Income Tax Appellate Tribunal - Ahmedabad
Gujarat State Electricity Corporation ... vs Department Of Income Tax on 13 March, 2015
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'D' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, AHMEDABAD
ी मक
ु ु ल कुमार ावत, या यक सद य एवं ी एन.एस. सैनी, लेखा सद य के सम%
BEFORE SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER AND
SHRI N.S. SAINI, ACCOUNTANT MEMBER
ITA No. 1823 and 1824/Ahd/2010
[Asstt. Year: 2006-07 and 2007-08
The DCIT, Cir.1(1) Gujarat State Electricity Corporation
Baroda. Vs Ltd.
Sardar Patel Vidyut Bhavan
Race Course Road, Baroda.
ITA No. 1873/Ahd/2010
[Asstt. Year: 2007-08
Gujarat State Electricity Corporation The DCIT, Cir.1(1)
Ltd. Vs Baroda.
Sardar Patel Vidyut Bhavan
Race Course Road, Baroda.
अपीलाथ'/ (Appellant) )*यथ'/ (Respondent)
Revenue by : Shri B.L. Yadav, Sr.DR
Assessee(s) by : Shri J.P. Shah
सन
ु वाई क तार ख/ Dateof Hearing : 26/02/2015
घोषणा क तार ख / Date of Pronouncement: 13/03/2015
आदे श/O R D E R
PER N.S. SAINI, ACCOUNTANT MEMBER:
1. ITA No.1823/Ahd/2010 is filed by the Revenue against the order of the CIT(A)-I, Baroda dated 24.2.2010 for the Asstt.Year 2006-07.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 2
2. ITA No.1824/Ahd/2010 and ITA No.1873/Ahd/2010 are cross- appeals filed by the Revenue and the assessee against the order of the CIT(A)-I, Baroda dated 24.2.2010 for the Asstt.Year 2007-08.
3. The ground no.1 of the Revenue's appeal for A.Y.2006-07 and Ground no.2 of the Revenue for the A.Y.2007-08 are against the order of the CIT(A) in deleting the addition of Rs.353.90 lakhs in A.Y.2006-07 and Rs.269.92 lakhs in A.Y.2007-08 on account of extra ordinary item i.e. flood, cyclone fire etc.
4. The AO made addition in Asstt.Year 2006-07 as under:
As per the P&L account the assessee has declared Rs.86109000/- (as income) under the head 'extraordinary items'. As per schedule 18, in this regard, the break up is as under-
Amount Rs.
Receipts from consumers 234000
Fuel related Gains 28365000
Subsidy against Loss due to 92900000
Floods
121499000
Less: Expenses
Loss due to flood, cyclone, fire 35390000
(86109000)
During the course of assessment proceedings, the assessee was requested to justify its claim of extra ordinary items and was specifically asked to show cause why the expenditure booked under the head Extraordinary Items may not be disallowed:
In response, the assessee submitted its reply as under vide letter dated 8-8-2008:
"During the year the Company has booked extra ordinary income amounting to Rs. 861.09 lacs, the break-up of which is as under:
Particulars Account Total
Code
Fuel related gains for prior period 65.1 192.38
Prior period adjustment of Head Office 91.27
Receipts from consumers relating to 65.2 2.34
prior period
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 3 Subsidies against loss due to flood 929.00 INCOME 1214.99 Loss due to flood cyclone fire 79.8 353.90 EXPENSE 353.90 Total 861.09 The Company has accounted subsidy of Rs.929.00 lacs received due to partly compensate the toss on account of the flood, as the income has been received during the year, the same is accounted and offered for taxation. Similarly during the year under review, the Company's claim amounting to Rs.283.65 lacs (Rs.192.33 lacs + Rs.91.27 lacs) regarding quality of coal supplied in past have been settled. Hence, the same has been offered for taxation during the year under review."
From the above, it is seen that the assessee has not furnished any details and explanation about the expenditure of Rs.3,53,90,000/- being loss due to flood, cyclone, fire. The assessee could not justify its claim on the basis of material evidences with respect to the particular assets and its extent. It also could not justify and did not make any submission as to why these expenses have been claimed under the head "extraordinary items". In view of the above, the asseessee's claim of Rs.3,53,90,000/- under the head extra ordinary items cannot be allowed to it. Accordingly the same is disallowed and added back to its total income.-
Without prejudice to the above, such claim in absence of details furnished, may be for the revival of assets damaged / destroyed during the natural calamities therefore, such claim is of capital nature. Therefore also the claim is not allowable.
5. Similarly, in Asstt.Year 2007-08, the AO made addition as follows:
"As per the P&L account the assessee has debited Rs.2,95,13,000/- under the head 'extraordinary items' as under:
Loss due to cyclone, fire and flood Rs.1,86,99,000/-
Misc. Write off Rs. 82,93,000/-
Sundry debits Rs. 25,21,000/-
Total Rs.2,95,13,000/-
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 4 Vide this office letter dated 20.05.09, the assessee was requested to justify its claim of extra ordinary items and was specifically asked to show cause why the expenditure booked under the head Extraordinary Items should not be disallowed.
The assessee vide its reply dated 12.06.09 simply submitted that miscellaneous write off represents loss on obsolescence of fixed assets of the company. Further, the assessee vide its reply dated 09.07.09 submitted that the loss due to flood was incurred for revival and repair of assets damaged and the sundry debits was on account of written off of deferred revenue expenditure.
However, assessee has not submitted any details such as nature of loss, how the amount of loss quantified, date when the asset was purchased, depreciation claimed/allowed, WDV, etc. In the absence of such details, assessee's claim could not be examined and verified properly and assessee could not be allowed the claim without such details. Moreover, loss on account of obsolescence could not be allowed after introduction of concept of depreciation on block of assets.
As regards loss due to cyclone, fire and flood and sundry debits, no details have been furnished by the assessee despite requirements of this office. Without details assessee's claims cannot be allowed.
In view of the above, the assessee's claim of Rs.2,95,13,000/- under the head extra ordinary items is disallowed and added back to the total income."
6. On appeal, the CIT(A) deleted the addition for Asstt.Year 2006-07 by observing as under:
"4.2 I have considered the submissions of the Id. AR and the facts of the case. The disallowance has been made only on the ground that the assessee could not substantiate that it had incurred expenditure of Rs. 353.90 lacs on repairing its assets damaged due to flood. It is seen that the assessee had received financial assistance amounting to Rs. 929 lacs for this purpose. This is evident from the Government of Gujarat Resolution No GUV-1105-2724-K1 dated 4.7.2005 10.10.2005 and 13.10.2005 issued by the Principal Secretary, Energy & Petrochemicals Department. The assessee had incurred less expenditure than the subsidy received and the excess has been duly offered for taxation. Being an undertaking wholly owned by the Government of Gujarat, the accounts are to be audited by the auditors appointed by C & AG. As per the accounts furnished to C & AG, ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 5 the expenses incurred on repair of "flood damaged" assets amounted to Rs. 353.90 lacs. The C & AG has certified the expenditure. No further evidence in this regard would ordinarily be necessary. If, however, it was felt that the expenses were over-state an independent enquiry could have been made to ascertain the correct expenses. However, this has not been done. Looking to the circumstances and also the fact that the excess subsidy received has been included in the taxable income, it is held that the AO was not justified in making the addition of Rs. 353.90 lacs, which is directed to be deleted."
7. For the Asstt.Year 2007-08, the CIT(A) decided the issue as under:
"6.2 I have considered the submissions of the Id. AR and the facts of the case. The amount written off consists of the following:
(i) Loss due to cyclone, flood, fire : Rs. 1,86,99,000/-
(ii) Misc. write-offs : Rs. 82,93,000/-
(iii) Sundry debits : Rs. 25,21.000/-
Rs. 2,95,13,000/-
The disallowance of loss due to flood, etc., has been made only on the ground that the assessee could not substantiate that it had incurred expenditure of Rs.186.99 lacs on repairing its assets damaged due to flood. It is seen that the assessee had received financial assistance amounting to Rs. 929 lacs for this purpose.
This is evident from the Government of Gujarat Resolution Nos GUV-1105-2724-K1 dated 4.7.2005, 10.10.2005 and 13.10.2005 issued by the Principal Secretary, Energy & Petrochemicals Department. The assessee had incurred less expenditure than the subsidy received and the excess has been duly offered for taxation. Being an undertaking wholly owned by the Government of Gujarat, the accounts are to be audited by the auditors appointed by C & AG. As per the accounts furnished to C & AG, the expenses incurred on repair of "flood damaged" assets amounted to Rs. 186.99 lacs. The C & AG has certified the expenditure. No further evidence in this regard would ordinarily be necessary. If, however, it was felt that the expenses were over-stated, an independent enquiry could have been made to ascertain the correct expenses. However, this has not been done. Looking to the circumstances and also the fact that the excess subsidy received has been included in the taxable income, it is held that the AO was not justified in making the addition of Rs. 1,86,99,000/-, which is directed to be deleted. So far as the miscellaneous write off of Rs. 82.93 lacs is concerned, it was submitted as under:
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 6 "The Company has carried out physical verification of material by a specified team as per the standard practices. After completion of physical verification, shortage/excesses of materials were listed out. The detailed reasons of shortage of material were received from respective stores in-charge. Excess material was treated as gain of the materials. However, shortage of material was treated as loss of material after detailed analysis and approved by the Competent Authority. Looking to the no. of transactions and values percentage of shortages is very low. The main reasons for shortages are as under:
- Weight difference -- Difference is occurred due to change of mode of measurement i.e., material received in MT while issued as per no. of bags as well as in piecemeal etc.
-Due to physical properties of material.
- Transaction of breakable items damaged during handling.
- Inter-changing of quantitative value at the time of issue due to same shape, size, etc. Accordingly, such losses on account of shortage, pilferage of stock is written off after approval of the competent authority. The appellant, therefore, prays that the additions made on this count may be deleted. "
6.4 I have considered the submissions of the Id. AR and the facts of the case. The amount written off consists of numerous items of small spares. In the business of the size of the appellant, keeping track of small consumable spares and stores with perfect accuracy is not always possible. At the time of annual stock taking, some items were found to be in excess of the number/quantity recorded in the stock register; whereas certain other items were found to be short in number/ quantity. The net effect is shortage of Rs. 82.93 lacs. As compared to the turnover, such loss is less than 1/10th of 1%. This is quite negligible. The assessee has accounted for both gains as well as losses in respect of stores in a consistent manner. Hence, it is held that disallowance of this amount was not justified and is, accordingly, deleted."
8. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee claimed deduction of Rs.353.90 lakhs for repairing of assets damaged due to floods in Asstt.Year 2006-07. The AO ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 7 disallowed the claim for deduction to the assessee on the ground that the assessee failed to submit the details and evidences with respect to particular asset and the extent to which the repairs were done. On appeal, the CIT(A) vacated the disallowance on the ground that the assessee had received financial assistance of Rs.929 lakhs for repairing of its assets damaged due to flood and the assessee has claimed deduction of Rs.353.90 lakhs on account of expenses incurred on repairs of flood damaged assets and the balance amount was shown as income in the year under consideration. The CIT(A) has also observed that the accounts of the assessee are audited by C&AG, as the assessee is a Government company, and therefore, the disallowance was not justified. We find that the undisputed facts are that the assessee- company received grant of Rs.929.00 lakhs from Govt. of Gujarat on account of loss suffered in flood and the said amount was declared as income by the assessee and was also accepted by the Department.
9. Further, the assessee claimed Rs.353.90 lakhs as actual expenditure incurred on account of damages by flood in the Asstt.Year 2006-07 and Rs.186.99 in Asstt.Year 2007-08. The assessee also claimed Rs.82.93 lakhs as Misc. write off in Asstt.Year 2007-08. The AO disallowed the entire amount of loss claimed by the assessee on account of loss due to flood and Misc. write off on the ground that the details of expenditure incurred were not available before him. In our considered view, the fact that the assessee suffered loss has not been disputed by the AO, and therefore, the AO was not justified in disallowing the entire amount of loss claimed by the assessee, and thereby inferring that no actual loss was suffered by the assessee.
10. However, we also find that the details of the expenditure incurred or loss suffered due to flood as well as Misc. write off of Rs.82.93 lakhs was not filed before the CIT(A) or before us also by the assessee. The CIT(A) deleted the disallowance on the ground that the accounts of the ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 8 assessee was audited by the C&AG and without verifying the details of loss and write off by the assessee. Thus, in our considered view orders of both the authorities below cannot be sustained. We, therefore, in the interest of justice remit the matter back to the file of the AO for adjudication of the issue afresh after allowing the assessee reasonable opportunity of producing the details of expenses incurred or loss suffered as well as details of amount write off and after verification of details so furnished and if the assessee fails to furnish the details, by estimating the reasonable amount of loss which was suffered by the assessee on account of flood and write off of the amount. Thus, this ground of the appeal for both the years under consideration is allowed for statistical purpose.
11. The ground no.2 for the Asstt.Year 2006-07 and Ground no.4 for the Asstt.Year 2007-08 are directed against the order of the CIT(A) in deleting the addition of Rs.2057.03 lakhs for Asstt.Year 2006-07 and Rs.1650.87 lakhs for the Asstt.Year 2007-08 on account of fees paid to Government of Gujarat to guarantee repayment of unsecured loan. The AO disallowed the claim of the assessee for the Asstt.Year 2006-07 holding as under:
"4. Guarantee fees and Premium on debt restructuring:
During the financial year under consideration the assessee has paid guarantee fees of Rs.20,57,03,000/- to the Government of Gujarat in consideration of it issuing guarantee for repayment of unsecured loans.
Further the assessee has also paid Rs.1,72,71,000/- as premium on restructuring of loans. The said premium has been paid to the Financial Institutions from whom Loans have been taken. The said premium was paid for restructuring of the loans in order to reduce the interest burden.
Thus the assessee has claimed expenses and also it has obtained several advantages as a result of restructuring of loans and in view of guarantee of, Gujarat Government for ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 9 repayment of loan. In view of the facts, the assessee was asked to show cause as to why the premium for restructuring debts and the guarantee fees should not be disallowed as capital expenditure. In reply the assessee vide letter dated 8.8.2008 stated as under:-
"The company raised loans from banks and financial institution and offered guarantee for, repayment of loan and interest thereon as security. Moreover, during the year under review, the assets and liability; of erstwhile Gujarat Electricity Board was transferred to the company, which also contained loans raised from banks and financial institutions.
The guarantee fees are payable to the state government every year on the outstanding balance of guarantee given to banks / financial institutions on the first day of the year. Therefore, it is submitted that it is not a single one time payment but recurring expenditure till repayment of loans."
The company has repaid higher interest bearing loans. For the same the bank charges premium on restructuring of loans. As the same reduces the cost of interest expenditure, it is requested to allow the same as revenue expenditure.'' I have gone through the submission of the assessee. It is clear from the details in this respect that the assessee is going to derive all the benefits in the form of restructuring of the debt, rescheduling of repayment schedule, reduction in interest etc. over a long period of time which are in the range of more than..5 years. It means that the assessee will derive advantage of enduring nature as a result of restructuring of loans. Therefore, the expenses pertaining to the same in the form of premium for restructuring debts have resulted into advantage or benefit of enduring nature to the assessee. It is pertinent here to mention "enduring benefits" has been discussed as under- . .
The Honorable Supreme Court has in case of ClT vs. Coal Shipments Pvt Ltd reported in 82ITR 902 has defined "Enduring benefit" in the following terms -
Although and enduring benefit need not be of an everlasting character, it should not at the same time ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 10 be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. What is the extent durability, or permanence should depend on the facts of each case. The expression "Enduring Advantage" is a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of terms upon which it can be acquired. .
The above views were again expressed by the Honorable Supreme Court in the case of Devidas Vitthaldas & Co. Vs. ClT (1972) reported in 84 ITR 277.
Therefore, having regard to that discussion and facts of the case as discussed above, the entire expenditure pertaining to CDR is held as capital expenditure. Accordingly, the total amount of Rs.22,29,74,000/- as claimed by the assessee on this account and discussed above, is held as capital expenditure and the same is disallowed and added to its total income.
12. The AO disallowed the claim of deduction for guarantee fee for the Asstt.Year 2007-08 holding as under:
"Guarantee Fees-
During the financial year under consideration the assessee has paid guarantee fees of Rs.16,50,87,000/- to the Government of Gujarat in consideration of guarantee issued by it for repayment of unsecured loans.
Thus the assessee has claimed expenses and also it has obtained several advantages as a result of restructuring of loans and in view of guarantee of Gujarat Government for repayment of loan. In view of the facts, the assessee was asked to show cause as to why the guarantee fees should not be disallowed as capital expenditure. In reply dated 12.06.09 the assessee has submitted only details without any justification specifically called for.
I have gone through the submission of the assessee. It is clear from the details in this respect that the assessee is going to derive all the benefits in the form of restructuring of the debt, rescheduling of repayment schedule, reduction in interest etc. over a long period of time which are in the range of more than 5 years. It means that the assessee will derive advantage of enduring nature as a result of restructuring of loans, therefore, ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 11 the expenses pertaining to the same in the form of premium for restructuring debts have resulted into advantage or benefit of enduring nature to the assessee. It is pertinent here to mention "enduring benefits" has been discussed as under -
The Honorable Supreme Court has in case of CIT vs. Coal Shipments Pvt Ltd reported in 82ITR 902 has defined "Enduring benefit" in the following terms -
Although and enduring benefit need not be of an everlasting character, it should not at the same time be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. What is the extent durability, or permanence should depend on the facts of each case. The expression "Enduring Advantage" is a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of terms upon which it can be acquired.
The above views were again expressed by the Honorable Supreme Court in the case of Devidas Vitthaldas & Co. Vs. CIT (1972) reported in 84 ITR 277.
Therefore, having regard to that discussion and facts of the case as discussed above, the entire expenditure pertaining to CDR is held as capital expenditure. Accordingly, the total amount of Rs.16,50,87,000/- as claimed by the assessee on this account and discussed above, is held as capital expenditure and the same is disallowed and added to its total income."
13. The CIT(A) in Asstt.Year 2006-07 deleted the addition by observing as under:
"5. Ground No. 3.1 relates to the disallowance of Rs. 20,57,03,000/- being guarantee fees paid to Government of Gujarat in consideration of guaranteeing repayments of unsecured loans. The AO noted that the above mentioned sum had been paid to the Government of Gujarat. The AO called upon the assessee to show cause why the same should not be disallowed as capital expenditure. The assessee explained that the guarantee fees were payable to the Government of Gujarat for guarantees extended in respect of various loans obtained by the appellant company. The Government of Gujarat guaranteed the repayment of the by the assessee. For this guarantee a fee @ 1% of the amount of loans outstanding at the beginning of the year was charged. Since the payment of fee was an annual requirement the same could not be ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 12 said to represent expenditure but clearly was revenue in nature. However, the AO did not explanation and held that the payment of guarantee commission resulted in advantage or benefit of enduring nature. Accordingly, the expenditure was held to lie in the capital field and was disallowed.
5.1 In appeal, the arguments taken at the assessment stage were reiterated. It was further pointed out that the assessee company was one of the seven resulting companies out of the demerger of the erstwhile GEB. In the past GEB had issued bonds and other financial instruments for raising funds from the public and from financial institutions. The Government of Gujarat guaranteed to the public and the financial institutions that in case of failure on the part of GEB to redeem the bonds and other financial instruments, the same would be made good by the Government of Gujarat. In lieu of this, commission @ 1% of the outstanding value of unsecured loans was charged. Hence the addition of Rs. 20,57,03,000/- may be deleted.
5.2 I have considered the submissions of the Id. AR and the facts of the case. The issue relating to whether an item of expenditure lies in the capital or the revenue field has exercised the courts in numerous cases. From an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition or creation of any new asset. Where no such asset is created, it would be indicative of an expenditure which was not capital in nature. Another test relates to the principle of "enduring benefit". "Enduring benefit" may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit "enduring", since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such short lived benefit could not be categorized as "enduring". Hence, I am inclined to the view that the payment of guarantee commission was revenue expenditure.
5.3 Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt. Ltd. (ITA No. 738/Ahd/2009) for AY 2006-07, the Tribunal held, vide order dt. 5.6.2009, following the decision of the Rajasthan High Court in ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 13 CITv Metalising Equipment Co. Pvt. Ltd, 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, quite apart from the other sound reasons for treating the expenditure as revenue, it would be unrealistic to say that the appellant company could derive any undue advantage or collateral benefit by making such payment to the GOG. In view of the totality of the circumstances, I am of the opinion that the AO was not justified in treating the payment of guarantee commission (Rs. 20,57,03,000/-) as capital in nature. The addition is directed to be deleted.
6. Ground No. 3.2 relates to the disallowance of Rs.1,72,71,000/- in respect of restructuring of loans. The AO found that this premium had been paid to financial institutions from whom loans had been taken at higher rate of interest and in respect of which the debts were retired and rolled over at lower rate of interest, on the ground that the same represented capital expenditure.
6.1 In appeal, it was submitted by the Id. AR that the premium paid for retiring the higher cost debt could not be considered as capital since by the incurring of such expenditure the assessee saved interest cost I the same year and also in subsequent years. Hence the expense was revenue and not capital.
6.2 I have considered the submissions of the Id. AR and the facts of the case. The courts have been repeatedly called upon to pronounce on the issue of capital vs revenue expenditure. The concurrence of judicial opinion now is that there are a number of tests for determining the nature of an expenditure, viz., test of bringing into existence an asset, test of enduring benefit, test of fixed and circulating capital, etc. However, the general view is that the test of enduring benefit is not a certain or conclusive test and it cannot be applied without regard to the particular facts and circumstances of each case. It has been generally agreed that where the laying out of such expenditure confers an advantage to the assessee which constitutes of merely facilitating the assessee's trading operations or enabling the management or conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be in the revenue account even though the advantage may endure for the indefinite future. As observed by the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v CIT, 111 ITR 377, "the idea of "once for all"
payment and "enduring benefit" are not to be treated as ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 14 something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or an advantage of an enduring nature" was evolved to emphasize the element of a sufficient degree of durability appropriate to the context. " In my opinion, the laying out of these expenses does not confer any enduring benefit but merely facilitates the carrying out of business in more efficient manner. It has been held that where expenditure is incurred which results in saving of recurring revenue expenditure, such an expense would itself be a revenue item and not a capital item. In my opinion, the laying out of the impugned expenses did not confer any enduring benefit but merely facilitated the carrying on of business in a more efficient manner. Accordingly, it is held that the payment of Rs.1,72,71,000/- on restructuring of loans was a revenue expense and therefore the disallowance of this amount is directed to be deleted."
14. For the asstt.year 2007-08, the CIT(A) has decided the issue by observing as under:
"7.2 I have considered the submission. I find that vide order dtd.24-2-2010 in Appeal No.CAB-I/348/08-09, the disallowance has been deleted. The facts and issue for determination are identical in this year also. Accordingly, following my order dt. 24- 2-2010, the disallowance of Rs.16,50,87,000/- is directed to be deleted."
15. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case in the Asstt.Year 2006-07, the assessee claimed Rs.2057.03 lakhs and Rs.1650.87 lakhs in the Asstt.year 2007-08 for fees paid to Govt. of Gujarat to guarantee repayment of unsecured loans. The AO disallowed the claim by holding it to be a capital expenditure. No reasons have been given by the AO for considering the amount as capital expenditure. The order passed by the AO is unreasoned and therefore, unsustainable.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 15
16. On appeal, the CIT(A) has allowed the claim of the assessee on the ground that benefits derived from the payment of commission lasted for one year only.
17. The DR has relied on the order of the AO.
18. On the other hand, AR of the assessee placed reliance on the decision of Hon'ble Gujarat High Court in the case of Mihir Textile Ltd.Vs. CIT, 252 ITR 686 (Guj) wherein it was held that guarantee commission paid was allowable as revenue expenditure.
19. We find that it is not in dispute that the amount was paid by the assessee as guarantee commission for unsecured loans. Therefore, respectfully following the decision of the Hon'ble Gujarat High Court in the case of Mihir Textile Ltd. (supra), we confirm the order of the CIT(A) and dismiss this ground of the Revenue for both the years under consideration.
20. The ground no.2 of the appeal of the Revenue for the Asstt.Year 2006-07 is also directed against the order of the CIT(A) in deleting the disallowance of premium claim on restructuring of loan of Rs.172.71 lakhs. The AO disallowed the claim of premium claim on restructuring of loans by holding as under:
"4. Guarantee fees and Premium on debt restructuring:
During the financial year under consideration the assessee has paid guarantee fees of Rs.20,57,03,000/- to the Government of Gujarat in consideration of it issuing guarantee for repayment of unsecured loans.
Further the assessee has also paid Rs.1,72,71,000/- as premium on restructuring of loans. The said premium has been paid to the Financial Institutions from whom Loans have been taken. The said premium was paid for restructuring of the loans in order to reduce the interest burden.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 16 Thus the assessee has claimed expenses and also it has obtained several advantages as a result of restructuring of loans and in view of guarantee of, Gujarat Government for repayment of loan. In view of the facts, the assessee was asked to show cause as to why the premium for restructuring debts and the guarantee fees should not be disallowed as capital expenditure. In reply the assessee vide letter dated 8.8.2008 stated as under:-
"The company raised loans from banks and financial institution and offered guarantee for, repayment of loan and interest thereon as security. Moreover, during the year under review, the assets and liability; of erstwhile Gujarat Electricity Board was transferred to the company, which also contained loans raised from banks and financial institutions.
The guarantee fees are payable to the state government every year on the outstanding balance of guarantee given to banks / financial institutions on the first day of the year. Therefore, it is submitted that it is not a single one time payment but recurring expenditure till repayment of loans."
The company has repaid higher interest bearing loans. For the same the bank charges premium on restructuring of loans. As the same reduces the cost of interest expenditure, it is requested to allow the same as revenue expenditure.'' I have gone through the submission of the assessee. It is clear from the details in this respect that the assessee is going to derive all the benefits in the form of restructuring of the debt, rescheduling of repayment schedule, reduction in interest etc. over a long period of time which are in the range of more than..5 years. It means that the assessee will derive advantage of enduring nature as a result of restructuring of loans. Therefore, the expenses pertaining to the same in the form of premium for restructuring debts have resulted into advantage or benefit of enduring nature to the assessee. It is pertinent here to mention "enduring benefits" has been discussed as under- .
The Honorable Supreme Court has in case of ClT vs. Coal Shipments Pvt Ltd reported in 82ITR 902 has defined "Enduring benefit" in the following terms -
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 17 Although and enduring benefit need not be of an everlasting character, it should not at the same time be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. What is the extent durability, or permanence should depend on the facts of each case. The expression "Enduring Advantage" is a relative term, not enduring in the sense of its being permanent, but is sufficiently durable depending upon the nature of terms upon which it can be acquired. .
The above views were again expressed by the Honorable Supreme Court in the case of Devidas Vitthaldas & Co. Vs. ClT (1972) reported in 84 ITR 277.
Therefore, having regard to that discussion and facts of the case as discussed above, the entire expenditure pertaining to CDR is held as capital expenditure. Accordingly, the total amount of Rs.22,29,74,000/- as claimed by the assessee on this account and discussed above, is held as capital expenditure and the same is disallowed and added to its total income.
21. The CIT(A) has decided the issue by observing as under:
"6.2 I have considered the submissions of the Id. AR and the facts of the case. The courts have been repeatedly called upon to pronounce on the issue of capital vs revenue expenditure. The concurrence of judicial opinion now is that there are a number of tests for determining the nature of an expenditure, viz., test of bringing into existence an asset, test of enduring benefit, test of fixed and circulating capital, etc. However, the general view is that the test of enduring benefit is not a certain or conclusive test and it cannot be applied without regard to the particular facts and circumstances of each case. It has been generally agreed that where the laying out of such expenditure confers an advantage to the assessee which constitutes of merely facilitating the assessee's trading operations or enabling the management or conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be in the revenue account even though the advantage may endure for the indefinite future. As observed by the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v CIT, 111 ITR 377, "the idea of "once for all"
payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 18 and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or an advantage of an enduring nature" was evolved to emphasize the element of a sufficient degree of durability appropriate to the context. " In my opinion, the laying out of these expenses does not confer any enduring benefit but merely facilitates the carrying out of business in more efficient manner. It has been held that where expenditure is incurred which results in saving of recurring revenue expenditure, such an expense would itself be a revenue item and not a capital item. In my opinion, the laying out of the impugned expenses did not confer any enduring benefit but merely facilitated the carrying on of business in a more efficient manner. Accordingly, it is held that the payment of Rs. 1,72,71,000/- on restructuring of loans was a revenue expense and therefore the disallowance of this amount is directed to be deleted."
22. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee claimed deduction for premium of Rs.172.71 lakhs paid in the Asstt.Year 2006-07 for restructuring of loan. According to the AO, the restructuring of loan was to reduce the interest burden and the assessee will benefit from the same for a long period of time of more than 5 years, therefore, he disallowed the same by treating it as capital expenditure.
23. On appeal, the CIT(A) deleted the disallowance on the ground that it does not confer any enduring benefit and merely facilitate the assessee's business in more efficient manner.
24. DR relied on the order of the AO.
25. On the other hand, AR of the assessee relied of the decision of the Hon'ble Gujarat High Court in the case of DCIT Vs. Gujarat Narmada Valley Fertilizers Ltd., 356 ITR 460 (Guj) wherein it was held that the expenditure incurred by the assessee on restructuring of loan was revenue expenditure. No contrary decision was cited by the learned DR. Therefore, respectfully following the decision of the Hon'ble Gujarat ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 19 High Court in the case of Gujarat Narmada Valley Fertilizers Ltd. (supra), we confirm the order of the CIT(A) and dismiss the ground of appeal of the assessee.
26. The ground no.3 of the appeal for the Asstt.Year 2006-07 and the ground no.1 of the appeal for the Asstt.Year 2007-08 are directed against the order of the CIT(A) in confirming the addition on account of Employee's PF contribution of Rs.37.31 lakhs for Asstt.Year 2006-07 and Rs.5.23 lakhs in Asstt.Year 2007-08.
27. In the Asstt.Year 2006-07, the CIT(A) has held as under:
"7. Ground No. 4 relates to the disallowance of Rs. 37,31,520/- being employees contribution to PF on the ground that the same was paid beyond the due date. Details in this regard are-available at page-5 of the assessment order.
7.1 In appeal, it was submitted by the Id. AR that the delay was only of two days. The assessee explained during the course of appellate proceedings that the payments for the months of June and July were delayed due to heavy flooding in Gujarat State. In respect of the other defaults, it was explained that the assessee is a public company and there was no malafide intention or taking of any undue advantage by making the payment late by 2-3 days only.
7.2 I have considered the submissions of the ld. AR and the facts of the case. The Delhi High Court has held in the case of CIT v Aimil Ltd., ITA Nos 1063 of 2006, 755, 1214 & 1246 of 2008 and 50, 78 & 204 of 2009 that the employees contribution towards PF/ESI deposited after the due date prescribed under the relevant Act/Rules but before the due date of filing of return would be allowable u/s 43B. In this case the delay is of a few days only. It is, therefore, held that the AO was not justified in disallowing Rs. 37,31,520/-, which is directed to be deleted."
28. In the Asstt.Year 2007-08, the CIT(A) has decided the issue as under:
"4. Ground No. 2 is related to the disallowance under section 36(l)(va) of Rs. 5,23,892/- being delayed payment of employees' contribution to P.P. The AO noted that the employees' contribution was paid for the month of ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 20 July, 2006, which was due to be paid on or before 20-8-2006. However, the payment was made on 21-8-2006 i.e. late by one day. Accordingly, the same was disallowed under section 36(i)(va). Assessee's explanation that 19th & 20th of August 2006 were Saturday & Sunday and therefore, the payment could be made only on 21st August was not accepted by the A.O. 4.1 In appeal, it was submitted that the delay is only of one day. Further, relying on the decision of Delhi High Court in the case of CIT vs. AIMIL Ltd. (ITA No. 1063 of 2006), it was pleaded that the deduction may be allowed since the payment was made before the due date for filing of return of income.
4.2 I have considered the submission of the A.O. and facts of the case. The delay in this case is of only one day. The General Clauses Act provides that if payment is made on the date following a holiday, the payment would be deemed to have been made within time. Moreover, in AIMIL's case, the Delhi High Court has clearly stated that even in the case of employees' contribution to PF, the delayed payment would qualify for deduction, provided it was deposited before the due date for filing of return. In the instant case, the payment has been made before the prescribed due date for filing the return of income. Accordingly, the disallowance of Rs.5,23,892/- is directed to be deleted."
29. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO disallowed deduction for employees' contribution to PF of Rs.37,31,520/- in Asstt.Year 2006-07 and Rs.5,23,892/.- in the Asstt.Year 2007-08, as the assessee failed to deposit the contribution with PF authority within the due date prescribed under the PF Act by invoking the provisions of section 36(1)(va) read with section 2(24)(x) of the Act.
30. On appeal, the CIT(A) following the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Aimil Ltd. (supra) deleted the disallowance on the ground that deduction was allowable to the assessee if the contribution to PF account was deposited before the due date of filing of the return under section 139(1) of the Act.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 21
31. The DR submitted before us that the issue is now covered in favour of the Revenue by the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation, 366 ITR 170 (Guj) wherein it was held that if the assessee has not credited the employee's contribution to the employees' account in the relevant fund or funds on or before the due date mentioned in Explanation to s. 36(1)(va), the assessee shall not be entitled to deductions of such amount in computing the income referred to in s. 28 of the Act.
32. On the other hand, the AR of the assessee submitted that the AO has disallowed the deduction simply because the payments were not made to the credit of PF authorities within the due date prescribed under the PF Act. He submitted that under the PF Act, the payments can be made within 15 days from the deduction of PF contribution from the employees' salary plus 5 grace days. The AO has not verified the payments made to the PF authorities according to this provision of the PF Act. He, therefore, submitted that the matter should be remitted back to the file of the AO for verification, and thereafter making the disallowance of payments, which are made beyond 15 days from the payment of salary to the employees plus 5 days' grace period allowed under the PF Act.
33. DR did not object to this submission of the AR of the assessee. We, therefore, set aside the orders of the lower authorities and remand the matter back to the file of the AO for adjudication of the issue afresh in the light of the discussion made hereinabove after providing reasonable opportunity to the assessee. Thus, this ground of appeal of the Revenue is allowed for statistical purpose.
34. The ground no.4 of the appeal in the Asstt.Year 2006-07 and the ground no.6 in the Asstt.Year 2007-08 are directed against the order of the CIT(A) in excluding the provision of gratuity for the computation of ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 22 book profit under section 115JB of Rs.3,68,000/- in the Asstt.Year 2006-07 and Rs.401.16 lakhs in the Asstt.Year 2007-08.
35. The CIT(A) in the Asstt.Year 2006-07 has decided the issue as under:
"8.1 Ground No. 5.1 pertains to the treatment by the AO of the provision for gratuity amounting to Rs. 3,68,000/- as unascertained liability and in enhancing the book profit by this amount.
8.1.1 The Id. AR submitted in appeal that, as held by various judicial authorities, if the provision for gratuity was made on acturial valuation, the same should not be considered as unascertained liability but was to be treated as an ascertained one. The assessee computed the quantum of provision for gratuity based on acturial valuation done by LIC of India, a Government owned company.
8.1.2 I have considered the submissions of the Id. AR and the facts of the case. The issue relating to treatment of provision as unascertained liability was considered by the Supreme Court in Bharat Earth Movers, 245 ITR 428. In that case, the issue was of provision for leave encashment. The principle laid down by the Court was that where the liability could be computed along scientific lines and on a scientific basis regularly from year to year, the provision towards the same could not be said to represent an unascertained liability. Here the assessee has got the computation done through LIC of India on a scientific basis, i.e. following acturial valuation principles. The ITAT, in the case of Etcher Motors Ltd v DCIT, 82 TTJ 61 has also held that provision for gratuity based on acturial valuation was not an unascertained liability which could be added back while computing book profit for the purposes of section 115JB. This view has been reiterated by the Mumbai Bench of the ITAT in Dresser Valve India Pvt. Ltd. v ACIT, ITA No. 6464/Mum/2007. Having regard to the above cited cases on this issue, it is held that the enhancement of the book profit by Rs.3,68,000/- was not warranted. The AO is directed to recomputed the book profits without including the provision for gratuity.
36. In the Asstt.Year 2007-08 the CIT(A) decided the issue as under:
"11. Ground No. 10(i) relates to the enhancement of Book profit under Section 115JB by the provision for gratuity amounting to Rs. 4,01,16,000/-, treating the same as unascertained liabilities.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 23 This issue has been dealt with in my appellate order dt. 24-2- 2010 in respect of A.Y. 2006-07. Since the facts and issue for determination remain the same this year as well, following the rationale of my earlier order, the A.O. is directed to exclude the provision for gratuity while computing the book profit under section 115 JB."
37. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO while computing the income of the assessee under section 115JB of the Act added Rs.3,68,000/- in the Asstt.Year 2006-07 and Rs.4,01,16,000/- in the Asstt.Year 2007-08 on account of provision for gratuity for the reason that it was an unascertained liability.
38. On appeal, the CIT(A) allowed the appeal of the assessee and directed the AO to exclude the provision of gratuity while computing the book profit under section 115JB by following the decision in the case of Etcher Motors Ltd. Vs. DCIT, 82 TTJ 61 wherein it was held that provision for gratuity based on actuarial valuation was not an unascertained liability which could be added back in computing the book profit under section 115JB of the Act.
39. DR supported the order of the AO whereas the AR of the assessee submitted that the issue is covered in favour of the assessee by the decision of the Hon'ble Gujarat High Court in the case of DCI Vs. Inox Leisure, 351 ITR 314 (Guj) wherein it was held that the provision of gratuity on the basis of acturial calculation was not to be added back under clause (c) to Explanation-1 below section 115JB of the I.T.Act, 1961.
40. DR could cite any contrary decision. He could not controvert the findings of the CIT(A) that the provision for gratuity in the instant case was made by the assessee on actuarial valuation. Therefore, following the decision o the Hon'ble Gujarat High Court in the case of DCIT Vs. Inox Leisure (supra), we dismiss this ground of the Revenue.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 24
41. The ground no.5 in the Asstt.Year 2006-07 is directed against the order of the CIT(A) directing the AO to exclude the amount withdrawn from reserve of Rs.8990.87 lakhs in the computation of book profit u/s.115B.
42. The CIT(A) has held as under:
Ground No. 5.2 relates to disallowance of Rs. 88,90,87,000/-. The AO noted that the assessee had reduced its book profits by the aforesaid amount for the purposes of section 115JB in terms of clause (i) of sec. 115JB (2), Explanation-l. The AO observed that the amount withdrawn from reserves could be reduced from the book profits only if the book profit of the year had been increased by such withdrawal. On examination of balance sheet it is found that the profit and loss account had not been increased by such amount. Accordingly, the AO denied the reduction of the impugned amount while computing profits u/s 115JB(2) of the Act.
8.2.1 In appeal, it was submitted by the Id. AR as under:
"It is submitted that as a result of restructuring of erstwhile GEB, the expenditure/write offs arising on 1-4-2005 pertaining to the transferred undertakings under the transfer schemes were charged/adjusted during the year against the balance lying in the Profit & Loss Account under the head "Reserves & Surplus" in the Balance Sheet. It is submitted that the balance in the Profit & Loss Account shown under the head "Reserves & Surplus" is made of amounts transferred from the Taxable Book Profits of the previous years. Thus the equivalent amount of Rs. 8890.87 lacs transferred to the Profit & Loss Account -which is shown under the head "Reserves & Surplus" in the Balance Sheet actually represents the balance transferred from the Profit & Loss Account of each year. Thus such balance has already been taxed in earlier years. This is because while computing the total taxable income of a particular year the Net Profits After Taxes are taken into consideration which is always prior to the Net Profits available for Appropriations. Generally the components of the Profit & Loss Account are as under:
I. Income II. Expenditure III. Profit Before Tax IV. Profit After Tax V. Profit for the Year (including Balance brought forward from earlier years) ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 25 VI. Net Profit Available for Appropriations VII. Balance Carried to Balance Sheet From the above it can be seen that the transfers to any Reserve is made out of the amount at Item No. VI viz., Net Profit available for Appropriations whereas for the purpose of computing the Taxable Income, Net Profits after Tax as per Item No.IV is taken. Thus the amounts transferred to Reserves are always taxed in the year in which the same are transferred.
In view of the above, the company has claimed a deduction of Rs.8890.87 lacs under the provisions of clause (i) to Explanation - 1 to sub-section (2) to section 115JB of the I T Act while working out the book profits under section 115JB of the IT Act.
The learned Assessing Officer has, however, disallowed the said deduction taking the view that the profit & loss account of the year under consideration has not been increased by the amount withdrawn from the reserve and has misinterpreted the proviso to clause (i) to Explanation 1 to section 115JB(2) of the IT Act.
The appellant invites your honour's reference to the provisions of clause (i) to Explanation -1 to sub-section (2) to section 115JB of the I T Act which provide that the amount withdrawn from reserves and credited to profit & loss account shall not be reduced unless the book profits of such year, in which such reserves were created, were increased by the amount transferred to such reserves or provisions (out of which the said amount was withdrawn).
From the above, it is clear that only such transfers (from the reserves of earlier years) shall be reduced from the book profits which have already been taxed in earlier years. Thus as explained in preceeding paras, the company has already offered the income for tax in the respective years in which the same was transferred to the Reserves. Out of the same Reserves, the company has withdrawn the amount during the year which are allowable as deduction while computing the bookprofits.
The appellant, therefore, prays that the adjustment made on this count while calculating the bookprofits under section 115JB of the I T Act may be deleted."
8.2.2 I have considered the submissions of the Id. AR and the facts of the case. In the case of the appellant, the provisions contained in the main body of clause (i) of the Explanation- 1 would not be applicable since they relate to reserves credited ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 26 before 1.4.96. Since the reserves in question were credited after 1.4.97, the proviso to the clause would be applicable. In terms of the proviso, the book profits would be allowed to be reduced to the extent of amount withdrawn from reserves only if the book profits 'such year' had been increased by those reserves out of which the said amount was withdrawn. In response to querry raised regarding the quantum of profits carried to reserves, the following table was furnished:
STATEMENT SHOWING BALANCES TRANSFERRED TO RESERVES Particulars FY FY FY FY FY FY FY FY 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 Income 498,881.72 56,119.27 37,605.06 34,017.23 33,757.60 35,032.66 31,090.60 8,760.07 Expenditure 492,861.05 51,697.84 36,357.26 30,933.79 23,947.73 25,068.09 25,585.50 6,259.47 Profit Before 6,020.67 4,421.43 1,247.80 3,083.44 9,809.87 9,964.57 5,505.10 2,500.59 Tax Provision for (1,027.15) 3,288.00 1,035.00 1,670.00 4,253.00 845.00 -
Tax - Profit After Tax 7,047.82 1,133.43 212.80 1,413.44 5,556.87 9,119.57 5,505.10 2,500.59 Profit B/F 15,262.22 14,128.71 13,913.73 12,544.32 15,177.96 7,215.82 2,12430 earlier years Other 5,207.31 0.08 2.18 (44.03) (8,190.51) (1,157.43) (413.58) (37629) adjustments Profit C/F to 27,517.35 15,262.22 14,128.71 13,913.73 12,544.32 15,177.96 7,215.82 2,12430 Balance Sheet
8.2.3 From the table, it is clear that in the earlier years the reserves had been created after profits earned during the year were credited to the profit and loss account and had duly suffered taxation. It is note-
worthy that the profits carried to balance sheet were those profits which were arrived at after deducting tax. It is not necessary under the proviso that the amount withdrawn from reserves should be credited to the profit and loss account of the same year. It is sufficient that the amount had been included in the book profit "of such year", i.e. the year in which the reserve was created. In the instant case, the amounts withdrawn from reserves had already been included in the profit and loss account, and hence the reduction under clause (i) of Explanation 1, proviso would be available to the assessee. Accordingly, the AO is directed to recompute the book profits u/s 115JB by allowing the same to be reduced by the impugned amount of Rs.88,90,87,000/-
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 27
43. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee has reduced Rs.8890.87 lakhs from the book profit under the clause (i) of Explanation to section 115JB of the Act, as the amount withdrawn from the reserve/provisions. The AO added the same to the book profit of the assessee on the ground that from the audited balance sheet submitted by the assessee, it was noticed by him that the profit has not increased by the amount withdrawn from the reserve.
44. On appeal, the CIT(A) allowed the appeal of the assessee by observing that the profit carried to the balance sheet in the reserve account were those profit, which were arrived at after deducting tax and that under the proviso it was not necessary that the amount withdrawn from the reserve should be credited to the profit & loss account of the same year.
45. DR supported the order on the AO, whereas the AR of the assessee relied o the order of the CIT(A).
46. In our considered opinion, as per Explanation-1 below section 115JB(2) clause (i) the profit as shown in the profit & loss account for the relevant previous year has to be reduced by the amount withdrawn from any reserve or provision, if any amount is credited to the profit & loss account. We find that a reading of the assessment order shows that the AO disallowed deduction claimed for amount withdrawn from reserves on the ground that the same was not credited in the profit & loss account of the year under consideration, and therefore, not included in the net profit as per the profit & loss account of the year. The CIT(A) deleted the addition without recording any finding whether the amount was included in the net profit of the year or not. Before us, copy of the audited profit and loss account was not filed by either of the party. In the absence of the same, we are not in a position to ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 28 adjudicate the issue completely. We, therefore, in the interest of justice restore this issue back to the file of AO for adjudicating the same afresh after verifying the amount withdrawn from the reserve was credited in the profit & loss account of the year, and consequently included the net profit or not. Thus, this ground of the appeal is allowed for statistical purpose.
47. In Asstt.Year 2006-07, the ground no.6 of the appeal is directed against the order of the CIT(A) in directing the AO to recomputed the book profit for MAT by not reducing the claim for depreciation of Rs.1.75 crores.
48. The CIT(A) has decided the issue as under:
8.3 Ground No. 5.3 relates to the enhancement of the book profits u/s 115JB by reducing the amount of depreciation allowable under clause (ii)(a) of Explanation- 1. The AO noted from the audited annual accounts that the C&AG had made a remark to the effect that the profits were under-stated by Rs. 1.75 crores, due to higher claim of depreciation of this amount. The assessee was asked to show cause why the quantum of reduction under clause (ii)(a) in respect of depreciation should not be correspondingly reduced while computing the book profit. In reply, the assessee submitted that the rate of depreciation was claimed as per Central Electricity Regulatory Commission (CERC) guidelines. However, this explanation was not accepted by the AO and the book profits were enhanced by Rs. 1.75 crores.
8.3.1 In appeal it was submitted by the Id. AR as under:-
"The learned Assessing Officer has made adjustments under this head on the basis of comments of CAG. During the year the Company adopted the ongoing rates of depreciation as per CERC norms in respect of most of its assets. CERC had revised rates of depreciation of certain assets which the Company could not adopt for the year 2005-
06. The same were applied in the subsequent years. Further the alleged understatement of profit is only due to the accounting entries made in the books of account on account of excess and/or short provision of depreciation. Thus there is no question of adding back the said amount to the net profits.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 29 Further since the accounts for the year under consideration were the first accounts after unbundling of GEB, the amount of Rs. 1.30 crore was left to be unadjusted. Hence the learned Assessing Officer has made adjustment on account of such credit balance lying in the Capital Work in Progress. It is submitted that the said credit balance is being allocated and credited to the respective heads of accounts in the subsequent financial year and hence there is no question of reworking of depreciation for the year under consideration.
It is submitted that the learned Assessing Officer has not at all understood the provisions of section 115JB of the Income Tax Act, 1961. The term "Book Profit" has been defined in the Explanation to section 115JA(2) of the Act to mean net profit as reflected in the P & L A/c of a company prepared for the relevant previous year, as drawn up as per parts I and III of Sch.VI to the Companies Act subject to certain adjustment by way of increase in respect of certain sums as referred to in clause (a) to (f) of the said Explanation and deduction in respect of certain sums as referred to in clause (i) to (ix) of the said Explanation.
It is further submitted that rates of depreciation are not applicable to the Part II and Part III of Schedule VI of the Companies Act but are meant only for sections 205 and 350 of the Companies Act which relate to the declaration of dividends and fixation of managerial remuneration respectively. The rates prescribed are only minimum rates and higher/lower rates can be applied after giving suitable notes to the account. The Assessing Officer has no jurisdiction to recast the profit & loss account for the purpose of section 115JB of the I T Act and can only make specific adjustments as provided in the Explanation below section 115JB.
The appellant invites reference to the Circular No:2 dated 7-3-2009 issued by the Department of Company Affairs which clarified the position that the rates of depreciation prescribed in Schedule XIV could be viewed as minimum rates and that on the basis of a bona-flde technological evaluation, if justified, higher rates of depreciation can be provided with proper disclosure by way of notes forming part of Annual Accounts.
It is, therefore, submitted that even depreciation rates higher than the rates prescribed bv the Companies Act are permissible and the Assessing Officer in such cases does not jurisdiction to recast the profit & loss account for the purpose of determining Book Profits under ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 30 section 115JB. In the appellant's case the company has applied the rates prescribed bv the Companies Act and not any other higher rates.
The appellant invites your honour's kind attention to case of Apollo Tyres Ltd. (255 ITR 273) -wherein -while determining its book profits for the relevant year, the arrears of depreciation of prior periods were charged against the profits of the current year which according to the Revenue was not in accordance with Part II and Part III of Schedule VI of the Companies Act, 1956. The AO recomputed the book profits and excluded the provisions made in respect of arrears of depreciation. The AO's order was confirmed by the Kerala High Court, and the issue was taken up further before the Ron 'ble Supreme Court. The Supreme Court adjudicated the issue and held as under :
"The AO, while computing the book profits of a company under section 115Jofthe IT Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having properly maintained in accordance with the Companies Act. The AO, thereafter, has limited power of making increases and reductions as provided for in the explanation to section 115J. The AO does not have the jurisdiction to go behind the net profits shown in the P&L A/c except to the extent provided in the explanation. The use of the •words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the AO to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain the accounts in a manner provided by the Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (lA) of section 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. "
(Underlined emphasized by us).
The appellant also invites reference to the Supreme Court decision in case of Malyala Manorama Co. Ltd. vs. Cit, reported at 168 Taxman ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 31 471 wherein on similar issue the Supreme Court has affirmed the decision in case ofAppollo Tyres Ltd. (supra).
The appellant's case is also squarely covered by the decision of Gujarat High Court in case ofDCIT vs. Vardhman Fabrics (P) Ltd. reported at 122 Taxman 375 wherein the assessee had calculated the depreciation on the plant and machinery at 33.33 per cent as permissible under the Income-tax Rules, 1962 as against 30 per cent depreciation required to be calculated under Schedule XIV of the Companies Act, 1956. The Assessing Officer allowed depreciation but the Commissioner exercised powers under section 263 and held that the rate of depreciation claimed under the Income-tax Rules was in excess of the rate under the Companies Act and that the excess was required to be disallowed.
On further appeal to the Tribunal, the Tribunal held that the Circular of the CLB lays down minimum rate of depreciation for the purpose of distribution of dividend and the company may decide to claim higher depreciation on the basis of a bona fide technological evaluation and proper disclosure is to be made by way of a note forming part of the annual accounts. The Tribunal further held that, in the instant case, the proper disclosure was made by way of a note to the annual statement of accounts and the rates claimed on the basis of income-tax records were based on the bonafide information of the Board of Directors as contained in the meeting of the Board of Directors held on 29-6-1988. The Tribunal held that the depreciation worked out by the assessee on the basis of income-tax records and debited to the profit and loss account would not be violative of the provisions of the Companies Act and cancelled the order passed by the Commissioner under section
263. On appeal, the Gujarat High Court affirmed the order passed by the Tribunal. The gist of the decision is as under :
"Section 115J, read with section 263, of the Income-tax Act, 1961 and Schedule IV, Parts II and III, of the Companies Act, 1956 - Zero-tax companies - Assessee calculated depreciation on plant and machinery at 33.33 per cent as permissible under the Income-tax Rules, 1962 as against 30 per cent depreciation required to be calculated under Schedule XIV of the Companies Act - Commissioner, acting under section 263, held that rate of depreciation claimed was in excess of the rate under the Companies Act and that excess was to be disallowed -Tribunal held that Circular of Company Law Board lays down minimum ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 32 rate of depreciation for purpose of distribution of dividend and company may decide to claim higher depreciation on basis of a bona fide technological evaluation and proper disclosure is to be made by way of a note forming part of annual accounts - Tribunal further held that, in instant case, proper disclosure was made by way of a note to annual statement of accounts and rates claimed on basis of income-tax records were based on bonafide information of Board of Directors as contained in aforesaid minutes of meeting of Board of Directors -Whether Tribunal was right in holding that depreciation worked out by assessee on basis of income- tax records and debited to profit and loss account was not violative of provisions of Companies Act and in cancelling order passed by Commissioner under section 263 - Held, yes".
The appellant also invites reference to the decision of IT AT, Bombay in case of Modern Woollen Ltd., vs. DCIT, reported at 47ITD 154. The Gist of the decision is as under :
"Section 115J of the Income-tax Act, 1961, read-with Parts II and III, of Schedule VI and Schedule XIV to the Companies Act, 1956 - Book profits - Special provisions relating to certain companies - Assessment year 1989-90 - On account of introduction of uniform previous year, assessee- company filed return of income for 18 months from 1-10-1987 to 31-3-1989 declaring a loss - It also furnished computation of book profits for purpose of section 115J which amounted to nil - For computing the booh profits the assessee charged depreciation at lower rates as provided in Schedule XIV to the Companies Act for the period 1-10-1987 to 30-9-1988 while for the later period 1-10-1988 to 31-3-1989 it charged depreciation at higher rates as provided in the Income-tax Rules - Assessing Officer calculated depreciation at lower rates according to Schedule XIV and determined at 30 percent of book profit atRs. 47,43,691
- Whether the assessee had discretion to provide higher rates of depreciation than those laid down in Schedule XIV to the Companies Act and, therefore, the Assessing Officer was unjustified in applying the lower rates and working out the book profit for purpose of section 115J in this manner -Held, yes ".
The appellant invites reference to the decision of IT AT, Delhi 'F' Bench in case of Bhushan Steels & Strips Ltd. Vs. Dy. CIT, reported at 91 TTJ 108 wherein the AO added back the arrears of deprecation of ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 33 earlier years provided during the year while computing the Book Profits under section 115JA of the Act on the ground that the arrears of depreciation for the earlier years cannot be charged against the current year's profit.
The assessee was of the view that all the entries related to prior period are required to be made below the line and hence such entries cannot be counted for the purpose of arriving at the book profit. The AO had disallowed the said claim following the decision of Kerala High Court decision in case of CIT vs. Apollo Tyres Ltd. reported at 149 CTR 538.
On appeal, the IT AT, Delhi Bench allowed the claim of the assessee holding that while working out the book profit under section 115JA, the arrears of depreciation have to be excluded from current year's profit.
The appellant also relies on the decision of ITATMumbai in case of Sterlite Industries (Ind.) Ltd. Vs. Addl. CIT, reported at 102 TTJ 53 wherein on exactly cases and following the Supreme Court judgement in case of Apollo Tyres Ltd. (Supra) it was held that while determining the 'book profit' under section 115J, the AO could not recomputed the profits in the P & A/c by excluding provisions made for arrears of depreciation.
In view of the foregoing detailed discussion and law prevailing as per the judicial pronouncement, the matter is very clear that in case of difference in the rates of depreciation prescribed and those applied in preparing the Annual Accounts cannot be a reason to recomputed the net profit for the purpose of determining book profits under section 115JB of the IT Act.
The appellant, therefore, prays that the adjustment made on this count while calculating the book profits under section 115JB of the I T Act may be deleted."
Reliance was placed on the decisions of the Supreme Court in Apollo Tyres Ltd v CIT, 225 ITR 273 and of the jurisdictional High Court of Gujarat in DCIT v Vardhman Fabrics (P) Ltd., 122 Taxman 375.
8.3.2 I have considered the submissions of the Id. AR and the facts of the case. Section 115JB (2) provides that -
"Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 34 previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956(1 to 1956):
Provided that while preparing the annual accounts including profit and loss account, -
(i) the accounting policies; , (u) the accounting standards adopted for preparing such accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):"
(Emphasis supplied) Thus, what is material for the purposes of section 115JB is not the profit & loss account prepared in terms of the Income-tax Act but that prepared in terms of Schedule-VI of the Companies Act. Part-II of Schedule-VI lays down the requirement as to profit and loss account. At item No. 3(iv), it has been laid down that the profit and loss account shall disclose information relating to the amount provided for depreciation, renewals or diminution in the value of fixed assets. Schedule-XIV lays down the rates of depreciation in respect of various assets, both in terms of written down value (WDV) and straight line method (SLM). At the same time, the Department of Company Affairs has issued Circular dt. 7.3.2009 which allows depreciation to be claimed at higher rates on the basis of bonaflde technological evaluation. It has been clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part A to the notes (wherein accounting policies have been disclosed) it is seen from item-xi relating to depreciation, that up to FY 2003-04 the company was providing depreciation as per Rules framed under the Electricity (Supply Act), 1948. Subsequently, CERC brought out a Notification No. 23.2/2005 R&R dt. 6.1.2006 issued by the Ministry of Power, Government of India. As per the notification, higher rates of depreciation have been prescribed as compared to the rates prescribed under Schedule-XIV of Companies Act, as well as the rates under Electricity Act. The assessee has claimed the higher rates on the basis of a bona fide technological evaluation by the Ministry of Power, Government of India to the effect that depreciation in respect of plant and machinery utlised for generating power needed to be provided at ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 35 higher rates. Hence the assesse has complied with the provisions of Schedule-VI of Companies Act while preparing its accounts.
8.3.3 The Supreme Court has held very clearly in Apollo (supra) as well as Malayala Manorama Co Ltd v CIT, 168 Taxman 471 that the power to make enhancement and reduction u/s 115J is limited only to the specific items provided under clauses (a) to (i) and (i) to (viii). The AO has only to satisfy himself that the provisions of the Companies Act have been complied with while preparing the accounts. The provisions of Income-tax Act with regard to depreciation etc., would not be material to the computation. On similar facts, the jurisdictional High Court of Gujarat in DCIT v Vardhman Fabrics (P) Ltd., 122 Taxman 375 had occasion to consider the Circular of the Company Law Board which clarified that the rates prescribed in Schedule XIV were minimum rates of depreciation and the company could claim higher depreciation on the basis of a bonafide technological evaluation and proper disclosure thereof in the notes forming part of annual accounts. In the instant case, from the facts as above, I am of the opinion that the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIV and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence the AO's action in reducing the claim of depreciation under item (ii)(a) by Rs. 1.75 crores is held to be unjustified. The AO is directed to recompute the book profit for MAT by allowing the depreciation claimed."
49. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO noted from the audited annual accounts that C&AG has made a remark that the profit was understated by Rs.1.75 crores due to higher claim of depreciation on this account. On a show cause notice issued by the AO, the assessee submitted that rate of depreciation was claimed as per the Central Electricity Regulatory Commission's guidelines. However, this explanation was not accepted by the AO and book profit was enhanced by Rs.1.75 crores.
50. On appeal, the CIT(A) allowed the appeal of the assessee on the ground that as per the notification of CERC No.23.2/2005 R&R dt.6.1.2006 issued by the Ministry of Power, Govt. of India, higher rate of depreciation has been prescribed as compared to the rates prescribed ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 36 under Schedule-XIV of Companies Act as well as the rates under Electricity Act. The assessee has claimed the higher rate on the basis of a bona fide technological evaluation by the Ministry of Power, Govt. of India to the effect that depreciation in respect of plant & machinery utilized for generating power needed to be provided at higher rate. Further, The CIT(A) has also held that the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT, 255 ITR 273 has held that power to make enhancement and reduction u/s.115J is limited only to the specific items provided under clauses (a) to (i) and (i) to (viii). The AO has to satisfy himself that the provisions of Companies Act have been complied with while preparing the accounts. The CIT(A) also held that on similar facts, the Hon'ble Gujarat High Court in the case of DCIT Vs. Vardhman Fabrics P. Ltd., 122 Taxman 375 after considering the circular of the Company Law Board which clarified that the rates prescribed in Schedule XIV were minimum rate of depreciation and the company could claim higher depreciation on the basis of a bona fide technological evaluation and proper disclosure thereof in the notes forming part of annual accounts.
51. We find that it is not in dispute that the assessee has claimed only that depreciation which was debited in its audited profit & loss account which was laid before the AGM. In our considered view, following the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) only those adjustments from net profit disclosed by such audited accounts can be made which are specified in Explanation to section 115JB. The depreciation not being a specified item in Explanation to section 115JB at the relevant time, we do not find any error in the order of the CIT(A), which is confirmed and therefore, the ground of the Revenue is dismissed.
ITA No.1873/Ahd/2010 : Asstt.Year 2007-08 (Assessee'sAppeal) ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 37
52. The ground no.1 of the appeal of the assessee is directed against the order of the CIT(A) confirming the addition of Rs.1,13,55,000/- out of interest expenditure considering the same as attributable to exempt dividend income by invoking the provisions of section 14A of the IT Act.
53. The CIT(A) has decided the issue as under:
"5. Ground No. 3 relates to the disallowance of Rs.1,13,55,000/- under Section 14A. It was noticed by the A.O. that the assessee had declared tax-free income amounting to Rs. 41,32,000/-, being dividend. Following the decision of the ITAT, Mumbai, ITA No. 8057/MUM/2003 in the case of Daga Capital Management Pvt. Ltd., the disallowance under Section 14A read with rule 8D was quantified at Rs. 113.55 lacs.
5.1 In appeal, the ratio in the case of Daga Capital Management Pvt. Ltd. was sought to be distinguished and it was submitted that on similar facts, no disallowance was made in the earlier years. It was further submitted that without prejudice to the assessee's claim that Section 14A was not applicable in its case, the A.O. had made a computational error while working out the quantum of disallowance. It was stated that the interest has been wrongly taken as Rs. 26,795.12 lacs whereas the correct figure should be Rs. 5,195.12 lacs. This is due to the fact that interest on term loans amounting to Rs. 21,600 lacs has also been included in the above figure, although such interest was not attributable to the investment which produced the tax free income.
5.2 I have considered the submission and facts of the case. I find that the similar issue came in appeal in the case of Gujarat Urja Vikas Nigam Limited (GUVNL) (Appeal No CAB-I/348/08-09) in the A Y 2006-07. In that appeal, vide order dtd. 24-2-2010, it has been held that, following the decision in Daga Capital Management Pvt. Ltd, it was mandatory for the A.O. to apply rule 8D while computing the disallowance under 14A, The facts are exactly identical to the appellant's case. Accordingly, following the ratio of my order in the case of GUVNL, the disallowance made by the A.O. is confirmed. However, the A.O. is directed to verify the correct figure of interest and recalculate the disallowance, if necessary."
54. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO found that the assessee has shown exempt income of Rs.41.32 ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 38 lakhs. The assessee has not disallowed any expenditure attributable to the earning of such exempt income in its computation of income. Hence, he disallowed Rs.103.32 lakhs on account of interest expenditure and Rs.10.26 lakhs on account of administrative expenses and made a total disallowance of Rs.113.55 lakhs by invoking the provisions of section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, 1962.
55. On appeal, the CIT(A) observed that the Hon'ble Gujarat High Court in the case of Gujarat Urja Vikas Nigam Ltd. (supra) following the decision in the case of Daga Capital Management Pvt. Ltd., held that it was mandatory for the AO to apply Rule 8D while computing the disallowance under section 14A of the Act. Therefore, he restored the matter to the file of the AO to verify the correct figure of interest and recalculate the disallowance, if necessary.
56. Before us, the AR of the assessee submitted that this Bench of the Tribunal in the case of DCIT Vs. Gujarat Urga Vikas Ltd., in ITA No.1820/Ahd/2010 order dated 30.9.2013 held that the Hon'ble Bombay High Court in the case of Godrej and Boyce, 328 ITR 81 (Bom) overruled the decision of the Special Bench in the case of ITO Vs. Daga Capital Management Pvt. Ltd., 117 ITD 169 (Mum)(SB) and restored the matter back to the file of the AO to adjudicate the issue afresh as per the guidelines of the Hon'ble Bombay High Court. He submitted that the directions given by the CIT(A) should be modified accordingly.
57. We find that the AR could not point out any specific error in the order of the CIT(A) which was purportedly passed following the decision of the jurisdictional High Court. The only submission of the AR is to follow the decision of the Tribunal and of the Hon'ble Bombay High Court.It is not the case of the assessee that the CIT(A) has not correctly followed the decision of the Hon'ble jurisdictional High Court. We find that once the Hon'ble jurisdictional High Court has decided the issue ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 39 then that decision has to be followed in preference over the decision of the Tribunal or of any other High Courts. Thus, we do not find any error in the order of the CIT(A), therefore, this ground of appeal of the assessee is dismissed.
58. The ground no.2 of the appeal of the assessee for the Asstt.Year 2007-08 is directed against the order of the CIT(A) confirming the disallowance out of extra ordinary items of Rs.25.21 lakhs. The AO has made disallowance in observing as under:
"As per the P&L account the assessee has debited Rs.2,95,13,000/- under the head 'extraordinary items' as under:
Loss due to cyclone, fire and flood Rs.1,86,99,000/-
Misc. Write off Rs. 82,93,000/-
Sundry debits Rs. 25,21,000/-
Total Rs.2,95,13,000/-
Vide this office letter dated 20.05.09, the assessee was requested to justify its claim of extra ordinary items and was specifically asked to show cause why the expenditure booked under the head Extraordinary Items should not be disallowed.
The assessee vide its reply dated 12.06.09 simply submitted that miscellaneous write off represents loss on obsolescence of fixed assets of the company. Further, the assessee vide its reply dated 09.07.09 submitted that the loss due to flood was incurred for revival and repair of assets damaged and the sundry debits was on account of written off of deferred revenue expenditure.
However, assessee has not submitted any details such as nature of loss, how the amount of loss quantified, date when the asset was purchased, depreciation claimed/allowed, WDV, etc. In the absence of such details, assessee's claim could not be examined and verified properly and assessee could not be allowed the claim without such details. Moreover, loss on account of obsolescence could not be allowed after introduction of concept of depreciation on block of assets.
As regards loss due to cyclone, fire and flood and sundry debits, no details have been furnished by the assessee despite requirements of this office. Without details assessee's claims cannot be allowed.
ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 40 In view of the above, the assessee's claim of Rs.2,95,13,000/- under the head extra ordinary items is disallowed and added back to the total income."
59. On appeal the CIT(A) held as under:
"6.5 With regard to the other sundry debits aggregating to Rs. 25.21 lacs, the assessee's explanation is that it was on account of deferred revenue expenditure written off during the year. The expenditure related to restoration of coal handling plant at Sikka, Dist. Jamanagar.
6.6 The amount written off represents l/5th of the expenditure incurred on restoration of the coal handling plant. The fact that the assessee has not claimed the entire expense in one year, clearly shows that the expenses were capital in nature. Accordingly, I hold that the A.O. has correctly disallowed the write off of this amount. The action of the A.O. is confirmed. Since this has been considered as capital expense, the A.O. is directed to allow depreciation in respect of the capitalized amount incurred on restoration of coal handling plant."
60. We have considered rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the AO disallowed the deduction of Rs.25.21 lakhs on account of sundry debits, which was on account of writing off of the deferred revenue expenditure for the reason that no details were submitted by the assessee, and therefore, he could not verify the same.
61. On appeal before the CIT(A), it was submitted that the amount of Rs.25.21 lakhs represents 1/5th of the expenditure written off during the year which related to expenditure for restoration of the coal handling plant at Sikka, dist. Jamnangar. The CIT(A) confirmed the disallowance on the ground that the assessee has not claimed the entire expense in one year shows that the expenditure was capital in nature.
62. Before us, the AR contended that the same is allowable as revenue expenditure. We find that the details of expenditure in question are not brought on record. No material could be brought ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 41 before us by the AR to show that the expenses in question was the revenue expenditure of the assessee of the year under consideration. We find that the system of accounting followed by the assessee is mercantile. Therefore, the revenue expenditure is deductible in its entirety in the year in which the same has been incurred, even though the assessee for keeping its books of accounts treated the same as deferred revenue expenditure in its books of accounts and write off the same over a period of five years. We, therefore, do not find any good reason to interfere with the order of the CIT(A), and thus the ground of the assessee is dismissed.
63. The ground no.3 of the appeal of the assessee for the Asstt.Year 2007-08 reads as under:
"3. The ld.CIT(A) has erred in law and facts in not adjudicating the ground relating to reduction of amount of capital grants amounting to Rs.31,37,78,000/- from the total cost of the fixed assets and allowing depreciation after such reduction by invoking the provisions of section 43(1) of the I.T.Act."
64. At the time of hearing, the AR of the assessee submitted that CIT(A) has not adjudicated this ground of the appeal taken before him. He pointed out that from the ground of appeal taken before the CIT(A) this ground was taken as ground no.8 of the appeal filed before the CIT(A).
65. In view of above submissions of the AR of the assessee, we restore this issue to the file of the CIT(A) for adjudication of the same after allowing proper opportunity of hearing to the assessee. Thus, this ground of the appeal of the assessee is allowed for statistical purpose.
66. The ground no.4 of the assessee's appeal is directed against the order of the CIT(A) in confirming the enhancement of book profit ITA No.1823, 1824 and 1873/Ahd/2010 (3 appeals) 42 computed under section 115JB of the IT Act by Rs.1,13,55,000/- on account of disallowance made under section 14A of the IT Act.
67. The CIT(A) decided this issue as under:
"13. Ground No. 11 relates to the enhancement of Book Profit by Rs. 1,13,55,000/- on account of disallowance made under Section 14A. This ground is consequential to the decision at ground no. 3 above. In ground no. 3, it has been held that the A.O. has rightly disallowed this amount as it is attributable to the earning of exempt income. This being the case, the provisions of clause (f) of Explanation-1 would be clearly attracted. Accordingly, the action of the A.O. is confirmed and this ground fails."
68. AR of the assessee submitted that this ground is consequential to ground no.1 of the assessee's appeal.
69. As we have upheld the order of the CIT(A) confirming the addition of Rs.1,13,55,000/- out of interest expenditure, considering the same as attributable to the exempt dividend income under the provision of section 14A of the Act, therefore, this ground of appeal of the assessee is also dismissed.
70. In the result, the appeals of the Revenue and the assessee are partly allowed for statistical purpose.
Order pronounced in the Court on Friday, the 13th March, 2015 at Ahmedabad.
Sd/- Sd/- (MUKUL KR. SHRAWAT) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 13/03/2015