IN THE INCOME TAX APPELLATE TRIBUNAL
"I" BENCH, MUMBAI
BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER, AND
SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
ITA no. 664 and 665/Ahd./2008
(Assessment Year : 200304 and 200405)
Indian Petrochemicals Corp. Ltd.
P.O. Petrochemicals
Dist. Vadodara 391346
PAN AAACI4415Q ....................... Appellant
v/s
Asstt. Commissioner of Income Tax
Circle1(2), Vadodara ................... Respondent
ITA no. 744 and 745/Ahd./2008
(Assessment Year : 200304 and 200405)
Asstt. Commissioner of Income Tax
Circle1(2), Vadodara ....................... Appellant
v/s
Indian Petrochemicals Corp. Ltd.
P.O. Petrochemicals
Dist. Vadodara 391346
PAN AAACI4415Q ................... Respondent
Revenue by : Mrs. Sasmita Misra
Assessee by : Mr. Arvind Sonde
Date of Hearing 06.06.2012 Date of Order 29.06.2012
Indian Petrochemicals Corp. Ltd.
ORDER
PER BENCH
These cross appeals are directed against the impugned separate orders
dated 26th November 2007, passed by the Commissioner (Appeals)I,
Vadodara, for assessment years 200304 and 200405 respectively. Since
most of the grounds and facts in all these appeals are common, these
appeals were heard together and are being disposed off by this consolidated
order for the sake of convenience and brevity.
2. We first take assessee's appeal being ITA no.664/Ahd./2008, for
assessment year 200304.
3. The issue involved in ground no.1, is whether the sales tax incentive of
` 38,62,33,200, is capital receipt or revenue receipt to the assessee.
4. The Assessing Officer has stated that as per computation of income,
the assessee has treated ` 38,62,33,200, as capital receipt on account of
sales tax exemption granted by the Government of Gujarat for establishing
industries in the backward area of Gandhar. In reply to a query raised by the
Assessing Officer as to why the said amount should not be treated as
revenue receipt, the assessee filed its reply stating that the exemption is
granted by the State Government of Gujarat because the industry is situated
in the backward area as notified in the notification passed by the
Government. The total quantum of exemption available is based on the
investment made in the fixed assets of the undertaking / industrial plant.
That the mode of granting such incentive is by way of sales tax exemption in
respect of sale of products generated by such undertaking but the total
quantum of incentive available is based on the capital invested in the
aforesaid project/ plants / undertaking. Hence, the sales tax exemption is a
capital receipt not chargeable to income tax. The Assessing Officer did not
accept the contention of the assessee and considering the judgment of
Hon'ble Supreme Court in Sahney Steel and Press Works Ltd. v/s CIT, [1997]
Indian Petrochemicals Corp. Ltd.
3
228 ITR 253 (SC), and also following the order of the Commissioner (Appeals)
for assessment year 200001, in the assessee's own case considered the
said amount of ` 38,62,33,200, as revenue receipt. Being aggrieved, the
assessee filed appeal before the Commissioner (Appeals).
5. On behalf of the assessee, it was contended that the said issue, though
was decided against the assessee by the Commissioner (Appeals) in
assessment years 200102 and 200203, but the legal position in the
assessment year under consideration i.e., assessment year 200304, has
changed in view of subsequent two decisions of the Tribunal and the decision
of ITAT Mumbai Special Bench in DCIT v/s Reliance Industries Ltd., [2004]
88 ITD 0273 (SB). It was contended that, subsequently, Ahmedabad Bench
of the Tribunal in Nirma Ltd., ITA no.301/Ahd./1996, vide order dated 13th
March 2005, after considering the judgment of Hon'ble Supreme Court in
Sahney Steel and Press Works Ltd. (supra), held that sales tax incentive to
be constituted capital receipt. The Commissioner (Appeals) did not agree
with the contentions of the assessee and also by distinguishing decision of
ITAT Mumbai Special Bench in Reliance Industries Ltd. (supra) and also the
decision of the Ahmedabad Bench of the Tribunal in Nirma Ltd. (supra), held
that no benefit could be given to the assessee in this behalf at this stage and
confirmed the action of the Assessing Officer. Hence, the assessee is in
further appeal before the Tribunal.
6. At the time of hearing, before us, the learned Counsel for the assessee
submitted that the same very issue is covered in favour of the assessee by
the decision of the Tribunal in assessee's own case for assessment year
200001, in ITA no.3896/Ahd./2003, assessment year 200102, in ITA no.
437/Ahd./2007 and assessment year 200203, in ITA no.3054/Ahd./2007,
the appeals filed by the assessee and the Tribunal relying on the decision of
ITAT Mumbai Special Bench in Reliance Industries Ltd. (supra) and the
decision of Ahmedabad Bench of the Tribunal in Nirma Ltd. (supra) for
assessment year 199293, in ITA no.175/Ahd./2003, vide common order
dated 30th April 2008, decided the issue in favour of the assessee i.e., the
Indian Petrochemicals Corp. Ltd.
4
sales tax incentive receipt is capital receipt. To substantiate his submissions,
the learned Counsel for the assessee filed a copy of the said order of the
Tribunal and submitted that the facts in the assessment year under
consideration are identical and, therefore, the issue is covered in favour of
the assessee.
7. Learned Departmental Representative, on the other hand, has not
disputed the above submissions of the learned Counsel for the assessee,
save and except, relying on the order of the authorities below.
8. On considering the above submissions of the learned Representatives
of the parties and earlier orders of the Tribunal in assessee's own case for
assessment years 200001, 200102 and 200203, copy placed at Pages1
to 53 of the paper book (relevant Pages14 to 18) and respectfully following
the said order, we decide the issue in favour of the assessee by allowing
assessee's ground of appeal and set aside the orders of the authorities
below. Hence, ground no.1, taken by the assessee is allowed.
9. In ground no.2, the assessee has disputed the order of the
Commissioner (Appeals) in confirming the disallowance of expenditure by
way of contribution of ` 70.20 lakhs, made by the assessee to various
organisations.
10. The Assessing Officer has stated that the assessee has claimed `
11,50,000, under the head "Donation / Contribution" and ` 58,70,190, under
the head "Community Welfare Expenses". The Assessing Officer has stated
that the assessee was asked to furnish the details along with the justification
for its claim on this account. The assessee stated that as part of social
responsibility and good corporate neighbour, the assessee company always
strives to demonstrate its concern for society by taking up projects in the
vicinity of its project to improve the quality of the life of the people through
direct expenditure / welfare bodies. The assessee stated that it made
donation / contribution towards community development work which
includes supply of portability of water, contribution towards construction of
Indian Petrochemicals Corp. Ltd.
5
school building, construction of road, health services, development of village,
etc. It was stated that the assessee company is entitled to get deduction in
respect of the aforesaid expenditure under section 37(1) of the Income Tax
Act, 1961 (for short "the Act") as a business expenditure. However, the
Assessing Officer was not satisfied and stated that the said expenditures are
not incurred for business purposes and are not covered by the provisions of
section 37(1) of the Act. He has stated that there is no commercial
expediency as far as the business of the assessee is concerned. He has
further stated that in regard to claim for donation, it is not entertainable
because the assessee has negative income as per the provisions of the
Income Tax Act, 1961.
11. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals) has also confirmed
the action of the Assessing Officer by following his earlier orders for
assessment years 200102 and 200203. Hence, the assessee is in further
appeal before the Tribunal.
12. Before us, at the time of hearing, the learned Counsel for the assessee
filed a chart giving details of the donation / contribution made to various
industries and submitted that similar contributions were also made by the
assessee in assessment year 200001. The learned Counsel further
submitted that similar issue was considered by the Tribunal in assessee's
own case, not only in the assessment year 200001, but also in the
assessment years 200102 and 200203, and the Tribunal, by its order
dated 30th April 2008, after considering the judgment of the Hon'ble Madras
High Court in CIT v/s Madras Refineries Ltd., 138 Taxman 261 (Mad.), the
decision of ITAT Mumbai Bench in Hindustan Petroleum Corp. Ltd. v/s DCIT,
[2005] 96 ITD 186 (Mum.), and the judgment of Hon'ble Karnataka High
Court in Mysore Kirloskar Ltd. v/s CIT, [1987] 166 ITR 836 (Kar.), held that
the expenditure incurred by the assessee was of revenue in nature and is
allowable as deduction under section 37(1) of the Act. To substantiate his
submissions, the learned Counsel referred to Paras9 to 11 of the said
Indian Petrochemicals Corp. Ltd.
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judgment (relevant Pages18 to 23 of the paper book). He submitted that
issue is covered in favour of the assessee in assessee's own case by earlier
order of the Tribunal.
13. On the other hand, the learned Departmental Representative has not
disputed the above submissions of the learned Counsel for the assessee,
save and except, relying on the orders of the authorities below.
14. We have heard the submissions of the learned Representatives and
perused the earlier orders of the Tribunal. We observe that the Tribunal, vide
Para11, in assessee's own case for assessment year 200001, observed as
under:
"11. We have considered the rival submissions, facts and
circumstances of the case and decisions relied upon by the assessee.
(i) So far as decision in the case of Madras Refineries Ltd
(supra) is concerned, the Hon'ble High Court has held that
expenditure incurred by the company for establishing the
drinking water facilities to the resident in vicinity of its business
and also for providing aid to school run for benefit of children of
those local residents as business expenditure because,
according to the Honble High Court, winning of the good-will of
people of the locality, helps in boosting business in many ways.
(ii) So far as decision in the case of HPCL vs. Dy.CIT (supra) is
concerned, the Hontle Bench has held the expenditure incurred
by the Assessee towards implementation of 20-Point
programme of the Government as Revenue Expenditure nd the
relevant observations contained at page No. 193 are in the
following terms:
"it will, therefore., be clear that even if an expense is incurred
voluntarily. it may still be construed as `wholly and exclusively'.
Just because the expenses are voluntary in nature and are not
forced in the assessee by a statutory obligation, these expenses
cannot cease to be a business expenditure. Keeping all these
factors in mind, as also entirety of the case, we are not inclined
to sustain the disallowance of ` .1055648 as expenditure,
incurred on implementation 20-Point Programmes. We are,
therefore, of the considered view that the authorities below
indeed erred in law in declining-deduction of expenses incurred
on 20-Point Programmes which `was, beyond dispute or
controversy, at the instance of the Government, and to
discharge the assessee's obligations towards society and as a
responsible corporate citizen,
Indian Petrochemicals Corp. Ltd.
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(iii) So far as decision in the case of Mysore Kirloskar Ltd. vs.
CIT (Kar.) is concerned, the Honble Karnataka High Court has
held the expenditure incurred on account of donations to certain
funds, charitable institutions, etc. is allowable even if the
donation has no nexus with the business of the assessee and
regardless of any business activity or any commercial
expediency in the light of principles laid down by the Hon'ble
supreme Court in the case of Indian Molasses Co. Pvt. Ltd. vs.
CIT [1959] 37 ITR 66(SC), at page no.75 & 76 which is in the
following terms:
"The income-tax law does not allow as expenses all the
deductions a prudent trader would make in computing his
profits. The money may be expended on grounds of
commercial expediency but not of necessity. The test of
necessity is whether the intention was to earn trading
receipts or to avoid future recurring payments of a
revenue character. Expenditure in this sense is equal to
disbursement which to use a homely phrase, means
something which comes out of the trader's pocket. Thus,
in finding out what profits there be, the normal
accountancy practice may be to allow as expense any
sum in respect of liabilities which have accrued over the
accounting period and to deduct such sums from profits.
But the income tax law does not take every such
allowance as legitimate for purpose of tax. A distinction is
made between an actual liability in presenti and a liability
de futuro which, for the time being, is only contingent.
The former is deductible but not the latter."
11.2 After considering the nature of expenditure and the proposition
of law held the Hon'ble Supreme Court as well as High Courts and the
Tribunal (supra), we are of the opinion that the expenditure incurred
by the assessee was definitely of Revenue nature and the assessee
was entitled to the deduction under section 37(1) of the Act subject,
however, to the verification of payment and since the assessee had
not furnished the receipts before the Assessing Officer, we direct the
Assessing Officer to allow the assessee's claim after verifying the
factum of payment from the assessee after allowing the assessee an
opportunity of being heard. The assessee's ground is allowed subject
to verification of factum of payment by the Assessing Officer.
11.3 Even otherwise, we are of the opinion that the assessee is
entitled to deduction of this expenditure because the nature of
expenditure as found cannot but be a "concrete expression of care and
concern" for the society to discharge the responsibility of a "Good
Corporate Citizen". Just because the expenditure was voluntary in
nature and was not forced on the assessee by a statutory obligation, it
does not cease to be business expenditure. In a democratic set up the
Government collect taxes only to carry on the governance activities
which are in the larger interest of the subject i.e., the society by
executing project for the wellbeing of the subjects, i.e., the society,
Indian Petrochemicals Corp. Ltd.
8
by executing project for the well being of the subjects and if a tax
paper helps the Government by carrying on such activities or by
contributing to carrying on such activities by the various arms of the
Government, the tax payer should be encouraged and not be
penalised. If such activities are seen is a source of penalizing the tax
payers by imposing additional burden of tax, then no tax payer will
ever come forward to extend a helping hand.
In view of this discussion, we are of the opinion that the
expenditure incurred by the assessee was of revenue nature and is
allowed, subject to observation in Para11.2 above."
15. Considering the earlier order of the Tribunal in assessee's own case
and the fact that the Commissioner (Appeals) made the disallowance by
following his earlier order for assessment years 200102 and 200203 and
made the aforesaid disallowance which has been reversed by the Tribunal,
we allow ground no.2, raised by the assessee by reversing the orders of the
lower authorities.
16. Ground no.3, relates to payment made to Dodsal Ltd. considering the
same as capital expenditure as against revenue expenditure claimed by the
assessee of ` 102,03,43,311.
17. The relevant facts giving rise to this ground of appeal are that the
assessee entered into a Build, Own, Operate, Transfer (for short "BOOT")
contract with Dodsal Ltd. (for short "Dodsal") on 8th December 1995, for its
Dahej, Vadodara pipeline project between Gandhar Complex and Vadodara
for a distance of 107 kms. As per the said agreement, the assessee company
was to pay a minimum guaranteed amount of ` 2.47 crores per month to
Dodsal which would increase depending upon the actual quantity handled.
Dodsal for its own financial purposes involved ICICI Ltd. who became the
lessor. The assessee company was not involved in this financial arrangement
between ICICI Ltd. and Dodsal. The assessee company claimed the payment
of ` 2.47 crores per month as revenue expenditure. The assessee stated
before the Assessing Officer that in the initial stages of Gandhar Complex,
the focus of the assessee was to put up the main plant and run successfully
rather than to concentrate the activities related to infrastructure facilities for
Indian Petrochemicals Corp. Ltd.
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the raw materials. At that time, focus was to leave it to external agency in
areas like Port infrastructure and pipelines both on the economics of cost
constraint on initial investment as well as the limited expertise on these
areas. Since the assessee company was not having expertise in the working
and managing of pipeline project and also handling movements of materials
through it, the assessee company identified Dodsal who had rich experience
in this area and entered into the contract of BOOT arrangement. The said
pipeline was commissioned in May 1997. The agreement in the ordinary
course was to terminate after 15 years from the date of commissioning.
However, the agreement could be terminated otherwise than by breach of
contract by the assessee / taking over the assets after five years of
commissioning based on a mutual understanding and in line with BOOT
agreement. It was stated that the assessee company continued to pay as per
agreement since 23rd May 1997 and the said amount was increasing beyond
` 2.47 crores per month depending upon actual quantity handled. It was
stated before the Assessing Officer that the assessee company, over a period
of time, got the relevant experience in handling and monitoring movement of
material through pipeline and other related matters. Besides the new
management taking over the control over the assessee company after its
disinvestments by the Government of India, also had relevant knowledge
and rich experience in this area. Since the pipeline was vital from operation
view point as well as considering the fact that the assessee company had
gained specific technical knowledge for operating such pipeline on its own, it
had thought prudent to terminate BOOT agreement with Dodsal by making
one time payment of ` 102,03,43,311, as per the terms of BOOT agreement
18. In view of above facts, the Assessing Officer has stated that the
assessee was asked to show cause as to why ` 102,03,43,311, paid to
Dodsal should not be treated as capital expenditure. In response thereto, the
assessee replied that the expenditure of ` 102,03,43,311, had been incurred
to restructure BOOT agreement entered into and it has not brought into
existence any fixed assets. The said payment has been made to improve the
operation efficiency of the assessee company in the current year and for the
Indian Petrochemicals Corp. Ltd.
10
years to come. Therefore, such expenditure is allowable as revenue
expenditure under section 37(1) of the Act. The assessee further submitted
before the Assessing Officer (Page8 of assessment order) as under:
"We also wish to state that the aforesaid expenditure has been
incurred only to restructure the existing agreement and has not
brought into existence any fixed assets. Even when the BOOT
agreement was in operation Dodsal Ltd. continued to be the owner of
the pipeline and after restructuring of the BOOT agreement, ICICI Ltd.
became the owner of the pipeline. The assessee was not the owner of
the pipeline earlier and by restructuring such agreement, the assessee
has not become the owner of the pipeline. What the assessee was able
to achieve by such restructuring is:
1. Taking control of the operations and maintenance of the pipeline
which was very vital for its operation and functioning from Dodsal Ltd.
to itself thereby reducing any security hazard or any other operational
problems which might crop up in future.
2. Utilising the experience gained during the operation of the
pipeline from 1997 to 2003 to its advantage thereby reducing the need
of a middle person in between.
3. Making substantial saving in the operational cost of the pipeline
viz. for the previous 3 years like 31.3.2001, 31.3.2002 and 31.3.2003,
annual aggregate payment made to Dodsal Ltd. for operation of this
particular pipeline was as follows:
31.3.2001 ` 30.92 crores
31.3.2002 ` 31.35 crores
31.3.2003 ` 32.64 crores
4. The expenditure on payment of lease rent and maintenance of
the pipeline as per the original BOOT agreement with Dodsal and as
per restructuring agreement is as follows:
Financial Year As per earlier Amount payable
agreement with as per re
Dodsal (` in structuring
crores) agreement (` in
crores)
200304 29.64 23.67
200405 29.64 23.88
200506 29.64 21.17
200607 29.64 15.13
200708 29.64 9.09
Indian Petrochemicals Corp. Ltd.
11
200809 29.64 6.67
200910 29.64 4.03
201011 29.64 0.81
201112 29.64 0
Total 266.76 104.45
19. The Assessing Officer, after considering the above submissions of the
assessee, has stated that after termination of the agreement with Dodsal,
which has translated into restructuring of BOOT agreement has resulted
into commercial advantage / benefit of enduring nature to the assessee in
the form of taking control of operation and maintenance of the pipeline. He
has stated that after termination of the agreement with Dodsal and making
one time payment of ` 102,03,43,311, the assessee has acquired
commercial advantage or benefit of other advantages / benefits in the form
of taking control of operation and maintenance of the pipeline which was
very vital for its operation and functioning from Dodsal reducing security
hazard and operational problems eliminating the need of a middleman
substantial saving in the operational cost of the pipeline i.e., maintenance
and operational cost of the pipeline during the current year and in the years
to come. Therefore, it is crystal clear that these are the advantages /
benefits of enduring nature. He has further stated that the assessee has also
crystallised this aspect as per the accounting standards in its books after
termination of the agreement with Dodsal and signing of new agreement
between the assessee and ICICI Ltd. in this regard. The Assessing Officer
has stated that by making a payment of ` 102,03,43,311 the fact that the
ownership has not been transferred to the assessee is not of any
significance. He has stated that the assessee achieved by making this
payment the right to operate and maintain which is very important
commercial right which has been taken over by the assessee from Dodsal.
This has also resulted into extinguishment of all the obligations of the
assessee towards Dodsal. In view of above, the Assessing Officer has held
that the payment of ` 102,03,43,311, but Dodsal is of capital nature. He has
Indian Petrochemicals Corp. Ltd.
12
further stated that the assessee has acquired intangible assets and since it
was put to use for less than 180 days during the financial year under
consideration, the assessee is entitled for the depreciation at half of the
eligible rate which comes to ` 12,75,42,913. Hence, the Assessing Officer
disallowed ` 89,28,00,398 [` 102,03,43,311 () ` 12,75,42,913] and added
back to the total income of the assessee.
20. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein it was contended on behalf of the assessee that
one time payment to Dodsal has not given right to any intangible asset or
any fixed assets in the hands of the assessee. Before the termination of
BOOT agreement, the pipeline was owned by the ICICI Ltd. and after re
structuring of said agreement also, ICICI Ltd. continued to remain the owner
and lessor of the pipeline. The assessee was not the owner of the pipeline
earlier and by restructuring such agreement, the assessee has not become
the owner of the pipeline. In both the situation, the assessee was only
paying for the user of the pipeline and for the flow of raw materials and the
payment for such user was always regarded as revenue expenditure and
claimed accordingly. It was further submitted before the Commissioner
(Appeals) that the BOOT agreement was entered with Dodsal for the purpose
of business and all through out the continuance of BOOT contract, these
facilities were being utilised for the flow of raw materials for the purpose of
business. The maintenance charges paid for flow of raw material from the
pipeline were also incurred for the purpose of business and it is only to carry
on the business more efficiently and economically with the BOOT agreement
being terminated. Hence, the contractual payment made for termination of
BOOT agreement is an expenditure incurred wholly and exclusively for the
purpose of business and is allowable as revenue expenditure. The
Commissioner (Appeals), after considering the above submissions of the
assessee and the observations of the Assessing Officer, has held that the
assessee has acquired intangible assets in the form of commercial right to
operate and maintain the pipeline with reduced security hazard. This right so
acquired is for the life time of the assessee's business. The acquisition of this
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13
right is also in relation of a capital asset. The assessee has crystallised this
expenditure as per accounting standard in its books of account after
termination of the agreement, therefore, the termination of BOOT agreement
has resulted in the acquisition of the right which is a capital assets being an
intangible asset. Accordingly, the Commissioner (Appeals) has confirmed the
action of the Assessing Officer that the expenditure of ` 102,03,43,311,
incurred is a capital expenditure. Hence, assessee is in further appeal before
the Tribunal.
21. Before us, on behalf of the assessee, it was contended that the BOOT
agreement was terminated to avoid recurring payment being made by the
assessee and only one time lump sum payment has been made. He
submitted that this lump sum payment is made to free from all obligations as
per the contract. The learned Counsel for the assessee submitted that
replacing recurring expenditure by making lump sum payment is revenue
expenditure and to substantiate his submissions, he referred to the
judgment of Hon'ble Supreme Court in Assam Bangal Cement Co. Ltd. v/s
CIT, [1955] 027 ITR 034 (SC). The learned Counsel, by referring to Pages
43 and 44 of the said judgment, submitted that Their Lordships considered
the judgment of the Full Bench of the Lahore High Court in the case of
Banarasidas Jagannath In re (Lah.), [1947] 015 ITR 185, wherein broad test
was deduced for distinguishing capital expenditure from revenue
expenditure. It was held that if what is got rid of by a lump sum payment is
an annual business expense chargeable against revenue, the lump sum
payment should equally be regarded as business expense but if the lump
sum payment brings in a capital asset, then that puts the business on
another footing altogether. He submitted that the assessee has made a lump
sum payment, to get rid of making annual payment in the form of monthly
payment to Dodsal which was allowable as business expenditure to the
assessee, is also to be considered as business expenditure under section
37(1) of the Act, That no asset has come into existence to the assessee by
making said payment. He further relied on the judgment of Hon'ble Supreme
Court in CIT v/s Madras Auto Service (P.) Ltd., [1998] 233 ITR 468 (SC). He
Indian Petrochemicals Corp. Ltd.
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submitted that in the above case, the assessee company entered into a lease
agreement and as per conditions of lease agreement, the lessee i.e., the
assessee had a right to demolish at this own expenditure the existing
premises and appropriate to itself all the materials thereof without payment
to the lessor any compensation and construct a new building thereon to suit
the purpose of their business. He submitted that as per clause (2) of the
lease deed, the lessee was required to pay a rent of ` 1,000 per month for
first 15 years, ` 1,500 per month for the next ten years, ` 1,650 per month
for the next ten years and ` 2,000 per month for the remaining years. The
lease deed further provided that the new construction, right from the
commencement of the work will be property of the lessor and upon
completion of the work of construction, the lessee will have only the right to
be a tenant for a period of 39 years under existing lease subject to the
payment of rent and observe all other terms and conditions of the lease. The
lessee was not entitled under any circumstances for any compensation
whatsoever on account of its putting up the new construction in place of the
old construction. Thus, the assessee invested a sum of ` 1,62,833, in
previous year relevant to assessment year 196869 and ` 50,937, during
the succeeding year in construction of new building. The assessee claimed as
capital loss. In the alternative, the assessee also claimed deduction of the
payment as business expenditure or as extra rent for the lease. The Tribunal
held that the expenditure of the said amount for the construction of a new
building is in the nature of business expenditure for the proper carrying on
the business of the assessee and treated this amount as revenue
expenditure and allowed deduction in that regard to the assessee. The
Hon'ble High Court upheld the view of the Tribunal. The Department filed
appeal before the Hon'ble Supreme Court. The Hon'ble Supreme Court stated
that in order to decide as to whether the expenditure is revenue or capital,
one has to look at the expenditure from a commercial point of view. What
advantage did the assessee get by constructing a building which belonged to
somebody else and spending money for such construction? The assessee got
long lease of a newly constructed building suitably to its own business at a
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15
very concessional rate, the expenditure, therefore, was made in order to
secure a long lease of new and more suitable business premises at lower
rent. The saving in expenditure was saving in revenue expenditure in the
form of rent. The learned Counsel submitted that the above expenditure
incurred by the assessee by terminating BOOT agreement with Dodsal is a
saving in annual expenditure in the form of lump sum payment and,
therefore, the same be equally regarded as business expenditure as the
monthly payment made by the assessee was also considered as revenue
expenditure. The learned Counsel also placed reliance on the judgment of
Hon'ble Jurisdictional High Court in CIT v/s HEDE Consultancy Pvt. Ltd.,
[2002] 258 ITR 380 (Bom.) and the judgment of Hon'ble Jurisdictional High
Court in Talathi And Panthaky Associates Pvt. Ltd., [2012] 343 ITR 309
(Bom.) and submitted that the Hon'ble Jurisdictional High Court also followed
the same principle and held that when a lump sum payment is made to get
rid of annual payment by which the assessee gets commercial advantage in
the form of securing tenancy of an equivalent area of premises on the same
rent as before, the expenditure could not be regarded as being of a capital
nature, the said expenditure incurred by the assessee is revenue
expenditure.
22. The learned Counsel further submitted that the Assessing Officer has
also stated it as capital expenditure because the assessee had capitalized it
in its book after termination of agreement with Dodsal. The learned Counsel,
by relying on the judgments of Hon'ble Supreme Court in Kedarnath Jute
Mfg. Co. Ltd. v/s CIT, [1971] 082 ITR 363 (SC) and Tamil Nadu Industrial
Investment Corporation Ltd. v/s CIT, [1999] 237 ITR 889 (SC), submitted
that the treatment given by the assessee in its books of account cannot
change the nature of the receipt or payments from revenue to capital. The
learned Counsel submitted that the said payment of ` 102,03,43,311, is to
be allowed as revenue expenditure.
23. On the other hand, the learned Departmental Representative justified
the orders of the authorities below and submitted that the assessee has
Indian Petrochemicals Corp. Ltd.
16
acquired an intangible right by making down payment after terminating the
BOOT contract with Dodsal. He submitted that the Commissioner (Appeals)
has rightly confirmed the action of the Assessing Officer to treat it as a
capital expenditure.
24. We have carefully considered the orders of the authorities below and
submissions of the learned Representatives of the parties. We have also
considered the case laws cited before us. We observe that the assessee
entered into BOOT agreement / contract with Dodsal in December 1995.
Pursuant thereto, Dodsal built, maintained and operated the Dahej Gandhar
Vadodara pipeline for an approximate distance of 107 kms. The said pipeline
was commissioned in May 1997. The assessee company, as per agreement,
was obliged to pay ` 2.47 crores per month minimum guaranteed amount to
Dodsal as BOOT charges. The said agreement, in the ordinary course, was to
terminate after 15 years from the date of commissioning. However, the
agreement could be terminated otherwise then by breach of contract by the
assessee / taking over the assets after five years of commissioning based on
a mutual understanding. It is stated that over a period of time the assessee
got relevant experience of handling and monitoring movement of material
through pipeline and other related matters. Since the said pipe line was vital
from operation view point and also considering the fact that it required
specific technical knowledge for operating such pipeline on its own, it was
thought prudent to terminate the BOOT agreement with Dodsal by making
one time lump sum payment of ` 102,03,43,311, as compensation on
account of premature termination of BOOT agreement. In order to justify
that the said down payment of ` 102,03,43,311, is economical to the
assessee company, we observe that the assessee stated before the
Assessing Officer that in the last three years i.e., F.Y. ending 31st March
2001, it paid ` 30.92 crores, in the F.Y. ending 31st March 2002, it paid `
31.35 crores and in the F.Y. ending 31st March 2003, it paid ` 32.64 crores
to Dodsal for operation of said pipeline. Undisputedly, the said payments
were allowed as revenue expenditure in respective assessment years.
Further, the assessee, in its reply to the Assessing Officer, also stated that
Indian Petrochemicals Corp. Ltd.
17
over a period of nine F.Ys from 200304 to 201112, it was to pay, as per
earlier agreement, minimum ` 266.76 crores to Dodsal. However, the
amount payable as per reconstructing agreement comes to ` 104.45 crores.
We further observe that the assessee has stated that even when BOOT
agreement was in operation, the assessee was not the owner of the pipeline
and also after reconstructing of the BOOT agreement, the assessee has not
become the owner of the pipeline. We observe that after restructuring of
the BOOT agreement, i.e., when the assessee made the lump sum payment
of ` 102,03,43,311, ICICI Ltd. became the owner of the pipeline and the
assessee only got control of the operation and maintenance of the pipeline
which is stated to be very vital for its operation and functioning of assessee's
projects. Now, the question arises as to whether this lump sum payment
made by the assessee to Dodsal is a capital expenditure or is a revenue
expenditure. We observe that the Hon'ble Supreme Court in Madras Auto
Service Pvt. Ltd. (supra) has stated that in order to decide whether the
expenditure is revenue expenditure or capital expenditure, one has to look at
the expenditure from a commercial point of view. In the said case, the
assessee, a lessee of a building obtained lease for a period of 39 years. One
of the condition of the lease was that the lessee had the right to demolish at
its own expenses the existing premises and appropriate to itself all the
material thereof without paying to the lessors any compensation and to
construct a new building thereon to suit the purpose of their business as per
plan approved by the lessor. The assessee spent / invested a sum of `
1,62,835, in the previous year relevant to the assessment year 196869 and
` 50,937, during the succeeding year in constructing a new building on the
said land. The assessee claimed before the ITO the expenditure of the said
sums of ` 1,62,835 and ` 50,937, in the relevant assessment years as
capital loss. In the alternative, the assessee claimed deduction of the
payments as business or extra rent for the lease. The Tribunal held that the
expenditure of the said two amounts for the construction of a new building is
in the nature of business expenditure for proper carrying on of the business
of the assessee and, therefore, the said two amounts were treated as
Indian Petrochemicals Corp. Ltd.
18
revenue expenditure and deduction was allowed in regard thereto to the
assessee. In appeal by the Department, the Hon'ble High Court upheld the
order of the Tribunal. The Department went in further appeal before the
Hon'ble Supreme Court wherein Their Lordships at Page472, have stated
that:
"In order to decide whether this expenditure is revenue expenditure or
capital expenditure, one has to look at the expenditure from a
commercial point of view. What advantage did the assessee get by
constructing a building which belonged to somebody else and spending
money for such construction? The assessee got a long lease of a new
constructed building suitable to its own business at a very concessional
rent. The expenditure, therefore, was made in order to secure a long
lease of new and more suitable business premises at a lower rent. In
other words, the assessee made substantial savings in monthly rent
for a period of 39 years by expending these amounts. The saving in
expenditure was a saving in revenue expenditure in the form of rent.
Whatever substitutes for revenue expenditure should normally be
considered as revenue expenditure. Moreover, the assessee in the
present case did not get any capital asset by spending the said
amounts. The assessee, therefore, could not have claimed any
depreciation. Looking to the nature of the advantage which the
assessee obtained in a commercial sense, the expenditure appears to
be revenue expenditure."
For distinguishing between the capital expenditure and revenue
expenditure Their Lordships of the Apex Court considered the case of Assam
Bangal Cement Co. Ltd. (supra) and at Page473, stated as follows:
1. Outlay is deemed to be capital when it is made for the initiation
of a business, for extension of a business, or for a substantial
replacement of equipment.
2. Expenditure may be treated as properly attributable to capital
when it is made not only once and for all but with a view to bringing
into existence an asset or an advantage for the enduring benefit of a
trade....... If what is got rid of by a lump sum payment is an annual
business expenses chargeable against revenue, the lump sum
payment should equally be regarded as a business expense, but if the
lump sum payment brings in a capital asset, then that puts the
business on another footing altogether.
3. Whether for the purpose of the expenditure, any capital was
withdrawn, or, in other words, whether the object of incurring the
expenditure was to employ what was taken in as capital of the
business. Again, it is to be seen whether the expenditure incurred was
Indian Petrochemicals Corp. Ltd.
19
part of the fixed capital of the business or part of its circulating
capital."
25. Thus, the Hon'ble Supreme Court in the above case i.e., Madras Auto
Service (P.) Ltd. (supra), while confirming the orders of the Tribunal as well
as of the High Court held that the said expenditure incurred by the assessee
company for the construction of a new building which did bring about some
kind of an enduring benefit to the assessee company is revenue expenditure
as it did not bring into existence any capital assets for the assessee
company. The asset which was created belonged to somebody else and the
assessee company derived an enduring business advantage by spending the
said amount. The expenditure have been looked upon as having been made
for the purpose of conducting business of the assessee for more profitability
or more successfully. The asset created by spending the said amounts did
not belong to the assessee but the assessee got the business advantage of
using modern premise at a low rent thus saving considerable revenue
expenditure for the next 39 years i.e., the term of lease period and
concluded that the expenditure should be looked upon as revenue
expenditure.
26. We are of the considered view that the above judgments of the Hon'ble
Supreme Court squarely applies to the facts of the case before us. In the
present case also, the assessee company, by making lump sum payment of `
102,03,43,311, to Dodsal has not acquired any capital asset but has
acquired only the right to operate and maintain the said pipeline for its
business purpose. Further, by making this lump sum payment to Dodsal, the
assessee company has got rid of making monthly payment. We are of the
considered view that the assessee company has not acquired any capital
asset by making lump sum payment. It has only derived an enduring
advantage as in the case of Madras Auto Service (P.) Ltd. (supra). Therefore,
the said expenditure of making lump sum payment by terminating BOOT
agreement entered into by the assessee company and Dodsal, it has only got
the business advantage of maintaining and operating the pipeline. The
assessee company has stated that even when the BOOT agreement was in
Indian Petrochemicals Corp. Ltd.
20
operation, the assessee was neither the owner of the pipeline nor after
making the lump sum payment to Dodsal on terminating the BOOT
agreement the assessee became the owner of the pipeline. The owner of the
pipeline is ICICI Ltd. The said facts have not been disputed by the
Department, even when assessee filed its reply before the authorities below
as well as at the time of hearing of this appeal before us.
27. The Hon'ble Jurisdictional High Court in HEDE Consultancy Pvt. Ltd.
(supra) also held that if the assessee company by spending amount by
renovating the godown, taken on lease did not get the assets created
belonging to it but if the assessee got business advantage of using modern
business premises at a low rent thus saving considerable revenue
expenditure for a considerable long period, the Tribunal was perfectly
justified in coming to the conclusion that the expenditure should be looked
upon as revenue expenditure. It was stated that if what is got rid of by
making a lump sum payment is an annual business expenditure chargeable
against revenue, the lump sum payment should equally be regarded as
business expenditure, but if the lump sum payment brings in a capital
assets, then that puts the business on another footing altogether.
28. The Hon'ble Jurisdictional High Court in CIT v/s Talathi And Panthaky
Associates Pvt. Ltd. (supra), also considered the similar issue and held that if
the assessee obtained a commercial advantage of securing tenancy of an
equivalent area of premises on the same rent as before by contributing an
amount of ` 1.50 crores towards reconstruction, the said expenditure is
revenue in nature and could not be regarded being capital in nature, as there
was no acquisition of a capital assets and the occupation of the assessee
continued in the character of the tenancy.
29. In the case before us also, the assessee has only got the right to use
the said pipeline for its business purposeS and has not acquired any capital
right in the said pipeline, save and except, to operate and maintain it by
making a lump sum payment of ` 102,03,43,311, to Dodsal on termination
of BOOT agreement. Therefore, we agree with the learned Counsel for the
Indian Petrochemicals Corp. Ltd.
21
assessee that the said payment is to be considered as revenue in nature and
not as capital in nature.
30. We also observe that the Assessing Officer as well as the
Commissioner (Appeals), while considering the said expenditure of `
102,03,43,311, as capital expenditure also stated that the assessee itself
has capitalized the said amount in its books of account. In this regard, it is
relevant to state that even if the amount which is otherwise allowable as
revenue expenditure but capitalized by the assessee in the books of account,
the expenditure cannot be disallowed. The Hon'ble Madras High Court in CIT
v/s Kasthuri and Sons, [2000] 241 ITR 412 (Mad.) and the Hon'ble Delhi
High Court in CIT v/s Dalmia Cement (Bharat) Ltd., [2000] 242 ITR 129
(Del.) have held that even if an assessee capitalized in the books of account,
the interest paid on borrowings taken to acquire fixed assets for its existing
business, the said interest would nonetheless be allowed as deduction under
section 36(1)(iii) of the Act while computing business profits of the relevant
assessment year as the entries in the books of account are not relevant for
rejecting the claim of the assessee, if it is otherwise allowable. The Hon'ble
Calcutta High Court in CIT v/s Berger Paints (India) Ltd. (No.2), [2002] 254
ITR 503 (Cal.) held that if according to the revenue laws the assessee is
entitled to treat a sum as a revenue expenditure, then that legal right of the
assessee is not estopped by the treatment given by the assessee to it in its
own books of account. The Hon'ble Supreme Court in Kedarnath Jute Mfg.
Co. Ltd. (supra) held that whether the assessee is entitled to a particular
deduction or not will depend on the provisions of law relating thereto and not
on the view which the assessee might take of his rights, nor can the
existence or absence of entries in his books of account be decisive or
conclusive on the matter.
31. In view of the above judgments, we hold that the claim of the assessee
which is otherwise allowable as revenue expenditure, cannot be denied
merely on the ground that the assessee has capitalized the said expenditure
by making entries in its books of account.
Indian Petrochemicals Corp. Ltd.
22
32. Therefore, we hold that the said expenditure of ` 102,03,43,311, is to
be allowed as Revenue expenditure and is not capital in nature. However,
the Assessing Officer, while giving effect to our order, will disallow the
depreciation as allowed by him. Consequently, ground no.3, raised by the
assessee is allowed by reversing the orders of the authorities below.
33. In ground no.4, the assessee has disputed the order of the
Commissioner (Appeals) in confirming the disallowance of expenditure
incurred on account of registration fee and stamp duty amounting to `
1,07,02,000
34. The Assessing Officer stated that the assessee has claimed expenditure
of ` 1,07,02,000, in respect of registration fee and stamp duty of lease
transactions entered into with ICICI Ltd., in respect of Dahej, Vadodara,
pipeline system. The assessee stated that the said expenditure is one time
expenditure incurred for registering the lease documents and does not make
value addition to assets under lease. The Assessing Officer has stated that
the allowance of entire expenditure in one year might give a very distorted
picture of the profits of the financial year under consideration as the lease
period is of 25 years. Therefore, the Assessing Officer apportioned the
expenditure of ` 1,07,02,000, over the lease period and allowed ` 4,28,080,
during the financial year under consideration by relying on the judgment of
Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. v/s CIT,
[1997] 225 ITR 802 (SC).
35. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals) upheld the action
of the Assessing Officer. Hence, the assessee is in further appeal before the
Tribunal.
36. Before us, during the course of hearing, the learned Counsel for the
assessee submitted that the said expenditure of ` 1,07,02,000, comprises of
` 93,92,000, towards stamp duty paid to the Government of Gujarat,
Indian Petrochemicals Corp. Ltd.
23
registration charges of ` 13,04,900, incurred for registering the lease
documents and bank charges of ` 5,100. He submitted that the said
expenditure is incidental expenditure incurred on lease transactions for the
lease entered into with ICICI Ltd. The learned Counsel referred to Page87
of the paper book which is the copy of the receipt evidencing incurring of
said expenditure of ` 1,07,02,000. Learned Counsel, relying on the judgment
of Hon'ble Jurisdictional High Court in CIT v/s Cinceita Pvt. Ltd., [1982] 137
ITR 652 (Bom.) and the judgment of Hon'ble M.P. High Court in CIT v/s
Gopal Associates, [2010] 326 ITR 413, (M.P), submitted that the said
expenditure is to be allowed as revenue expenditure.
37. On the other hand, the learned Departmental Representative relied on
the order of the Commissioner (Appeals).
38. We have heard the learned Representatives of the parties, considered
the orders of the authorities below and the case laws cited before us. We
observe that the issue is squarely covered in favour of the assessee by the
aforesaid judgments. In the case of Cinceita Pvt. Ltd. (supra), the issue was,
as to whether the expenditure of ` 10,700, incurred by the assessee for
stamp duty, registration of lease deed and payment to Solicitor in connection
with the lease deed is capital expenditure or revenue expenditure. The
Hon'ble Jurisdictional High Court by following its earlier judgment in CIT v/s
Hoechst Pharmaceuticals Ltd., [1978] 113 ITR 877 (Bom.) held that by
incurring the said expenditure, the assessee has not acquired any assets of
enduring nature and the said expenditure could not be disallowed as of
capital nature. It was further held that the period of lease could not be
recorded as decisive of the circumstances as to whether the said advantage
secured is of enduring nature. Further the Hon'ble Madhya Pradesh High
Court also considered the similar issue as to whether the expenditure
incurred on stamp duty and registration charges at the time of execution of
lease agreement for taking on lease of a plant for seven years is to be
allowed as revenue expenditure or not. Their Lordships have held in the
above case viz. Gopal Associates (supra) that the amount spent on
Indian Petrochemicals Corp. Ltd.
24
registration charges at the time of execution of lease agreement was
revenue expenditure. In this regard, Their Lordships of the Hon'ble M.P. High
Court placed reliance on the judgment of the Hon'ble Kerala High Court in
Plantation Corporation of Kerala Ltd. v/s Commissioner of Agricultural
Income-tax (Ker.), [1994] 205 ITR 364 (Ker.) and the judgment of Hon'ble
Gujarat High Court in Gujarat Machinery Mfg. Ltd. v/s CIT, [1995] 211 ITR
1010 (Guj.). In view of the above, we hold that the said expenditure of `
1,07,02,000, is to be allowed as revenue expenditure in the assessment year
under consideration. Consequently, ground no.4, raised by the assessee is
allowed by reversing the orders of the authorities below.
39. In ground no.5, the assessee has disputed the order passed by the
Commissioner (Appeals) in confirming the disallowance of ` 21,76,125, being
expenditure incurred on account of repairs by treating the same as capital
expenditure.
40. The relevant facts are that, the assessee made payment of ` 24.87
lakhs to Engineers India Ltd on account of designing work relating to E.O.
reactor to replace the existing reactor. During the course of assessment
proceedings, the assessee stated before the Assessing Officer that the
payment was made only for designing and relocation of the reactor which
was already purchased in the year 1999 and which was not functioning at
the location at which it was placed. It was stated that the expenditure was
incurred only to relocate the reactor within the factory premises for
optimum use and it did not make any value addition to the reactor. Thus, the
said expenditure cannot be regarded as capital expenditure. The Assessing
Officer did not agree with the contentions of the assessee and stated that the
exercise of relocating the reactor resulted in its optimum use by the
assessee and thus, clearly attributed to value addition of the reactor. He has
stated that by relocating the reactor, the assessee has acquired a new or
different advantage in the form of optimum use of the reactor and,
accordingly, considered the said expenditure of ` 24.87 lacs as capital in
nature. However, the Assessing Officer allowed the depreciation of `
Indian Petrochemicals Corp. Ltd.
25
3,10,875, and added back the balance amount of ` 21,76,125, to the income
of the assessee.
41. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals) has confirmed the
order passed by the Assessing Officer after stating that the said reactor did
not function at its original place of installation and the expenditure incurred
on designing of its location amounted to being in the peculiar facts and
circumstances of the case the expenditure incurred to form part of the
capital asset. Hence, the assessee is in further appeal before the Tribunal.
42. Before us, the learned Counsel for the assessee submitted that the
assessee has not acquired any new asset by relocating the reactor from its
original place in its existing factory. He submitted that the said expenditure
is revenue in nature and placed reliance on the judgment of Hon'ble
Jurisdictional High Court in CIT v/s Abbott Laboratories (I) Pvt. Ltd., [1993]
202 ITR 818 (Bom).
43. On the other hand, the learned Departmental Representative relied on
the order of the Commissioner (Appeals).
44. We have heard the learned Representatives of the parties, considered
the orders of the authorities below and the case laws cited before us by the
Assessing Officer as well as the learned Counsel.
45. There is no dispute to the fact that the reactor which was installed at a
new place is the existing reactor which was procured by the assessee in the
year 1999. The Department has not disputed the fact that the said reactor,
at the place where it was originally installed was not functioning and,
therefore, the same reactor was relocated within the factory premises for
optimum use. We are of the considered view that incurring the said
expenditure to relocate the reactor from its existing place to a new place to
make use of it does not create any new asset to the assessee. The Hon'ble
Jurisdictional High Court in Abbott Laboratories (I) Pvt. Ltd. (supra) has held
Indian Petrochemicals Corp. Ltd.
26
that when the expenditure is incurred by an assessee for rationalising of its
administrative and modernisation of its machinery with a view to derive
maximum benefit out of the existing resources, it is a case where the
expenditure which is allowable as deduction and could be treated that the
expenditure has been incurred to improve the production of the existing
project with a view to increase its profitability and not an expenditure in
connection with a new plant or a new project. Hence, we hold that the said
expenditure of ` 24.87 lacs incurred by the assessee has to be allowed as
revenue expenditure by reversing the orders of the authorities below.
However, the Assessing Officer, while giving effect to this order, will
withdraw the depreciation allowed by him. Consequently, ground no.5,
raised by the assessee is allowed.
46. In ground no.6, the assessee has disputed the order of the
Commissioner (Appeals) in confirming the action of the Assessing Officer in
disallowance of ` 22,13,29,394, under section 80HHC of the Act while
computing the book profit under section 115JB of the Act.
47. The Assessing Officer has stated that the assessee has claimed `
22,13,29,394, as deduction under section 80HHC. The Assessing Officer
stated that the profit of the business as computed under the head "Profit &
Gains of Business or Profession" in the case of assessee is nil. The question
of allowance of deduction under section 80HHC does not arise both under the
normal provisions as well as section 115JB and, accordingly, disallowed the
deduction claimed by the assessee under section 80HHC.
48. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals) stated that similar
issue came up before him in the case of assessee in assessment year 2001
02 and he confirmed the action of the Assessing Officer in this regard.
Accordingly, the Commissioner (Appeals), by following his earlier order dated
28th November 2006, passed for assessment year 200102, confirmed the
action of the Assessing Officer in rejecting the claim of deduction under
Indian Petrochemicals Corp. Ltd.
27
section 80HHC of ` 22,13,29,394, for the purpose of computing book profit
under section 115JB. Being aggrieved, assessee is in further appeal before
the Tribunal.
49. Before us, the learned Counsel for the assessee, at the time of
hearing, submitted that the Tribunal in the appeal filed for assessment years
200001 and 200102, on similar issue, decided the same in favour of the
assessee by reversing the orders of the authorities below by following the
decision of ITAT Mumbai Special Bench in DCIT v/s Syncom Formulations (I)
Ltd. & Ors., 292 (AT) 144 (Mum.), vide Para65 to 68. He further submitted
that the similar issue has also come up before the Hon'ble Supreme Court in
CIT v/s Bhari Information Tech. Sys. P. Ltd., [2012] 340 ITR 593 (SC), and
the Hon'ble Supreme Court by its judgment dated 20th October 2011, while
confirming the order of Mumbai Special Bench of the Tribunal in Syncom
Formulations (I) Ltd. (supra), held that the deduction claimed by the
assessee under section 80HHC has to be worked out on the basis of adjusted
book profit under section 115JA and not on the basis of the profits computed
under the regular provisions of law applicable to computation of profits and
gains of business. He submitted that the Hon'ble Supreme Court also stated
that the decision of Mumbai Special Bench of the Tribunal was with regard to
computation of deduction under section 80HHC, but 80HHC / 80HHE falls
under ChapterVI of the Act. The learned Counsel submitted that the issue is
now covered in favour of the assessee by the judgment of Hon'ble Supreme
Court in Bhari Information Tech. Sys. P. Ltd., (supra).
50. On the other hand, learned Departmental Representative has not
disputed the above submissions of the learned Counsel for the assessee and
conceded that the issue is squarely covered in favour of the assessee by the
decision of ITAT Mumbai Special in Syncom Formulations (I) Ltd. (supra) as
well as by the judgment of Hon'ble Supreme Court in Bhari Information
Tech. Sys. P. Ltd., (supra).
51. In view of above fact that the issue is now covered in favour of the
assessee by the judgment of Hon'ble Supreme Court in Bhari Information
Indian Petrochemicals Corp. Ltd.
28
Tech. Sys. P. Ltd., (supra), wherein it was held that deduction under section
80HHE of the Act in the case of export of computer software is required to be
worked out on the basis of adjusted book profits under section 115JA and
not on the basis of profit computed under regular provisions of law applicable
to the computation of profits and gains of business. Their Lordships of the
Hon'ble Supreme Court in the above case approved the decision of ITAT
Mumbai Special Bench in Syncom Formulations (I) Ltd. (supra) and stated
that section 80HHC as well as section 80HHE falls in the same Chapter i.e.,
ChapterVI. The provisions under section 115JA are also in pari material with
the provisions of section 115JB of the Act. Consequently, we allow ground
no.6, raised by the assessee by reversing the orders of the authorities below.
52. We now take up Revenue's appeal being ITA no.744/Ahd./2008, for
assessment year 200304.
53. In ground no.1, the department has disputed the order of the
Commissioner (Appeals) in allowing deduction of ` 15,59,750, claimed as
lease rental.
54. The Assessing Officer has stated that the assessee claimed deduction
for lease rent of ` 22,43,936, in respect of boilers taken on lease from ICICI
Ltd. / ICICI Securities and Finance Ltd. (ISEC) during the financial years
199394 and 199495. The Assessing Officer disallowed the claim of the
assessee by following his order for assessment year 199495 and 199899
and considering that the said payment comprising of repayment of principal
amount, interest and sales tax thereon. The Assessing Officer allowed `
5,94,856, being interest and sales tax of ` 89,330, and disallowed the
balance amount of ` 15,59,750, by considering it to be the repayment of
principal amount of the assets.
55. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals), by following the
order of the Tribunal in assessee's own case for assessment years 199596
and 199697 and his own order for subsequent assessment years, decided
Indian Petrochemicals Corp. Ltd.
29
the issue in favour of the assessee by canceling the disallowance of `
15,59,750. Hence, the Department is in appeal before the Tribunal.
56. Before us, the learned Departmental Representative, at the time of
hearing, relied on the order of the Assessing Officer.
57. The learned Counsel for the assessee, on the other hand, submitted
that the same very issue was not only decided by the Tribunal in favour of
the assessee but the order of the Tribunal was also confirmed by the Hon'ble
Gujarat High Court in the appeal filed by the Department against the order of
the Tribunal passed for assessment years 199596 and 199697. The
learned Counsel referred to Pages95 to 100 of the paper book which is a
copy of order dated 21st September 2010, passed by the Hon'ble Gujarat
High Court confirming the order of the Tribunal to allow lease rent in respect
of boiler taken on lease by the assessee for assessment year 199596. The
learned Counsel further submitted that the same very issue was also
considered by the Tribunal in assessee's own case for assessment years
200001, 200102 and 200203, by a common order dated 30th April 2008,
to allow the lease rent paid by the assessee to ICICI Ltd. and ICICI
Securities and Finance Corporation Ltd., in respect of boiler.
58. We have considered the orders of the authorities below and earlier
years order of the Tribunal in assessee's case (cited supra) and also the
judgment of Hon'ble Gujarat High Court in the appeals filed by the
Department against the order of the Tribunal for assessment year 199596
and 199697, copies placed at Pages95 to 100 and 101 to 105 of the paper
book. We observe that the lease rent paid by the assessee on the boiler has
been allowed in the preceding assessment years. Respectfully following the
earlier orders of the Tribunal and as confirmed by the Hon'ble Gujarat High
Court (cited supra), we uphold the order of the Commissioner (Appeals) and
dismiss ground no.1, raised by the Revenue.
Indian Petrochemicals Corp. Ltd.
30
59. In ground no.2, the Department has disputed the order of the
Commissioner (Appeals) in deleting the disallowance of ` 40,25,388, made
by the Assessing Officer under section 40A(9) of the Act.
60. The Assessing Officer has stated that the assessee made contribution
of ` 40,25,388, to various clubs run by and meant for the staff and their
families at Vadodara, Naga Channa and other stations. The Assessing Officer
stated that this contribution has been categorised under the head sums paid
by the assessee as an employer which are not allowable under section
40A(9) of the Act. The Assessing Officer did not accept the contention of the
assessee that the said expenditure was incurred to facilitate management of
various activities of employees and their family purpose covering population
of different types at the plants. The Assessing Officer stated that the
provisions of section 40A(9) are very clear that any contribution to
employee's any fund, trust, company or society, etc., other than for the
purposes as provided under section 36(1) of the Act are not eligible for
deduction as business expenditure. Therefore, he disallowed the claim of the
assessee.
61. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals), by following his
order for assessment year 200203, decided the issue in favour of the
assessee and allowed the claim. Hence, the Department is in appeal before
the Tribunal.
62. Before us, the learned Departmental Representative, at the time of
hearing, relied on the order of the Assessing Officer.
63. On the other hand, the learned Counsel for the assessee submitted
that the same very issue has been considered by the Tribunal in assessee's
own case for assessment years 200001, 200102 and 200203 by its order
dated 30th April 2008 (supra), vide Paras30 to 32 of the said order. He
further submitted that the facts in the assessment year under consideration
Indian Petrochemicals Corp. Ltd.
31
are identical to the earlier assessment years which the learned Departmental
Representative has not disputed.
64. In view of the above submissions of the learned Representatives of the
parties and after considering the earlier order dated 30th April 2008, of the
Tribunal, we agree that the issue on identical fact is covered in favour of the
assessee by the earlier decision of the Tribunal (cited supra). Respectfully
following the same, we uphold the order passed by the Commissioner
(Appeals) and dismiss the ground no.2, raised by the Department.
65. In ground no.3, the Department has disputed the order of the
Commissioner (Appeals) in deleting the disallowance of ` 2,66,000, on
account of prior period expenditure.
66. The Assessing Officer has stated that the assessee claimed payment in
respect of two invoices representing storage charges for the period of
November / December 2001, for tanks used for storage of imported feed
stock at Kandla paid to M/s. Chemicals and Resins Pvt. Ltd. During the
course of assessment proceedings, the assessee stated that the details
required verification from their site engineer and such verification was
completed in the current year and the payment was approved accordingly. It
was stated that the liability to make the said payment got crystallised in the
current year. Hence, the expenditure is allowable under section 37(1) of the
Act as it was incurred in this year. The Assessing Officer did not agree and
stated that assessee is following mercantile system of accounting, the
expenditure relates to earlier financial year. Hence, he disallowed the prior
period expenses of ` 2.66 lacs and added back to the total income of the
assessee.
67. Being aggrieved, the assessee carried the matter before the first
appellate authority, wherein the Commissioner (Appeals) allowed the claim
stating that similar disallowance made in the earlier assessment years 2000
01 and 200102, were allowed. Hence, the Department is in appeal before
the Tribunal.
Indian Petrochemicals Corp. Ltd.
32
68. Before us, the learned Departmental Representative relied on the order
of the Assessing Officer and whereas the learned Counsel for the assessee
submitted that similar issue on identical facts came before the Tribunal in
assessment year 200102 and the Tribunal, by its order dated 30th April
2008, allowed the claim of the assessee. The learned Departmental
Representative has not disputed this fact.
69. Considering the orders of the authorities below and the submissions of
the learned Representatives of the parties, we observe that similar issue on
identical facts came before the Tribunal in assessee's own case for
assessment year 200102 and the Tribunal allowed the claim of the
assessee. Respectfully following the same, we hold that there is no reason to
interfere with the order of the Commissioner (Appeals). Moreover, the
Department has not disputed the fact that the liability to make said payment
also crystallised in the assessment year under consideration. Consequently,
we uphold the order of the Commissioner (Appeals) by dismissing the ground
no.3, raised by the Department.
70. Ground no.4, raised by the Revenue, reads as follows:
"4. On the facts and in the circumstances of the case and in law,
the learned CIT(A) erred in deleting the adjustment for provision of
bad and doubtful debts amounting to ` 16,82,43,673 made under
clause (c) of the Explanation below section 115JB(2) in computing the
book profit under this provision, by ignoring the fact that it was a
liability tagged with the assets in the form of debts, and without
appreciating that the Supreme Court decision in the case of Apollo
Tyres Ltd. v/s CIT, 255 ITR 273 (SC) only ruled that the Assessing
Officer had no authority to alter the book profit except as provided in
the Explanation.
71. Before us, at time of hearing, the learned Counsel for the assessee
conceded that in view of the amendment made by the Finance (no.2) Act,
2009, by inserting clause (i) to Explanation (1) of section 115JB(2) of the
Act, with retrospective effect from 1st April 2001, the provisions made for
bad and doubtful debt is to be disallowed and, therefore, the order of the
Indian Petrochemicals Corp. Ltd.
33
Assessing Officer is to be confirmed by reversing the order of the
Commissioner (Appeals).
72. In view of the above submissions of the learned Counsel for the
assessee, we allow ground no.4, raised by the Revenue by confirming the
disallowance made by the Assessing Officer. Consequently, the ground no.4,
raised by the Revenue is allowed.
73. We now take up assessee's appeal being ITA no.665/Ahd./2008, for
assessment year 200405.
74. In ground no.1, the assessee has disputed the order of the
Commissioner (Appeals) in not treating the sales tax incentive of `
50,32,63,379, as capital receipt.
75. At the time of hearing, the learned Representatives of the parties
submitted that the facts and the issue are identical to assessment year
200304 and, whatever decision is taken in respect of that assessment year
i.e., 200304, the same will be applicable for this assessment year as well.
76. On perusal of the orders of the authorities below, we agree that the
facts and issue in this assessment year viz. 200405 are identical to
assessment year 200304. We also observe that the Commissioner
(Appeals), while confirming the action of the Assessing Officer, followed
orders for assessment years 200102 and 200203. We have discussed the
said issue in Paras4 to 7, herein above and following our findings given in
Para8, we decide the issue in favour of the assessee by allowing the
assessee's ground of appeal. Hence, ground no.1, raised by the assessee is
allowed.
77. In ground no.2, the assessee has disputed the order of the
Commissioner (Appeals) in confirming the disallowance of expenditure by
way of contribution of ` 1,03,20,654, made by the assessee to various
organisations.
Indian Petrochemicals Corp. Ltd.
34
78. At the time of hearing, the learned Representatives of the parties
submitted that the facts and issue are identical to assessment year 200304
and, therefore, whatever decision is taken in respect of that assessment year
i.e., 200304, the same will be applicable for this assessment year as well.
79. On perusal of the orders of the authorities below, we agree that the
facts and the issue in this assessment year viz. 200405 are identical to
assessment year 200304. We also observe that the Commissioner
(Appeals), while confirming the action of the Assessing Officer, followed the
orders for assessment year 200102 and 200203. We have discussed the
said issue in Paras10 to 13, herein above and following our findings given in
Paras14 and 15, we decide the issue in favour of the assessee by allowing
the assessee's ground of appeal. Hence, ground no.2, raised by the assessee
is allowed.
80. In ground no.3, the assessee has disputed the order of the
Commissioner (Appeals) in confirming the disallowance of depreciation of `
1,92,95,000, in respect of jetties constructed by the assessee and used for
the purpose of its business.
81. The relevant facts, giving rise to this ground of appeal, are that the
assessee company constructed jetty for and on behalf of Gujarat Maritime
Board (for short "GMB"), as per agreement entered into with GMB dated 26th
February 1996, delineating the terms of its use at Narmada Estuary at
Village Dahej. It is relevant to state that as per the recitals of the said
agreement, it was agreed between the parties that the capital cost of
construction as audited and certified by a C.A., would be made by the
assessee company with exclusive ownership thereof being vested in GMB. In
turn, the assessee was afforded the facility for preferential use of jetty over
other users. However, this did not exempt the assessee from payment of
regular charges as reduced by the rebates as stipulated in the said
agreement. As per the said agreement, the assessee was required to pay
landing and shipping fees / port charges @ 20% of the actual landing and
shipping fee / port charges specified in the schedule of port charges. The
Indian Petrochemicals Corp. Ltd.
35
balance 80% as rebate was required to be setoff against the capital
investment i.e., the cost of the construction of the jetty. It is also provided in
the agreement that after the capital investment was recovered through such
setoff, the assessee was required to pay landing and shipping fees / port
charges at normal rate. The Assessing Officer stated that the assessee
company was compensated for incurring the capital cost of construction by
virtue of regular rebate on charges. The assessee company treated the
capital cost of the investment as the value of capital asset and claimed
depreciation @ 25% of such capital cost. The total cost of construction was `
49.56 crores, and the assessee was claiming depreciation @ 25% every year
despite the capital cost being liquidated by the rebates received by the
assessee from GMB from time to time. The Assessing Officer disallowed the
depreciation claimed by the assessee and added to the total income of the
assessee. Being aggrieved, the assessee carried the matter before the first
appellate authority.
82. On behalf of the assessee, it was argued that as per agreement with
GMB, ownership of jetty would always remain with GMB. The benefit to the
assessee on account of construction of jetty was the license to use jetty for
the purpose of its business and to get concession in the payment of landing
and shipping fees / port charges. In such circumstances, actually the
assessee would have been entitled to claim the whole of the cost of jetty as
a revenue deduction in the year in which such jetty was constructed.
Further, it was contended that assessee had been claiming depreciation from
assessment year 199798 onwards at the rate applicable to plant and
machinery, which has been allowed till assessment year 200304. It was
contended that the rebate available to the assessee as per the agreement on
account of having met the cost of construction of the jetty, is only revenue
rebate. Such rebate is available on the basis of usage of the port and varies
from year to year and it has not, in any way, reduced the actual cost spent
by the assessee for the construction of jetty during the year 1996. It was
contended that total rebate up to assessment year 200304 available has
been at ` 1467.21 lakhs, and such rebate has already been offered as
Indian Petrochemicals Corp. Ltd.
36
revenue income due to reduction in revenue expenditure claimed. Therefore,
there is no justification for treating such rebate as a cost having been made
for the construction of jetty.
83. The Commissioner (Appeals) considered the submissions. He has
stated that jetty rebate is made available by GMB not gratis but only
because the assessee has met the cost of construction of the jetty. The jetty
rebate should go to reduce the cost of the construction of the Jetty on which
assessee is claiming depreciation over all these years. He has stated that the
fact that the rebate will be available to the assessee only till such time as it
aggregates to be equal to the cost of construction of the jetty, strengthened
the argument and lends further credence to the Assessing Officer's view. He
has stated that the assessee cannot take the argument on one hand that the
jetty does not belong to it and belongs to GMB while it capitalized the cost of
construction of the jetty in its books of account and continued to claim
depreciation on the same from year to year. In view of the above, the
Commissioner (Appeals) confirmed the action of the Assessing Officer to
disallow depreciation claimed by the assessee. Hence, assessee is in further
appeal before the Tribunal.
84. During the course of hearing, the learned Counsel for the assessee
submitted before us that when the rebate was allowed to the assessee by
GMB, it only enhanced the profit and, accordingly, the assessee has offered
more income to tax. He further submitted that the depreciation has been
claimed by the assessee since assessment year 199798 onwards and the
same has been allowed and it is only in the assessment year under
consideration i.e., assessment year 200405, it is disallowed. The learned
Counsel submitted that similar issue has been considered by the ITAT,
Mumbai "D" Bench, in the case of sister concern of the assessee being ITA
no.1743 to 1745/Mum./2007, for assessment years 200001 to 200203, in
the case of Reliance Ports & Terminals Ltd. v/s DCIT, by order dated 26th
November 2007, and the Tribunal allowed the claim for depreciation on the
Indian Petrochemicals Corp. Ltd.
37
cost of construction of jetties by treating the said expenditure as part of the
block of intangible asset and filed a copy of said order of the Tribunal.
85. On the other hand, the learned Departmental Representative relied on
the orders of the authorities below.
86. We have carefully considered the submissions of the learned
Representatives of the parties and the orders of the authorities below. We
have also considered the order of the Tribunal dated 26th November 2007
(supra).
87. We observe that on identical facts, the Tribunal considered similar
issue in the case of Reliance Ports and Terminals Ltd., and allowed the claim
for depreciation on the cost incurred by the assessee on construction of
jetties at Sikka Port, Gujarat, for GMB. In the said case, the assessee
constructed jetties at Sikka Port, Gujarat of GMB primarily to serve imports
of group companies at the port. As per the agreement entered into, the
assessee was entitled to concession in wharfage charges i.e., land / shipping
fee on use of jetty, which was to be setoff against capital investment made
by the assessee. The assessee treated this right to use the jetty as an
intangible asset and claimed depreciation on the cost incurred @ 25%. The
Assessing Officer stated that the assessee was not entitled to depreciation on
the cost of construction of jetty as the entire cost being reimbursed by GMB
by way of rebate on the wharfage charges which otherwise the assessee was
liable to pay in full. Further, the right to use the jetty was not in the nature
of any business or commercial right similar to normally accepted intangible
asset such as knowhow, patents, copy rights, trade markes, license,
franchises or any other business or commercial rights in similar nature. That
entire investment in the jetty was quantifiable and the return from the
investment was specified based on which the rebate on wharfage charges
was determined. It is relevant to state that in the said case, as per the
agreement, the ownership of the jetty was to be with GMB although, the cost
of building and jetty was made by the assessee. In the said case also, the
assessee was required to pay landing and shipping fees (known as wharfage
Indian Petrochemicals Corp. Ltd.
38
charges) @ 20% of the actual landing and shipping fees specified in the
schedule of port charges. The balance 80% was required to be setoff
against the capital investment i.e., the cost of the construction of jetties.
After the capital investment was recovered through such setoff, the
assessee was required to pay landing and shipping fees at normal rate. The
agreement was to remain in force for a period of 25 years or till such time
such aggregate of the rebate obtained by the assessee in wharfage charges
equaled the amount of construction of the jetties, whichever is earlier. The
assessee spent ` 14,25,63,02,471, and treated the same as intangible asset
under section 32(1) of the Act on the reasoning that it was license and also
represent business and commercial right on which the assessee claimed
depreciation @ 25%. The Assessing Officer did not agree with the assessee
and disallowed the claim. The first appellate authority also confirmed the
action of the Assessing Officer. Further, the Commissioner (Appeals) held
that the expenditure to be allowed proportionately over a period of 25 years.
Being aggrieved, the assessee filed appeal before the Tribunal. The Tribunal,
after considering the submissions of the Representatives of the parties, held
that by virtue of the terms of agreement, the assessee only acquired the
commercial right or license and they are really an intangible asset within the
meaning of section 32(1) of the Act. Thereafter, the Tribunal, vide Para32,
of the said order, held that the assessee is entitled for the depreciation by
treating the expenditure as part of block of intangible asset. The relevant
Para32 of the said order, reads as follows:
"32. The question is whether the present expenses incurred by the
assessee can be said satisfy the tests of being licences, franchises or
any other business or commercial rights being intangible assets within
the meaning of the aforesaid provisions. In our view, the Tribunal in
the earlier year has already concluded that this expenditure is question
is incurred wholly and exclusively for the purpose of business and the
terms of the agreement which are extracted hereinabove clearly shows
that the assessee has acquired some business or commercial right by
incurring this expenditure. This expenditure has not resulted in the
acquisition of any tangible asset like building, machinery, plant or
furniture. Any other expenditure which did not result in the acquisition
of these intangible assets can only be treated as intangible assets. In
our view, substantial expenditure incurred by the assessee is for
certain commercial considerations and business interest has resulted in
Indian Petrochemicals Corp. Ltd.
39
business advantage to the assessee in the form of priority user of the
infrastructure facility that was badly needed by the assessee and its
associates concerns. The assessee would have been forced to incurred
extra expenditure if this expenditure were not incurred by the
assessee. After all the businessman does not incur any expenditure
unless it gives some business advantage and the huge expenditure
incurred by the assessee is only to get such business advantage like
priority user by the assessee company and right to claim rebate on the
wharfage charges payable or to guard against the possible increase in
the wharfage charges that may be necessitated by efflux of time or
economic inflation. All points are considered together, in our view, the
expenditure in question give rise to acquisition of licence or other
business or commercial right which are really in the nature of
intangible asset and are fully covered within the meaning of section
32(1) of the Act. In the light of the above discussion, the contention of
the assessee that the said expenditure is to be treated as an intangible
asset, and therefore, the assets are entitled for appropriate
depreciation by treating the said expenditure as part of the block of
intangible asset is fair, reasonable and in accordance with the
amendment provisions of law in this regard."
88. We observe that the terms of agreement of the assessee before us are
similar to the terms of agreement which was considered in the case of
Reliance Ports & Terminals Ltd. (supra) and entered into with GMB. The
benefit which the assessee before us is entitled to get on account of
construction of jetty are similar to the case considered by the Tribunal, vide
its order dated 26th November 2007 (supra). The learned Departmental
Representative, during the course of his submissions, has not pointed out
any distinguished facts in the case before us vizaviz in the above case of
Reliance Ports and Terminals Ltd. (supra). We observe that the decision in
above case squarely apply to the facts of the case before us. Therefore,
respectfully following the earlier order of the Tribunal dated 26th November
2007 (supra), we hold that the assessee is entitled for depreciation at the
rate as applicable on the cost incurred for construction of jetty at Dahej.
Hence, we allow ground no.3, of the appeal filed by the assessee by
reversing the orders of the authorities below.
89. In ground no.4, the assessee has disputed the order of the
Commissioner (Appeals) in confirming the addition of ` 91,29,312, on
account of unavailed CENVAT credit under section 145A of the Act.
Indian Petrochemicals Corp. Ltd.
40
90. The Assessing Officer has stated that the account of the assessee
company in annexure to clause 12 of the Tax Audit Report reflected
unutilised CENVAT credit amounting to ` 91,29,312. The assessee was asked
to explain as to why the said amount should not be added in view of the
provisions of section 145A of the Act. The assessee filed its reply, stating
that the aforesaid item has been shown under the head of loan and advance
in the printed balance sheet and the same has not been claimed as revenue
deduction. Therefore, no disallowance is called for. The Assessing Officer did
not agree with the assessee and stated that the position in law has
undergone a substantial change with the introduction of section 145A. The
Assessing Officer also rejected the contentions of the assessee that if value
of closing stock is increased then the value of the opening stock should also
be adjusted by stating that any change in the opening stock which had the
effect of changing the closing stock of the preceding year did not accord well
with the accepted norms of accountancy and placed reliance on the
judgment of the Hon'ble Jurisdictional High Court in Melmould Corporation
v/s CIT, [1993] 202 ITR 789. The Assessing Officer made an adjustment of `
91,92,312, to the total income of the assessee. Being aggrieved, the
assessee carried the matter before the first appellate authority.
91. On behalf of the assessee, the following submissions were made which
are mentioned by the Commissioner (Appeals) at Pages15 to 18 of the
impugned order as under:
"Before me, the appellant has submitted that the Assessing Officer has
mentioned In the assessment order that `during the course of
assessment we have contended that the value of closing stock
cannot be disturbed unless a similar treatment for adjustment is also
Indian Petrochemicals Corp. Ltd.
41
made to the opening stock. However, we do not find any such mention
of our stand In the assessment proceedings. It has referred to its reply
on this issue. The appellant's observation in this regard is found to be
correct. The appellant has also stated that the Assessing Officer's
reliance on the case of Melmould Corporation v. CIT 202 ITR 497
(Bom.) is misplaced. It has argued that, in fact, in the aforesaid case,
the Bombay High Court has taken a view that if there is a change In
the method of accounting for closing stock in a particular year and
such change has been followed consistently thereafter, then no
adjustment is required to be made for such change In the opening
stock of that year. The appellant has submitted that a combined
reading of section 145A and AS 2 clearly indicates that for Section
145A to be applicable, both the specifications laid down in the section
should be fulfilled viz, the valuation of inventory shall be:
a) In accordance with the method of accounting regularly
employed by the assessee; and
b) further adjusted to include the amount of any tax, duty,
cess or fee (by whatever name called) actually paid or
incurred paid or incurred by the assessee to bring the
goods to the place of its location and condition as on the
date of valuation.
In our case the Inventory is valued net of MODVAT as all other
entries including purchase, sale and dosing stock are on net basis and
not on gross basis". It has argued that its case Is dearly covered by
the decision of Supreme Court In the case of CIT v. Indo Nippon
Chemicals Co. Ltd 261 ITR 275, where it was held that "(i) that merely
because the Modvat credit was an irreversible credit available to
manufacturers upon purchase of duty-paid raw material, that would
not amount to income which was liable to be taxed under the Act:
income was not generated to the extent of the Modvat credit on
unconsumed raw material; (ii) that it was not permissible for the
Assessing Officer to adopt the gross method" for valuation of raw
materials at the time of purchase and the `net method' for valuation of
stock on hand". The appellant has argued from this that in its case "it
is a reverse situation where we have adopted the net method at the
time of purchase and valuation of stock and the AO. has adopted net
method for purchase and gross method for valuation of stock In hand.
As clearly laid down by the Supreme Court, such inconsistent method
of valuation of stock is totally unjustified. Without prejudice to the
aforesaid submission, the appellant has submitted that even if the AO.
insists on including cenvat credit in the value of closing stock, such
inclusion of Modvat / Cenvat credit will not have any impact on the
taxable income of the assessee. The appellant has further submitted
by drawing attention to the observations of the Supreme Court in the
case of Chainrup Sanpatram v CIT (1953) 24 ITR 481, in which the
Supreme Court has laid down firstly, "that profits do not arise out of
valuation of closing stock. Secondly, that valuation of unsold stock at
the close of the accounting period is a necessary part of the process of
determining the trading results and it cannot be regarded as source of
such profits. The true purpose of crediting the value of unsold stock is
Indian Petrochemicals Corp. Ltd.
42
to balance the cost of the goods entered on the other side of the
account at the time of their purchase so that the cancelling out of the
entries relating to the same stock from both sides of the account
would leave only the transaction on which there has been actual sales
in the course of the year showing the profit or loss actually realized on
the year's trading. In short, this is the principle of balancing. The
Supreme court has further laid down that as the entry for stock which
appears in a trading account is merely to cancel the charge for the
goods purchased and which have not been sold, It should necessarily
represent the cost of the goods.
It has thus argued for the deletion of the addition of Rs.91,29,312/-.
92. The Commissioner (Appeals), after considering above submissions of
the assessee held vide Para14, as under:
"14. I have considered the rival submissions. It is observed that sec.
145A very clearly requires that the amount of any duty, cess or other
taxes etc. should be included in the value of the closing stock. It Is
observed that the Assessing Officer has no choice in that However, if
this amount represented by the unutilized cenvat amount has not been
debited to the purchase account / raw material account, no addition by
way of any disallowance can be made. However, no fault with the
action of the Assessing Officer in including this amount to the closing
stock can be found. Under the circumstances, it is directed that the
Assessing Officer shall allow this duty / tax on actual payment basis in
the year of payment u/s 43B of the Act."
Hence, the assessee is in further appeal before the Tribunal.
93. At the time of hearing, the learned Counsel for the assessee submitted
that above issue is covered in favour of the assessee by the judgment of
Hon'ble Jurisdictional High Court in the case of CIT v/s Mahalaxmi Glass
Works Pvt. Ltd., [2009] 318 ITR 116 (Bom.) and also by the judgment of
Hon'ble Delhi High Court in CIT v/s Mahavir Alluminium Ltd. [2008] 297 ITR
77 (Del.), wherein it has been held that if there is a change in valuation of
closing stock in one end, there must necessarily be a corresponding change
at the other end otherwise the true profit would not be reflected.
94. On the other hand, the learned Departmental Representative relied on
the order of the Commissioner (Appeals).
Indian Petrochemicals Corp. Ltd.
43
95. We have considered the submissions of the learned Representatives of
the parties and the orders of the authorities below as well as the cases relied
on by the learned Counsel for the assessee (supra). We are of the
considered view that if the valuation of closing stock is increased by the
unavailed CENVAT / MODVAT, the purchases should also be increased by a
similar amount. During the course of hearing, it was contended that
purchases has been debited exclusive of the excise duty element i.e., by
adopting net method of purchases and, accordingly, the closing stock of raw
materials is valued exclusive of the unavailed CENVAT / MODVAT credit. We
observe that Hon'ble Delhi High Court has held in the case of Mahavir
Alluminium Ltd. (supra), after considering the decision in the case of CIT v/s
Allahabad New Cotton Mills Ltd., AIR 1930 PC 56, that whenever there is
change in the valuation at one end, there must necessarily be a
corresponding change at the other end otherwise the true picture would not
be reflected. In the case of Mahavir Aluminium Ltd. (supra), the issue related
to closing valuation of adjustment of unutilised MODVAT credit. The Tribunal
allowed the adjustment and in appeal the Hon'ble High Court confirmed the
order of the Tribunal. The Hon'ble Jurisdictional High Court, after considering
its earlier decision in the case of Melmould Corporation Ltd. (supra), and the
decision of the Hon'ble Delhi High Court in the case of Mahavir Aluminium
Ltd. (supra), has held as under:
"We are in respectful agreement with the reasoning and the finding
given by the Delhi High Court."
96. In view of the above, we hold that if the closing stock to be increased
on account of unutilised MODVAT credit, the corresponding opening stock of
that year is also to be increased, as the Department has not disputed the
fact that the purchases have been debited exclusive of the excise duty
element i.e., by adopting net method of purchases. If the value of closing
stock is increased by the MODVAT, the purchases should also be increased
by a similar amount. Therefore, the issue is squarely covered in favour of the
assessee by the decision of the Hon'ble Jurisdictional High Court (supra).
Indian Petrochemicals Corp. Ltd.
44
Hence, ground no.4, taken by the assessee is allowed by deleting the
addition of ` 91,29,312, made by the Assessing Officer.
97. In ground no.5, the assessee has disputed the order of learned
Commissioner (Appeals) in not allowing deduction of ` 34,46,43,586, being
deduction claimed under section 80HHC of the Act, while computing book
profit under section 115JB of the Act.
98. At the time of hearing, the learned Representatives of the parties
submitted that the facts and the issue are identical to ground no.6, of the
appeal of the assessee for assessment year 200304 and, therefore,
whatever decision is taken in respect of that assessment year i.e., 200304,
will be applicable for this assessment year as well.
99. On perusal of the orders of the authorities below, we agree that the
facts and the issue in this assessment year viz. 200405 are identical to
assessment year 200304. We also observe that the Commissioner
(Appeals), while confirming the action of the Assessing Officer, followed his
order for assessment years 200102 dated 28th November 2006. We have
discussed the said issue in Paras47 to 50 herein above and following our
findings given in Para51 herein above, we decide the issue in favour of the
assessee by allowing the assessee's ground of appeal. Hence, ground no.5,
raised by the assessee is allowed by reversing the orders of the authorities
below.
100. We now take up Revenue's appeal being ITA no.745/Ahd./2008, for
assessment year 200405.
101. In ground no.1, the Department has disputed the order of the
Commissioner (Appeals) in deleting the disallowance of ` 46,37,295, made
by the Assessing Officer under section 40A(9) of the Act.
102. At the time of hearing, the learned Representatives of the parties
submitted that the facts and the issue are identical to ground no.2, of the
appeal filed by the Department for assessment year 200304 and, therefore,
Indian Petrochemicals Corp. Ltd.
45
whatever decision is taken in respect of that assessment year i.e., 200304,
same will be applicable for this assessment year as well.
103. On perusal of the orders of the authorities below, we agree that the
facts and the issue in this assessment year viz. 200405 are identical to
assessment year 200304. We also observe that the Commissioner
(Appeals), while deleting the disallowance made by the Assessing Officer,
followed his order dated 2nd May 2007, for assessment year 200203. We
also observe that the facts in the assessment year are identical to the facts
of the assessment year 200304, which we have discussed in Para60 to 63
herein above and for the reasons given in Para64 herein above, we uphold
the order passed by the Commissioner (Appeals) and reject ground no.1 of
the appeal filed by the Department.
104. Ground no.2, reads as follows:
"2. On the facts and in the circumstances of the case and in law,
the learned CIT(A) erred in deleting the adjustment for provision of
bad and doubtful debts amounting to ` 36,61,40,743 made under
clause (c) of the Explanation below section 115JB(2) in computing the
book profit under this provision, by ignoring the fact that it was a
liability tagged with the assets in the form of debts, and without
appreciating that the Supreme Court decision in the case of Apollo
Tyres Ltd. v/s CIT, 255 ITR 273 (SC) only ruled that the Assessing
Officer had no authority to alter the book profit except as provided in
the Explanation.
105. Before us, at time of hearing, the learned Counsel for the assessee
conceded that in view of the amendment made by the Finance (no.2) Act,
2009, by inserting clause (i) to Explanation (1) of section 115JB(2) of the
Act, with retrospective effect from 1st April 2001, the provisions made for
bad and doubtful debt is to be disallowed and, therefore, the order of the
Assessing Officer is to be confirmed by reversing the order of the
Commissioner (Appeals).
106. In view of the above submissions of the learned Counsel for the
assessee, we allow ground no.2, raised by the Revenue by confirming the
Indian Petrochemicals Corp. Ltd.
46
disallowance made by the Assessing Officer. Hence, ground no.2, of the
appeal filed by the Revenue is allowed.
107. In the result both the appeals for assessment years 200304 and
200405 of the Assessee are allowed while both appeals of the Revenue are
allowed in part.
Order pronounced in the open Court on 29th June 2012
Sd/- Sd/-
N.K. BILLAIYA B.R. MITTAL
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 29th June 2012
Copy to:
(1) The Assessee;
(2) The Respondent;
(3) The CIT(A), Mumbai, concerned;
(4) The CIT, Mumbai City concerned;
(5) The DR, "I" Bench, ITAT, Mumbai.
TRUE COPY
BY ORDER
Pradeep J. Chowdhury ASSISTANT REGISTRAR
Sr. Private Secretary ITAT, MUMBAI BENCHES, MUMBAI
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