M/S East India Petroleum Private ... vs Department Of Income Tax

Asstt. Commissioner of Income M/s. East India Tax, Circle 2(2) Vs. Petroleum Private Limited Hyderabad Hyderabad PAN: AAACE 4494 K (Appellant) (Respondent)

C.O. No.18/Hyd/2013 (Arising out of ITA No.235/Hyd/2013) A.Y 2008-09 M/s. East India Petroleum Asstt. Commissioner of Private Limited Vs. Income Tax, Circle 2(2) Hyderabad Hyderabad PAN: AAACE 4494 K (Cross Objector) (Respondent)

For Revenue: Shri B.V. Gopinath, DR For Assessee: Shri P. Murali Krishna

Date of Hearing : 09/06/2015 Date of Pronouncement : 29/07/2015

ORDER

Per Smt. Asha Vijayaraghavan, J.M.

These are the cross appeals preferred by the Revenue and the assessee against the order of the CIT (A)-III Hyderabad dated 24th December, 2012 relating to A.Y 2008-09.

2. The assessee is a company engaged in the business of storage of oil and gas. Assessee filed return of income for A.Y

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2008-09 declaring nil income after setting off brought forward losses under the normal provisions of income tax and offered to tax a book profit of Rs.34,84,30,788 as per the provisions of section 115JB.

3. A survey u/s 113A was conducted on assessee's premises and consequent to the survey the assessee's case was reopened by issue of notice u/s 148 of the I.T. Act. In response to the notice issued u/s 148, assessee filed a letter stating that the return originally filed be treated as being filed in response to the notice issued u/s 148. However, during the course of assessment proceedings, assessee observed that while filing the original return of income, principal waiver amounting to Rs.9,26,00,305 by the financial institutions was by mistake offered as income. While computing the book profits u/s 115JB, assessee has inadvertently taken the carried forward depreciation as Rs.14,86,71,093 instead of Rs.20,99,67,903, thereby offering to tax an amount of Rs.34,84,30,788 instead of Rs.28,71,33,978 u/s 115JB of the IT Act. Accordingly, filed a revised computation of income before the AO duly rectifying the said mistakes and requested to take the same on record.

4. AO rejected the assessment proceedings for the previous year relevant to the A.Y 2007-08, AO adjusted the book profits u/s 115JB by addition of provision of service fee amounting to Rs.5.00 crores, stating that the same is provision for unascertained liability. AO carried the said adjustment to the current A.Y and reduced the same brought forward losses in the current A.Y.

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5. AO erred in not considering the principal loan amounting to Rs.9,26,00,305 claimed as capital receipt in the revised computation of income. Aggrieved, assessee filed appeal before the CIT (A).

6. During the appellate proceedings, assessee stated that the AO was incorrect in applying the ratio of the Goetze as the facts are different. Assessee gave elaborate submission and requested to consider the revised computation of income and compute the income accordingly. The ld AR submitted as follows:

During the year under consideration, the appellant entered in to one time settlement scheme with lOBI bank and ABN Amro Bank, with respect to the loans taken for acquiring the capital assets. On Account of settlement, the appellant got interest and principal waiver amounting to Rs. 25, 81,92, 182/- and Rs. 9,26, 00, 3051- respectively. These amounts were credited to profit and loss account under schedule 14 "Other Income". The fact that the other income includes 'principOal portion of loan' was also stated in the note B-2 to schedule 19 to the Notes to Accounts'.

In the computation of income, the appellant reduced interest waiver uls.43B, J since the same has been already disallowed in the respective years. However, forgot to claim the principle waiver as 'capital receipt'. In this regard, we would' like to bring to your kind notice that it is a settled law no what the issue of taxability of waiver depends on the purpose for which the loan was utilized. If the loan was taken for acquiring a capital asset, the waiver there of would not amount to any income eligible to tax u/s, 28(iv) or 41 (1). On the other hand, if the loan was taken for a trading purpose and was

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treated as such from the very beginning in the books of account, its waiver would result in income. The decision of the Hon'ble Madras High Court in the case of Iskraremeco Regent Ltd 331 ITR 317, the Hon'ble Bombay High Court in the case of Mahindra & Mahindra Limited 261 ITR 501 and the Hon'ble Gujarath High Court in the case of Chetan Chemicals Pvt Ltd 267 ITYR 770 supports the above contention of the appellant.

Further, the assessing officer is not correct in treating the capital receipt on . account of waiver of principle amount, merely because the appellant had credited the same to the profits & loss account but inadvertently failed to reduc the same in the computation of income. It was the duty of the assessing officer to explain the correct legal position. It is a settled law that the receipt being one which in law could not be regarded as income, it could not become income merely because the respondent erroneously credited it to the profit and loss account, in view of the apex court's decision in the case of India Discount Co 751TR 191."

7. The CIT (A) held that the claim of the assessee can be considered and the appellate authorities are well within their rights to consider the claim relying on the decision of the ITAT Hyderabad in the case of GVK Industries Ltd vs. ACIT in ITA No.1579/Hyd/2008 dated 30.03.2012. The CIT (A), therefore, held that the judgement of the Apex Court in the case of Goetz India Ltd vs. CIT (284 ITR 323) is inapplicable in this case.

8. The CIT (A) discussed various case laws and held that the assessee obtained the loan for the purchase of machinery and it was a capital receipt ab initio. Thereafter the loan was waived. The CIT (A) further held that the cessation of the loan liability

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would continue to be capital receipt in the hands of the assessee although it was no longer a liability and therefore, the amount in question pertaining to the waiving of the principal amount of loan is not taxable being capital receipt.

9. The CIT (A) further gave direction to the AO to see whether the earlier cases can be reopened as per the law starting from the year in which the assets were acquired from this loan and if that can be done, he directed the AO to reopen the earlier cases and consider the cost of acquisition of the capital asset connected to this loan amount as zero and disallow depreciation in all the years starting from the year in which the assets were acquired.

10. The second issue relates to the corrected figures of brought forward losses as per the books of accounts which were not considered by the AO. AO made an addition on account of provision for service fee added back in the A.Y 2007-08. AO made the addition by giving the following reasons:

"3.3 During the course of assessment proceedings for the Asst. Year 200708 provision for service fee amounting to Rs. 5. 00 crores have been added to the book profits, since said provision is towards unascertained liability. Consequent to this addition, the loss of the assessee as per profit & loss account for the said assessment year has been reduced to the extent of Rs.5.00 crores. The said adjustment to the losses has been carried to the current assessment year and adjusted against the brought forward losses in the computation as per section 115JB ofthe Income Tax Act, 1961.

3.4 During the course of assessment proceedings the assessee has filed a revised computation of income, stating that the brought forward losses as per books of

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accounts has not been calculated correctly for the purpose of section 115JB. The brought forward business losses reduced from the book profits were stated to be Rs.20,99,67,903/- as against Rs. 14,86, 71,093/- claimed in the return of income.

3.5 The plea of the assessee has been considered carefully. The assessee has not made the claim in the return of income and hence the same has been rejected respectfully following the decision of the Apex Court in the case of Goetz India Ltd., Vs. CIT (284 ITR 323)".

11. The CIT(A) held that the claim is to be considered and the decision of the Apex Court in the case of Goetz India Ltd., Vs. CIT (284 ITR 323) in not applicable in the appellate proceedings and following the decision in the case of GVK Industries (Supra) directed the AO to compute the correct figure of brought forward losses and give credit to the assessee wherever the law so demands.

12. The CIT (A) further held that with respect to the addition of Rs.5.00 crores, the same is added back in last year u/s 115JB of the Act and no adjustment or change in the book profits was made in the earlier year. Further the provisions was added back for computing the taxable income as per the I.T. Act. Hence he held that in the current year this amount cannot be added to the book profit, because they were never altered and nowhere was it held that the book profits had been wrongly computed. Accordingly the CIT (A) deleted this addition.

13. Aggrieved, Department has come up in appeal before us and raised the followingh grounds:

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1. CIT(A) erred on facts and in law in granting relief to the assessee.

2. CIT(A) erred in law in holding that capital item of Rs.9,26,OO,306/- had to be deleted from income, as settled issues unrelated to reopening cannot be raised in reopening proceedings.

3. The decision of CIT(A) is erroneous in law because it is contrary to decision of Hon'ble Supreme Court in MIs.

Sun Engineering Works Limited.

4. The C/T(A) erred in law in directing that the addition of RS.5 Crares is to be disallowed though in the first place no such addition was made and correct carry forward book loss at by the AO for setting off from the current year profit u/s.115JB".

14. With respect to the first issue regarding waiver of principal loan amounting to Rs.9,26,00,306 claimed as capital receipt in the revised computation of income. By giving the following reasons the AO brought that income to tax:

"3.1 During the course of assessment proceedings, the assessee has filed a revised computation of income, claiming that the principal waiver amounting to Rs.9,26,00,305/- was by mistake offered to income and claimed that since the said amounts are capital receipt in nature, the same cannot be brought to tax.

3.2 The plea of the assessee has been considered carefully. The assessee has not made the claim in the return of income and hence the same has been rejected respectfully following the decision of the Apex Court in the case of Goetz India Ltd (284 ITR 323)".

15. The Department has objected that the loans/reduction cannot be granted in the course of re-assessment proceedings. The ld Counsel had argued that when the first assessment is made on the return filed by the assessee, the correct income is

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required to be determined in accordance with the I.T. Act and the relief eligible to the assessee should be allowed.

16. We find that the assessee has filed the revised computation of income and has failed to file the revised return. The AO has also given assessee enough time by taking up the scrutiny proceedings and issued notice u/s 143(2) and 142(1) to respond to the assessment and for filing a revised return. The Hon'ble Apex Court in the case of Goetz India Ltd vs. CIT has clearly stated that the assessing authority has no power to entertain claim made otherwise than by way of revised return. Hence, the CIT (A) erred in following the decision of GVK Industries Ltd vs. ACIT (ITA No.1579/Hyd/2008 dated 30.03.2012) as the facts in this case are not similar to that as in the case of GVK Industries. The fact is that the assessee has not filed revised return and hence the ratio of the decision in the case of Goetz India Ltd vs. CIT (Supra) is applicable. In fact the proceedings are u/s 147, which are for assessing undisclosed income. Further, the Apex Court in the case of CIT vs. Sun Engineering Works (P) Ltd (S.C) (198 ITR 298) has stated as follows:

"Claims which have been disallowed in the original assessment cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income which has escaped assessment, because the controversy on re-assessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the re-assessment proceedings unless relatable to the items sought to be taxed as "escaped income". Indeed, in the re- assessment proceedings for bringing to tax items which had escaped assessment, it would be open to the assessee to put forward claims for deduction of any

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expenditure in respect of that income or regarding the non-taxability of the items at all. Section 147 being for the benefit of the Revenue and not the assessee, the assessee cannot be permitted to convert the re- assessment proceedings into an appeal or revision in disguise and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to "escaped income". Even in cases where the claims of the assessee durng the course of re-assessment proceedings relating to the escaped income are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income, for purposes of "re-assessment" cannot be reduced beyond the income originally assessed".

17. Hence, we are of the opinion that the CIT (A) had erred in not following the decision in the case of CIT vs. Sun Engineering Works (P) Ltd (Supra). We allow the appeal of the Revenue on this issue.

18. The next issue raised by the Revenue is deletion of Rs.5.00 crores while computing book profits. Rs.5.00 crores represents the provision of service fee made by the company in earlier years. The same was added back in computing the book profit for the earlier year 2007-08 as the said proivision was towards unascertained liability. The AO stated that consequent to this addition the loan of the assessee as per P&L a/c for the said A.Y has been reduced to the extent of Rs.5.00 crores. The said adjustment to the loan has been carried to the current A.Y and adjusted against the brought forward losses in computation as per section 115JB of the Act. In the course of assessment proceedings assessee has filed revised computation of income

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stating that the brought forward losses as per books of accounts has not been calculated correctly for the purpose of section 115JB. The brought forward business loss reduced from the book profit were stated to be Rs.20,99,67,903 as against Rs.14,86,71,093 claimed in the return of income. AO rejected this claim of carry forward loss in the books of accounts on the ground that it was not claimed in the return of income. The CIT (A) directed the AO to compute the correct figure of brought forward losses as per the law. We do not find any infirmity in the order of the CIT (A) as he has rightly directed the AO to compute the correct figure of brought forward losses. We, therefore, set aside this issue of computation of book profit u/s 115JB as well as set off of the book losses against such book profit to the file of the AO for being done denovo in accordance with the law.

19. In the result, appeal of the Revenue is partly allowed for statistical purposes.

C.O. No. 18/Hyd/2013 1. The cross objection has been filed by the assessee against the direction given by CIT (A) to the AO to reopen the earlier assessment years and reduce the cost of assets to the extent the loan which has been waived and to rework the depreciation. We find that the entire cost of machinery has been paid by the assessee to the suppliers. Therefore, there is no question of reduction in the cost of acquisition of assets on which depreciation has been granted. The issue is with regard to the treatment of waiver of the principle portion of the loan. The waiver of loan does not reduce the cost of acquisition of the plant and machinery. The waiver is for reduction on the liability which

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has arisen on the liability incurred on purchase of plant and machinery and cannot be adjusted against the cost of acquisition of machinery. In Mahinddra and Mahindra Ltd vs. CIT (261 ITR

501) it has been held that the amount of waiver is not assessable u/s 28(iv) and hence there is no remission of liability and the amount is not assessable u/s 41(1). Hence following the decision of the Hon'ble Bombay High Court, the decision given by CIT (A) is not correct. We allow the cross objection of the assessee.

2. In the result, Cross Objection preferred by the assessee is allowed.

3. To sum up, appeal of the Revenue is partly allowed for statistical purposes and the cross objection of the assessee is allowed.

Order pronounced in the Open Court on 29th July, 2015.

Sd/- Sd/- (B.Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 29th July, 2015.

Vnodan/sps Copy to:

1. Asstt. Commissioner of Income Tax Circle 2(2) Hyderabad

2. M/s. East India Petroleum Pvt. Ltd. 202 Roxana Towers, Greenlands, Begumpet, Hyderabad

3. CIT(A) -III Hyderabad

4. CIT -II Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File By Order

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