Income Tax Appellate Tribunal - Ahmedabad
Deepak Nitrite Ltd., Baroda vs Department Of Income Tax on 29 May, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDAB AD BENCH, AHMEDABAD
CAMP AT V ADODAR A -18-01-2010 to 29.01.2010
BEFO RE HO N'BLE S/SHRI DEEP AK R. SH AH, AM AND D. T. G AR ASI A,JM.
ITA No.2614/ Ahd/2008
(AY 2004-05)
Deepak Nitrite Ltd
P AN: AAACD7468A
9/10, Kunj Society,
Alkapuri,
Baroda-390007 .. Appellant
V/s
DCIT
Circle -1
Baroda ...Respondent
ITA No.2778/ Ahd/2008
(AY 2004-05)
DCIT
Circle -1
Baroda .. Appellant
V/s
Deepak Nitrite Ltd ..Respondent
ITA No.3240/ Ahd/2008
(AY 2000-01)
Deepak Nitrite Ltd
P AN: AAACD7468A
9/10, Kunj Society,
Alkapuri,
Baroda-390007 .. Appellant
V/s
DCIT
Circle -1
Baroda ...Respondent
ITA No.2778/A/2008
2 ITA No.2778/A/2008
ITA No.3240/Ahd/2008
Appearance
Revenue by : Shri Krishna Saini
Assessee by : Shri D P Bapat
ORDER
Per DEEP AK R. SHAH The Cross-appeals by assessee and revenue for assessment 2004-05 are directed against the order of ld. CIT-VI, Baroda dated 29.5.2008 in an appeal against the assessment framed u/s 143(3) of the Income Tax Act, 1961(in short the Act). The appeal by the assessee for the assessment year 2000-01 is directed against the order of the learned CIT(A)-I, Baroda, dated 14.7.2008 in an appeal against the assessment framed u/s 143(3) r.w.section 147 of the Act. Since, these appeals involve common issues and pertain to the same assessee, for the sake of conveniences they were heard together and are being decided by this consolidated order.
2. First we shall deal with the appeals of the assessee.
3. The first ground of appeal for the assessment year 2004-05 is against disallowance of depreciation of Rs..68,799/- in respect of CAN Plant.
3.1 At the time hearing, the learned AR for the assessee fairly conceded that the issue raised in the first ground of appeal for the assessment year 2004-05 is decided against the ITA No.2778/A/2008 3 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 assessee by the Ahmedabad Bench of the Tribunal in assessee's own case for the assessment year 2003-04, by order dated 4.4.2008 holding that that since relevant plant and machinery at GIDC is not used for the purposes of business and since facts are identical, following the decision of the Tribunal in assessee's own case, the disallowance is upheld.
4. Ground no.2 in appeal for the assessment year 2004-05 and only ground in appeal for the assessment year 2000-01 is against the order of the learned CIT(A) confirming the addition as deemed dividend u/s 2(22)(a) of the Act. The amount of addition for AY 2004-05 is Rs.38,20,047/- whereas same for the assessment year 2000-01 is Rs.25,88,540/-. 4.1 The matter was carried to CIT(A), who upheld the addition made by the AO though on different ground, by observing as under :
"6. Ground no.2 is against treating a sum of Rs.38,20,047/- as deemed dividend taxable as income as deemed dividend", 6.1 The AO was of he view that the annual rental value in respect of the occupancy rights of the property of Yerrowada Investment Pvt Ltd. held by the assessee ahs to be computed and to be taxed in the hands of the assessee as deemed dividend under the head income from other sources. The rate adopted during the AY 2003-04 in the case of M/s Blue Shell Investment Pvt Ltd i.e. another shareholder of M/s YIPL under similar facts was Rs.8,05 per sq. ft per month in respect of the residential property. Therefore for AY 2004-05 the rate was taken as Rs.8.855 per sq.ft. per month and the total annual rental value was computed at ITA No.2778/A/2008 4 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 Rs.38,20,047/- and the same was added to the total income as deemed dividend;
6.2 In appeal in is contended that the addition of deemed dividend arise in the year in which the occupancy rights were acquired by the assessee which is AY 1997-98 and therefore the addition AY 2004-05 is unwarranted. Further notional annual value cannot be assessed to tax u/s 22 of the IT Act if the house property is used for business purposes. It is further submitted that the addition is not justified as the appellant is entitled to depreciation on the properties as claimed in ground no.1( c ). Further the claim of appellant of depreciation was allowed in AY 1997-98 by the CIT(A) when the issue was raised for the first time and depreciation sec;
6.3 I have gone through the rival contentions. The appellant has exclusive beneficial occupancy and user rights which is represented by its holding of 2876 shares of Rs.1`0 each in M/s YIPL and appellant had paid purchase consideration of Rs.5,39,25,000/- for acquiring the shares; 6.4 M/s YIPL is company registered under the companies Act with the objective or carrying on various business activities. The said company had acquired land and had constructed about 5 lacs sq. ft. of residential and commercial space. In the year 1996 it has been claimed that the said company allotted occupancy rights to its shareholders with respect to constructed, under constructed and unutilized FSI. The articles and memorandum of association of the said company have undergone modifications thereafter were entitled to occupancy rights which included the rights to lease out or rent out the said premises. The articles have also been amended to state that the rights attached to the share can only be altered with written consent of all the shareholders; 6.5 The AO has opined that the annual rental value in respect of occupancy rights has to be taxed as deemed dividend in the hands of the appellant and adopting the rate of Rs.8.855 per sq. ft per month on the area of 35950 sq. sft, the deemed dividend was worked out at Rs.3820047/-; 6.6 Having considered the facts of the case and he provisions of section 2(22) (e) I am of the view that section 2(22) (e) carves out legal fiction to ITA No.2778/A/2008 5 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 cover any payment by way of advance or loan to a shareholder who is beneficial owner of the shares as deemed dividend to the extent to which he company possesses accumulated profits. In the instant case there is no payment of loan or advance to the appellant and therefore section 2(22)(e) is not applicable. However it is seen that the benefit could be covered section 2(22)(a). reads as under:
" any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;
6.7 Here the appellant is a shareholder of M/s YIPL who by way of amendment in its article association has transferred the occupancy rights proportionate to the shareholding to various shareholders. Had such rights not been transferred M/s YIPL would have generated income from such properties so M/s YIPL has foregone the income in favour of the appellant and other shareholders. Thus in terms of section 2(22)
(a) such capital right amounts to release of assets by M/s YIPL to the shareholders. Accordingly, the annual letting value of the property would be taxable as dividend U/s 2(22) (a). The addition is confirmed albeit for different reasons and the ground is dismissed."
4.2 The learned AR for the assessee submitted that YIPL owned properties but by virtue of its Articles of Association, shareholders of said company are given the occupancy rights in the premises. The Articles in this regards were amended prior to acquisition of shares by the assessee. The assessee is holding 2876 shares of each of Rs.10 but the purchase consideration paid was valued at Rs.539 lakhs. This has been considered as cost of building and depreciation thereon was ITA No.2778/A/2008 6 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 claimed and allowed over the years since AY 1997-98. The occupancy rights were acquired on the date on which the shares were acquired in YIPL. For assessment year 1997- 98, in the case of assessee the findings given by CIT(A) b y an order date20.6.2002 are that when the assessee acquired 2876 shares for a sum of Rs.5,39,25,000/-, the shares carried occupancy rights over the property. The findings given are that the shares with occupation rights attached were sold to the assessee. These findings were not challenged, therefore, it is incorrect to say that the amendment to Articles were subsequent to the acquisition of shares by the assessee and hence release o f any assets in favour of the assessee. Though the shares were acquired in 1997-98 till 2004-05 no addition has been made as deemed dividend under any of the clauses. For the first time, the addition is made for 2004-05 and based on the findings for the assessment year 2004-05, the only assessment were re-opened was AY 2000-01. However, in all earlier years no addition has been made in this regard. On the basis of above, the learned AR submitted that a) YIPL did not release any assets to the assessee; b) in any case no event has taken place in AY 2004- 05, being the year in appeal, justifying the invocation of section 2(22) (a) in this year; c) though the lower authorities have invoked the provisions of section 2(22) of the Act, the ITA No.2778/A/2008 7 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 amount charged to tax is computed with reference to the provisions of section 22/23 of the Act being the annual value of the properties; d) the annual value of he properties cannot be charged to tax since the assessee has been allowed depreciation on the cost of shares to which the property rights are attached signifying the use of the property for the purposes of the business of the assessee; and e) therefore, the addition by way of deemed dividend is not justified under any provision of the Income Tax Act;
4.3 The Learned DR, on the other hand, relied upon the findings of the CIT(A).
4.4 W e have considered, the rival submissions. W e find that the provisions of section 2(22) (a) has been extracted by CIT(A) in paragraph 6.6 of his order. By reading the aforesaid definition it is clear that dividend will include under clause (a) only when it amounts to distribution by a company out of accumulated profits coupled with release of any part of the assets of the company. Therefore, to attract section 2(22)(a), the dividend can be taxed only when there is distribution out of accumulated profits by way of release of any part of the assets. In the present, case it is seen that when the assessee acquired the shares, it also acquired the occupancy right in the premises. Such rights were acquired ITA No.2778/A/2008 8 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 during FY relevant to assessment years 1997-98. There is no amendment to the Articles after the shares are acquired by the assessee. Thus, there is no release of any assets by YIPL to the assessee who is a shareholder therein. There is also no findings that the distribution is out of accumulated profits. W hat is brought to tax is the annual value of the property and not property itself. Since, there is no release by the company to the assesses of any assets and that too out of accumulated profits during the year in appeal, the addition u/s 2(22)(a) is not called for. W e, therefore, delete addition made u/s 2(22)(a) of the Act.
5. The next grounds of appeal for the assessment year 2004-05 is against the following items :
a) confirming disallowance of claim for deduction of Rs.29,37,576/- being unutilized credits under DEPB and irrecoverable amounts due from Export credit and guarantee corporation; The amount consists of following sums.
a) DEPB write off Rs.14,92,386
b) Irrecoverable amount from ECGC of Rs.14,45,190/-.
5.1 The matter was carried to CIT(A) who held as under:
"9.1 The AO observed that the assessee had
claimed Rs.1492386 on account of DEPB written off and Rs.1445190 on account of ECGC written off. The assessee submitted in assessment proceedings that the erstwhile Aryan Pesticides Ltd (APL) had accounted the DEPB as income in the AY 2000-01 on accrual basis and the said ITA No.2778/A/2008 9 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 amount was offered for tax AY2001-02. However, the claim was time barred and the assessee company could not recover the amount and hence the same was written off in the books. Regarding ECGC claims receivable I was submitted that the erstwhile APL had accounted the same as income in AY 1999-2000 on accrual basis and since the claim is not recoverable the same was written off in the books. The AO did not accept the contentions of the assessee and observed that the assessee ad failed to avail the benefits of these incentives within the permissible time. Further the assessee has not submitted complete details in this regard explaining as to how these have become irrecoverable and time barred. Moreover, since no activities were performed by the assessee to utilize the above incentives the question of any loss on this account did not arise and disallowed Rs.29,37,576/- claimed by the assessee 9.2 In appeal request for filing additional evidence in regard to the aforesaid claims were filed comprising of details of DEPB receivables, shipping bill-wise and export invoice-wise, details of ECGC claims, correspondence between amalgamating company M/s Arayan Pesticides ltd and ECGC and the proof that these were written off during the year 9.3 The documents were referred to the AO who vide remand report dated 5.5.2008 stated that the management control over M/s Aryan Pesticides ltd was effective from 1.4.2003 thus the appellant would have over the control of all the documents of the amalgamating company much earlier and year these were not produced before AO. On merit it is argued that from the additional evidence submitted it could not be said with certainty that the claims have indeed become bad.
9.4 The appellant in response to the remand report submitted that up to 31.3.2002 the appellant had 47% shareholding in the amalgamating company and did not have any managerial control over it. It is further stressed that he evidences produced have clearly elicited that the delay in tracing the original documents led to belated lodging of claims:
ITA No.2778/A/200810 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
9.5.1 Coming to the merits of the claims it is seen that these claims are not in the nature of bad debts as these were not trading debt in the first place but were in the nature of incentives/income receivable . At best the time barred debts are business loss which could be allowed only in the hands of amalgamating company in the year in which the clams were time barred. Admittedly both the debts got time barred prior to the assessment year under contention. Since these are not in nature of bad debts there was no requirement of writing it off as is stipulation for claim of bad debts. Under the scenario the claim of Rs.29,37,576/- has been rightly disallowed in the hands of the appellant.
Ground no.5 is dismissed"
5.2 The learned AR submitted that when the claim was made u/s 36(1)(vii) and not us/28, the claim cannot be restricted on the ground that these are not trading debts but other claim receivable. It has been contended that as income in earlier years were taxed and which if not recoverable has to be allowed as bad debt/business loss.
The learned AR has placed reliance on the decision of the Apex Court in the case of CIT V/s T Veerabhadra Rao reported in (1985) 22 Taxman 45 (SC) (155 ITR 152) 5.3 As regards the claim from ECGC, it was submitted that as per the correspondence with ECGC the goods were exported by M/s Aryan Pesticides ltd which amalgamated with the assessee w.e.f. 1.4.2003, but the amount could not be realized either from the party to whom the goods were exported or from ECGC. The assessee was pursuing with ECGC for the claim. After it was found that ECGC is not ITA No.2778/A/2008 11 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 entertaining the claim, the same was written off as bad debt/business loss. Therefore, the same is allowable.
5.4 On the other hand, the learned DR relied upon the observations of the CIT(A). It was submitted that an amount written off is not allowable as bad debt. It was submitted that ECGC cannot be considered to be a party which is declared defaulter. Therefore the said sum cannot be conclusively held as bad debt.
5.5 W e have considered the rival submissions. Though the amount written off are not in respect of trade debtors but the amounts are receivable which were earlier offered as income and taxed accordingly. The credit in respect of DEPB receivable is shown to be Rs.40,46,878/- which includes the sum of Rs.1492386/- of the erstwhile M/s Arayan Pesticides ltd. The office of the DGFT informed the assessee that the claim has become time barred and hence not allowable.
Therefore, the amount is allowable as business loss. If the claim is allowable in the hands of the amalgamating company but not claimed and allowed in the hands of the said company are still allowable in the hands of M/s Aryan Pesticides ltd.
The Hon'ble SC in the case of CIT V/s T Veerabhadra Rao (155 ITR 152) held as under :ITA No.2778/A/2008 12 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
"If the same assessee is carrying on a business and he writes off a debt relating to the business as irrecoverable, he would, without doubt, be entitled to a corresponding deduction u/s 36(1)(vii) subject to the fulfillment of the conditions set forth in section 36(2). If a business, along with its assets and liabilities, is transferred by one owner to another, there is no reason why a debt so transferred should not be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, it cannot be accepted that the same rights should not be recognized in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded as belonging to the new owner. Unless, the language of the statute plainly and clearly compels a construction to the contrary, the normal rule of the law should be given its proper play. It is true that section 36(2)(i) declares that a deduction can be allowed only if the debt, or part thereof, has bent ken into account in computing the income of the assessee of that previous year on an earlier previous year and tat it has also been written of as irrecoverable in the account of the assessee for that previous year. In the instant, case the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The interest was taxed as income because if represented an accretion accruing during the earlier year on money owned to the assessee by the debtor. The items constituted income because it represented interest on a loan. The nature of the income indicated the transaction from which it emerged. The transaction was the debt and that debt was taken into account in computing the income of the assessee of the relevant previous year. It was the same assessee who had subsequently, pursuant to a settlement, accepted part payment of the debt in full satisfaction and had written off the ITA No.2778/A/2008 13 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 balance of h debt as irrecoverable in his accounts. It appeared, therefore, that the conditions in both sub-clauses (a) and (b) of section 36(2)(i) were satisfied, in the present case, and hence, the assessee was entitled to the deduction of the said bad debt.
Even if the debt had been taken into account in computing the income of the predecessor-firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the assessee would still have been entitled to a deduction of the amount written off a bad debt, it is not imperative that the assessee referred to in sub-clause (a) of section 36(2)(i) must necessarily mean the identical assessee referred to in sub- clause (b) of the same section. A successor to the pertinent interest of a previous assessee would be covered within the time of sub-clause(b). The successor-assessee, in effect, stapes into the shoes of the predecessor"
5.6 W hen the claim is made and the assessee is pursuing the claim, the revenue authorities cannot held that debt got time barred in earlier years and hence to disallowed in the year of claim. W hen the claim is made u/s 36(1)(vii) or u/s 28, the AO is not to decide the year in which the claim become irrecoverable. Till the claim is pursued and not written off, it is not bad debt. Only when the assessee chooses to write off, the AO is to examine whether the debt is bad or not. This is to precise intervention of the amended provision of section 36(1)(vii) as amended w.e.f 1.4.1989. The amendment has to put an end to the controversy as to decide the year of debt becoming bad. The assessee can pursue the claim and only when it finds that the claim is not realizable, may choose to write it off. Therefore, both the claims in relation to DEPB and ECGC are in respect of claims written off during the year and which were earlier accounted as income by the amalgamated company, the same are allowable when the same are found to be not recoverable in the hands of the amalgamating company. W e, therefore, delete the disallowance of Rs.29,37,576/-.
ITA No.2778/A/200814 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
6. The next ground of appeal for the assessment year 2004-05 is against the disallowance of bad debts in respect following parties:
Rs.1,67,104--Bhogyehwar Dye Chem Rs.14772/- - Oscar Chemicals Ltd 6.1 In respect of Bhogyeshwar Dye Chem, the learned CIT(A) held that the amount is outstanding since 1997-98 and in 2003-04 further transactions have taken place. Therefore, the assessee was dealing with the party till March 2003.
Hence it could not be believed, that when there is transaction with the party in 2003, but in 2004 the debt suddenly became bad. As regards Oscar Chemicals, the CIT(A) held that continuous transactions have been taking place with the party and therefore, the debts have not became bad. 6.2 The learned AR of the assessee submitted that the transaction with Bhogyeshwar Dye Chem during the Financial Year 2003-04 are only to the extent of transferring the deposits held in their account to the debts accounts and reversal of the said entries. Therefore, it is incorrect to hold that any transactions have taken place between the parties during FY 2003-04. In respect of Oscar Chemical Ltd, it was submitted that credit note was issued to the party in ITA No.2778/A/2008 15 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 respect of supplies made in the month of July 2000, therefore, the claim is not by way of bad debt but because of the discount allowed to the party in respect of Bill no. 296-297 dated 22.7.2000. A copy of account, in this regard have been incorporated in the paper book numbering from 99 and 100. 6.3 The learned DR, on the other hand, submitted that as per the accounts of Bhogyeshwar Dye Chem Ltd, out of the sum of Rs.167104/-, Rs.59361/- is the credit balance in the deposit account, therefore, to the extent of deposit the amount is not bad. The balance claim can be considered on merits. 6.4 W e have considered the submissions and also perused the copy of the account of the debtors. W e find that after 1997-98 no amount is received from Bhogyeshwar Dye Chem Ltd. Further the assessee transferred a sum of Rs.59361/- in the deposit account of the said party with the assessee. Therefore, only net amount can be considered to be bad. As regards the account of M/s Oscar Chemical Ltd , though the amount is not bad debts in strict sense but by way of credit note issued against the bill no. 296-297 dated 22.7.2000. Since, this claim was settled during the year loss is allowable as such. Thus, the outstanding balances is the name of Bhogyeshwar Dye Chem Ltd is allowable as bad debts as the provisions of condition of 36(1)(vii) read with section 36(2) of ITA No.2778/A/2008 16 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 the Act are satisfied. In the case of Oscar Chemical Ltd , the same being credit note issued to the parties is allowable as business loss.
7. The next grounds of appeal for the assessment year 2004-05 is in respect of confirming denial of the claim for carry-forward of loss on transfer of capital assets of Rs.14,28,06,864/- including loss of Rs.1,06,25,567/- 7.1 The assessee claimed long term capital loss on sale of equity shares of and units of UTI are as under :
S al e of e qu i t y s h ar es of DF PC L ( 13 6 ,9 0 9, 2 74) S al es of e qu i t y s h ar es N o va S yn t h et ic ( 7, 0 48 ,7 0 9) Lt d Un i ts of UT I ( 10 , 62 5, 5 6 7) Lo n g ter m c a p it a l l os s ( i i) ( 15 4 ,5 8 3, 5 50) Ne t l on g t er m c ap i ta l l os s ( I) a nd ( I I) ( 14 2 ,8 0 6, 5 50) 7.2 As regards the loss on conversion of Units of UTI, the AO held that just as the capital gain on transfer of Units are not forming part of income as per the provisions of sections 10(33) of the Act. Similarly, loss from such transfer will also not forming the part of total income.ITA No.2778/A/2008 17 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
7.3 Before the learned CIT(A), the reliance was placed on the decision of Calcutta High Court in the case of Royal Calcutta Turf Club reported in 144 ITR 709. The learned CIT(A) following the decision of Hon. Madras High Court in the case of CIT V/s Thiagarajan (129 ITR 115), which in turn has followed the decision of Hon. Supreme Court in the case of CIT V/s Harprasad and Co. reported in 99 ITR 118 dismissed the claim of the assessee. Following the view taken in respect of claim on transfer of units of UTI, the loss on shares was also dismissed.
7.4 The learned AR for the assessee submitted that what can be disallowed u/s 10(33) is any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 and not in respect of other shares. Therefore, the law as applicable in respect of transfer of Unit of UTI cannot be applied to the transfer of equity shares of company. The claim was never examined by the AO. Therefore, the matter be restored back to the file of the AO for appropriate findings.
7.5 As regards, loss on transfer of Units of UTI, the reliance was placed on the decision of Calcutta High Court in the case of Royal Calcutta Turf Club reported in 144 ITR 709.ITA No.2778/A/2008 18 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
7.6 On the other hand, the learned DR relied on the findings of the learned CIT(A).
7.7 W e have considered the rival submissions. As regards the loss on sale of shares since the profit on sales of shares are chargeable to tax, in the same fashion, if any loss is incurred on sale of shares the same are allowable to be carried forward u/s 74 of the Act, if not set off as per the sections 70 and 71 of the Act.
8. As regards, the loss on transfer of UTI units, section 10(33) provides that any income arising from capital assets being Unit of Unit Scheme 1964 shall not form part of the total income. Thus, the exemptions is granted in respect of any income on transfer of Units under Chapter-III of the Act.
W hat can be set off either u/s 70 or 71 is the loss computed under the head "Capital Gain" The computation under the head " Capital Gain" will take place provided profit beyond the income on such transfer of capital assets is chargeable to tax.. Since the income on transfer of units of UTI are not to form part of the total income, till the same will never enter the computation of "Capital Gain" under Chapter IV-E, relating to computation of "Capital Gain". W hat did not enter to computation under Chapter-IV will not be eligible for set off and carry forward either u/s 70 or 71 of the Act. The Hon. ITA No.2778/A/2008 19 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 Supreme Court in the case of CIT V/s Harprasad and co. (P) Ltd (99 ITR 118(S) held as under :
"From the charging provisions of he Act, it is discernible that the words "income" or "profit and gains" should be understood as including losses also, so that, in open sense "profits and gains"
represent plus "income" whereas losses represents "minus income". In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of taxable income of the assessee. Although section 6 of the 1922 Act classifies income under six heads, the main charging provision is section 3 which levies income-tax as only one tax, on the "total income" of the assessee as defined in section 2(15) of the 1922 Act. An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the "total amount of income, profits and gains referred to in section 4(1)", Secondly, it must be "computed in the manner laid down in the Act". If either of these conditions fails, the income will not be a part of the total income that can be brought to charge' Capital gain would be coved by the definition of "income" in sub-section (6C) of section 2, only if they were chargeable under section 12B of the 1922 Act. Section 12B as modified by the Finance Act, 1949 did not charges any "capital gain" arising between 1.4.1948 and 1.4.1957. Indeed section 12B was not operative in these years (1948-57). During this period, "capital gains" charges under section 12B or any other provisions of the Act. In the instant case, the second condition, namely, the manner of computation laid down in the Act forms an integral part of the definition of "total income", was not satisfied. Thus, in the relevant previsions year and the assessment year, or even in the subsequent year, capital gains or "capital gains"
or "capital losses" did not form part of the "total income" of the assessee which could be brought to charges and were therefore not required to be computed under the Act.ITA No.2778/A/2008 20 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
Before the insertion of sub-section (2A) in section 22 of the 1922 Act by the amendment of 1.4.1952 an assessee was entitled to carry forward a loss even if he had submitted no return for the year in which the loss was sustained. After the enactment of sub-section (2A), it is a condition precedent to the carry-forward and set off of the loss that the assessee must file a return either in response to a general notice under sub-section (1) of section22 or voluntarily, without any individual notice under sub-section (2) of that section. If he does not file the return for the year in which the loss was incurred and get the loss computed by the ITO, the right to carry forward the loss will also be lost. But if the loss is from a source or head of income not liable to tax or congenitally exempt fro income-tax, neither the assessee is require to show the same in the return nor is the ITO under any obligation to compute or assess it, much less for the purpose of carry forward. In the instant case, the assessee in his return had not shown any "capital loss". He had claimed his loss as a revenue loss. The ITO could therefore, reject the assessee's claim to carry forward the loss merely on the ground that it was not a "revenue loss". His further finding that it was a "capital loss" was only incidental and, in fact, was not necessary.
From what had been said above, to follows as a necessary corollary that during the period second 12B of the 1922 Act did not make income under the head "capital gains" chargeable, an assessee was neither required to show income under the head in his return, nor entitled to file a return showing "capital loss" merely for the purpose of getting the same computed and carried forward. Sub-section (2A) of section 22A of 1922 Act would snot give him such a right because the operation of that sub-
section is in terms, confined to, (i) a loss which is sustained under the head "profits and gains of business, profession or vocation" and would ordinarily have been carried forward under sub- section (2) of section 24 of 1922 Act, and (ii) to "income" which falls within the definition of "total income" Both these conditions are necessary for the application of the sub-section were lacking in the instant case.
ITA No.2778/A/200821 ITA No.2778/A/2008 ITA No.3240/Ahd/2008
There was no substance in the contention that under sub-section (2) read with sub-section (1) of section 24 of the 1922 Act, the assessee had an independent right to carry forward his capital loss, even if it could not be set off, owing to the non- taxability of capital gains against further profits, if any, in the immediate subsequent year. Sub- section (2) of section 24 expressly refers to loss "capital Loss" or the minus income under the head "Capital gains " which at the relevant time were not chargeable and did not computation of the "total income" of the assessee under the Act.
The concept of carry forward of loss does not stand in vacuo. It involves he notion of set-off . Its sole purpose is to set off the loss against the profits of a subsequent year. It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wan to adjust the loss against profits to reduce the ax demand. It follows that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a non- taxable source, there would be no point in allowing the loss to be carried forward. Conversely, if the loss arising in the previous year was under a head not chargeable to tax it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source. The "capital loss" in the instant case, was sustained in September 1953, that is , in the previous year 1953-54. Assuming in the subsequent year 1955-56 and 1956-57, when the capital gains were not taxable he made huge capital gains for exceeding this loss. The assessee was not obliged to show those capital gains in his return. The loss of the year 1953-54 could not be absorbed or set off against such capital gains of the subsequent years."
Just as the income on transfer of Units of UTI did not form part of total income and since the same is not forming part of computation made u/s 48 to 55 under the head "Capital Gain". ITA No.2778/A/2008 22 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 The assessee is not entitled for any such loss being set off against income under the any head or right to carry forward the same under section 74 of the Act. Therefore, the loss on transfer of units UTI cannot be allowed to be carried forward to subsequent years.
9. The next ground of appeal in AY 2004-05 is the addition to the book profit computed under section 115JB of the Act being the provision of gratuity and the deemed dividend added under section 2(22) of the Act while computing the income under regular provisions of Act.
9.1 In respect of provision for gratuity, the addition to book profit was confirmed by the learned CIT(A) by applying the decision of Apex Court in the case of Shree Sajjan Mills Ltd V/s CIT -156 ITR 585 (SC), wherein it was held that the provisions for gratuity is unascertained liability. The said decision was followed by Ahmedabad Bench of the Tribunal in ITA No.2368/Ahd/2006 dated 2.3.2007 in the case of ACIT V/s HOEC Bhardhl India ltd.
9.2 The learned AR for the assessee submitted that the Hon. Bombay High Court in the case of CIT V/s Echjay Forgings Pvt ltd (251 ITR 15) held that the provisions for gratuity on the basis of actuarial calculations is an ascertained liability. Since in the present case the provision for gratuity is made on actuarial valuation, the same has to be allowed while computing the book ITA No.2778/A/2008 23 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 profit. As regards deemed dividend taxed u/s 2(22)(a), it will not form the part of the book profit as the same is outside the profit computed as per the profit and loss account. Reliance was placed on the decision of the Hon. Supreme Court in the case of Apollo Tyres (255 ITR 273). 9.3 The learned DR, on the other hand, relied on the findings of he leaned CIT(A). He has placed a copy of the Tribunal order relied upon by the ld. CIT(A).
9.4 W e have considered the rival submissions. The decision referred to by the Tribunal in the case of ACIT V/s HOEC Bhardhl India ltd.(supra) was rendered ex-parte and without considering the decision of the Hon. Bombay High Court in the case of CIT V/s Echjay Forgings Pvt ltd (251 ITR 15). The Hon.Bombay High Court held that the provision for gratuity on the basis of actuarial valuation could not be said that it was not an ascertained liability. Since, the adjustment to book profit u/s 115JB permits increase by only those provisions other than the ascertained liability and since as per the Hon. Bombay High Court, the provisions for gratuity on the basis of actuarial calculation was not an unascertained liability, the adjustment to book profit is not called for. W e, therefore delete the addition made in this regard.
ITA No.2778/A/200824 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 9.5 As regards the addition to book profit by an amount of deemed dividend taxed u/s 2(22)(a), since such deemed dividend did not form the part of book profit computed as per Part -II and III of Schedule-VI to Companies Act, 1956, in view of the decision of the Supreme Court in the case of Apollo Tyres (supra) no adjustment is called for. W e, therefore, delete the addition made in the book profit in respect of gratuity and deemed dividend.
10. The next grounds of appeal is in respect of confirming the following receipts as not forming part of the profits of business for computing deduction u/s 80HHC.:
a) Conversion charges -Rs.3,26,69,452
b) Miscellaneous sales being sales - Rs.1,32,09,642 of by-products and waste materials
c) insurance claims -Rs.1,56,837.
d) Foreign currency exchange - Rs.95,94,000
fluctuation gains
e) Sale tax refunds - Rs.47,21,000
f) Miscellaneous scrap sales -Rs.15,10,000/-
10.1 The AO held that the receipts as referred in the ground shall not form the part of "profits of business" as per Clause (baa) of Explanation to Section 80HHC and hence 90% thereof are to be reduced from computation of "Profits of the business". The CIT(A) by applying the decision of Apex Court ITA No.2778/A/2008 25 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 in the case of CIT V/s Ravindranathan Nair -213 CTR 227 (SC) held that processing charges constitutes independent income and hence 90% thereof will not form part of "Profits of Business" under clause (baa) of Explanation to section 80HHC. In respect of other income also the same are to be reduced from total turnover and therefore on parity of the same would have to be removed from profit of the business for computation of deduction u/s 80HHC.
10.2 The learned AR of the assessee submitted that the decision of the Hon. Supreme Court in the case of CIT V/s Ravindranathan Nair (supra) was in a different context. The effect of the said decision has been considered by the Mumbai Bench of the Tribunal in the case of Star India Limited in ITA No.1249//M/2004 and ITA No.378/M/2004 dated 16.4.2008. The ITAT has opined that in the case of CIT V/s Ravindranathan Nair (supra) what was decided was whether labour charges received could form part of total turnover or not and whether not 90% thereof are to be excluded from the "Profits of the business: for the purposes of computation of deduction u/s 80HHC. Therefore, the decision of Hon. Supreme Court has been wrongly applied by the CIT(A). 10.3 As regards, other items in the ground, the same was subject matter of dispute in assessee's own case. The ITA No.2778/A/2008 26 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 Tribunal held that exchange fluctuation receipt, miscellaneous sale of by-product, sale of scrap, sale of defective raw- material and sales tax refund was forming the part of profits of business.
10.4 The learned DR relied upon the findings of the learned CIT(A).
10.5 As regards conversion charges in the nature of job work, we find that the issue has been answered by the Mumbai Bench of the Tribunal in the case of Star India Limited by observing as under :
"45. In the case of Ravindranathan Nair (supra), the scope of explanation (baa) to section 80HHC was not before the court. The only question referred to the court for its opinion was whether labour charges received by the assessee on account of job work could be treated as part of total turnover. The issue whether 90% of such labour charges could be excluded from the profits of business in terms of Explanation (baa) was neither before the court nor any argument was advanced on this aspect of the matter by either of the parties. Therefore, this decision cannot be said to be a precedent for the proposition that in case of an independent activity involving, element of turnover, 90% of the receipts should be excluded from the profits of business. This decision is a precedent only for the proposition that in such case the receipt would form part of total turnover in terms of section 80HHC(3) of the Act.
46. For the reasons given in the preceding para, we are also unable to accept the contention of he leaned counsel for the assessee that judgment of Hon. Bombay High Court in the case of CIT V/s Bangalore Clothing Co.(supra) has been approved the Hon.Supreme court in the case of CIT V/s Baby Marine Exports (surpa). In that case also, ITA No.2778/A/2008 27 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 the Supreme Court was not concerned with the scope of Explanation (baa) to the section 80HHC. The question before the court was whether the export incentives received by the supporting manufacturer from the export house could be considered as part of the sale proceeds for claiming deduction us/ 80HHC. The contention of the revenue was that export incentive was received independently in Indian currency without having any link or nexus with any foreign earning and therefore the same could not be considered as part of the sale proceeds. Consequently, deduction u/s 80HHC (IA) could not be allowed. On the other hand, the contention of the assessee was that under the contract between the assessee and the export house, the assessee was entitled to receive the export incentives as part of sale consideration and therefore, it was entitled to deduction in respect of such amount. Though the judgment of Bombay High Court in the case of Bangalor clothing co. was referred to by the learned counsel for the assessee but the said judgment does not find any place in the operative part of the judgment of the apex court. The entire operative part of the judgment related to the interpretation of section 80HHC (1A). After interpreting the said provisions, the court held the tribunal was justified in holding that export incentive was integral part of sale price realized by he assessee . Therefore, it cannot be said that he said judgment of he Bombay High Court stands approved by the apex court.
47. In view of the above discussion, it has to be held that there is no judgment of he apex court on the scope of explanation (baa) to section 80HHC. However, we find merit in the contention of the ld. Counsel for the assessee that the scope of the above explanation was considered by the Hon.Bombay High Court in the case of Bangalore Clothing co. (supra). In that case, the assessee was exporting garments manufactured by it in its own factory In addition, the assessee was also doing the same work on the job work basis for other parties. The job works charges formed part of the business profits is computed under the head "Profits and gains from Business an profession".
The question before the court was whether 90% of job charges could be excluded from the profits ITA No.2778/A/2008 28 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 of business in terms of explanation (baa) to section 80HHC. The Hon. Court held that activity of manufacturing resulted in operational income irrespective of he fact whether goods were manufactured of its own or on job work basis. It was also held that in case of operational income, job chares, would for part of total turnover as well as profits of business. The court further held that in such cases, where element of turnover was involved. 90% of job charges, could not e excluded from the profits of business. Therefore, this judgment is a precedent for the proposition that where a business activity carried on by the assessee results in operational income then such receipts would form part of the total turnover and consequently, no part of it could be excluded from the profits of business computed under the head "
Profits and gains from business and profession" in terms of the explanation (baa) to section 80HHC. This decision clearly fortifies the view taken by us.
10.6 Following the decision of the Mumbai Bench of the Tribunal in the case of Star India Pvt Ltd and in view of the facts that no contrary decision are cited, we hold that the conversion charges of Rs.3,26,69,452/- will form part of total turn over and 90% thereof will not be excluded while computing the profits of business as per the clause (baa) of Explanation to Section 80HHC of the Act. As regards other receipts, the issue has been considered by Tribunal in assessee's own case by the order of the Tribunal dated 4.4.2008. Following the same decision, we hold that the miscellaneous sales being sale of by-product , insurance claim foreign exchange fluctuation receipt, sales tax refund, miscellaneous sales are not similar to the receipt like "brokerage","Commission",'rent', 'interest','charges' and hence ITA No.2778/A/2008 29 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 applying the principle of ejusdem generis, , such receipts, to the extent of 90% thereof will not be excluded while computing the profit of business under clause (baa) of explanation to sec.80HC.
10.7 As regards, reduction of above receipts under the context of deduction from book profit admissible sub-section (4) of section 115JB of the Act, once again the issue has been answered by ITAT, Mumbai in the case of DCIT V/s M/s Glenmaker Laboratories ltd (AY 2004-05) order dated 9.11.2009. As per the said decision the amount of profit eligible for deduction u/s 80HHC shall be computed with reference to book profit and the amount to be reduced is the appropriate percentage thereof as provided in section 80HHC(1B). The computation shall be with reference to book profit and not as per the income computed under the regular provisions of Income Tax Act but only subject to restriction put under sub-section (1)(B) Of Section 80HHC.
11. W e now, take up the appeal of the revenue. 11.1. At the time of hearing both the parties agreed that in view of retrospective amendment in Finance Act(No.2) made by 2009 w.e.f.1.4.2001, the amount set aside as provisions for diminution in the value of assets being the debts is also to be added while computing book profit u/s 115JB of the Act. W e, ITA No.2778/A/2008 30 ITA No.2778/A/2008 ITA No.3240/Ahd/2008 therefore, hold that the provisions for bad debt amounting to Rs.51,72,707/- shall form part of book profit.
12.. In the result, the appeal of the assessee for the AY 2004-05 is partly allowed. The appeal of the revenue for the assessment year 2004-05 is allowed and the appeal of the assessee for the assessment year 2000-01 is also allowed.
Order pronounced in the open court on 29.1.2010 Sd sd (D.T.G AR ASI A) ( DEEP AK R. SH AH ) Judicial Member Accountant Member Vadodara, On this 29th day of Jan 2010 SRL20110 Copy of the order is forwarded to:-
1. Appellant 2 .Respondent
3. CIT(A)-concerned
4. Commissioner of Income Tax Concern
5. The DR, Surat Bench, Surat
6. Guard File By Order True copy Deputy Registrar, I TAT, Ahmedabad