The Bombay Dyeing & Mfg Co.Ltd, Mumbai vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL "H" BENCH, MUMBAI ी जो ग दर संह, या यक सद य एवं ी संजय अरोड़ा, लेखा सद य के सम ।

BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARORA, AM आयकर अपील सं./I.T.A. No. 2250/Mum/2010 ( नधा रण वष / Assessment Year: 2003-04) The Bombay Dyeing & Mfg. Co.Ltd. Jt. CIT(OSD) Range (2)(1),

Neville House, J. N. Heredia Marg, बनाम/ Aayakar Bhavan, Vs. Ballard Estate, Mumbai-400001 Mumbai.

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACT2328K

(अपीलाथ! /Appellant) : ("#यथ! / Respondent)

आयकर अपील सं./I.T.A. No. 3193/Mum/2010

( नधा रण वष / Assessment Year: 2003-04) ACIT (2)(1), The Bombay Dyeing & Mfg. Co.Ltd. Aayakar Bhavan, R.No. 575, 5th बनाम/ Neville House, J. N. Heredia Marg, floor, M.K.Road, Mumbai-400020 Vs. Ballard Estate, Mumbai-400001

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACT2328K

(अपीलाथ! /Appellant) : ("#यथ! / Respondent)

नधा&'रती क) ओर से / Assessee by : Shri Madhur Agarwal.

राज व क) ओर से/Revenue by : Ms. Neema Singh Pandey.

सन ु वाई क) तार.ख /Date of Hearing : 12.03.2015

घोषणा क) तार.ख /Date of Pronouncement : 11.06.2015

ITA No.2250 & 3193/M/2010 The Bombay Dyeing & Mfg.Co.Ltd.

आदे श / O R D E R

Per Sanjay Arora, A. M.:

These are cross appeals, i.e., by the assessee and the Revenue, directed against the order by the Commissioner of Income Tax (Appeals)-IV, Mumbai ('CIT(A)' for short) dated 02.02.2010, partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for assessment year (A.Y.) 2003-04.

I.T.A. No. 2250/Mum/2010 (Assessee's Appeal)

2. The principal issue, raised per its ground no.1, is in respect of disallowance of provision made for a loss (at Rs. 1285.64 lacs) on account of a firm purchase contract. The assessee-company, in the business of manufacturer of chemicals, entered into an agreement on 19.03.2003 (which stood revised on 25.03.2003) with M/s. Kolmer Petrochemicals, A.G., Switzerland [Kolmer] for the purchase of 6,000 MT of raw material, Paraxylene, used in the manufacture of the finished product, DMT, at $ 882 (Rs. 44,267/08) per MT, i.e., at a cost of Rs. 27.82 cr. The goods were to arrive at Mumbai, the location of delivery, between April 23 and 25, 2003, while its payment, as per the modified agreement, was to be made two days prior to the arrival of the vessel. The other material amendment was that the goods had to be delivered latest by April 30, 2003, failing which the contract was to be treated as cancelled, and the seller continued to be recognized as the owner of the goods. The price of Paraxylene, however, started falling in the months of May and June, 2003, attaining a level of Rs. 22,500 PMT (approx.) at the time of the finalization of the accounts for the year, i.e., June 11, 2003. This led to a corresponding fall in the price of DMT, to Rs. 29,000/- PMT. The assessee, accordingly, provided for the loss inasmuch as the value of the raw-material, realizable on conversion into finished product, had fallen considerably, working out the same at Rs. 14.96 Cr. and, further, resulting likely loss at Rs. 12.86 cr. (Rs. 27.82 and Rs. 14.96) cr.

3. Discussion:

The assessee's case is that the loss had been provided in compliance of the Accounting Standard 1 (AS1), which provides for disclosoure of accounting policies, 2 ITA No.2250 & 3193/M/2010 The Bombay Dyeing & Mfg.Co.Ltd.

whereby the enterprise is to, following the fundamental accounting principle of prudence, provide for all known liabilities and losses. Reliance stands placed on the following decisions:

i) CIT v Nagri Mills Co. Ltd. (33 ITR 681)(Bom) ii) Western Maharashtra Development Corporation Ltd. V DCIT (22 SOT 13)(ITAT Pune

iii) National Mineral Development Corporation Ltd. V JCIT (98 ITD

278)(ITAT Hyderabad)

iv) Western Coalfields Ltd. V ACIT (27 DTR 226)(ITAT Nagpur)

v) ITO v SBI DHFL Ltd. (35 taxmann.com 184)(ITAT Mumbai)

vi) Securities Trading Corporation of India Ltd. V Addl. CIT (ITA No.449 -

973/M/2009)(ITAT Mumbai)

The Revenue's case:

The Revenue dismisses the assessee's claim as contingent. The goods are likely to arrive only in the next year, whereat only, the property in the goods shall pass to the assessee, for it to take cognizance of or recognize the loss arising to it on the fall in the market price of the raw material and, resultantly, its net realizable value, worked backwards on the basis of the estimated realizable value of the finished product, whose price declines in sympathy. True, the assessee is to provide for all known losses/liabilities, following the prudence principle, but the same is only for losses that had arisen up to the balance-sheet date, and no those anticipated or likely to arise in future.

4. We have heard the parties, and perused the material on record. The assessee's claim is not maintainable, both in law and in accountancy. The contract is firm, but only subject to the conditions specified therein. If the goods are not delivered by April 30, 2003, the contract fails, i.e., is not binding, and there is no question of the assessee incurring any losses, i.e., the loss is contingent on the specific performance of the contract. The loss could not possibly arise on the arrival of goods beyond the cut off date (April 30, 2003). Merely because the agreement is executed in the relevant year would by itself be not sufficient and, in fact, is no ground for claiming a loss, where so, for the year. It is only upon delivery of goods by that date that the loss, if any, could be said to have arisen to the assessee on account of the said firm contract. This

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of course would be subject to the qualification that it is pretty certain, as on 31.03.2003, the balance-sheet date, that the goods shall arrive in time. In the instant case almost the entire delivery time fail during the following year. There is thus, in our view, no basis in the present case for such certainty.

Two, and equally importantly, no loss has in fact arisen during the relevant year. The loss under reference is only on account of fall in the market price of Parxylene and, resultantly, DMT, the finished product. Admittedly, the price of raw- material started falling only in May/June 2003, i.e., after the end of the relevant year on 31.03.2003. This fact was confirmed by the Bench from the ld. counsel during hearing, who fairly conceded to it being in fact so. True, all known losses and liabilities have to be provided for following the fundamental accounting principle of conservatism and prudence, which stand since statutorily incorporated per AS1 issued by CBDT u/s.145 of the Act.

Market prices being volatile, a loss can be said to arise on the basis of movement therein, firstly, only where they exhibit a secular, irreversible downward trend. Clearly, where likely to reverse itself, will not lead to a loss having in fact incurred and, consequently, a finding to that effect. This in fact appears to be the case inasmuch as the fall in the market price of raw-material led to a corresponding fall in the price of the finished product, i.e., as per the ruling international prices, and subsisted. Secondly, the loss/liabilities must have in fact arisen or accrued, and which is not so; the prices starting to fall only in May 2003, perhaps towards it end. Losses arising subsequent to the relevant year can at best, i.e., where material, be taken note of in the notes to the accounts, and not booked. Why, the booking itself reflects the expenditure as being contingent. Each year is a self contained unit of assessment, and losses of one year cannot be claimed or transferred to another year. Though representing trite law and, in fact, an argument admitting of not debate, the decision in the case of CIT vs. British Paints India Ltd. [1991] 188 ITR 44 (SC) comes readily to mind. Per that decision, the apex court clarified the fundamental principles of jurisprudence on tax law, i.e., it is the correct income for each year that is to be brought to tax for that year and, two, each year is an independent and self-contained unit of assessment. Prudence only implies that even though the amount cannot be

4 ITA No.2250 & 3193/M/2010 The Bombay Dyeing & Mfg.Co.Ltd.

determined with certainty, and represents only a best estimate in light of the available information, the same must be provided for. It nowhere advocates or prescribes providing for loss/liability that has not arisen during the relevant year or, in any case, by the end of the relevant year. Events after the balance-sheet date can only be taken into account in so far as they inform about the conditions prevailing during the relevant year, so as to enable a correct assessment of the operating results for the year and the state of affairs as at its close. There is nothing to show that the market price of the raw-material or the finished products had declined, much less to any substantial extent, up to 31.03.2003, the relevant year end.

The assessee's claim, in view of foregoing, is without merit. The decisions relied upon would be of little moment, even as clarified during hearing, in view of our specific finding of no loss having in fact arisen to the assessee during the year and, further, the principle of prudence as not being applicable to losses which arise or have their genesis in events subsequent to the end of the relevant year. As regards reliance on the decision in Nagri Mills Co. Ltd. (supra), we may advert to the decisions in the case of Mysore Spinning & Mfg. Co. Ltd. v. CIT [1966] 61 ITR 572 (Bom) and British Paints India Ltd. (supra), besides to J.K.Woollen Manufactures (P.) Ltd. v. CIT [1967] 65 ITR 237 (All). We decide accordingly, confirming the disallowance of the impugned loss. This decides ground no.1 of the assessee's appeal.

5. Ground no.2 was not pressed by the ld. AR during hearing, and is accordingly dismissed as not pressed.

6. Ground no.3 relates to a disallowance in the sum of Rs. 31,26,703/-, being the provision for various expenses, effected by the AO for the reason that they were not supported by any evidences. In appeal, the ld. CIT(A) called for a remand report from the AO in view of the additional evidences/materials sought to be relied upon by the assessee, granting deletion where found evidenced and/or supported. The balance disallowance, being confirmed, the assessee is in second appeal.

7. We have heard the parties, and perused the material on record. During the hearing, the ld. AR, the assessee's counsel, conceded to the assessee having no further details/material to support its claim, relying on its written submissions before the

5 ITA No.2250 & 3193/M/2010 The Bombay Dyeing & Mfg.Co.Ltd.

authorities below, and towards which reference was made to pages 18 and 19 of the assessee's paper-book. Under the circumstances, we have no hesitation in confirming the impugned disallowance. We may, however, elaborate further. That an expenditure is allowable, where mercantile system of accounting, as in the present case, is adopted, even though no payment has been made, which is claimed to have been during the subsequent year, is undisputed and not in issue. Reference, therefore, to the decision by the apex court in CIT vs. U.P.State Industrial Development Corporation [1997] 225 ITR 703 (SC) would be of no moment. The question is of the basis on which it could be said or concluded that expenditure to that extent had in fact accrued, and which we find as wanting. The burden to prove its return, as well as claims preferred thereby, is only on the assessee, and which we find as not discharged to that extent. It may also be clarified here that the assessee had been extended sufficient opportunity to present its case. Needless to add, the assessee is a liberty to make a fresh claim for the subsequent year/s, even as it shall have to be shown by it that expenditure as claimed had arisen for those years, i.e., of payment, each year being independent. We may though clarify that we are not making any observation with regard to the deduction of the said expenditure for those years/s. We decide accordingly, dismissing the assessee's third ground.

8. Ground 4 concerns the computation of the deduction u/s. 80HHC, and which was, at the very outset, again, admitted by the ld. AR to be squarely covered against the assessee by the decision of the Apex Court in the case of Ipca Laboratories Ltd. v. Dy. CIT [2004] 266 ITR 521 (SC). We, accordingly, direct for computation of deduction u/s. 80HHC in terms of the said decision by the said hon'ble apex court. We decide accordingly.

9. The fifth and last ground of the assessee's appeal concerns the computation of book profit u/s. 115JB of the Act inasmuch as the assessee claims for the deduction u/s. 80HHC to be reduced in computing the book profit there-under. The matter in our view stands squarely covered by the decision by the Apex Court in the case of CIT vs. Ajanta Pharma Ltd. [2010] 327 ITR 305 (SC). We, accordingly, set-aside the matter

6 ITA No.2250 & 3193/M/2010 The Bombay Dyeing & Mfg.Co.Ltd.

back to the file of the AO for working the book profit u/s. 115JB in terms of the said decision. We decide accordingly.

I.T.A. No. 3193/Mum/2010 (Revenue's Appeal)

10. The appeal raises two effective grounds, i.e., grounds 2 and 3, which we shall take up in seriatim; ground 1 being general in nature, warranting no adjudication.

11. Ground 2 of the Revenue's appeal is in respect of an addition qua unutilized MODVAT credit in the sum of Rs. 354.40 lacs. While the AO made the addition as in his view the unutilized MODVAT credit was required to be added u/s. 145A, the ld. CIT(A) directed for including the said credit in the value of the opening stock, purchases, sales and closing stock. We find the same to be a proper interpretation of section 145A, which, being a non obstante clause, shall prevail. The decision by the hon'ble jurisdictional High Court in CIT vs. Mahalakshmi Glass Works Pvt. Ltd. [2009] 318 ITR 116 (Bom), followed by him, though we observe to be on a different issue, i.e., whether section 145A shall apply to the opening stock as well, or that the same shall have to be taken necessarily at the value of the closing stock for immediately preceding year. The same may, therefore, not be relevant. The apex court in interalia British Paints Pvt. Ltd. (supra) confirmed the valuation of both the opening and the closing stock on the same basis, which aspect stands dealt with by the tribunal in some detail in Dy. CIT vs. Daman Ganga Paper Ltd. [2014] 39 CCH 362 (Mum) (Trib.), considering the decision by the hon'ble jurisdictional High Court in Melmould Corporation vs. CIT [1993] 202 ITR 789 (Bom).

Coming back to the decision by the first appellate authority, impugned before us, we find no infirmity in his direction for including the unutilized MODVAT credit and, thus, apply the condition of section 145A on all factors of production, i.e. opening stock, purchases, sales and closing stock. This also represents the consistent view of the tribunal, and for which we refer to the decision in the case of Hercules Pigment Industry vs. ITO [2014] 146 ITD 31 (Mum), rendered considering all the relevant decisions, including in the case of Mahalakshmi Glass Works Pvt. Ltd. (supra). We accordingly confirm the impugned order on this ground.

7 ITA No.2250 & 3193/M/2010 The Bombay Dyeing & Mfg.Co.Ltd.

12. The third and the other ground relates to the deletion of addition made on account of premium payable on premium notes (SPN). The matter was during hearing fairly conceded by the ld. DR to be covered against the Revenue by the order by the tribunal in the assessee's own case for AY 1996-97 (in ITA No. 8127/M/2004). In view thereof, we decline inference. We decide accordingly.

13. In the result, the assessee's appeal is partly allowed for statistical purposes and the Revenue's appeal is dismissed.

Order pronounced in the open court on June 11, 2015 Sd/- Sd/- (Joginder Singh) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; 4दनांक Dated : 11.06.2015

न.स./Sharwan. PS

आदेश क ! त#ल$प अ%े$षत/Copy of the Order forwarded to :

1. अपीलाथ! / The Appellant 2. "#यथ! / The Respondent 3. आयकर आय5 ु त(अपील) / The CIT(A) 4. आयकर आय5 ु त / CIT - concerned

5. 6वभागीय " त न ध, आयकर अपील.य अ धकरण, मुंबई / DR, ITAT, Mumbai

6. गाड& फाईल / Guard File

आदेशानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar)

आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai

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