Income Tax Appellate Tribunal - Mumbai
Dcit 9(2)(2), Mumbai vs Crest Paper Mills Ltd., Mumbai on 19 December, 2018
1
Crest Paper Mills Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "C", MUMBAI
Shri G Manjunatha (ACCOUNTANT MEMBER)
AND
Before Shri Ravish Sood(Judicial Member)
ITA No 2579/Mum/2016
(Assessment year 2010-11)
DCIT 9(2)(2), Mumbai vs Crest Paper Mills Ltd
2nd Floor, Tarun Plastic Compound,
Mogra Villa, Andheri (E), Mumbai-400
069
PAN : AAACC4143D
APPELLANT RESPONDEDNT
ITA No 3044/Mum/2016
(Assessment year 2010-11)
Crest Paper Mills Ltd vs DCIT 8(1), Mumbai
2nd Floor, Tarun Plastic
Compound,
Mogra Villa, Andheri (E),
Mumbai-400 069
PAN : AAACC4143D
APPELLANT RESPONDEDNT
Revenue by Shri Abi Rama Kartikeyan
Assessee by Shri Pradeep Sharma
Date of hearing 10-10-2018
Date of pronouncement 19-12-2018
2
Crest Paper Mills Ltd
ORDER
Per G Manjunatha, AM :
This appeal filed by the revenue as well as the assessee are directed against the order of the CIT(A)-16, Mumbai dated 04-01-2016 for the assessment year 2010-11. Since facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order.
2. The brief facts of the case are that the assessee company is engaged in the business of manufacture and sale of duplex board and trading activities, filed its return of income for AY 2010-11 on 11-10-2010 declaring total income at Nil, after claiming set off of brought forward business loss of Rs.1,76,60,305. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the I.T. Act, 1961, determining the total income at Rs.14,19,97,500, by making addition towards estimated net profit of 8% on total sales turnover by rejecting books of account u/s 145 of the I.T. Act, 1961 for Rs.9,18,70,062, addition towards waiver of secured loans by banks and financial institutions on account of one time settlement u/s 41(1) of the Income-tax Act, 1961 for Rs.5,01,27,439 and addition towards waiver of interest credited to P&L Account by disallowing various expenditure including depreciation, bad debts written off, write off of obsolete inventories and other expenses against such interest income. The assessing officer also recomputed book profit by taking 3 Crest Paper Mills Ltd into account net profit estimated on sales turnover and then by adding addition made u/s 41(1) of the Act in respect of remission / cessation of liability towards waiver of loan by banks and financial institutions.
3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has challenged rejection of books of account and estimation of net profit at 8% of total turnover on the ground that in absence of any incorrectness in books of account, the AO was erred in rejecting books u/s 145 of the Act, and estimation of net profit of 8% merely for the reason that the assessee could not file complete details of purchase and sales from the parties. The assessee also challenged other additions made by the AO towards waiver of loans by banks as remission or cessation of liability u/s 41(1) to argue that waiver of loan by banks is a capital receipt which could not be treated as remission / cessation of liability u/s 41(1) of the Act, as the assessee never derived any benefit or never claimed deduction towards said loan in the past. Insofar as addition towards interest credited to P&L Account by rejecting expenses, the assessee claimed that it has debited various expenses including depreciation on plant & machinery against income credited to P&L account being waiver of interest, but the AO has ignored all these facts and made addition without assigning any reason as to how deduction claimed towards various expenses could not be allowed as 4 Crest Paper Mills Ltd deduction. The assessee has filed elaborate written submissions on each and every ground taken before the CIT(A) which has been reproduced at para 5 on pages 3 to 19 of the order of Ld.CIT(A). The assessee has relied upon plethora of judicial precedents in support of his arguments.
4. The Ld.CIT(A), after considering relevant submissions of the assessee and also by relying upon certain judicial precedents, deleted addition made by the AO towards estimation of net profit on sales turnover by holding that the AO had not brought any evidence on record regarding earning of 8% net profit on sales turnover or that the assessee had earned profit more than what has been reflected in the books of account. The books of account can be rejected when true profit could not be deduced with the help of records maintained by the assessee. When assessee had filed complete details of accounts, merely for the reason that no supporting evidence including lorry receipts were filed for purchases and sales, books of account could not be rejected and profit from sales also cannot be estimated exorbitantly. The Ld.CIT(A), while deleting addition made by the AO, has relied upon the decision of ITAT in the case of Gold Star Fin Vest (P) Ltd vs ITO 33 Taxmann 129. Insofar as addition towards cessation / remission of liability u/s 41(1) of the Act, the Ld.CIT(A) observed that the AO has brought on record clear facts to the effect that waiver of loan given by the banks on account of working capital loan taken by the assessee 5 Crest Paper Mills Ltd against hypothecation of stocks and receivables; therefore, when benefit derived by way of remission or cessation of liability on account of working capital loan borrowed for the purpose of business of the assessee, such waiver of loan by the lenders amounts to business profits taxable under the head 'Income from business or profession'. However, the Ld.CIT(A) has allowed partial relief of Rs.17,99,653 out of total addition made by the AO of Rs.5,01,27,439 on the ground that an amount of Rs.17,99,653 represents waiver of term loan given by the banks for acquiring capital assets. Insofar as addition towards disallowance of expenses, the Ld.CIT(A) has allowed partial relief in respect of bad debts written off amounting to Rs.1,41,96,836 and also allowed further relief in respect of amount debited to P&L Account towards direct expenses, interest on loan by holding that when interest on loan has been paid for loans taken to repay earlier loans, the said interest could not be disallowed. Similarly, out of other expenses amounting to Rs.1,42,66,261, the Ld.CIT(A) has allowed adhoc deduction of Rs.25 lakhs and confirmed the balance amount by holding that the assessee failed to file complete details of expenses with supporting evidences. As regards ground taken by the assessee to challenge re-computation of book profit, the Ld.CIT(A) observed that since the assessee has not pressed ground, the same has been dismissed, as infructuous.
6
Crest Paper Mills Ltd
5. Aggrieved by the order of Ld.CIT(A), assessee as well as the revenue are in appeal before us.
6. The first issue that came up for our consideration from revenue appeal is addition towards estimation of net profit of 8% on total turnover. The factual matrix of the impugned dispute are that during the course of assessment proceedings, the assessee shown to have purchases totalling Rs.114,57,97,730 from Brand House Retails Ltd and also claimed to have made sales totalling Rs.114,83,73,779 to Saraswati Trade Centre Pvt Ltd . The AO, further observed that the assessee's business was under lock out since seven years and there was hardly any staff to do any business activities. Therefore, in order to ascertain correctness of purchases and sales claimed to have made by the assessee, called upon the assessee to file evidences including purchase bills and sale bills alongwith supporting evidences. In response, the assessee has filed certain details including purchase and sales bills to justify the transactions recorded in books of account. The AO, on the basis of information furnished by the assessee observed that though the assessee has recorded huge purchases as well as sales transactions, no transportation expenses had been shown in the books of account. He further observed that there was no debtors and creditors in the books of account, even though such a huge magnitude of purchases and sales transactions were made and accordingly issued notices u/s 7 Crest Paper Mills Ltd 133(6) to both the creditors and debtors calling for details of purchases. In response to notice, the creditors, M/s Brand House Retails Ltd furnished monthwise sales and annual accounts of the company; however, no other details were submitted. Further notice issued u/s 133(6) to Saraswati Trade Centre Pvt Ltd which was returned by the postal authorities with remark 'not known'. Subsequently, summons u/s 131 of the Act, were issued to both seller and purchasers which were also returned by the postal authorities with the remark, 'not known'. When these facts were brought to the notice of the assessee, the assessee has filed certain details and financial statements of Saraswati Trade Centre Pvt Ltd. Since, the assessee has failed to file complete details of purchases and sales recorded in the books of account and also the parties failed to appear before the AO in response to summons issued u/s 131, the AO came to the conclusion that the assessee has not carried out any business activity, but has taken accommodation entries. Accordingly, he came to the conclusion that the transactions recorded by the assessee including purchases and sales were sham transactions. The AO further observed that when the assessee was not carrying out any business activity since last seven years, showing purchase / sales transactions of materials which is different from the products dealt in by the assessee could not be considered as genuine, hence opined that the assessee has obtained accommodation entries in the 8 Crest Paper Mills Ltd nature of purchase and sales using a colourable device. Accordingly, rejected books of account u/s 145 of the Act and estimated 8% net profit on total sales turnover.
7. The Ld.DR submitted that the Ld.CIT(A) was erred in not considering the facts brought out by the AO to make addition towards estimation of 8% profit on total sales turnover including non-cooperation of the parties in response to notice issued u/s 133(6) and also to summons issued u/s 131 of the Income-tax Act, 1961. The Ld.DR further submitted that the AO has brought out clear facts to the effect that the assessee could not prove the genuineness and identity of the purported sellers as well as buyers, but the Ld.CIT(A) negated all observations made by the AO without assigning any reasons. The Ld.DR further submitted that the Ld.CIT(A) while deleting addition has relied upon the decision of ITAT, Mumbai Bench in the case of Gold Star Fin Vest (supra) without considering the fact that the said case law is not applicable to the facts of assessee's case. The Ld.DR further submitted that the issue before the Hon'ble ITAT in the said case is estimation of net profit on sales transactions of a share broker, where by considering the nature of business of the assessee, the ITAT has come to the conclusion that estimating a huge profit is incorrect. In this case, the AO has applied 8% profit on total sales turnover, which is in accordance with the prescribed rate as per the statute in respect of a trader 9 Crest Paper Mills Ltd involved in retail business as per provisions of section 44AD of the Act. In this case, since the assessee is involved in trading activity, the AO has rightly applied profit percentage prescribed under the Act but the Ld.CIT(A) has deleted addition made by the AO without recording any reasons as to how the assessee has proved that the transactions are genuine.
8. The Ld.AR for the assessee, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that the Ld.CIT(A) has apprised the facts in right perspective in the light of evidence filed by the assessee which clearly suggests that the transactions are genuine, but the AO merely for the reason that the parties have not responded to notices issued u/s 133(6) and summons u/s 131 came to the conclusion that these are sham transactions ignoring complete evidences filed by the assessee. The Ld.AR further submitted that when the AO has accepted the fact that these are sham transactions, was wrong in estimating net profit of 8% ignoring the fact that the assessee has derived a profit which has been clearly recorded in the books of account. The Ld.AR further submitted that before rejection of books of account the AO has to point out descrepancies which render the books of account not capable of deducing the true and correct profit of the business, but without recording any reasons as to incorrectness in books of account merely for non receipt of 10 Crest Paper Mills Ltd information from the parties, books of account cannot be rejected and profit cannot be estimated.
9. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. We have also considered the case laws relied upon by the parties. It is an admitted fact that the assessee is a sick company not carrying out any business activities since last seven years. It is also an admitted fact that the assessee is showing trading results of purchase and sales in textiles. The assessee claims to have purchased goods from a single party and also claimed to have sold the goods to a single party. Except purchase and sales, neither opening stock nor closing stock was shown in the books of account. No receivables and payables are also shown in the books of account. It is also an admitted fact that the assessee has not claimed any expenses like transportation and other expenses which is directly relatable to trading activity. The AO estimated net profit by rejecting books of account u/s 145 of the Income-tax Act, 1961 on the ground that the assessee failed to prove the transaction with necessary evidences, therefore, he came to the conclusion that these are sham transactions. It is the contention of the assessee that merely for the reason that the parties did not respond to the notices issued u/s 133(6) or summons issued u/s 131, the genuineness of transactions which are supported by valid documents could not 11 Crest Paper Mills Ltd be treated as sham transactions. The assessee further contended that rejection of books of account u/s 145 of the Income-tax Act, 1961 could be made only when the AO records a categorical finding that the books of account maintained by the assessee are not true and correct and which does not give correct profit from the business. In absence of any finding as to incorrectness in books of account, merely for the reason that parties were not responded, the books of account could not be rejected and profit cannot be estimated.
10. Having heard both the sides, we find that the AO has brought out categorical facts in his assessment order to the effect that the transactions recorded by the assessee in respect of purchases and sales were not supported by requisite documents. The AO also recorded a finding of fact that the purchasers and sellers from / to whom the assessee claims to have made purchases and sales did not respond to the notices issued u/s 133(6) and summons issued u/s 131 of the Act. Under these facts, the AO came to the conclusion that the assessee has obtained accommodation entries of purchase and sales by using colourable device so as to show certain business activities even though the business of the assessee was shut down for almost seven years. The Ld.CIT(A) negated all observations made by the AO so as to delete additions made towards estimation of profit for the sole reason that the purchases were supported by certain documents. The Ld.CIT(A) did not 12 Crest Paper Mills Ltd controvert the findings of fact recorded by the AO in respect of non appearance of parties to the notices issued by the AO. The Ld.CIT(A) also failed to controvert the findings of the AO in respect of shortcoming in the documents maintained by the assessee in respect of sales and purchases. Therefore, we are of the considered view that the AO was right in rejection of books of account u/s 145 of the I.T. Act, 1961, when the assessee has failed to file complete details of evidences in support of purchase and sales transactions recorded in the books of account.
11. Having said so, let us examine the rate of net profit applied by the AO to determine the profit from the business. The AO has adopted 8% profit on total sales turnover. But, the Ld.CIT(A) has deleted estimation of net profit by following the decision of ITAT, Mumbai Bench in the case of Gold Star Fin Vest Ltd vs ITO (supra) by holding that the AO has not brought on record any evidence to prove that assessee has earned 8% profit or that the assessee had earned profit more than what was reflected in the books of account. We have gone through the case laws relied upon by the Ld.CIT(A) in the light of facts and find that the facts of the case considered by the Ld.CIT(A) are entirely different from the facts of the present case. In the case before the ITAT, the issue was estimation of profit in respect of a share broker involved in dealing in shares and securities. Under these facts, the ITAT came to the conclusion that 13 Crest Paper Mills Ltd the stock brokers are dealing in shares and securities on behalf of their customers by charging nominal commission of 0.15% and the said finding of the ITAT is supported by another decision of co-ordinate bench in the case of ITO vs Parlesh & Co. In this case, admittedly, the assessee was in the business of trading in textiles. The assessee claimed to have traded in textiles. Therefore, we are of the considered view that the Ld.CIT(A) was erred in applying the ratio of decision in the case of Gold Star Fin Vest Ltd vs ITO (supra) to delete addition made by the AO at 8% of net profit.
12. Having said so, what is appropriate percentage of profit needs to be estimated, in case books of account are rejected u/s 145 of the Income-tax Act, 1961. There is no hard and fast rule or staggering formula for estimation of net profit and which depends upon facts and nature of business carried out by the assessee. But what is relevant is the estimation made by the assessing authority should be reasonable having regard to the nature of business of the assessee or it should be based on a comparable case of a similar nature of business. In case, there is no comparable cases, one can go to provisions of section 44AD. The statute has provided a specific provision for estimation of net profit, in case of assessees involved in retail business. As per the provisions of section 44AF of the I.T. Act, if the turnover of a specific assessee is less than the prescribed limit and also if the profit declared by the assessee is 14 Crest Paper Mills Ltd in line with the prescribed percentage, then the AO needs to accept the book results declared by the assessee. As per the provisions of section 44AF, statute has prescribed estimation of net profit of 5% in case of assesses engaged in retail trading. In this case, the assessee is engaged in trading in textiles. The books of account of the assessee has been rejected by the AO u/s 145 of the I.T. Act, 1961. Therefore, when books of account are rejected, the books results of the assessee could not be relied upon to determine the true and correct profits from the business. The AO has to bring on record some comparable cases of similar nature or estimate a reasonable net profit which is in line with the profit in similar line of business. In this case, the AO has adopted 8% profit, but the said estimation is not supported by any comparable case of similar nature. The AO has adopted 8% profit, which is applicable for specified assessee as per section 44AD. In case of retail traders, the statute provides for 5% profit on total sales. Therefore, we are of the considered view that net profit of 5% would meet ends of justice. Therefore , we reverse the findings of the Ld.CIT(A) and uphold estimation of net profit of 5% on total sales turnover.
13. The next issue that came up for our consideration from assessee's appeal is addition towards waiver of loans of banks under one time settlement scheme. The assessee has treated waiver of loans by the banks as capital 15 Crest Paper Mills Ltd receipt and credited to reserves and surplus account. The AO has added loan waiver u/s 41(1) of the Act as remission / cessation of liability for the reason that the assessee has got benefit of waiver of loan borrowed for the purpose of business. According to the AO, all working capital loan borrowed for the purpose of business shall be treated as business receipts in case any benefit derived by the assessee on account of loan waiver scheme. It is the contention of the assessee that the assessee does not get any benefit on account of waiver of loan and the same cannot be treated as remission of liability u/s 41(1) as the same has not been considered as deduction in the earlier years and also no benefit has been derived by the assessee. The assessee further contended that in order to fix a particular loan under the provisions of section 41(1), there has to be remission / cessation of liability and there has to be recovery of any loss in the subsequent year on account of remission, but in this case, the assessee has got the benefit of loan waiver. Therefore, the said liability cannot be treated as remission or cessation of liability u/s 41(1) of the Act.
14. We have heard both the parties and perused the material available on record. The AO has brought out clear facts to the effect that the assessee has derived benefit out of waiver of working capital loan borrowed by the assessee from banks by way of hypothecation of stocks and receivables. From the 16 Crest Paper Mills Ltd findings of the Ld.AO, it is very clear that the assessee has not borrowed the loan for the purpose of acquiring any capital asset. When a loan is borrowed for the purpose of business of the assessee, the principal amount of loan including any interest waived would constitute income chargeable to tax under the Act. Since the assessee has failed to controvert the finding of facts recorded by the lower authorities that the said loan has been taken for the purpose of acquiring capital asset, we find no reason to interfere with the findings of the lower authorities that the benefit derived by the assessee by way of waiver of loan constitute business profit which is taxable under the head 'Income from business or profession'. This legal proposition is supported by the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd vs DCIT (2009) 308 ITR 470 (Bom) wherein it was held that if an amount is received in course of a trading transaction even though it is not taxable in the year of receipt is being of capital character, that the amount changes its character when the amount becomes assessee's own money because of limitation or by way of other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. This legal proposition is further strengthened by the decision of ITAT, Delhi Benches in the case of DCIT vs Logistronics Pvt Ltd 127 ITD 16 (Del) wherein the Tribunal held that the principal amount of loan which 17 Crest Paper Mills Ltd was taken for the purpose of business are trading liability; on its waiver by the creditor would constitute income chargeable to tax under the Act. It was further observed that if the loan was utilised for the purpose of acquiring any capital asset, the same on its waiver, would not constitute income chargeable to tax either u/s 41(1) or u/s 28(iv) of the Income-tax Act, 1961. In this case, on perusal of facts, we find noticed that the assessee has borrowed working capital loan from banks by way of hypothecation of stocks and receivables. When a working capital loan is waived by banks, the same constitute business receipts chargeable to tax. The Ld.CIT(A), after considering relevant facts, has rightly allowed partial relief of Rs.17,99,653 which is on account of waiver of term loan and confirmed balance amount being waiver of working capital loan. We do not find any error in the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the assessee.
15. The next issue that came up for our consideration is disallowance of expenses amounting to Rs.5,66,26,527. The factual matrix of the impugned dispute are that the assessee has credited interest waiver by the banks to P&L Account. Against such interest waiver, the assessee has claimed various expenses including depreciation on plant and machinery, bad debt written off, write off of obsolete inventories, debit balances written off, write off of 18 Crest Paper Mills Ltd obsolete stores & spares and also claimed direct and administrative expenses including interest paid on loan. The AO has disallowed expenses claimed against interest income credited to P&L Account including depreciation on the ground that the assessee has not used the plant & machinery for the manufacturing activities. Therefore, depreciation as envisaged u/s 32 cannot be allowed. The AO also disallowed bad debts write off claimed by the assessee and other expenses on the ground that the assessee wants to nullify the tax involved in amount credited to P&L Account on account of interest waiver by the banks. The AO further observed that the assessee neither holds any inventory in the opening stock nor in the closing stock. The assessee has shown purchases and sales which is almost similar and reason for obsolete inventories wrote off is not explained with necessary evidence. Therefore, he came to the conclusion that expenses have been claimed to set off the income credited to the P&L Account being interest waiver cannot be allowed as deduction and accordingly, the total income credited to P&L Account to the tune of Rs.5,66,26,527 has been taxed u/s 41(1) of the Income-tax Act, 1961.
16. The Ld.AR for the assessee submitted that although the assessee did not claim depreciation on plant & machinery for past seven years due to the fact that the said machinery was under the control of banks, but during the year under consideration, i.e. in June, 2009 after one time settlement with banks, 19 Crest Paper Mills Ltd the assessee got back the assets, therefore, it has claimed depreciation as per the provisions of law. Merely for the reason that there was no depreciation in earlier years, depreciation claimed on plant & machinery which were used in the business could not be disallowed. Similarly, the assessee has contended that in respect of bad debts written off and write off of debit balance in advance account, the assessee has passed necessary entries in the books of account to write off of the debts which were irrecoverable. Therefore, the AO was incorrect in rejecting the claim merely for the reason that no evidence has been filed. In respect of write off of obsolete inventory, stores and spares, the Ld.AR submitted that the assessee has filed complete details before the AO; however, the AO has rejected the evidence filed by the assessee only for the reason that there was no business activity in the year and also there was no opening and closing stock. As regards administrative expenses, interest paid and other direct expense, the Ld.AR has submitted that the assessee has paid interest on loan borrowed to repay the existing loan which were borrowed for the purpose of business of the assessee and hence, whatever interest paid on loan has necessarily to be allowed as deduction. Insofar as expenses, whether the assessee is carrying out its business or not, to maintain the corporate status of the assessee, it needs to incur various expenses. Therefore, there was no reason for the AO to disallow expenditure.
20
Crest Paper Mills Ltd
17. The Ld.DR, on the other hand, strongly supported the order of the Ld.CIT(A). The Ld.DR further submitted that the Ld.CIT(A) has apprised the facts in the light of evidences produced by the assessee to come to the conclusion that there is no reason to allow depreciation as the assessee neither carried out any business activity nor proved the existence of assets which is pre-condition for claiming deprecation u/s 32 of the Act. Similarly, in respect of other expenses, no details has been filed before the AO except stating that it has incurred various expenditure. Therefore, the Ld.CIT(A) was right in disallowing expenses claimed by the assessee by allowing adhoc amount of Rs.25 lakhs for administrative & other expense.
18. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. It is an undisputed fact that the assessee has shut down its business operations since 2002, when the banks have taken possession and control of its assets including plant & machinery for non payment of loans. It is also an admitted fact that the assessee has gone into a one time settlement with banks and settled its dues in the year 2009. From 2002 to 2009 there was no business operations. Even during the year under consideration, except for a trading activity of a different product, the assessee did not carry out any business activity including manufacture of its own product. Therefore, the question of use of plant & 21 Crest Paper Mills Ltd machinery in its business is ruled out. We further notice that in order to claim depreciation as per provisions of section 32, the assessee has to prove that the said plant & machinery owned by the assessee has been used for the purpose of business or profession in the year under consideration. In this case, since the assessee has failed to prove use of its plant & machinery for its business, the lower authorities were right in rejecting depreciation claimed by the assessee. This legal proposition is supported by the decision of jurisdictional High Court of Nagpur Bench in the case of Dineshkumar Gulabchand Agarwal vs CIT 267 ITR 768 (Bom)(Nagpur Bench) where it was observed that the word used in section 32 denotes actual use for the purpose of business. The Ld.CIT(A), after apprising relevant facts and also by following jurisdictional High Court decision in the above case, has come to the conclusion that depreciation was rightly disallowed by the AO. We do not find any error in the findings of the Ld.CIT(A); hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the assessee.
19. Coming to other disallowances including disallowance of inventories written off of stores & spares, direct expenses, interest paid and administrative expenses totalling to Rs.1,90,20,078. As regards interest paid, the Ld. CIT(A) has allowed the claim by holding that the assessee has proved payment of interest on borrowing loan for the purpose of business. In regard to the other 22 Crest Paper Mills Ltd expenses, the Ld.CIT(A) has observed that the assessee has failed to file any evidence including bills and vouchers to prove that said expenditure incurred wholly and exclusively for business purpose. The Ld.CIT(A) further observed that even though the assessee has failed to prove the necessity of incurring said expenditure, keeping in view the fact that the assessee has regained control over plant & machinery, it has to incur certain expenditure on repairs and maintenance and security and also to incur certain administrative expenditure in order to maintain its corporate status, has allowed an amount of Rs.25 lakhs towards expenses and balance amount of Rs.1,17,66,261 has been confirmed. Facts remain unchanged. The assessee failed to bring on record any evidence to counter the facts of finding recorded by the Ld.CIT(A). Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the assessee.
20. The next issue that came up for our consideration is not allowing set off of brought forward losses of earlier years. The Ld.AR for the assessee submitted that the Ld.CIT(A) was not discussed the issue of carry foward of set off of various losses aggregating to Rs.2,18,78,078 even though the assessee has filed complete details of losses claimed in the returns and allowability of such losses.
23
Crest Paper Mills Ltd
21. Having heard both the parties, we find that the Ld.CIT(A) did not adjudicate the ground taken by the assessee in respect of carry forward and set off of losses . The assessee claims that loss claimed is allowable as it has fulfilled the conditions prescribed u/s 72 of the Income-tax Act, 1961. Therefore, we set aside the issue to the file of the AO and direct the AO to verify the details filed by the assessee to ascertain whether carry forward and set off of losses is allowable or not. In case, the AO found that the assessee has fulfilled all the conditions prescribed under the Act, to allow the benefit of carry forward and set off of losses, then, the AO is directed to allow losses claimed by the assessee.
22. The next issue that came up for our consideration from assessee's appeal is re-computation of book profit u/s 115JB of the Act.
23. The Ld.AR for the assessee submitted that the assessee has not pressed the ground at the time of appellate proceedings before CIT(A), However, detailed submissions were filed before the Ld.CIT(A) to explain how addition made u/s 41(1) could not be added to book profit computed u/s 115JB. We find that the Ld.CIT(A) has rejected the ground taken by the assessee by holding that the assessee did not press the ground, but on verification of details filed by the assessee we find that the assessee has filed a detailed note on re-computation of book profit u/s 115JB of the Act. We further notice that 24 Crest Paper Mills Ltd whether the addition made by the AO towards remission or cessation of liability u/s 41(1) could be a subject matter of addition to book profit computed u/s 115JB has to be examined in the light of provisions of Explanation 1 to section 115JB . The remission / cessation of liability u/s 41(1) of the Act is an item of income to be credited to the P&L account as and when the assessee got benefit by way of remission / cessation of liability. In this case, even though the assessee has derived benefit out of one time settlement given by banks on account of waiver of working capital loan, the assessee has directly credited the said benefit to capital reserves account without routing it through P&L Account. The AO has made addition of the amount of waiver of working capital loan by the banks u/s 41(1) of the Income-tax Act. When an item of income is part of P&L Account and the assessee has not routed the said item through P&L account, the AO has every right to make addition of the said amount under the normal provisions of the Act to the book profit computed u/s 115JB of the Act. Although the assessee has relied upon the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd vs CIT to argue that book profit computed u/s 115JB could not be altered except as provided in Explanation 1 to section 115JB, but fact remains that the assessee has not prepared its account in accordance with Parts II & III of Schedule VI to the Companies' Act and such accounts are not in accordance with the provisions of 25 Crest Paper Mills Ltd section 211(c) of Companies Act, 1956. In such cases, the AO has every right to make adjustment towards book profit computed u/s 115JB of the Act. In this case, since the assessee has not routed the benefit got out of onetime settlement of loan from the banks through P&L Account, the AO has rightly made addition to book profit computed u/s 115JB in respect of addition made u/s 41(1) of the Act. Therefore, we are of the considered view that there is no error in the adjustment made by the AO and accordingly, we uphold the AOs finding and reject ground taken by the assessee.
24. In the result, appeal filed by the revenue in ITA No.2579/Mum/2016 is partly allowed and appeal filed by the assessee in ITA No.3044/Mum/2016 is partly allowed, for statistical purpose.
Order pronounced in the open court on 19 -12-2018.
Sd/- sd/-
(Ravish Sood) (G Manjunatha)
Judicial Member ACCOUNTANT MEMBER
Mumbai, Dt : 19th December, 2018
Pk/-
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Mumbai