Income Tax Appellate Tribunal - Mumbai
United Phosphorus Ltd, vs Assessee on 13 April, 2012
ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" Bench, Mumbai
Before Shri R.S. Padvekar, Judicial Member and
Shri B. Ramakotaiah, Accountant Member
ITA No.1408/Ahd/1997
(Assessment year: 1993-94)
United Phosphorus Ltd DCIT Special Range-1
11, G.I.D.C Vs Surat, Gujarat
VAPI, Gujarat
PAN -
(Appellant) (Respondent)
Assessee by: Shri Mr.P.J.Pardiwala,
Ms.Vasanti B.Patel
Ms.Saidusha Multani
Department by: Shri Subachan Ram, DR
Date of Hearing: 13/04/2012
Date of Pronouncement: 30/05/2012
ORDER
Per B. Ramakotaiah, A.M.
This is an appeal against the order of the CIT (A)-1 Surat dated 21/02/1997. In this appeal assessee has raised ten grounds and also additional grounds in the course of appellate proceedings. The additional grounds being legal in nature, they are considered and allowed.
2. We have heard the learned Counsel Shri P.J. Pardiwala along with Ms. Vasanti B. Patel and Ms. Sai Sudha Multani and the learned CIT (DR) Shri Subachan Ram. The learned Counsel also placed on record a chart indicating the grounds and how various issues are covered. The learned DR placed on record the written submission with reference to Ground No.1 which was also countered by assessee in its written reply rejoinder dated 18/4/2012. These submissions of the Counsel are considered and Page 1 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench the issues are decided as under. For the sake of record, the grounds and the additional grounds are extracted summarily as under:
"1. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in including in the total income, advance license benefit receivable amounting to `.5,46,20,751/-.
2. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in not allowing the claim in respect of deduction of a sum of `.22,88,579/- paid to GIDC as premium on leasehold land.
3. On the facts and circumstances of the case and in law, the CIT (A) erred in rejecting the appellants' claim for deduction in respect of stamp duty paid amounting to `.8,07,600/- for transfer of rights in respect of lease leasehold land from Shroff Industrial Chemicals Pvt. Ltd to the appellant pursuant to the scheme of amalgamation of the said company with the appellant.
4. On the facts and circumstances of the case and in law, the CIT (A) erred in rejecting the appellants' claim for deduction in respect of a sum of `.42,911/- representing miscellaneous expenses for facilitating the use of the leasehold land.
5. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in disallowing as capital expenditure as capital expenditure a sum of `.4,60,500/- representing registration fee and stamp duty for increase in authorized capital.
6. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in allowing depreciation in respect of items on plant and machinery costing less than `.5,000/- each at `.97,311/- as against `.7,78,490/- claimed by the appellant.
7. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in considering the claim for depreciation as per the revised statement of depreciation submitted by the appellant inspite of the fact that in the assessment order passed for assessment year 1992-93, the claim for deduction of interest capitalized had not Page 2 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench been allowed as a deduction and accordingly the depreciation was eligible on the higher written down value without considering the deduction of interest capitalized in assessment year 1992-93.
8. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in allowing deductions under section 80I and section 80IA after deducting depreciation eligible under section 32.
9. On the facts and circumstances of the case and in law, the CIT (A) erred in treating the ground of appeal pertaining to interest under section 244A as infructuous.
10. On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Dy. Commissioner of Income Tax in computing the deduction under section 80HHC at `.5,24,26,886/-".
3. Ground No.1 is with reference to taxability of advance license benefit receivable. Briefly stated, assessee has shown advance license receivable of `5,46,20,751/- under the head "Advance license benefit receivable" and has thus shown lower consumption of raw material. In the computation of income the deduction of this amount was claimed by relying on the decision in the case of M/s. Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. v. IAC [1992] 41 ITD
142. It was the submission that the amount does not accrue till assessee utilized the advance license for import of raw material. Accordingly it claimed adjustment of the amounts accounted for in the books of account while offering the amount of earlier year which were utilized during the year. Consequent to the stand taken in assessment year 1992-93, AO did not allow assessee's claim and brought to tax the amount as adjusted in the books of account. The CIT (A) following his order in earlier year confirmed the same.
4. It was fairly admitted that this issue of taxability of advance benefit license receivable was held against assessee by the ITAT Ahmedabad Tribunal in assessee's own case for assessment years 1992-93, 1995-96, 196-97 and 1997-98. It was also further submitted that Hon'ble Gujarat High Court admitted the questions Page 3 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench in all the appeals preferred by assessee and the matter is presently pending before the Hon'ble Gujarat High Court. Assessee placed on record the question admitted by the Hon'ble High Court which are as under:
"(i) Whether, in the facts and circumstances of the case the ITAT was right in law in holding that the alleged income from Advance License Benefits Receivable ("ALBR" for short) is taxable in the year under consideration even though the said income has accrued to the appellant in the subsequent years?"
5. Assessee was requesting for constitution of Special Bench of ITAT as an identical issue was decided by the Mumbai Tribunal in the case of M/S Excel Industries Ltd for assessment year 1995-96 in appeal ITA No.2087/Mum/2000. In view of the conflict of views expressed by different Benches of the Tribunal, a request for Special Bench was made vide letter dated 31/01/2008. However, in the meantime the decision of the ITAT in Excel Industries was upheld by the Hon'ble Bombay High Court in the case in ITA No.1183/Mum/2011 dated 25/11/2011 in that question for reference specifically is as under:
"1. Whether the advance license and the DEPP benefits receivable by assessee are liable to be assessed to tax in the year in which the license is granted to the licensee or liable to be taxed in the year in which the benefits actually accrue after the imports are effected is the question raised in this appeal".
6. The Hon'ble High Court held as under:
"2. The Income Tax Appellate Tribunal following its decision in the case of Jamshri Ranjitsinghji Spinning & Weaving Mills Limited reported in 41 ITD 142 held that the said amounts are liable to be taxed in the year in which the benefits actually accrue to assessee and not in the year in which the license is granted. This Court in the case of Commissioner of Income Tax vs. M/s. Mafatlal Industries Ltd, being Income Tax Appeal No.424 of 2009 decided on 22nd September, 2009 has upheld the decision of the Income Tax Appellate Tribunal in the Page 4 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench case of Jamshri Ranjitsinghji Spinning & Weaving Mills Limited (supra)".
3. In view of the matter we see no merit to entertain this appeal. The appeal is accordingly dismissed with no order as to cost".
7. Therefore, as far as the matter of taxability is concerned, the issue no longer survives for consideration as far as ITAT is concerned, which is within the jurisdiction of Hon'ble Bombay High Court. Accordingly constitution of Special Bench is not required. The learned Counsel specifically placed on record all the orders of the Coordinate Bench in the case of Excel Industries and Mafatlal Industries Ltd which were approved by the Hon'ble High Court. The learned CIT DR, however, in the written submissions submitted that the decision of the Hon'ble Ahmedabad Bench in assessee's case has been specifically referred by the Special Bench of the ITAT in the case of Topman Exports Vs. Income Tax Officer 33 SOT 337 (Mum) which order was ultimately approved by the Hon'ble Supreme Court. Even though the issue therein was with reference to the DEPP since issue of accrual of DEPP, which is comparable with the present issue of advance license was considered therein, the Special Bench decision is binding because the same was approved by the Hon'ble Supreme Court. He has specifically referred to the proposition in Para 33 and 34 as under:
"When DEPB income accrues
33. Before we venture to decide the accrual of income on account of DEPB, it is essential to note that both the appellants before us are following the mercantile system of accounting. Under this method of accounting, expenses become deductible when the liability to pay arises irrespective of the date of actual payment. Similarly income is recognized and becomes chargeable to tax when the right to receive such income is finally acquired by the assessee. The date of actual receipt of the income is not a decisive criteria, which event may take place before or after such accrual. As soon as the right to receive income Page 5 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench is finally acquired by the assessee, the income accrues and has to be accounted for and offered for taxation as per the provisions of the Act. We are reminded of the classic judgment rendered by the Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR
27. In this case, it was held that income becomes chargeable to tax when the right to receive is acquired. At the same time, it is equally true that where the right to receive income is inchoate no income can be said to have accrued as has been held in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 5241 (SC). If, however, the right to receive the income gets vested unconditionally in assessee, the income will accrue notwithstanding the fact that some controversy may arise later on by which the payer may claim the amount back. In that case the dispute will be about the refunding of the amount and will not have any effect on the accrual of income at the earlier stage. From the above discussion, we note that the fundamental principle of the accrual of income is that the income accrues and becomes chargeable to tax when the assessee finally acquires right to receive it irrespective of the fact whether it is received or not.
34. Let us apply this test to the facts of the instant cases. It has been noted above from the relevant clauses of Foreign Trade Policy that there is a requirement to make application with the concerned authority after making exports, for the grant of DEPB or duty drawback, as the case may be. It is only when an exporter makes application after effecting exports, that he acquires the right to such DEPB/duty drawback. The mere fact that he has exported the goods or merchandise will not entitle him to the DEPB/duty drawback unless an application is specifically made in this regard. Thus it is clear that it is only on the making of an application for DEPB that he acquires the right to receive the DEPB and income accrues at that stage. The Ahmedabad Bench of the Tribunal in a well reasoned order in United Phosphorus Ltd. v. CIT [2002] 81 ITD 553 has held that the value of advance license benefit receivable by the assessee has to be treated as income accruing to it in the year in which the exports are actually made and is chargeable to tax accordingly in that year alone. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Punjab Bone Mills [1998] 232 ITR 7952 considered a case in which the assessee, following the mercantile system of accounting, accounted for cash incentives for exports on receipt basis.Page 6 of 23
ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench The Assessing Officer treated this amount as income on accrual basis. It was argued on behalf of the assessee that accrual of income would occur only when the amount was sanctioned and not when application, claiming cash incentives, was filed by the assessee on the making of the exports. The Tribunal took the view that the cash incentives accrued to the assessee on the date on which application for the claim was made to the competent authority. Approving the view of the Tribunal, the Hon'ble High Court held that the right to receive export incentive accrued to the assessee on the filing of claim. It was held that the export by itself would not give rise to income and neither the date of receipt of cash incentive was relevant. This judgment stands approved by the Hon'ble Supreme Court in the case of CIT v. Punjab Bone Mills [2001] 251 ITR 7803. In the light of this judgment and by considering the general principles of the accrual of income, it becomes explicitly clear that the assessees in question became entitled to DEPB at the time they filed applications for such incentive, of course, after making the exports. Thus the time of accrual of DEPB is the date when application for DEPB is filed with the concerned authority. That being the position, the income would accrue at that stage and become chargeable to tax accordingly. The fact that the assessee sells the DEPB entitlement in this year or later year and hence, the income be considered to have accrued in entirety on the date of such sale is totally irrelevant insofar as the original amount, being the face value of the DEPB, is concerned. Similarly when the exporter utilizes DEPB entitlement for own import, the time of accrual of income will not be when the subsequent import is made and the face value of DEPB gets adjusted against the duty payable but when application was originally filed for the DEPB. The subsequent events, viz, the sale of DEPB as such or making imports for self consumption or direct sale of such imported goods, are not significant in determining the accrual of income on account of the face value of DEPB, which results on making application for the DEPB, after making the exports".
8. When this was brought to the notice of the learned Counsel, he has distinguished the submissions of the learned DR by the following rejoinder.
Page 7 of 23ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench ""The Ld DR has stated that the issue of the year of taxability of ALBR has been a recurring issue in the appellant's case and has been decided against the appellant by the appellate order dated 22 May 2001 passed by the Income-tax Appellate Tribunal, Ahmedabad for assessment year 1995-96 (ITA No.2485/Ahd/1999) wherein it has been held that ALBR ought to be taxed in the year in which the goods are exported. He has also placed reliance on the fact that in the accounts the appellant has taken credit for the said benefit. The Ld DR has further placed reliance on the decision of the Hon'ble Supreme Court (SC) in the case of M/s Topman Exports v CIT (Civil appeal no.1699 of 2012).
As regards the decision of the Hon'ble Tribunal in the appellant's case, it was already pointed out that the Bombay Bench of the Tribunal in the case of Excel Industries Ltd has taken a view different from the view taken by the Ahmedabad Bench in the appellant's case after considering the earlier order. The Revenue's appeal against the order passed in the case of Excel Industries Ltd has been dismissed by the High Court at Bombay and, therefore, the order in the appellant's case need not be followed. As regards the allegation that the benefit is recorded in the books, it is submitted that it is well settled that the making of entries in the books of account is not determinative of the taxability of an amount. In this connection, reliance is placed on the decision of the Supreme Court in the case of CIT vs Shoorji Vallabhdas and Co (46 ITR 144) and CIT vs India Discount Co Ltd (75 ITR 191). As regards the decision of the Hon'ble SC, it is submitted that while calculating deduction under section 8OHHC, the issue for consideration before the Hon'ble SC was whether entire sale proceeds or only the profit on transfer of Duty Entitlement Passbook Benefit (DEPB) would have to be reduced. The issue as to when the income accrues as such did not arise for consideration. The Hon'ble SC while upholding the contention of the assessee observed that the benefit of the DEPB is chargeable to tax under section 28(iiib) in the year in which an application has been made for DEPB credit against the exports made by the assessee. In this connection, it is submitted that there is no question of applying the said SC decision to the instant case since the issue involved in the appellant's case is the year of taxability of ALBR under section 28(iv) and the said SC Page 8 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench decision deals with computation of deduction under section 8OHHC.
Further, it is pertinent to note that there is a significant difference between the said schemes viz. Advance License and DEPB. In this connection, attention is invited to the Chapter 7 of the EXIM policy (1 997-2002) which deals with Duty Exemption/Remission Schemes (copy enclosed). The main differences in the said schemes are as under:
1. An Advance License is issued under Duty Exemption Scheme to allow import of inputs which are physically incorporated in the export product whereas DEPB is issued under Duty Remission Scheme which allows post export drawback of import charges on inputs used in the export product.(refer Paras 7.1 and 7.2).
2. Advance License enables duty free import of inputs subject to actual user condition. The benefit receivable under the Advance License is subject to the fulfillment of a time bound export obligation. (refer Para 7.3).
Thus, the benefit is based on inputs and can be realized only when the inputs are actually imported. Under the DEPB scheme, an exporter is entitled to credit of custom duty paid which is a specified percentage of FOB value of exports. The credit is available after export of goods and on an application made with the competent authority. The actual import of inputs is not required. The credit is available for import of raw materials, intermediates, components, parts, packing material, etc.
3. Advance License and /or materials imported there under are not transferable even after completion of export obligation. However, in exceptional cases, the material may be allowed to be transferred on merits by ALC [refer Para 7.3 (a)]. DEPB or items imported against it are freely transferable (refer Para 7.16). In this connection, it is submitted that the benefit to the appellant under the Advance License Scheme is in the form of exempon/concession in custom duty for importin9 duty free raw material against fulfillment of certain export obligation. Thus, until the raw material is actually imported, no benefit arises. It is contingent since the assessee may choose not to import the raw material in question because of various factors some of them being as under:
Page 9 of 23ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench
(a) increase in the price of such raw material in the foreign country,
(b) fluctuation in the foreign exchange rate,
(c) variation in the rate of custom duty and
(d) variation in the purchase price of raw material in the domestic market.
There are several such factors which establish beyond doubt that ALBR benefit is contingent and it materializes only when the relevant imports are made and not earlier and therefore the same cannot be said to accrue prior to the import of raw material. It is also submitted that no benefit can be said to have arisen immediately on exports since the said license is not transferrable. Thus, it is submitted that the mere grant of the advance license does not result in a benefit to the appellant since such benefit can actually be availed of by the appellant only when the raw material is imported and consumed. Accordingly, the benefit in the form of exemption from duty accrues to the appellant only on the happening of an event in future, being the import of raw materials, which event admittedly had not taken place in the captioned assessment year.
It is further submitted that unlike the Advance License Scheme, under the DEPB scheme the actual import of inputs is not required. The credit is available after export of goods and on an application made with the competent authority. Also DEPB is freely transferable.
In view of the aforesaid differences between the two schemes, it will be appreciated that the taxability of ALBR stands on a different footing and accordingly, the aforesaid SC decision which even if regarded as dealing with the taxability of DEPB is not applicable in the instant case. It is once again re-iterated that the taxability of ALBR is covered by the following decisions of the jurisdictional High Court wherein the view taken by the Income-tax Appellate Tribunal, Mumbai in the case of Jamshri Ranjitsinghji Spinning and Weaving Mills Ltd vs Inspecting Assistant Commissioner (41 lTD
142) that the benefit accrues in the year in which the imports are made has been upheld.
(i) Excel Industries Limited (ITA (L) No. 1183 of 2011) (unreported)(refer compilation Volume Ill page nos 183-
184)
(ii) Excel Industries Limited (ITA (L) No. 143 of 2011) (unreported)(refer compilation Volume Ill page no 185) Page 10 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench
(iii) Mafatlal Industries Limited (ITA No. 424 of 2009) (unreported)(refer compilation Volume Ill page no 186)"
9. We have considered the issue and examined the orders on record. We are in a peculiar situation wherein in assessee's own case, the Tribunal (Ahmedabad Bench) in one year earlier to the present assessment year i.e. 1992-93 and in three years later to this i.e. 1995-96, 1996-97 and 1997-98 have already adjudicated same issue after considering assessee's working made in the books of account in respect of utilization of credit available by a well reasoned order reported in 81 ITD 553 (Ahd.). In that it was held:
Section 145(1) of the Act specifically provides that income chargeable under the head 'Profits and gains of business or profession' shall be computed in accordance with the method of accounting regularly employed by the assessee. However, the provisions of section 145 cannot override sections 4 and 5 of the Act. If an income has neither accrued nor received in the relevant year within the meaning of section 5, whatever section 145 says, such income cannot be charged to tax even though a book keeping entry has been made recognizing such income, which in law and on facts does not really accrue or arise or received in previous year. Section 145 thus does not affect the range or ambit of taxable income. Such computation provision contained in section 145 cannot enlarge or restrict the content of taxable income.
It is the duty of the Assessing Officer to consider in each case as to whether the assessee has employed a regular method of accounting and whether annual profits can be properly deduced from the method so employed. The Assessing Officer should also examine whether the accounts maintained are correct and complete. Once the Assessing Officer is satisfied about the regularity of the method of accounting and about the correctness and completeness of the books of account and is also convinced that true income can be properly deduced, the Assessing Officer is bound to compute the taxable income of the assessee as per section 145(1) in accordance with the books of account maintained by the assessee.
If an item of income has not accrued in law and on facts, it cannot be made taxable merely because a book keeping entry recognizing such income has been made in the books of account. The existence or absence of entry in the books of account cannot be treated as decisive or conclusive in relation to determination of the taxability of an income under the provisions of the Act, where such entry of income in Page 11 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench the books of account is in conflict with the ambit and range of taxation as contemplated in section 5. The question as to whether a particular income has really accrued or arisen to the assessee in a particular year must be judged in the light of reality of the situation. One will have to look at the substance of the situation in order to decide whether income has really accrued or not in the relevant previous year.
Section 145 recognizes a right of a taxpayer to adopt any of the recognized methods of accounting. The choice of choosing the method of accounting always remains with the taxpayer. The method of accounting adopted by the assessee-taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts. The method of accounting regularly employed may be discarded only if in the opinion of the Taxing Authorities income of the taxpayer cannot properly be deduced there from.
One had to examine the facts of the present case in the light of the aforesaid principles of law emerging from the various decisions and the provisions of law referred to hereinbefore. The assessee had accounted for the net income by way of 'ALBR' amounting to Rs. 8,29,87,603 in their books of account in the year under consideration. The taxability of such income had not been disputed by the assessee. The assessee had only disputed the year of its taxability. While finalizing the books of account, the assessee had accounted for such income in the year in which they had actually exported the goods on the basis of which the import license was granted to them for importing duty- free raw materials, as import of duty-free raw materials had a direct nexus with the corresponding exports made. The question which arose for our consideration was as to whether the value of such ALBR by the assessee could be treated as income accrued to them in the year when the exports were actually made or such income would accrue only in the year when the duty-free raw material was actually imported pursuant to such import licenses. The assessee had consistently followed the method of recognizing such income in its books of account in the year when the exports were actually made. But while submitting the income-tax return, they claimed that such income could not be treated as income accrued to the assessee in the year when the exports were made but it should be treated as having accrued only in the year when the duty-free raw material was actually imported.
The assessee had maintained their accounts on accrual basis. The various accounting standards and guidelines on accrual Page 12 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench system of accounting relied upon by the parties indicate that there are various alternative recognized methods of accounting in relation to Import Entitlement License, etc. One of the methods is that the cost of raw material imported by the assessee will be debited in the books of account on the basis of actual cost in the year when it is actually imported. In such a case no accounting entry of import entitlement license is required to be made. The assessee had chosen not to adopt this method. The other method can be that where there is reasonable certainty as to the receipt of import license and the measurability of its benefit, the difference between the price of locally purchased raw material and the duty- free raw material at prevailing international price should be measured at the end of the year and it should be adjusted in the books by reducing the cost of locally purchased raw materials already utilized for exports and debiting Receivable Account. Such a method can be adopted in a case where the Import License cannot be sold. This was precisely the system of accounting which had been consistently followed by the assessee in the present case.
The assessee-company had maintained its accounts on accrual basis, which has been made mandatory by the amendment of section 209(3) of the Companies Act, 1956 with effect from 15-6- 1988. The accrual basis of accounting records financial effect of the transactions, events and circumstances of an enterprise in the period in which they occur rather than recording them in the period in which cash is received or paid by the enterprise. The main objective of accrual basis of accounting is to relate the accomplishments (measured in the form of revenue) and the efforts (measured in terms of cost), so that the reported net income reflects true and fair position of the profit/loss of the company for the relevant period. The Accounting Standard (AS-9) issued by the Institute of Chartered Accountants of India, lays down two conditions which must be fulfilled for recognition of revenue in the course of business activities of an enterprise:
(a )The revenue should be measurable; and (b )It should not be unreasonable to expect ultimate collection. Thus, where the revenue is not measurable and/or where it is unreasonable to expect ultimate collection, recognition of revenue is deferred.
Most of the problems of accounting measurement arise out of the periodic concept. The main difficulty arises in deciding what revenues and what expenses are to be taken into consideration for one accounting period. The concept of materiality (substance) is threshold for recognition of a transaction in accounting process.Page 13 of 23
ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench The accrual concept requires that in measuring a profit for any financial period, the expenses and revenues should be matched in a realistic way, i.e., they concern the same goods and the same time period. The matching concept is therefore an essential part of accrual accounting. Even under the Conservatism Concept of accounting, the revenues should be recognized when there is reasonable certainty about their realization. In the present case, the assessee had accounted for the value of benefit receivable by way of import of duty-free raw material against specific export orders in the year in which corresponding export obligation had actually been discharged. Under the Export Promotion Scheme, the assessee was entitled to duty-free import of raw material against exports made by them. The only obligation of the assessee for earning right to import such duty-free raw material was that the specified export should be made. The assessee had accounted for the value of such benefit only in the year in which the corresponding export obligation had duly been dis-charged. It was in consonance with the matching concept implicit in accrual system of accounting. The moment the assessee had exported the goods, it acquired a legally enforceable right to get the import license for importing duty-free raw material according to the norms specified in the relevant Import/Export Policy. Such a right was a valuable right, and it became a perfect, vested and absolute right on discharge of export obligation. It had a direct nexus with the corresponding exports already executed in the year under consideration. The benefit so receivable by way of import of duty-free raw material related to the same goods which had been exported in the accounting period. Thus the revenue so accounted for in the books of account representing the value of ALBR by the assessee was matching in a more realistic way with the goods exported by the assessee. The method of accounting adopted by the assessee for booking such income in the books of account in the year in which exports had been made represented more realistic, true and fair position of profits earned during the year under consideration.
The contention that such income was contingent and uncertain until the goods were actually imported, was not in conformity with the method of accounting of the accrual concept adopted by them in relation to accounting for of such income in the books of account after a careful consideration of all relevant facts and circumstances.
In the present case, the income represented by the value of ALBR by the assessee had been accounted for in the books of account in the year when the exports had actually been made, which was in conformity with one of the alternative recognized Page 14 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench methods of accounting. The choice of choosing one of the recognized alternative methods of accounting rested with the assessee. The assessee had exercised that option by choosing to consistently follow such a method of accounting in relation to booking of income represented by ALBR against exports. Once that option had been exercised while finalizing the accounts in accordance with the accounting system and in conformity with the provisions contained in the Companies Act, 1956, the assessee could not thereafter contend while filing the return of income that such income should not be treated as having accrued in the year under consideration, as duty-free raw material had not actually been imported till the end of the relevant year but it should be treated as income accrued in the year, when raw material had actually been imported.
Even under the Conservatism (or Prudence) Concept of accounting, such income should be recognized when there is reasonable certainty about their realization. The board of directors while finalizing the annual accounts are under an obligation to ensure that the profits/loss as per profits & loss account of the relevant year should disclose a true and fair position of the profits of the year. It is expected that the board must have taken into consideration all the relevant facts and circumstances so as to satisfy themselves about the reasonable certainty of realization of such benefit receivable by the assessee. The term 'true and fair view' connotes that the balance sheet and the profit & loss account should give the true and fair presentation of the actual state-of-affairs and the working results of the company. The directors are accountable and responsible for presenting the true and fair state-of-affairs in the balance sheet and also in respect of the profit/loss as shown in the profit & loss account. The directors are also responsible for adherence to the disclosure requirements as per Schedule VI of the Companies Act. The board of directors must had, therefore, applied their serious attention to this item of income accounted for in the books of account, as was apparent from the fact that a detailed note in the 'Notes of Accounts' had been given in this regard forming part of the Balance sheet authenticated by the board of directors. The accounts of the company had been audited by an eminent firm of Chartered Accountants, who had not in any manner qualified their audit report in respect of the aforesaid income of Rs. 8,29,87,603 accounted for in the books of account. Thus, the true and fair position of the profits as per P&L Account of the company including recognition of such income on accrual basis during the relevant year had also been confirmed by a well known firm of Page 15 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench auditors. The Annual Audited Accounts had been approved by the company in its General Meeting.
The assessee acquired a legally enforceable right to import duty- free raw material under the relevant Duty Exemption Scheme in the year when it discharged its obligation of exporting the goods in the year under consideration. The benefit accounted for in respect of duty-free raw material had a direct nexus with the export orders executed in the relevant year.
The assessee had consistently followed such method of accounting in relation to such income in various years. The test of reasonable certainty about the realization of such income envisaged in the Conservatism Concept of accounting also stood fulfilled on the facts and circumstances of the instant case. It was clear from a perusal of Duty Exemption Scheme notified in the Import and Export Policy that the exporters are allowed to grant of import licenses for import of duty-free raw material used for manufacture of goods exported. Without acquiring the right to import duty-free raw material, which constitutes a substantial gain, it may not perhaps be viable to export the goods in the competitive market. The substantial benefit by way of right to import duty-free raw material against exports already made, is, therefore, not only certain but the exporter acquires legally enforceable right to receive such benefit soon after discharging his export obligation.
The figures of actual utilization of Advance Licenses resulting in substantial benefit to the appellant by way of reduction in cost of raw material consumed for goods exported, showed that realization of a substantial amount of such benefit was certain. The contention of the assessee that such income was contingent and uncertain at the end of the relevant year, was not correct. Any person with ordinary prudence could reasonably anticipate that such substantial benefit by way of duty-free import of raw material was surely and certainly receivable by the assessee in consideration of the goods exported by them.
The appellant company had taken adequate care to provide for adequate margin arising due to all such contingencies, uncertainties and other factors which might result in some variation of the net income accrued and adjusted in the year under consideration.
That clearly indicated that the amount of such benefit accounted for by the appellant company in its books of account was based on a realistic, systematic and appropriate method. Accordingly, the Commissioner (Appeals) had rightly held that the income by way of ALBR amounting to Rs. 8,29,87,603 duly Page 16 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench accounted for as income in the books of account maintained by the assessee in the year under consideration on accrual basis could not be excluded from the taxable income of the year under consideration.
10. This order of the ITAT is at present subjudice before the Hon'ble Gujarat High Court since assessee's original assessment jurisdiction is with ITAT Ahmedabad and now files are transferred to Mumbai. The A.O in all earlier cases including present assessment year is A.O, Ahmedabad. This being the middle of the years and as the Revenue has consistently accepted the working of assessee, any variation in this year will result in lot of mismatch of the amounts to be brought to tax. One of the reason why the ITAT has upheld assessee's accounting principles is on the reason that at the end of the 9 year period, there is only a difference of `.39,14,539/- in the advance license booked and advance license utilized out of `.53,66,88,164/- crores benefit obtained by assessee.
The relevant details are as under:
"Sr. Asst. Year Advance Advance License Difference No. License Utilized/Lapsed Booked
1. 1992-93* 6,199,580 -- 6,199,580
2. 1993-94 54,620,751** 6,199,580 48,421,171
3. 1994-95 80,238,750 35,541,764 44,696,986
4. 1995-96 82,987,603 47,684,742 35,302,861
5. 1996-97 79,237,763 116,158,672 (35,920,909)
6. 1997-98 91,777,247 146,135,678 (54,358,431)
7. 1998-99 73,987,997 62,890,307 11,097,690
8. 1999-2000 21,164,259 85,792,334 (64,628,075)
9. 2000-01 46,474,214 33,370,548 13,103,666 Total 536,688,164 532,773,625 3,914,539 The taxability of the benefit by way of advance license by importing duty from raw material has not been disputed by assessee, but the dispute relates only to the year of taxability. Further this question of Page 17 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench accrual was specifically considered by the Special Bench in the case of Topman Exports (supra), which has upheld the order of coordinate bench by observing that Ahmedabad Bench of the Tribunal in a well reasoned order in United Phosphorus vs. CIT, 81 ITD 553 has held that the value of advance license benefit receivable by assessee has to be treated as income accruing to it in which the exports are actually made and is chargeable to tax accordingly in that year alone. In view of the observations of the Special Bench impliedly, the decision in case of assessee by ITAT, Ahmedabad bench has also been approved by the Special Bench. Even though the Special Bench order with reference to DEPP was reversed by the Hon'ble Bombay High Court in the case of Kalpataru Colours & Chemicals (2010) 328 ITR 451, the same was not approved by the Hon'ble Supreme Court in the case of M/s Topman Exports vs. CIT & others in Civil Appeal No.1699 of 2012. In case of present assessee, issue has already been decided against it by Ahmedabad bench of the Tribunal and the matter is seized by the Hon'ble High Court of Gujarat. We also considered that difference between the advance license benefit receivable granted by the Duty Exemption/Remission Scheme by the Govt. of India and DEPP and DFRC schemes. The advance license was issued for import of raw materials. The license can only be utilized for import of inputs for exports and unless imports are made, license cannot be availed or utilized. In the case of DFRC and DEPP, these are the issued for import of raw materials in manufacture of goods, without payment of basic custom duty, surcharge etc, in respect of export products covered under SION as notified by DGFT. In that scheme the exporters shall be entitled for benefit in respect of any duty paid, whether imported or indigenous use in export products as per SION scheme. Therefore, import of raw material is not important but only export is material for obtaining benefit under DEPP and DFRC. Advance license scheme license is not only non-transferrable but Page 18 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench can only be utilized for import of raw material which may or may not happen. Therefore, there is a difference in the two schemes. However, this is an academic discussion.
11. As stated earlier, we for the sake of consistency considering repercussion on other years, have no option than to follow the Coordinate Bench decision (ITAT Ahmedabad Bench) in assessee's own case as the matter is pending before the Hon'ble Gujarat High Court for adjudication. Accordingly, we follow the Coordinate Bench decision wherein it has been held that advance license benefit receivable was taxable in the year of export. Therefore, the ground is considered dismissed, following the principles laid down by the Coordinate Bench in assessee's own case in earlier year and later years.
12. Ground No.2 is with reference to premium on lease hold land. Assessee entered into an agreement with the GIDC on yearly rent fixed at `.22/- per plot and further paid premium at the time of entering to the extent of `.22,88,579/-. Even though the learned Counsel said many decisions are in favour of assessee, it was fairly admitted that in assessee's own case in assessment year 1995-96, 1996-97 and 1997-98 the issue is held against assessee. Consequently since the Coordinate Bench decision in assessee's own case is against, we respectfully, following the same dismiss the ground raised by assessee.
13. Ground No.3 is not pressed.
14. Ground No.4 pertains to miscellaneous expenses in respect of leasehold land. Assessee has spent an amount of `.42,911/-on leveling charges, grass cutting charges, site cleaning charges, digging charges on the plot allotted by the GIDC. AO and the CIT (A) considered the amount as capital in nature. It was the submission that the decision of the Hon'ble Supreme Court in the case of Madras Auto Services Ltd 233 ITR 468 is in favour of assessee.Page 19 of 23
ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench Considering the nature of the expenditure incurred on the land being utilized in the business, we are of the opinion that this amount is allowable as revenue expenditure. Therefore, this ground is allowed. AO is directed to allow the amount accordingly.
15. Ground Nos. 5 & 6 is not pressed.
16. Ground No.7 pertains to the issue of depreciation on account of disallowance in respect of interest capitalized in assessment year 1992-93. Assessee has furnished revised statement of depreciation after excluding depreciation on interest capitalized in earlier year. In assessment year 1992-93 the interest capitalized but claimed as revenue was not allowed and accordingly the depreciation had to be increased on a higher written down value in assessment year 1992-
93. This claim of depreciation is consequent to the decision in 1992-
93. AO is directed to examine whether the interest capitalized in the books was allowed as revenue expenditure in that year. If it is allowed as revenue expenditure, the ground will become infructuous. Otherwise, AO is directed to allow depreciation on the capitalized interest portion if it is not done already. With these directions the ground is considered allowed for statistical purposes.
17. Ground No.8 pertains to deduction under section 80 and 80IA without deducting depreciation eligible under the I.T. Act. It was fairly admitted that this issue is against assessee by the orders of the ITAT in 1995-96 (Para XII(8)(B), 81 ITD 553 at page 657 and also by ITAT order 1996-97 and 1997-98. It was further submitted that the decision is also against assessee by the orders of the Hon'ble Bombay High Court in the case of Plastibends India Ltd vs. Add. CIT 185 ITR 187 (Bom). Consequently the ground is dismissed.
18. Ground No.9 pertains to interest under section 244A. It was submitted that interest under section 244A was granted for the period upto 31/3/1994 although refund order was issued on 25.4.1994, the copy of the intimation was dated 19.4.1994. It was Page 20 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench submitted that the claim is in favour of assessee for granting of one month interest by the decision of ITAT in Jay Brothers Investment and Trading Co.(P) Ltd vs. DCIT 74 TTJ 74 (Mum). In view of the decision of the Coordinate Bench, we direct AO to grant interest for the month of April, 1994 or till the issuance of refund order, if it is not already granted. With this, ground is considered allowed.
19. Ground No.10 has two limbs. Ground No.10(a) is with reference to loss from export of traded goods was to be added back while computing the adjusted profits of the business. It was submitted that this decision is in favour of assessee by the decision of the Hon'ble Supreme Court in the case of A.M. MOOSA V. COMMISSIONER OF INCOME. TAX, (2007) 294 I.T.R. 1 (SC). The Coordinate Bench in the case of Excel Industries in ITA No.773/Mum/2009 dated 23/12/2009 has considered the issue. The relevant extract is as under:
"7. I have considered the facts of the issues as well as the written submission made by the AR of the appellant and find merit in them. Without going into the technical issues, this issue is clearly covered by the order of my predecessor quoted by the Authorized Representative of the appellant relying on the ratio of the decision of the Supreme Court in the case of A.M. Moosa vs. CIT (294 ITR
1) wherein after considering the provisions of section 80AB it had been held as under:
"Even under section 80HHC(3)(c)(i) the profit is to be the adjusted profit of business. The adjusted profit of the business means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus, in calculating the profits under sub-section (3)(c)(i) one necessarily has to reduce the profits under sub- section (3)(c)(ii). As seen above the term "profit" means positive profit. Thus, if there is loss then those losses in export of trading goods have to be adjusted. The cannot be ignored. ...
In view of the above, it is held that the loss derived from export of traded goods should be added back to the profits of the business while computing the adjusted profits of the business as required by clause (b) of the Page 21 of 23 ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench Explanation below section 80HHC(3) for arriving at the amount of deduction eligible under sub-section 3(c)(i). Hence this ground of appeal is allowed".
20. In view of the above, AO is directed to work out the deduction accordingly. This part of ground is allowed
21. Ground No.10b pertains to claim of deduction as a supporting manufacture in respect of export through export houses for which disclaimer certificate was obtained. It was fairly admitted that this issue was not discussed by AO even though it was claimed and mentioned in 80HHC report. The CIT (A) also did not allow the ground. We are of the opinion that this issue requires re- examination by AO and in case assessee has furnished necessary certificates and disclaimer certificates as prescribed, these are to be examined by AO. For this, the issue in this ground is restored to the file of AO for fresh consideration according to law and facts.
22. In the additional grounds of appeal, assessee has not pressed Ground Nos. 1 and 2.
23. Ground No.3 pertains to deduction under section 80I and 80IA. It was the contention that in view of the method of accounting followed by assessee as gross expenditure relating to the eligible units is to be reduced from the profits of the eligible unit, the corresponding income included in the other income of the eligible unit are to be taken into account for debiting the profits of the eligible unit. Alternatively 10% expenses should be reduced to earn other income relying on Hero Exports Ltd 295 ITR 454. Assessee placed on record its claim of computation under section 80I and 80IA. Since these issues require examination by AO, even though the issue is of legal nature, the matter is restored to the file of AO for examination of assessee's contentions and decide afresh while working out the deduction under section 80I and 80IA. The matter is restored to AO for consideration. Ground is allowed for statistical purposes.
Page 22 of 23ITA No.1408-adh.of 97 United Phosphorus Ltd Vapi - F Bench
24. Additional Ground No.4 pertains to interest under section 234B. It was fairly admitted that this issue is against assessee by the decision of Special Bench of the ITAT in the case of Motorola Inc. vs. DCIT 95 ITR 269 (Del.). Accordingly the ground is dismissed.
25. In the result, appeal filed by assessee is partly allowed.
Order pronounced in the open court on 30th May, 2012.
Sd/- Sd/-
(R.S. Padvekar) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 30th May, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "F" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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