Income Tax Appellate Tribunal - Indore
Beta Naphthol P. Ltd. vs Deputy Commissioner Of Income Tax. on 15 July, 1993
Equivalent citations: (1994)50TTJ(INDORE)375
ORDER
S. K. JAIN, J. M. :
Aggrieved by the order dt. 21st Oct., 1992 of the CIT(A) for the asst. yr. 1989-90, the assessee-company is in appeal on the following grounds of objections :
(i) The CIT(A) erred in confirming the addition of Rs. 89,170, being the amount of national interest on advances given to sister concern.
(ii) The CIT(A) erred in confirming the disallowance of Rs. 6,75,000, being service charges paid to M/s. Souvenirs Chemicals Private Limited for effecting sales and also for procurement of raw materials.
(iii) The CIT(A) erred in confirming the disallowance of Rs. 15,000 put of expenses.
(iv) The CIT(A) erred in sustaining the action of the Assessing Officer in forcing upon the assessee the deduction of depreciation not claimed by the assessee.
(v) The CIT(A) erred in not holding that the deduction under S. 80-HHC of the IT Act, 1961, was allowable before allowing deduction under S. 32AB of the Act.
(vi) The CIT(A) erred in holding that the deduction under Ss. 80HH and 80-I of the Act was not allowable before setting off of brought forward depreciation.
(vii) The CIT(A) erred in not deciding the issue relating to 50% reduction in job work charges paid towards repairs of plant & machinery.
(viii) The CIT(A) erred in directing to verify the claim of Rs. 27,04,031 to allow/disallow the same.
(ix) The CIT(A) erred in confirming the addition of Rs. 6,32,315 to the book profit, being, alleged excess provision for depreciation.
(x) The CIT(A) erred in not deciding the claim regarding allowability of deduction under S. 80-HHC.
(xi) The CIT(A) erred in confirming levy of interest under Ss. 234-B and 234-C of the Act.
(xii) The CIT(A) erred in not holding that the additional tax or national income assessed under S. 115-J of the Act was improper and bad in law.
Ground No. (i) :
2. The assessee had debited an amount of Rs. 63,43,804 to the interest account. It appears that during the course of assessment proceedings, the Assessing Officer was inclined to make disallowance of part of interest not relating to positive claim of the assessee, but relating to interest-free advances given to certain parties. The assessee submitted its reply dt. 4th Feb., 1992, and thereby voluntarily offered Rs. 2,43,474 to be reduced from the claim of the interest in respect of interest-free advances made to ten parties. This, according to the assessee, was done in order to avoid litigation and to buy peace. The assessee, however, did not make such concession in respect of interest-free advances made to the following parties :
(i) M/s. Dexter Fabricators Private Limited.
(ii) M/s. Crown Consultants.
3. It was submitted by the assessee that the advances to the Dexter Fabricators were made for purchase of capital goods and those were made to M/s. Crown Consultants for technical consultation. The Assessing Officer noticed that in Crown Consultants, Shri K. K. Baweja, managing director of the assessee-company, was a director and in M/s. Dexter Fabricators Private Limited, Shri O. P. Baweja, director, in the assessee company was a director. The Assessing Officer further observed that there was no justification for the advances since there was no consultancy received during the instant year from M/s. Crown Consultants. He, thereby made addition of Rs. 89,170.
4. On appeal, the CIT(A) endorsed the order of the Assessing Officer.
5. Learned Representatives of the parties are heard on this issue.
6. It appears that the point in issue has not been looked at by the Tax Authorities below in proper aspect. No doubt, M/s. Dexter Fabricators and M/s. Crown Consultants are sister concerns of the assessee-company, but nonetheless it is not that they were given any undue advantage and the assessee-company thereby suffered only for avoiding tax. As a matter of fact, capital goods including job work obtained by the assessee-company in the succeeding assessment year from M/s. Dexter Fabricators was of the value of Rs. 17.6 lakhs whereas the advances were to the extent of Rs. 15.82 lakhs only. It is, thus, apparent that the advance was made for purchase of capital assets and it is settled law that interest on the capital borrowed for the purposes of the business is an allowable deduction under S. 36(1)(iii) of the Act. The disallowance is, therefore, unjustified.
7. Similarly, in the case of M/s. Crown Consultants, the assessee was required to make payment of consultancy charges to the tune of Rs. 3.5 lakhs and the advances made to the said concerns were of Rs. 5 lakhs. However, the assessee had interest free credits to the tune of Rs. 141 lakhs. It, therefore, cannot be said that the borrowed capital on which the interest was paid was diverted from non-business purpose; and even if it was so, the assessee-company had its own huge capital out of which it could conveniently part with certain amount to others without charging interest. The addition of Rs. 89,170 is deleted.
Ground No. (ii) :
8. The claim of service charges of Rs. 6,75,000 paid by the assessee-company to its sister company, namely, M/s. Souvenir Chemicals Pvt. Ltd., has been negatived concurrently by the Tax Authorities below, mainly on the ground that having regard to the relation of the assessee-company with the payee company and the nature of the job said to have been performed by the payee company it was unreasonable to make the payment of so much commission. Their inference was that the sister concern was brought in the picture in order to divert its own income.
9. We have minutely examined the material placed on record. It is pointed out by the learned counsel for the assessee that M/s. Souvenir Chemicals Pvt. Ltd. did not have much business and it engaged and retained huge stock for the purpose of business of the assessee-company. It is pointed out by him that M/s. Souvenir Chemicals had incurred general expenses of Rs. 9,10,559 due to the fact that its staff was employed for the purchase and sale of the raw materials and finished goods of the assessee-company. It is also pointed out by him that because of the work assigned to M/s. Souvenir Chemicals Pvt. Ltd., the assessee was not required to incur much expenditure on staff. Learned Departmental Representative, on the other hand, supported the orders of the tax authorities below.
10. It is apparent that the appreciation of the claim of the assessee made by the Tax Authorities below is not objective. This year there has been 198% increase in the purchase of raw material and 258% in sales. Despite so much increase in the business, there is no increase in the expenditure in comparison to the immediate preceding year. It is, therefore, legitimate to think that the assessee-company did profitably utilise the service of M/s. Souvenir Chemicals Private Limited and the amount of commission paid to the latter cannot be taken as unreasonable. The disallowance of Rs. 6,75,000 is deleted.
Ground No. (iii) :
11. The Assessing Officer made disallowance of Rs. 25,000 out of various expenses debited to profit & loss account. According to him certain miscellaneous expenses were unvouched. Such unvouched expenses were mostly under the head conveyance. The CIT(A) reached the conclusion that the total of unvouched expenses would not possibly come to Rs. 25,000. He, therefore, restricted the disallowance to Rs. 15,000.
12. Learned Representatives of the parties are heard on this issue.
13. It is apparent that the Tax Authorities below did not realise the practical difficulty of a businessman that it is not possible to obtain receipts from each and every taxi-driver for utilization of the conveyance. There are certain expenses for which vouchers, as expected by the Departmental Officer, cannot be obtained. Moreover, such lumpsum disallowance without pointing out the exact amount cannot be appreciated. The disallowance of Rs. 15,000 sustained by the CIT(A) is deleted.
Ground No. (iv) :
14. The assessee did not claim depreciation on fixed assets and the details thereof were also not furnished by the assessee. However, the Assessing Officer required the assessee to furnish the details of the additions made during the year and on such information coupled with that of the preceding year, he computed the depreciation at Rs. 84,98,685. The conclusion of the Assessing Officer was that the assessee did not claim depreciation for oblique motive of saving tax. He, therefore, forced deduction of depreciation upon the assessee. The grievance of the assessee before the CIT(A) was met with unsuccess. He observed that the assessee could not opt not to claim depreciation for a particular year to get a higher deduction under the Act.
15. It is contended by the learned counsel for the assessee that the claim of depreciation is a right of an assessee and the assessee has option to claim it or to forego it. It is urged by him that in case the assessee does not make claim for depreciation, it cannot be forced upon the assessee. In support reliance is placed upon CIT vs. Shri Someshwar Sahakari Sakhar Karkhana Ltd. (1989) 177 ITR 443 (Bom). He also placed reliance upon BECO Engg. Co. Ltd. vs. CIT (1984) 148 ITR 478 (P&H). In reply, the learned Departmental Representative supporting the orders of tax authorities below contended that the assessee cannot take undue advantage of claiming depreciation at its choice.
16. We have minutely considered the respective submissions of the parties. There cannot be any quarrel with the proposition that the depreciation is loss sustained in use of any building, machinery or plant. It is equally true that it is a charge only on the profits, but it does not stand on the same footings as a loss incurred in business, which should be claimed in the very year of loss. The provision for depreciation is merely a provision to replace the very means of production, viz. the factory, the machinery or the plant. And, after all one cannot claim more depreciation than the capital out-lay; it is only the duration during which it is claimed varies. Thus, the assessee is not ultimately prejudiced by any inaction of his in omitting to make a claim in any year, or by any default on his part to furnish the prescribed particulars as required by S. 34(1). If no allowance is granted in a year, the actual cost or written down value of the assets remains undiminished and the assessee can claim a larger depreciation in the following years until he has recouped the entire cost. The CIT(A) was, therefore, not justified in endorsing the action of the Assessing Officer of thrusting depreciating on the assessee on the reasoning that the assessee could not opt not to claim depreciation for a particular year to get a higher deduction under the Act.
17. Almost all the High Courts in India, except in two cases, namely, Das Prakash Bottling Co. vs. CIT (1980) 122 ITR 9 (Mad) and Ascharajlal Ram Prakash vs. CIT (1973) 90 ITR 477 (All), have taken a view that unless the assessee asked for depreciation and furnished the prescribed particulars, the deduction of depreciation allowance could not be allowed by the ITO and at any rate it could not be thrust upon the assessee. In some of the cases as in the case of BECO Engg. Co. Ltd. vs. CIT (supra), the assessee was permitted to withdraw by way of revised return, the claim of depreciation originally made. All such cases are as under :
(i) Beco Engg. Co. Ltd. vs. CIT (1984) 148 ITR 478 (supra) (P&H)
(ii) Muthukaruppan Chetiar vs. CIT (1939) 7 ITR 76 (Mad) (FB)
(iii) Hope Ville Estate vs. State of Tamil Nadu (1978) 112 ITR 861 (Mad)
(iv) Rao Bahadur S. Ramanathan vs. CIT 3 ITC 10 (Mad)
(v) CIT vs. Friends Corpn. (1989) 180 ITR 334 (P&H)
(vi) CIT vs. Shri Someshwar Sahakari Sakhar Karkhana Ltd. (1989) 177 ITR 443 (Bom)
(vii) CIT vs. Kolhapur Oxygen Acetylene Pvt. Ltd. (1991) 190 ITR 574 (Bom)
(viii) Chokshi Metal Refinery vs. CIT (1977) 107 ITR 63 (Guj)
(ix) CIT vs. Arun Textiles C (1991) 192 ITR 700 (Guj)
(x) CIT vs. Machine Tool Corpn. of India (1993) 201 ITR 101 (Kar) Gujarat High Court in the case of CIT vs. Arun Textiles C (supra) has dissented from Ascharajlal Ram Parkash vs. CIT (supra) and Dashprakash Bottling Co. vs. CIT (supra).
18. Sub-ss. (1) & (2) of S. 34 have been omitted by the Taxation Laws (Amendment & Misc. Provisions) Act, 1986, w.e.f. 1st April, 1988, which provided that the depreciation would be allowed only if the prescribed particulars for the purposes of cls. (i) & (ii) of S. 32(1) of the Act have been furnished in respect of the depreciable assets. However, omission of these provisions does not in any manner disturb the judicial view taken by the majority of the High Courts in India that unless the assessee asks for depreciation, it could not be thrusted upon him. Sub-ss. (1) and (2) of S. 34 were deleted, in view of the switch over to the system of allowing depreciation on blocks of assets and it has nothing to do with the law of precedent that depreciation cannot be trust upon the assessee. In the case of CIT vs. Shri Someshwar Sahakari Sakhar Karkhana Ltd. (supra), Honble Mr. Justice S. P. Bharucha of Bombay High Court (as then he was) made these observations :
"The provisions, therefore, prescribe two preconditions to the allowance of a deduction for depreciation. The first, which is implicit, is that the assessee should have asked for it. The second, which is explicit, is that the prescribed particulars should have been furnished. If either of these conditions is not fulfilled, the deduction cannot be allowed by the ITO."
Thus, even if the second pre-condition to the allowance of a deduction for depreciation is dispensed with by omission of sub-ss. (i) and (2) of S. 34; but the first pre-condition, which is implicit that the assessee should have asked for it, does exist. Similar was the view expressed by the Central Board of Revenue in Circular No. 29-D (XIX-14) of 1965 dt. 31st Aug., 1965, that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance.
The circular has been considered by the Punjab & Haryana High Court in the case of Beco Engg. Co. Ltd. vs. CIT (supra). In that case, the assessee has claimed depreciation and extra shift allowance in the original return of income, but the claim was withdrawn in the revised return. It has been held by the High Court that the Tax Authorities below could not take into consideration the original return for the assessment and the ITO could not give the allowance of depreciation to the assessee.
19. In view of the above discussion, the Assessing Officer is directed to withdraw the depreciation allowed by him.
20. Ground No. (v) : The claim of the assessee that the deduction under S. 80-HHC of the Act should be allowed before allowing deduction under S. 32AB of the Act has been negatived concurrently by the Tax Authorities below and to us, rightly. The word "profits" appearing in S. 80-HHC(1) has the same meaning as the profits of business as computed under the head "Profits & gains of business or profession." The deduction under S. 32-AB necessarily falls within that computation and, therefore, it cannot be left out for allowing deduction under S. 80-HHC. This ground of objection of the assessee is, therefore, dismissed.
21. Ground No. (vi) : The issue as to computation of deductions in respect of profits and gains for industrial undertaking under Ss. 80-HH and 80-I as to whether the profits and gains derived from the industrial undertaking should be reduced by the amount of unabsorbed depreciation has been considered by the Tribunal in the case of ITO vs. Hindustan Electrographites Ltd. (1992) 41 ITD 223 (Ind). In the light of that decision, it is directed that for the purpose of computation of the deduction allowable under Ss. 80-HH and 80-I, the amount of unabsorbed depreciation shall not be deducted out of the profits and gains derived from the industrial undertaking.
22. Ground No. (vii) : The assessee claimed deduction of Rs. 1,58,495 paid to Dexter Fabricators Pvt. Limited on account of job work done by them for the assessee. The Assessing officer took help of the observation in the assessment case of M/s. Dexter Fabricators that the expenses of Dexter Fabricators that the expenses of Dexter Fabricators were grossly inflated. He thereby called upon the assessee to submit the details of expenses incurred by Dexter Fabricators in providing job work to the assessee. The assessee thereby submitted the copy of the agreement entered into by M/s. Dexter Fabricators with M/s. Gracim Industries Ltd., Nagda., demonstrating that M/s. Dexter Fabricators, on the other hand charged more for the similar job work than what was charged from the assessee. Such explanation of the assessee did not satisfy the Assessing officer. He allowed only 50% of the total amount of Rs. 1,58,495 and made disallowance of Rs. 79,247. The assessee raised an objection as to such disallowance before the CIT(A) vide ground No. 12 of the grounds of appeal. The CIT(A) is, however, silent on the ground.
23. We would have set aside this issue to the CIT(A) for recording his finding thereon. However, the point is so simple and straight that it can be decided even at this stage. The Assessing Officer has not at all doubted the actual payment of Rs. 1,58,495 by the assessee to M/s. Dexter Fabricators Private Limited for the job work. He made no exercise to find out if there was excess payment by the assessee for the job work on any of items. He simply acted upon the finding of the Assessing Officer in the case of the M/s. Dexter Fabricators, without making any independent inquiry in the case of the assessee. There is absolutely no basis for treating the payment for the job work as unreasonable under S. 40A(2)(a). It is needless to say that the Assessing Officer is not free to form any opinion as to unreasonableness of the payment. His opinion must be based upon facts. As stated above, he did not care to find out the fair market value of the goods and services rendered by M/s. Dexter Fabricators and arbitrarily made, disallowance of 50% of the expenditure incurred by the assessee. Such action is neither just nor proper. The addition of Rs. 79,247 is deleted.
Ground No. (viii) :
24. The practice of the assessee was to make provision for depreciation on straight-line method. It wanted to switch over to the written down method of depreciation for the first time while closing the accounts for the year ending 30th June, 1988. The total of depreciation already provided in the past years on straight-line method was less by Rs. 27,04,031 in comparison to the depreciation calculated on WDV basis. This difference was computed for the period upto the asst. yr. 1987-88. The assessee, therefore, made extra provision of Rs. 27,04,031 in the balance sheet for the period from 1st July, 1987 to 30th June, 1988, which is included in the total provision of Rs. 59,49,264. The amount of this provision has been reduced from the current years depreciation, computed by the Assessing Officer at Rs. 84,98,685 and as such he has considered Rs. 57,94,654 only for allowing depreciation.
25. On appeal, the CIT(A) summarily disposed of the issue by directing the Assessing Officer to verify the claim and allow/disallow the same accordingly.
26. Learned Representatives of the parties are heard at length.
27. After long discussion, we find that the following questions emerge out of this issue.
(i) Whether the assessee having consistently followed the straight-line method of depreciation for making the provision in the books of account, can switch over the WDV method for the purpose ?
(ii) If so, whether the assessee can claim the arrears of depreciation arising out of change in method adopted by the assessee ?
(iii) If not, whether the Assessing Officer can disturb the book profit for the purposes of S. 115J by making disallowance of such arrears of depreciation ?
28. Following excerpts from A Guide to Company Audit of the Institute of chartered Accountants of India (ICAI) (4th Edition, 1980) from page 91 need to be referred :
"1. The Council has considered in detail the question arising regarding a change in the mode of charging depreciation in the accounts of companies. The views of the Council are as follows.
2.1 There is no bar either from the legal or the accounting point of view to a company changing its method of providing depreciation.
2.2 The fact that depreciation may not have been provided in accordance with S. 350 of the Companies Act does not necessarily affect the "true and fair view" presentation of either the balance sheet or the profit and loss account as this is a separate and independent issue. The auditor must, however, satisfy himself that the depreciation provided for the year, as well as the total depreciation as at the balance sheet under the changed method, is adequate. Further, if it is proposed to pay dividends, the auditor must/satisfy himself that the new method of providing depreciation conforms to the requirements of S. 205 of the Companies Act, 1956".
29. Change in the method of providing depreciation is, no doubt, a change in the method of accounting, but there is no prohibition in making such change, inasmuch as that S. 145(1) in terms does not require any inquiry into the bona fides but inquiry becomes relevant to find out whether the change has been made for sufficient reasons. See Hada Textile Industries vs. CIT (1991) 187 ITR 371 (Cal). In the Guidelines to the Company Audit issued by the Institute of Chartered Accountants of India (ICAI) reproduce above, it has been pointed out as to under what circumstances, an assessee can adopt the changed method.
30. We, therefore, hold that the assessee was entitled to change the method for making provision for depreciation.
31. Discussion in para 25 of the order of the Cochin Bench of the Tribunal in Appollo Tyres Ltd. vs. Dy. CIT (1992) 44 TTJ (Coch) 534 : (1992) 43 ITD 464 (Coch) is the complete answer to the question No. (ii) arising out of this issue and para 26 of the said orders is complete answer to the question No. (iii) arising out of the issue.
32. We, therefore, hold that the assessee was entitled to change the method of depreciation from straight-line method to WDV and was thereby entitled to claim extra depreciation as arrears of the past years, being the difference between the two methods, for the purpose of computation of profits under S. 115-J of the Act. The Assessing Officer is directed not to interfere with the balance sheet of the assessee in that regard.
Ground No. (ix) :
33. Schedule XIV has been inserted by the companies (Amendment) Act, 1988, with retrospective effect from 2nd April, 1987. In the Companies Act, Note No. 4, of the said Schedule reads as under :
"Where, during any financial year, any addition has been made to any asset or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such asset shall be calculated on a pro rata basis from the date of such addition or as the case may be upto the date on which such asset has been sold, discarded, demolished or destroyed."
Sec. 205 as amended by the Amendment Act of 1988, lays down that the depreciation should be calculated in accordance with the rates specified in Schedule XIV to the Act and as such depreciation under the Companies Act has been delinked from that under the IT Act. The assessee made provision for depreciation on the assets added in the previous year relevant to the instant assessment year on WDV method for the entire year in contravention of the Note No. 4 reproduced above and as such according to the note of the auditor there was excess provision of Rs. 6,32,315. The Assessing Officer made disallowance of this claim and corrected the Profit & Loss Account of the company to this extent.
34. Learned Representatives of the parties are heard on this issue.
35. It is apparent that so far as the claim of Rs. 6,32,315 is concerned, the preparation of Profit & Loss account was not in accordance with the provisions of the Companies Act, 1956, as amended in 1988. The Assessing officer was, therefore, justified in increasing the profit to this extent. We find no merit in this objection of the assessee. It is dismissed.
Ground No. (X) :
36. The Assessing officer computed the deduction allowable under S. 80HHC on the basis of book profits, which is apparently notional income. This is not permissible in law. The profits and gains of the business for the purpose of deduction under S. 80HHC are directed to be computed in accordance with the provision of Ss. 28 to 44 of the IT Act.
Ground No. (xi) :
37. The objection of the assessee is that levy of interest under S. 234B and 234C of the Act should be in accordance with the computation of income under Ss. 28 to 44 of the Act.
38. Contention of the learned counsel for the assessee is that income under S. 115J is a notional income and, therefore, that should not be the basis for levy of interest under S. 234B and 234C. We find no merit in this stand of the assessee. In this connection, reference may be made to order of the Special Bench of the Tribunal in the case of Sutlej Cotton Mills vs. Asst. CIT (1993) 46 TTJ (Cal) (SB) 310 : (1993) 199 ITR (AT) 164 (Cal). It has been held in this case that the assessee is required to pay advance tax taking into account application of S. 115J. The Special Bench thereby overruled the view of the Division Bench of the Tribunal at Delhi in the case of Steel Authority of India vs. Dy CIT (1991) 40 TTJ (Del) 559.
39. However, the next contention of the learned counsel for the assessee is that the expression "assessed tax" in the context of the facts obtaining in its case should not be taken as the tax on the total income determined under sub-s. (1) of S. 143 or on "regular assessment". His contention is that it should be taken with reference to the liability to pay advance tax under S. 208.
40. In order to appreciate the line of reasoning of the learned counsel for the assessee, it is necessary to bear in mind that the assessed income of the assessee includes cash compensatory support on export sales amounting to Rs. 10,51,649 which, till the date of payment of advance tax, did not fall under the category of revenue receipt as per order of the Special Bench of the Tribunal in the case of Gedore Tools (India) Pvt. Ltd. vs. IAC (1988) 31 TTJ (Del) (SB) 260 and, therefore, it was taken to "General reserve" and not to the profit & loss account. It became revenue receipt by virtue of insertion of cl. (iiib) in S. 28 of the Act Act by the Finance Act, 1990, with retrospective effect from 1st April, 1967. Thus, according to him, it was not possible for the assessee to visualize that the said amount would be taken as a revenue receipt and, therefore, it was also not possible to pay advance tax thereon. In support, the learned counsel relied upon order dt. 11th Aug., 1992 of the Tribunal in the case of Hindustan Electrographites vs. Dy. CIT (supra) in ITA No. 68/Ind/1991 vide para 7.
41. We appreciate the argument of learned counsel for the assessee. Interest under these provisions is directed to be charged on such assessed tax, which comes after exclusion of the aforesaid amount of cash compensatory support.
42. Ground No. (xii) : The next objection of the assessee is that the levy of additional tax on notional income assessed under S. 115J of the Act is improper, unjustified and bad in law, because the provisions of S. 143(1)(a) for levy of additional tax cannot be invoked on the book profit being not real income liable to tax.
43. We have heard the learned representatives of the parties on this issue. There is merit in the contention of the learned counsel that no additional tax can be levied on the basis of book profit under S. 115J. In this connection, reference may be made to Indian Rayon & Industries Ltd. vs. J. R. Kanekar, Asst. CIT (1992) 108 CTR (Bom) 384. The Assessing Officer has made adjustment of Rs. 14,97,251 on the basis of book profits, and has further made disallowance of Rs. 3,68,967 and has thereby made adjustment of that amount as well. All these adjustments are not justified. Moreover, in the final order under S. 143(3), none of these disallowances on the basis of which adjustment has been made, has been upheld. The additional tax levied is, therefore, deleted.
44. Since the appeal has been decided on merit, the application for stay of demand has become infructuous.
45. In the result the appeal is partly allowed.