TMI Blog2024 (1) TMI 1278X X X X Extracts X X X X X X X X Extracts X X X X ..... certificates - HELD THAT:- The assessee is executing composite contracts of varied nature which would involve supply of material as well as services. The assessee is following definite accounting policy to recognize the revenue in the books of accounts. No defect in the books has been pointed out by lower authorities. The revenue shown by the assessee is way above than the revenue shown in the TDS certificates. The assessee is a corporate entity and would receive contract payments through banking channels only. The assessee has already provided copies of bills, TDS certificates and relevant ledgers from books of accounts. No discrepancy is noted in the same. Therefore, the impugned addition is merely on suspicion and nothing more. By deleting the addition, we allow the corresponding grounds raised by the assessee. Disallowance of Electricity Tax under normal provisions and u/s 115JB - HELD THAT:- The constitutional validity of the state levy is sub-judice before Hon ble High Court of Madras [ 2001 (9) TMI 45 - MADRAS HIGH COURT] The Hon ble Court has stayed the recovery of demand subject to deposit of Rs. 200 Lacs by the assessee. The same has been deposited by the assessee. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng what was reasonable. To allow the expenditure, it would not be necessary that the project should fructify. Considering all these facts, we would hold that impugned disallowance against this entity could not be sustained. Investments made in IJCL were made as a joint venture investment. This entity was to manufacture phosphoric acid and the entire production was to be sold to the assessee. The assessee made 60% contribution in this entity. The venture was to ensure supply of critical raw material for the assessee. Simply because the project could not fructify would not disentitle the claim of the assessee that it had business connection with this entity. The investment made by the assessee has RBI approval. This being so, disallowance of interest either u/s 37(1) or u/s 36(1)(iii) could not be said to be justified. The advances given to SPEL have been given by the assessee as a promoter entity to meet its debt obligations and capital expenditure. The advances were given by the assessee to this entity only up-to financial year 2000-01. During impugned year, the advances made by the assessee have been converted into equity shares. In earlier years, when the advances were given, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05. 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. MAT computation - Adjustment of provision of bad and doubtful debts u/s 115JB - AO to disallow the provision for bad and doubtful debts while computing the Book Profits u/s 115JB on the ground that the same was unascertained liability - HELD THAT:- The provision made by the assessee towards bad and doubtful debt was towards unascertained liability only. The same is also evident from the fact that provision made against SSIL was reversed in subsequent years and full amount due against that entity was claimed as deduction. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest paid to financial institutions u/s 43B amounting to Rs. 41,99,00,000/ -. 2.1 The CIT(A) / NFAC ought to have appreciated that the interest converted in to loans and the same was not allowed as deduction in the relevant assessment year in which such provisions were made, are now reversed and credited to the profit and loss account. Hence such reversal provision credited to P L but which were not allowed as deduction in the year in which they were made, cannot constitute income u/s 41(1) and hence has to be deducted from income. 2.2 The CIT(A) / NFAC after having held at @ para 4.1.3.3 of the CIT(A) order that the reversal of liability will become income in the years, the loan is waved off. But since the liability is not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Bharti Televenture Ltd 331 ITR 502 Del. Reliance Utility and Power Ltd. vs. CIT 313 ITR 340 (Born.) CIT vs. Hotel Savera 239 ITR 795 (Mad) CIT (LTU) Vs. Reliance Industries Ltd 307 CTR 121 SC PCIT v Sintex Industries 403 ITR 418 Guj confirmed by 93 Taxman.com 24 SC. 6. The CIT(A) erred in deleting the interest of Rs. 105. 73 crores excluded in the memo which represents interest income of AY 2001-02 Rs. 57.26 Crores AY 2002-03, Rs. 48.46 Crores which were offered to tax in those two years. The amount was adjusted against investment for AY 2003-04 but disallowed I not claimed for that year. However, as the creditor agreed to pay the interest during the current year, it was credited to P L but excluded in the Memo as the amount was already offered to tax earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made towards Bad and Doubtful debts to that extent and credit the same to the P L account by which the same if offered to tax in the subsequent years. The disallowance which from subject matter of this appeal are three folds i.e., (i) Adjustment of provision of bad and doubtful debts u/s 115JB; (ii) Disallowance of Electricity Tax under Sec.43B r.w.s. 115JB; (iii) Disallowance of bad-debts written-off. 6. The Ld. AR advanced arguments on impugned issues citing various judicial decisions and also filed written submissions to support the case of the assessee. The revenue also advanced arguments and filed written submissions in support of impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as given in succeeding paragraphs. The assessee being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not provide the relevant facts and figures. Aggrieved, the assessee is in further appeal before us. 7.3 Having considered the orders of lower authorities, we find that the adjudication of Ld. CIT(A) is in accordance with the statutory provisions as well as binding decision of Hon ble High Court of Madras. The amendment brought in by Finance Act 2006 was squarely applicable to the facts of the case. The newly inserted explanations (3C) and (3D) provide that mere conversion of interest into loan would not be deemed to be actual payment of interest. Therefore, the same has rightly been disallowed and confirmed by lower authorities considering the provisions of Sec.43B. The assessee is free to make the claim of the same whenever it is eligible to claim the deduction in accordance with law. The correspon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions 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 Account. There was no separate Profit Loss Account in respect of assessee s contract activity. Finally, entire amount of Rs. 2641.75 Lacs as shown in TDS certificates was added to the total income with an observation that if the assessee furnishes evidences to show that any of the said amount was admitted as income in any other year, the addition as well as TDS credit would be modified suitably u/s 154. 8.3 During appellate proceedings, the assessee submitted that it admitted contract income of Rs. 11197.39 Lacs out of which amount of Rs. 5475.51 Lacs pertained to income from Kuwait operations which was not liable for TDS. The assessee claimed TDS credit of Rs. 56.36 Lacs covered in 110 TDS certificates and the corresponding income covered in the relevant certificates was Rs. 2641.75 Lacs. The assessee had furnished break ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding 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 same to Profit Loss Account. The Ld. AO held that the validity of levy of electricity tax was under dispute and the said demand pertained to earlier years. The Constitutional validity of the levy was also disputed by the assessee. Therefore, both the components were not actually paid by the assessee and these components were admittedly taxes levied under the statutes passed by State Government. Therefore, the same would be governed by the provisions of Sec.43B. Since these items were not actually paid and both the items were provision of unascertained liabilities, the prohibition of Sec. 43B would apply. Moreover, the amounts at this juncture were only liabilities of a contingent nature since the levy would depend on the court s judgment to be delivered in future on its validity. Relying on the decision of Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 that interest was charged up-to AY 2002-03 which was offered to tax. However, in subsequent year, as per contractual terms, the interest was waived-off in view of poor financial position of SPC. It was submitted that as per agreement executed by the assessee with this entity on 03.03.2004, no interest is chargeable after 31.03.2002 in view of the mutual agreement and the financial difficulties experienced by SPC. (ii) Advance to National Aromatics Petrochemical Corporation Ltd. (NAPCL) The assessee made equity advance of Rs. 154789 Lacs to NAPCL in earlier years. During the year, the amount extended was Rs. 0.86 Lacs. It was submitted that since the project could not take-off due to pending litigation, the assessee did not charge any interest on the same. (iii) SPIC fertilizers and Chemicals Ltd. (SFCL FZE) This entity s business was stated to be having direct nexus wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways 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 acquire fixed asset, creation of capital work-inprogress, making of advances / investments, creation of net current assets etc. Accordingly, Ld. AO worked out proportionate interest disallowance of Rs. 5587.10 Lacs and disallowed the same u/s 37(1) on the ground that the expenditure was not for the purpose of business. 10.3 During appellate proceedings, the assessee reiterated that most of these entities had business nexus with the assessee s business. The advances so made had direct business nexus. The assessee relied on the decision of Tribunal for AY 2001-02 ITA No. 2252/Mds/2003 dated 20.10.2004 deleting the disallowance with respect of SFCL-FZE and IJCL. However, this issue was remitted back by Tribunal in AY 2003-04 in ITA No. 1466/Chny/2009 dated 16.12.2019 considering the observation of Ld. AO that interest free funds were replaced by interest bearing funds. Similar issue was restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary 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 in AYs 1997-98 to 1999-2000, however, considering the decision of the Tribunal for AY 2003-04, ITA No. 1466/Chny/2009 dated 16.12.2009 due to change in nature of advances since 2000-01, the issue was remitted back to Ld. AO. The assessee failed to produce any evidence to corroborate its claim regarding business expenditure. The ledger extract did not provide evidence of any running business of the sister concern. Therefore, the disallowance was hit by the provisions of Sec. 37(1). Further, as per settled legal position, interest before commencement of business could be capitalized but could not be allowed as revenue expenditure. The advances were to be converted into equity investments and proviso to Sec. 36(1)(iii) would apply which provide that any interest paid in respect of capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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 against this entity could not be sustained. Similarly, the investments made in IJCL were made as a joint venture investment. This entity was to manufacture phosphoric acid and the entire production was to be sold to the assessee. The assessee made 60% contribution in this entity. The venture was to ensure supply of critical raw material for the assessee. Simply because the project could not fructify would not disentitle the claim of the assessee that it had business connection with this entity. The investment made by the assessee has RBI approval vide letter dated 22.09.1994 which is placed on page nos.100 101 of paper-book-1. This being so, disallowance of interest either u/s 37(1) or u/s 36(1)(iii) could not be said to be justified. We order so. The advances given to SPEL have been given by the assessee as a promoter entity to meet its debt obligations and capital expenditure. The advances were given by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reserves and Surplus. After going through the same, we concur with the submissions of Ld. AR that the assessee had surplus net funds and disallowance need not be made in terms of decision of Hon ble Supreme Court in the case of CIT V/s Reliance Industries Ltd. (307 CTR 121) which held that it could be presumed that the investments were made out of interest free funds available with the assessee. The ratio of decision of Hon ble Madras High Court in CIT V/s Hotel Savera (239 ITR 795) as well the decision of Hon ble Bombay High Court in CIT V/s Reliance Utilities (313 ITR 340) also supports the case of the assessee. The interest disallowance on inter-corporate deposits of Rs. 675 Lacs has been deleted by us in assessee s own case vide ITA No. 170/Chny/2023 for AY 2003-04 on the ground that in the year when these deposits were placed, the assessee had sufficient own funds to make the investments. Taking consistent view, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 financial year 2001-02 in respect of AAE and ICD. 9.4 The reports of the statutory auditors for the year ended 31.3.2004 states in this connection as follows: Advance of Rs. 24800 lakhs given to SPIC Petro in the earlier years against equity has been converted during the year into investments in equity shares of that company. The company has also accrued the interest on advances till 31-03-02 amounting to Rs. 30609.63 lakhs (including Rs. 10573.01 lakhs recognised during the year) against which the company has issued zero bonds . 9.5 In notes on accounts at Page 61 the Directors have stated as follows: The company promoted SPIC Petro in 94-95 for the manufacture of polyester filament yarn and purified Terepthalic Acid. As per the agreement dated 03-0304 between SPIC SPIC Petro, SPIC Petro has agreed to an interest claim of Rs. 30609.63 lakhs on the advances against equity and intercorporate deposits made by the company. Out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icy 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.e.f. 1.4.2000 such borrowing costs cannot be capitalised. During the year interest of Rs. 5726.45 lakhs has been capitalised as part of the carrying amount of such advances. Had the accounting standard been followed and if such interests not been capitalised but charged to the P L account, the interest and financial charges for the year would have been higher and profit for the year before tax, loans and advances and reserves and surplus would have been lower to that extent. The Notes on Accounts (Schedule 15 at page 39) also states as follows: During the year interest of Rs. 5726.45 lakhs has been capitalised as part of the carrying amount of advances made to promoted companies in accordance with the policy consistently followed in the past. If such interest had not been capitalised, but charged to the P L account in accordance with AS No. 16 borrowing costs which is mandatory from 01.04.2000, the interest and financial charges for the year woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (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 No. 16. 9.8.4 Identical notes have also been appended to the printed financial statements for the year ended 31.3.2002 in relation to the amount of Rs. 4846.86 lakhs capitalised similarly for that year and the conclusion is also the same as in para 9.8.3 above. 9.8.5 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 charges account in the financial statements. This position is further made clear from the accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting 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 Manufacturing Co. Ltd., Vs CIT(82 ITR 363)(SC), CIT Vs Kalinga Tubes Ltd.,(218 ITR 164)(SC) and Madras Fertilisers ltd., Vs CIT (209 ITR 174, 194)(Madras). Therefore, what the assessee did was to file a revised return of income for the year 2003-04, reversing the write off of interest of Rs. 105.73 crores referred to earlier, which the assessee mistakenly called offering of interest income on advance to SPIC Petro 9.8.8 Coming to the present year ended 31.3.2004, the assessee has actually offered the said interest of Rs. 10573.31 lakhs which is netted off against the interest and financial charges in schedule 14. Significantly, there is no mention in the Notes on accounts about the capitalisation of interest as in earlier years, since actually no such capitalisation of interest had been resorted to in the year ended 31.3.2004. This recognition of interest income is made amply clear from the Notes on Accounts for the year ended 31.3.2004 referred to in para 9.5 above. Thus the total interest comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter 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 for the relevant asst. year. However, the aforesaid interest of Rs. 10573.31 lakhs was again accrued in the books during the AY 2004-05. As the corresponding write off was not claimed as deduction in the immediately preceding year in the return, the interest will not constitute income during the asst. year 2004-05 9.10.2 The assessee's contention as above would reflect the correct position if and only if the interest of Rs. 1053.71 lakhs had been recognized as interest income during the earlier asst. years 2001-02 and 2002-03, but this is not the case as explained elaborately in the preceding paras. What was done in the asst. years 2001-02 and 2002-03 was merely capitalisation of a portion of the assessee's interest liability relatable to the borrowed funds invested by it in SPIC Petro, unmindful of the fact that such capitalisation though consistently followed, violated the mandatory accounting standard No. 16 which had come into effect in the meanwhile. This is made clear again and again by the printed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent from admitting as income the interest receivable, though both are deducted / netted off from the interest account in the financial statements. On perusal of Schedule-14 for the year ended 31.3.2003, it was to be seen that there was no deduction from the interest charges as interest on advances to companies as seen in the earlier years. Since admittedly the capitalisation of the interest relatable to the advance to promoted companies i.e., SPIC Petro in this case, made in the earlier years was not in accordance with AS-16, for the assessment year 2003-04, the assessee reversed the above entry of capitalization in its books. The mistake in not following As-16 in the earlier two years was rectified in the accounting year relevant to the assessment year 2003-04. In this year, the assessee has actually offered the said interest of Rs. 10573.31 Lacs which is netted off against the interest and financial charges in schedule-14. Therefore, the aforesaid reduction of Rs. 10573.31 Lacs as claimed in the statement of income was incorrect. What was done in AYs 2001-02 and 2002-03 was mere capitalisation of portion of the assessee's interest liability relatable to the borrowed funds in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter 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 paragraphs. The revisionary authority while passing an order u/s 263, flagged two more issues viz. Adjustment of provision of bad and doubtful debts u/s 115JB and disallowance of Bad Debts. These issues are adjudicated as under: - 16. Adjustment of provision of bad and doubtful debts u/s 115JB 16.1 The revisionary authority directed Ld. AO to disallow the provision for bad and doubtful debts for Rs. 1690.09 Lacs while computing the Book Profits u/s 115JB on the ground that the same was unascertained liability. The assessee contended that it was an ascertained liability. Reliance was placed on the decision of Hon ble Supreme Court in the case of HCL Comnet Systems and Services Ltd. (305 ITR 409). During revisionary proceedings, it was stated by the assessee that stated provision includes provision of Rs. 1603.61 Lacs which was made against advances made to Sical Ships (India) Ltd. (SSIL). The advance made by the assessee to that entity aggregated to Rs. 2760.45 Lacs. That entity was engaged to transport imported raw material from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 any provision made towards diminution in value of an asset has to be added back with the book profits, confirmed the adjustment made by Ld. AO. Further, the assessee, in first appeal for AY 2008-09, claimed deduction thereof i.e., in the assessment year in which such provisions are reversed and credited to Profit Loss account. In this year, the assessee was claiming contrary. The amendment made by Finance Act 2009 was applicable to the facts of the case. The deduction could be allowed only in the relevant AY in which such provisions are reversed and credited to the Profit Loss account. Therefore, the action of Ld. AO was upheld against which the assessee is in further appeal before us. 16.4 From the fact itself, it is very clear that the provision made by the assessee towards bad and doubtful debt was towards unascertained liability only. The same is also evident from the fact that provision made against SSIL was reversed in subsequent years and full amount due against that entity was claimed as deduction. The amendment brought in by Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
