts claim of Rs. 84.09 Lacs, revisionary authority held that the said claim was merely a double claim. Pursuant to revisionary directions, Ld. AO framed an assessment u/s 143(3) r.w.s. 263 wherein Book Profits were adjusted accordingly. 16.3 During appellate proceedings, the assessee reiterated the submissions made during revisionary proceedings. However, Ld. CIT(A), considering the amendment made by Finance Act 2009, with effect from 01.04.2001 to Explanation 1 to Sec.115JB wherein clause (i) was introduced by which an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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