Rai Bahadur Narain Singh Sugar Mills ... vs Assessee

Rai Bahadur Narain Singh Sugar Mills vs Addl.CIT, Ltd., Plot No.5, B Block, Range-15, Middle Circle, C.R. Building, Opp. Indra Palace Building, New Delhi. Connaught Place, New Delhi-110001 (PAN: AAACR0924M) (Appellant) (Respondent) Appellant by: Shri M.P. Rastogi, CA Respondent by : Shri Vikram Sahay, Sr. DR Date of Hearing: 12.2.2015 Date of pronouncement:20.03.2015 ORDER

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

This appeal has been preferred by the assessee against the order of the

CIT(A)-XVIII, New Delhi dated 4.12.2012 in Appeal No. 263/11-12 for AY

2009-10. In the beginning of the argument, ld. Counsel of the assessee

submitted that the assessee does not want to press ground no. 1(a) and (b),

therefore, the same is dismissed as not pressed. Remaining ground nos. 2 to 5

read as under:-

1 ITA No.703/Del/2013

AY 2009-10

"2. That the Learned CIT (A) has erred both on facts in law in holding that the amount contributed under U.P. Sheera Niyantran Adhiniyam is required to be added for the purposes of computing 'Book Profit' under section 115JB of the Act as the same is in the nature of reserve not specified under section 33AC of the Act.

3. (a) That the learned CIT (A) has erred in sustaining the addition made by the learned assessing officer in respect of the amount of capital subsidy to the book profits while computing income under the section 115JB of the Act, on the alleged contention that the appellant has transferred Rs. 27,55,420/- to a reserve which has not been specified under section 33AC of the Act and therefore the same has to be added back for computing Book Profits under section 115JB of the Act.

(b) That, in this connection, the learned CIT (A) has erred in interpreting the provisions of section 115JB of the Act stating that the appellant had transferred the amount of Rs. 27,55,420/- to a reserve which has not been specified under section 33AC, without giving credence to the fact that the amount of Rs. 27,55,420/- is not an appropriation of profits and there is no such debit to profit & loss account for the alleged appropriation.

4. That the Learned CIT (A) was not justified in sustaining the disallowance of depreciation of Rs. 7,76,433/- claimed in respect of discarded assets.

5. (a) That the Learned CIT (A) has erred in treating the entire amount of Miscellaneous receipts of Rs. 70,81,529/- under the head income from other sources by stating that the Learned assessing officer has wrongly treated only Rs. 8,19,660/- under head income from other sources.

(b) That, in this connection, the Learned CIT(A) has ignored the fact that out of an amount of Rs. 70,31,529/- of Miscellaneous Receipts the Learned Assessing officer had treated only Rs. 8,19,660/- as income from other sources after going through the details furnished by the appellant during the assessment proceedings.

(c) That in this connection, the Learned CIT (A) has erred in law in stating that the miscellaneous receipts

2 ITA No.703/Del/2013 AY 2009-10

amounting to Rs. 70,31,529/- do not fall under the purview of the term 'profit derived by an industrial undertaking from manufacturing activity' mentioned under section 80 IC of the Act and thus, it is not a part of business income, being ineligible for deduction under section 80 IC of the Act.

(d ) Without prejudice to the above, the Learned CIT (A) has not given any opportunity to the appellant to substantiate its claim with regard to the miscellaneous receipts of Rs. 70,31,529/-, being a part of business income only and eligible for deduction under section 80lC of the Act. The Learned CIT (A) has, therefore, not followed the principle of Natural justice during the course of the appellate proceedings.

(e) That the action of the learned CIT (A) has resulted in an enhancement of assessable income which has been made without affording an opportunity to the appellant as required under the provisions of the Act."

Ground No. 2

2. Apropos ground no. 2, ld. Counsel of the assessee submitted that Learned

CIT (A) has erred both on facts in law in holding that the amount contributed

under U.P. Sheera Niyantran Adhiniyam is required to be added for the

purposes of computing 'Book Profit' under section 115JB of the Act as the same

is in the nature of reserve not specified under section 33AC of the Act. Ld.

Counsel of the assessee further submitted that the net profit of the assessee

remains the same because of two reasons, first, reserve fund is an allowable

expenditure and secondly, the assessee has no right over the amount transferred

to Molasses Reserve Fund due to overriding title.

3. Replying to the above, ld. DR supported the orders of the authorities

below and submitted that the amount of contribution to Molasses Reserve Fund

3 ITA No.703/Del/2013 AY 2009-10

is a provision which is contingent in nature and in this situation, the claim of the

assessee that it represents diversion of income on account of overriding

obligation cannot be accepted. Ld. DR further contended that the assessee

company has transferred Rs.1,78,447 to a reserve which has not been specified

u/s 33AC of the Act, therefore, in accordance with Explanation 1 to the

provisions of section 115JB, the book profit would be increased by the amount

carried to any reserve.

4. On careful consideration of above submission, we note that the CIT(A)

has dismissed the contentions of the assessee and confirmed the order of the AO

with following observations and conclusions:-

7.3 I have carefully considered the assessment order and the submissions filed by the appellant. The facts of the case as per assessment order are that the AO had added back Rs.1,78,447/- i.e. the contribution to Molasses Reserve Fund, while computing income under section 115JB of the Income Tax Act, 1961, on the basis that it is a provision which is contingent in nature and the claim that it represents diversion of income on account of an overriding obligation cannot be accepted.

Under section 115JB of the Act, the net profit as per profit and loss account is to be increased by the following, provided the same is debited to the profit and loss account:

a) the amount of income-tax paid or payable, and the provision there for, or

b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or

4 ITA No.703/Del/2013 AY 2009-10

c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

d) the amount by way of provision for losses of subsidiary companies; or

e) the amount or amounts of dividends paid or proposed; or

f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or

g) the amount of depreciation, or

h) the amount of deferred tax and the provision there for,

i) the amount or amounts set aside as provision for diminution in the value of any asset.

The appellant Company has transferred Rs. 1,78,4471- to a reserve which has not been specified under section 33AC, therefore, in accordance with the Explanation I to provisions of section 115JB, the book profit would be increased by the amount carried to any reserve. The addition made by the Assessing Officer is confirmed and the ground of appeal is, therefore, dismissed."

5. In view of above, at the very outset, we note that the assessee company

has transferred impugned amount to a reserve which has not been specified u/s

33AC of the Act, therefore, as per Explanation 1 attached to provisions of

section 115JB of the Act, the book profit is required to be increased by the

amount carried to any reserve account. We also note that the AO has rightly

relied on the decision of Hon'ble Apex Court in the case of State Bank of

Patiala reported as 219 ITR 706(SC) wherein it was clearly held that the issue

of what construes "reserve" and "provision" and the ratio laid down in these 5 ITA No.703/Del/2013 AY 2009-10

decisions clearly enlighten us that to constitute a reserve, a particular amount set

aside out of the profit and other surpluses, should be such as not designated to

meet a liability, contingency, commitment or diminution in the value of assets

known to at the date of balance sheet. Hence, the reserve can be set aside out of

the profits and surpluses and the same cannot be claimed as deduction because

it is not an expense laid out for the purpose of business. Coming to the facts of

the present case, the contribution to the Molasses reserve fund can be viewed as

a provision in nature and it is not an actual liability and the provision created for

additional storage facility is obviously in the nature of provision for contingent

liability, therefore, the impugned amount being contingent in nature deserves to

be added back while computing income u/s 115JB of the Act. Finally, we reach

to a conclusion that the action of the AO as well as order of the CIT(A) is well

founded and justified and we are unable to see any perversity, infirmity or any

other valid reason to interfere with the same on this issue. Accordingly, ground

no. 2 of the assessee being devoid of merits is dismissed.

6. Apropos ground no.3, ld. Counsel of the assessee submitted that the

CIT(A) has erred in sustaining the addition made by the learned assessing

officer in respect of the amount of capital subsidy to the book profits while

computing income under the section 115JB of the Act, on the alleged contention

that the appellant has transferred Rs. 27,55,420/- to a reserve which has not

been specified under section 33AC of the Act and, therefore, the same has to be

6 ITA No.703/Del/2013 AY 2009-10

added back for computing Book Profits under section 115JB of the Act. The ld.

Counsel strenuously contended that the CIT(A) was not justified and correct in

interpreting the provisions of section 115JB of the Act by stating that the

assessee had transferred the impugned amount to a reserve which has not been

specified u/s 33AC of the Act without giving credence to the fact that the

alleged amount is not an appropriation of profits and there is no such debit of

profit and loss account for the alleged appropriation. Ld. Counsel has further

drawn our attention towards para 4 of the impugned order and submitted that

the assessee filed detailed written submissions on this issue vide letter dated

9.8.2012. Ld. AR further submitted that as per section 115JB of the Act, while

preparing account including profit and loss account, the accounting policies,

accounting standards and methods and rates adopted for calculating charges

shall be the same as have been adopted for the purpose of preparing such

accounts including profit and loss account and laid before the company at its

annual general meeting in accordance with the provisions of section 210 of the

Companies Act 1956. Ld. AR strenuously contended that the treatment

followed by the assessee company is in accordance with the generally accepted

accounting principles and polices and the AO, while computing the book profits

of a company u/s 115JB of the Act has only the power of examining

whether the books of accounts are certified by the authorities under the

Companies Act. The AR further submitted that the AO, thereafter has a

limited power of making any change to the book profit as provided for in 7 ITA No.703/Del/2013 AY 2009-10

Explanation 1 to section 115JB of the Act as the AO does not have the

jurisdiction to go beyond the net profit shown in the P&L account except to the

extent provided in Explanation thereto. To support the above contentions, ld.

AR paled reliance on the decision of CIT vs HCL Comnet Systems &

Services Ltd. (2008) 305 ITR 409 and Apollo Tyres Ltd. vs CIT (2002) 255

ITR 273 and submitted that the AO has to accept the authenticity of the

accounts maintained in accordance with the provisions of the Companies Act,

which are also certified by the auditors and passed by the company in its Annual

General Meeting.

7. Replying to the above, ld. DR supported the impugned order and

submitted that u/s 115JB of the Act, net profit as per profit and loss account is

to be increased and the amounts carried out to any reserves, by whatever name

called, other than a reserve specified u/s 33AC of the Act, therefore, in

accordance with Explanation 1 to provisions of section 115JB of the Act, the

book profit would be increased by the amount carried to any reserve.

8. On careful consideration of above rival submissions, at the very outset, it

is pertinent to note that as per facts noted by the AO, the assessee received an

amount of Rs.27,55,420 capital subsidy against the interest paid on Central

Government loan and capital subsidy which was debited to the profit and loss

account of the assessee company. As per final statement of account, a similar

corresponding amount was shown as capital subsidy in the balance sheet in

8 ITA No.703/Del/2013 AY 2009-10

Schedule II under the head of reserves and surpluses. At this juncture, we also

take cognizance of Note No. 14 Schedule 12 to balance sheet (as on 31.3.2008)

which reads as under:-

"5.0.1 This is as per Note No. 14 (schedule 12 to balance sheet as at 31.03.08), which reads as under:

"Under the agreement dated 31.01.1986, as amended thereafter, the interest liability aggregating to Rs.27,55,420/- on loan from the Central Govt. is treated as having been discharged in view of the fact that an equivalent amount is received as cash subsidy for the specific purpose to the company's undertaking by the Govt. The Hon'ble ITAT, New Delhi, for the A.Y. 1990-91 in the company's own case, has held that the subsidy received from the Central Govt. is capital in nature. Accordingly, the interest amounting to Rs.27,55,420/- has been debited to the statement of profit and loss under the head 'Financial Expenses' and the corresponding amount has been credited to capital subsidy under the head' Reserves and Surplus'."

9. It is also undisputed that the amount of interest paid by the assessee to the

Central Government on loan for 1990-91 has been allowed as revenue

expenditure by the ITAT, New Delhi, wherein it was held that the

corresponding subsidy is a capital subsidy. We also note that the appeal of the

revenue against the order of the Tribunal has been dismissed by Hon'ble High

Court on the contention that no substantial question of law arises out of the

order of the Tribunal. From bare reading of the impugned order, we observe that

the ld. AR, during first appellate proceedings placed this fact before the CIT(A)

which was also noted at page 2 and 3 and page 18 of the impugned order and the CIT(A)

granted relief for the assessee on ground no. 4A and 4B by holding that the issue has

9 ITA No.703/Del/2013 AY 2009-10

been decided in favour of the assessee in the earlier years by the CIT(A), ITAT

Delhi and Hon'ble Jurisdictional High Court of Delhi and, therefore,

respectfully following the same, the first appellate authority granted relief for

the assessee with a final conclusion that the interest on loan advanced by the

central government is allowable and the capital subsidy received by the assessee

company in this regard is not taxable.

10. Coming back to the issue involved in ground no. 3(a) and (b) of the

extant appeal, at the very outset, we note that as per ratio of the decision of

Hon'ble Apex Court in the case of CIT vs HCL Comnet Systems & Services

Ltd. (supra) and Apollo Tyres Ltd. vs CIT (supra), the AO has to accept the

authenticity of the accounts maintained in accordance with the provisions of the

Companies Act which are also certified by the auditors and passed by the

company in its Annual General Meeting. In this connection, we may also point

out that the ld. DR has not disputed the fact that the subsidy against the interest

paid by the assessee company on central government loan is granted with the

object of incentive for the entrepreneur to establish sugar industry or to expand

the capacity of the existing sugar industry in the state of UP and thus, the said

subsidy is given for setting up of an industry or expansion of existing industry.

We further find it appropriate to note that SASISRI EXTRACTIONS LTD.

vs. ASSISTANT COMMISSIONER OF INCOME TAX 122 ITD 428,

Coordinate Bench of this Tribunal has held that where subsidy is granted as

10 ITA No.703/Del/2013 AY 2009-10

percentage of fixed capital cost taken as the basis for determining the subsidy

that would only be a measure adopted under the scheme to quantify the

financial aid. The contention is that it is not a payment, directly or indirectly, to

meet any portion of the 'actual cost' but intended as an incentive to

entrepreneurs, its quantification determined at a percentage of the fixed capital

cost." We further note that the Hon'ble Apex Court in the case of P.J.

Chemicals (supra) has held that the expression "actual cost"" in section 131(1)

of the Act needs to be interpreted liberally and subsidy does not partake of the

character of a payment intended either directly or indirectly to meet the 'actual

cost'." As we have noted above that it has already been accepted by the

Hon'ble High Court in assessee's own case for AY 1990-91 that the subsidy

received by the assessee is in the nature of capital subsidy, hence, the same

cannot be treated as revenue and thus, the income approach of accounting for

capital subsidy received as government grant is not applicable in this case as per

AS-12 where in para 5.2 it has been made clear that the capital approach is to

be followed in respect of government grants and it is inappropriate to recognise

government grants in profit and loss statements because they are not earned to

represent an incentive provided by the government. Accordingly, conclusion of

the CIT(A) on this issue is not found to be sustainable and we demolish the

same by directing the AO that the amount of capital subsidy to the book profits

while computing the income u/s 115JB of the Act is not an appropriation of

profits and there is no such debit to the profit and loss account for the alleged 11 ITA No.703/Del/2013 AY 2009-10

appropriation and, therefore, the same cannot be added while computing the

income u/s 115JB of the Act. Accordingly, ground no. 3(a) and (b) of the

assessee are allowed.

Ground No. 4

11. Ld. AR submitted that the AO denied the claim of the assessee for

depreciation of Rs.7,76,433 on discarded assets by wrongly holding that the

precondition of depreciation is that it has to be used for the purpose of business

and profession. Ld. AR further contended that the CIT(A) was also not justified

in confirming the conclusion of the AO on the issue by holding that the

depreciation on machines discarded by the assessee company as transfer to

stores and spares cannot be said to satisfy the conditions mentioned in section

32(1) of the Act for the purpose of claiming depreciation and the user of

machines would not include a passive user. Ld. AR placing reliance on the

decision of Hon'ble Jurisdictional High Court of Delhi in the case of CIT vs

Oswal Agro Mills Ltd. (2012) 341 ITR 461 (Del) submitted that the passive

user of the asset is also recognised as user for the purpose of business and the

meaning of passive user has to be interpreted to mean that the asset is kept

ready for use. Ld. AR also contended that if this condition is specified, then

even if the machinery is not used for certain reason in the concerned

assessment, the assessee would not be denied the claim of depreciation. Further, placing reliance on the decision of Hon'ble Jurisdictional High Court

12 ITA No.703/Del/2013 AY 2009-10

of Delhi in the case of CIT vs Yamaha Motor India Pvt. Ltd. (2010) 328

ITR 297 (Delhi), ld. AR submitted that the assessee company claimed

depreciation on assets written off which was disallowed by the AO on the

contention that the discarded machinery had not been used in the relevant

previous year, then the Hon'ble High Court in the similar set of facts and

circumstances held that the actual user of machinery was not required with

respect to discarded machinery for the purpose of claiming depreciation, the

phrase "machinery being used for the purpose of business" would mean that the

discarded machinery was used for the purpose of business during the year for

which depreciation has been allowed.

12. Replying to the above, ld. DR supported the orders of the authorities

below and submitted that the depreciation is allowed on block of assets if the

same have been used for business purposes as provided in section 32 of the Act

and the depreciation is given on the wear and tear of the asset and the main pre-

condition of allowability of depreciation is that it has to be used for the purpose

of business and profession. Ld. DR further submitted that the assessee has been

consciously not using the same for its business purpose and the machinery was

not only discarded, shifted to the stores and spares, therefore, claim of

depreciation of the assessee is not acceptable on discarded assets.

13. On careful consideration of above rival submissions on the issue, at the

very outset, we note that the issue of allowability on depreciation of discarded

13 ITA No.703/Del/2013 AY 2009-10

asset in the present appeal is squarely covered by the Jurisdictional High Court

of Delhi in the case of CIT vs Yamaha Motor Pvt. Ltd.(supra), wherein

dismissing the appeal of the revenue, their lordships held that the condition for

eligibility for depreciation when the machinery being used for the purpose of

business would mean that the discarded machinery was used for the purpose of

business in the earlier years for which depreciation had been allowed. We

further respectfully take note of the decision of Hon'ble Jurisdictional High

Court of Delhi in the case of CIT vs Oswal Agro Mills Ltd. (supra) wherein it

was held that while the asset is forming part of a block of assets, then the

depeciation u/s 32(1) of the Act was to be allowed even if any asset or assets of

the block was not used for the relevant financial year.

14. Therefore, we are inclined to hold that the AO was not justified in

disallowing the depreciation to the assessee on the assets which were discarded

and transferred to the stores and spares during the financial year under

consideration. The CIT(A) was not correct in confirming the order of the AO

on this issue and thus, we dismiss the same and direct the AO to allow the

depreciation to the assessee on discarded assets in the light of our foregoing

discussion on this issue. Accordingly, ground no. 4 of the assessee is allowed.

Ground No.5

15. Apropos ground no. 5(a), (b), (c), (d) and (e) of the Act, the ld. Counsel

submitted that the CIT(A) has not given any opportunity to the assessee to 14 ITA No.703/Del/2013 AY 2009-10

substantiate its claim with regard to miscellaneous receipt of Rs. 70,31,529/-

being a part of business income and ineligible for deduction under section 80

IC of the Act. Ld. AR further contended that the AO had treated only

Rs.8,19,660 as income from other sources after going through the details

furnished by the assessee during assessment proceedings out of an amount of

Rs.70,31,529 of miscellaneous receipts but the CIT(A) disallowed entire

amount of miscellaneous receipts as income from other sources and enhanced

the addition without issuing any notice to the assessee and without affording

due opportunity of hearing to the assessee. Ld. AR vehemently contended that

the action of the CIT(A) has resulted in an arbitrary enhancement of assessable

income which has been made out without affording an opportunity to the

assessee prior to enhancement of income as required under the provisions of

the Act and against the principles of natural justice. Ld. AR finally prayed that

the impugned order is not sustainable and therefore, the same should be

dismissed.

16. Replying to the above, ld. DR fairly accepted that the AO made part

disallowance of Rs.8,19,660 out of total miscellaneous receipts and the CIT(A)

enhanced the same disallowance without affording due opportunity of hearing

for the assessee and without issuing any notice to the assessee in this regard.

Ld. DR was fair enough to submit that if it is found just and proper, then the

15 ITA No.703/Del/2013 AY 2009-10

department has no objection if the issue is restored to the file of the CIT(A) for

a fresh adjudication on this limited issue only.

17. On careful consideration of above submissions, we note that the CIT(A)

enhanced the addition without issuing any notice and affording due opportunity

of hearing for the assessee, therefore, the order of enhancement is not

sustainable as per provisions of the Act and well-accepted principles of

jurisprudence. In this situation, we are of the considered view that the ends of

justice would be met if the issue is restored to the file of the CIT(A) for a fresh

adjudication after affording due opportunity of hearing for the assessee for this

limited purpose only. We order accordingly and ground no. 5 of the assessee is

deemed to be allowed for statistical purposes in the manner as indicated above

for this limited purpose only with a direction that the CIT(A) shall decide the

issue afresh without being prejudiced or influenced by the earlier orders on this

issue.

18. To sum up, the appeal of the assessee on ground no. 1 and 2 of the

assessee is dismissed, ground no. 3 and 4 are allowed and ground no. 5 is partly

allowed for statistical purposes.

16 ITA No.703/Del/2013 AY 2009-10

Order pronounced in the open court on 20.03.2015.

Sd/- Sd/-

(R.S. SYAL) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

DT. 20th MARCH 2015 'GS'

Copy forwarded to:-

1. Appellant 2. Respondent 3. C.I.T.(A) 4. C.I.T. 5. DR By Order

Asstt.Registrar

17