आयकर अपील सं./I.T.A. No.4035/Mum/2006 / (

आयकर अपीलय अ
धकरण, मुंबई यायपीठ “जी” मुंबई
IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN (AM) AND SANJAY GARG, (JM)
सवी बी.आर.बाकरन, लेखा सदय एवं ी संजय गग, यायक सदय के सम
आयकर अपील सं./I.T.A. No.4035/Mum/2006
(नधारण वष / Assessment Year : 2002-03)
Asstt. Commissioner of Income
Tax Cir 4(2),
Room No.642, 6th floor,
Aayakar Bhavan,
M K Road,
Mumbai-400020.
(अपीलाथ /Appellant)
बनाम/ M/s JBF Industries Ltd.,
JBF House,
Vs.
Old post office Lane,
Kalbadevi road,
Mumbai-400002
..
(यथ / Respondent)
थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. : AAACJ2575J
आयकर अपील सं./I.T.A. No.1623 and 1624/Mum/2009
(नधारण वष / Assessment Years : 2004-05 & 2005-06)
M/s JBF Industries Ltd.,
8th floor,
Express tower,
Nariman Point,
Mumbai-400021
(अपीलाथ /Appellant)
बनाम/ Asstt. Commissioner of Income
Tax Cir 4(2),
Vs.
Room No.642, 6th floor,
Aayakar Bhavan,
M K Road,
Mumbai-400020..
..
(यथ / Respondent)
थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. : AAACJ2575J
अपीलाथ ओर से / Revenue by
Smt. Parminder Prejanand J
यथ क" ओर से/Assessee by
Shri Rahul Sarda and
Dr K Shivraman Sr.Cousel
सन
ु वाई क" तार&ख / Date of Hearing
:
21.10.2014
घोषणा क" तार&ख /Date of Pronouncement : 17.12..2014
ITA. No4035/Mum/2006 and
other two appeals
2
आदे श / O R D E R
Per B.R.BASKARAN, Accountant Member:
The appeal filed by the revenue for assessment year 2002-03 and
the appeals filed by the assessee for assessment years 2004-05 and
2005-06 are directed against the orders passed by Ld CIT(A) in the
respective years. All these appeals were heard together and hence they
are being disposed of by this common order, for the sake of convenience.
2.
The facts relating to the case are stated in brief. The assessee
herein is a manufacturer of POY, PTY and Bulk drugs.
It was was
desirous of installing 6000 tpm Polyester Polymer Plant comprising two
polymer lines of 3000 tpm each, based on Purified Terephthalic Acid (PTA)
feed stock and was also intending to install facilities to handle Dimethyl
Terephthalate (DMT) feed stock, which necessitated use of DMT of at least
3000 tons per month. M/s Bombay Dyeing & Mfg. Co. Ltd (BD) is the
company
producing
Dimethyl
Terephthalate
(DMT)
feed
stock.
Accordingly the assessee herein approached ‘BD’ seeking assistance to
carry out its plans. Accordingly an agreement was entered on 09-06-2000
between the assessee and ‘BD’, as per which the terms of assistance was
settled.
According to the said agreement, ‘BD’, inter alia, agreed to
purchase certain equipments and lease out the same to the assessee
herein. In turn the assessee agreed to purchase 9000 tons + 5% per
quarter of DMT from M/s BD.
Accordingly, M/s BD purchased
machineries, as per the requirement of the assessee and leased out them
to the assessee and in this regard, both the parties also entered into a
lease agreement.
3.
We shall first take up the appeal filed by the revenue for assessment
year 2002-03. The only issue contested in this appeal is with regard to the
disallowance of lease rentals claimed by the assessee.
The AO noticed
3
ITA. No4035/Mum/2006 and
other two appeals
that the assessee has claimed lease rentals paid by it as revenue
expenditure. The AO, however, disallowed the said claim by holding that
the lease agreement was not an operating lease, but it was a financial
lease. The Ld CIT(A), however, allowed the deduction of lease rentals
and hence the revenue has filed the appeal before us.
4.
We have heard the parties and perused the record. The AO has
disallowed the claim for deduction of lease rentals mainly on the ground
that the impugned lease was not an ‘Operating lease’ but
a ‘financial
lease’. The AO has also refused to allow depreciation on the reasoning
that the ownership of the asset is transferred to the assessee only after
payment of all installments. The AO has taken this view mainly on the
reasoning that
(a)
The lease agreement was entered prior to actual purchase of
machinery. In case of genuine lease, the machinery shall be
purchased first and then the same shall be leased out.
(b) The lessor has agreed to sell the machinery for Re.1 only at the end
of the lease period, as the lease rentals already cover the whole of
the cost of the equipment.
(c)
5.
The agreement does not take cognizance of the ‘scrap value’ of the
machinery that may be fetched by selling the machine in the open
market at the end of the lease period.
Before Ld CIT(A), the assessee submitted that the lease transaction
should not be seen in isolation by disregarding the business arrangement
by which the assessee agreed to purchase DMT from M/s BD and the said
company agreed to purchase machinery and lease it out to the assessee.
Accordingly, it was submitted that it was a case of genuine lease
agreement. The Ld CIT(A) was convinced with these submissions and
accordingly held that it was not a case of sale and lease back transaction.
Accordingly, he set aside the order of AO on this issue.
6.
The Ld D.R strongly defended the order passed by the assessing
officer. He submitted that the lease rentals fixed for the entire lease period
4
ITA. No4035/Mum/2006 and
other two appeals
was equal to the cost of machinery. Further, M/s BD has purchased the
machinery after entering into the lease agreement. Further, there was a
composite agreement between the assessee and M/s BD, by which M/s
BD has agreed to provide assistance to the assessee in
expanding
assessee’s production capacity and in turn, the assessee has agreed to
purchase DMT from M/s BD. Accordingly, the Ld D.R submitted that it was
a case of pure financial assistance though it has been camouflaged as
lease transaction.
Accordingly he submitted that the substance shall
prevail over the form and hence the AO was justified in treating the
arrangement as financial transaction.
7.
On the contrary, the Ld A.R submitted that the genuineness of lease
agreement has been accepted in the hands of M/s BD. He submitted that
the present case was not a case of sale and lease back transaction, but a
case of purchase of machinery as per the requirement of the assessee and
leasing out the same to the assessee. M/s BD agreed to purchase and
lease out the machinery, since the assessee had also agreed to purchase
DMT produced by M/s BD. Hence, it was a mutually beneficial business
arrangement. He submitted that the intention of the parties was to lease
out the machinery on monthly payment of lease rentals. Accordingly, the
Ld A.R submitted that the Ld CIT(A) was justified in reversing the decision
of the AO on this issue. In the alternative, the Ld A.R submitted that the
assessee should be allowed depreciation, if the Tribunal takes the view
that it was a financing transaction.
8.
On assimilation of the facts prevailing in the instant case, we are
inclined to support the view taken by the assessing officer.
As stated
earlier, there was a business arrangement between the assessee and M/s
BD. According to the same, the assessee agreed to purchase prescribed
quantity of DMT from M/s BD. Against the same, the assessee has sought
assistance from M/s BD for expanding its capacity. Accordingly, M/s BD
5
ITA. No4035/Mum/2006 and
other two appeals
agreed to lease out the machinery to the assessee herein. In fact, the
machinery was identified by the assessee and M/s BD purchased the
same. There should not be any dispute that M/s BD agreed to purchase
the machinery and lease it out to the assessee only to provide financial
assistance to the assessee to expand its production capacity, so that M/s
BD would also be benefited from sale of DMT to the assessee. Thus, it is
clear that the intention of M/s BD was to provide financial assistance to the
assessee and not leasing out of the assets.
9.
We notice that the ld CIT(A) was of the view that the assessing
officer has disallowed the claim of the assessee on the ground that it was a
sale and lease back transaction. We have already seen that the case of
the assessing officer was something different. Hence, in our view, the Ld
CIT(A) has granted relief to the assessee on a misconceived notion and
hence his order is liable to be set aside.
10.
We notice that the AO has denied the benefit of depreciation also on
the ground that the assessee is not the owner of the asset as per the lease
agreement. There is a fallacy in the said decision. Once the AO has held
that this was a case of finance transaction by ignoring the lease
agreement, in our view, he should not refer to the very same lease
agreement to decide about the ownership.
Accordingly, we are of the
view that the assessee should be allowed depreciation benefit.
11.
In view of the foregoing discussions, we set aside the order of Ld
CIT(A) on this issue in assessment year 2002-03 and uphold the order of
the assessing officer in confirming the disallowance of lease rentals.
However, as discussed in the preceding paragraph, we direct the
assessing officer to allow the depreciation admissible as per the Act on the
value of machinery.
6
12.
ITA. No4035/Mum/2006 and
other two appeals
We shall now take up the appeal filed by the assessee for AY 2004-
05, wherein following issues are urged before us:(a) Disallowance of brought forward loss while computing the
book profit u/s 115JB.
(b) Disallowance of claim of lease rental.
(c) Disallowance of interest pertaining to earlier years.
(d) Charging of interest u/s 234A, 234B and 234C of the Act.
In addition to the above, the assessee is also contending that the ld CIT(A)
has passed the order after expiry of 90 days from the date of hearing,
which is against Rule 34 of the Appellate Tribunal Rules. In this regard,
the Ld A.R also placed reliance on the decision of Hon’ble Delhi high Court
in the case of CIT Vs. Chetan Das Lachman Das (2012)(211 Taxman 61).
First of all, the Ld A.R could not convincingly explain to us as to how the
Appellate Tribunal Rules are applicable to the Ld CIT(A). Secondly, he
could not explain as to how the assessee was aggrieved by the order of Ld
CIT(A) on this issue. Hence, we do not find any merit in this legal issued
urged by the assessee and accordingly dismiss the same.
13.
The first issue relates to the claim for deduction of unabsorbed
business loss of Rs.9,93,985/-, while computing book profit u/s 115JB.
According to Ld A.R, the AO disallowed the said claim without assigning
any reason. Before Ld CIT(A), the assessee furnished break-up details of
unabsorbed depreciation and business loss as per books of account. The
Ld CIT(A), however, took the view that the unabsorbed depreciation of
Rs.8.25 crores should be taken as NIL, since it was a negative figure.
Accordingly he held that the nothing is deductible while computing book
profit.
14.
We heard the parties.
The view of the Ld CIT(A) that the
unabsorbed depreciation should be taken as NIL does not appear to be
ITA. No4035/Mum/2006 and
other two appeals
7
correct view, since the unabsorbed depreciation as well as unabsorbed
business loss shall be described as negative figures only.
As per the
provisions of sec. 115JB, lower of the both is required to be deducted from
the book profit. Hence, we set aside the order of Ld CIT(A) on this issue.
However, since the figures reported by the assessee require verification,
we restore this issue to the file of the assessing officer with the direction to
examine the claim of the assessee afresh and pass a speaking order on
the same.
15.
The next issue relates to the disallowance of claim of lease rental.
We notice that the Ld CIT(A) has taken the view in accordance with the
decision taken by us while adjudicating identical issue in AY 2002-03 in the
preceding paragraphs.
Accordingly, we hold that the Ld CIT(A) was
justified in disallowing lease rental expenses and in the alternative allowing
depreciation on the cost of assets to the assessee.
16.
The next issue relates to the disallowance of interest pertaining to
earlier years. During the year relevant to the AY 2004-05, the assessee
claimed interest on SBI loans relating to FY 2001-02 and 2002-03 to the
tune of Rs.7.33 crores as deduction.
The assessee submitted that the
assessee’s loan account had been categorized as “Non performing asset”
by the bank and hence no interest was charged in the relevant years.
However, during the current year, the Cash credit limit was enhanced and
the enhanced amount was used to recover the arrear interest.
Accordingly, the assessee submitted that the interest was charged during
the year and the same has also been recovered through the Cash Credit
account. Accordingly, it was claimed that the interest has got crystallized
during the year. The AO disallowed the same on the reasoning that the
same does not pertain to the year under consideration. Before Ld CIT(A),
the assessee raised an alternative contention that the interest amount
should be allowed on payment basis in terms of sec. 43B of the Act. The
8
ITA. No4035/Mum/2006 and
other two appeals
Ld CIT(A) did not agree with the submissions made by the assessee. He
upheld the disallowance. With regard to the alternative claim for deduction
u/s 43B of the Act, the Ld CIT(A) held that the assessee should have paid
the interest either by paying cash or by depositing cheque, i.e., according
to Ld CIT(A) the recovery of interest by enhancing Cash credit limit was
not to be considered as payment.
17.
We find merit in the alternative submission of Ld A.R. Even, if the
loan account is categorised as “Non-Performing Asset”, nothing prevented
the assessee to make provision for payment of interest. However, the said
provision for interest was liable to disallowed u/s 43B of the Act, since it
was not paid.
However, the same is allowable in the year in which the
interest was actually paid in terms of sec. 43B of the Act.
Though the
assessee has not paid the interest amount either by way of cash or
cheque, yet the fact remains that the bank has recovered the interest by
enhancing the Cash credit limit. There should not be any dispute that the
enhancement of Cash Credit limit places funds at the disposal of the
assessee. Hence recovery of interest from out of the enhanced limit is
nothing but payment of interest by the assessee. It is pertinent to note that
the provisions of sec. 43B do not provide anything about the source from
which the payment should be made. Hence, in our view, the claim of the
assessee is admissible u/s 43B of the Act. However, we notice that the
alternative claim has not been examined by the tax authorities.
Accordingly, we set aside the order of Ld CIT(A) on this issue and restore
the same to the file of the assessing officer with the direction to allow the
claim of the assessee u/s 43B of the Act after carrying out necessary
examination.
18.
The next issue relates to the charging of interest u/s 234A, 234B and
234C of the Act. The charging of interest is consequential in nature and
hence this ground does not require adjudication.
ITA. No4035/Mum/2006 and
other two appeals
9
19.
We shall now take up the appeal filed by the assessee for AY 2005-
06, wherein following issues are contested:(a) Disallowance of depreciation on leased premises;
(b) Disallowance of claim of lease rental.
(c) Disallowance of depreciation on electrical fittings;
(d) Disallowance of interest u/s 36(1)(iii) of the Act;
(e) Disallowance made under section 40A(2)(b) of the Act.
(f) Computation of book profit without allowing adjustment of amount
transferred from general reserve.
20
The first issue relates to the disallowance of depreciation of leased
premises. The facts relating thereto are that the assessee had given on
lease a part of its premises, along with the electrical fittings, furniture and
other fixtures to two of its sister concerns and also to others under license
agreements. The assessee received rent of Rs.18 lakhs in aggregate and
declared the same as business income. Accordingly, the assessee also
claimed depreciation on
WDV of the building..
The AO, however,
assessed the rental income under the head income of the house property
and accordingly disallowed depreciation claimed on the premises leased
out. The ld. CIT(A) confirmed the action of the AO.
21.
Before us, the ld. AR submitted that the rental income should have
been assessed as the assessee’s business income. He further submitted
that, even if the rental income is assessed as Income from House
Property, the depreciation should not have been disallowed, since the
building is forming part of block assets.
In this regard, the ld. AR placed
reliance on the following case law:
i)
ii)
iii)
iv)
CIT V/s Sundaram Finance Ltd (2012) 205 Taxman 37 (Mad) (High Court)
ACIT V/s S.K.Patel Family Trust (2012) 251 CTR 427 (Guj) (High Court)
CIT V/s Oswal Agro Mills Ltd (2012) 341 ITR 467 (Delhi) (High Court)
Sonic Biochem Extractions P.Ltd V/s ITO (2013) 23 ITR 447
10
22.
ITA. No4035/Mum/2006 and
other two appeals
On the other hand, the ld. DR strongly defended the order of the ld.
CIT(A).
23.
On consideration of the rival contentions, we do not find any merit in
the contention of the ld. AR. The various case laws relied upon by him
have been rendered on different context and the same, in our view, could
not be taken support by the assessee.
The facts remain that the
assessee had let out its building to its sister concerns and others and has
received rent aggregating to Rs.18 lakhs. We notice that the AO has
followed the decision rendered by the Hon’ble Supreme Court in the case
of CIT vs. Shambu Investment (2003) 263 ITR 143 (SC) to hold that the
rental income is assessable as income from house property.
24.
Before us, the ld. AR could not submit any material to contend that
the
decision of the Hon’ble Supreme Court referred above is not
applicable to it. More particularly, it was not a case of letting of premises
due to temporary lull in the business activity of the assessee. It was also
not shown that the letting out was in connection with the commercial
exploitation of the assets. Hence, the letting out of the building was purely
with the intention to earn rental income.
Accordingly, we confirm the
orders of tax authorities in assessing the rental income under the head
“income from house property”.
25.
With regard to the claim of depreciation, we notice that the assessee
has not established that it was a case of letting out for a temporary period
due to adverse situation prevailing in the business, which means that the
building has ceased to remain as a business asset. Under these set of
facts, in our view, the ld. CIT(A) was justified in confirming the
disallowance of depreciation.
ITA. No4035/Mum/2006 and
other two appeals
11
26.
The next issue relates to disallowance of lease rent.
We have
considered the identical issue in the assessment years 2002-03 and 200405, wherein we have confirmed the disallowance of lease rent expenditure
claimed by the assessee. In the alternative, we have held that the
depreciation should be allowed on the cost of assets. The view taken by
the ld. CIT(A) in the instant year is in accordance with the decision taken
by us in the earlier years. Accordingly, we confirm the order of ld. CIT(A)
on this issue.
27.
The next issue relates to disallowance of depreciation claimed on
electrical fittings. The assessee had claimed the depreciation at the rate of
25% on the electrical installation and fittings i.e. at the rate applicable to
the plant and machinery. However, the AO noticed that the “electrical
fittings” is included
in the category of “furniture and fittings” in the
Depreciation Schedule prescribed in the Income tax Act and the applicable
rate of depreciation is 15% only.
Accordingly, the AO disallowed the
excess claim of 10%. The ld. CIT(A) also confirmed the said disallowance.
The ld. counsel of the assessee submitted that
the electrical fittings
contemplated in the Depreciation Schedule under the head “furniture and
fitting” relate those items not related to Plant and Machinery.
However,
the assessee has classified those items which are related to the Plant and
Machinery or installed in the factory premises as “Electrical fittings” and
they consisted of heavy duty power cabling, panel board, DG sets for
generating of power etc.
The ld. AR further submitted that such kind of
electrical items shall take the colour of Plant and Machinery and for this
proposition he placed reliance on the decision of the Ahmedabad Bench
of the Tribunal in the case of Madhu Industries Ltd V/s ITO (2010) 43
DTR 23 (Ahd),
wherein it was held that
the electrical installation
consisting of electrical wires, switches, plugs, cables, MCB box and other
electrical items shall form part of plant and machinery since they do not
function independently.
He submitted that the Ahmedabad bench of
ITA. No4035/Mum/2006 and
other two appeals
12
Tribunal has held that these kind of electrical items cannot be classified as
furniture and fixture. Accordingly, the ld. AR submitted that the assessee
should be grated depreciation at the rate of 25% on the electrical fittings by
considering the same as plant and machinery.
28.
On the contrary, the ld. DR defended the order of the ld. CIT(A) on
this issue.
29.
We notice the Note No.5 given under the Depreciation Schedule
applicable to the assessment year 2005-06
(which is available in the
Income tax Rules) defines the expression “electrical fitting”.
According to
the said definition electrical fittings includes electrical wires, switches,
clutches, other fittings and fans etc.
Under the Depreciation Schedule
“electrical fittings” is clubbed along with “Furniture & fixures.
Hence, the
expression “Electrical fittings” should mean only those items which can be
considered as “Fixtures” of general nature as defined in Note no.5.
However, the heavy electrical items, which are attached to plant and
machinery, in our view, should be considered as part of Plant and
Machinery and the same cannot be classified as fixtures of general nature.
We also notice that the Ahmedabad Bench of the Tribunal in the case of
Madhu Industries Ltd
(supra) has taken the view that the electrical
installation attached to plant and machinery should be considered as plant
and machinery only.
The ld. AR also submitted that the assessee has
classified the electrical installation relating to plant and machinery under
the head electrical fittings.
Ahmedabad
Bench of the
Hence, by following the decision of the
Tribunal referred above we hold that the
electrical fittings in the instant case should be considered as plant and
machinery and hence the depreciation should be allowed at the rate of
25% to plant and machinery.
13
30.
ITA. No4035/Mum/2006 and
other two appeals
The next issue is disallowance of interest u/s 36(1)(iii) of the Act.
The AO noticed that the assessee had capitalized the interest of Rs.51.15
lakhs, being the interest relating to capital expansion in the existing unit
and also relating to the new units being set up. The assessee had worked
out the disallowance by adopting average interest rate of 12.23%. On
further analysis, it was noticed that the assessee had capitalized interest
amount of Rs.23.61 lakhs in respect of the new project being set up at
Athal and Sirigam, even though the actual amount on these two units was
over Rs.6 crores and Rs.15 crores respectively. Hence, the AO took the
view that the amount capitalized by the assessee was not correct.
Accordingly, he worked out the interest to be capitalized, by taking into
account date-wise investment and also by applying formulae adopted by
the assessee and accordingly made further disallowance (capitalization) of
Rs.37.58 lakhs. Though the assessee contended that the assessee had
not borrowed any fresh capital for acquiring the capital assets for the
above said two projects, yet the AO rejected the said contention on the
reasoning that the assessee has failed to substantiate the said claim.
Accordingly he added the sum of Rs.37.58 lakhs to the total income of the
assessee and the ld. CIT(A) also confirmed the same.
31.
We have heard the parties and perused the record. At the time of
hearing the ld. AR submitted that the assessee had used the internal cash
accruals for funding the above said projects and the availability of its own
funds could be proved to the AO by showing the balance sheet of the
assessee. Accordingly, he requested that this matter may be set aside to
the file of the AO so that the assessee would be able to demonstrate about
the availability of its own funds, to which the ld. DR also did not object.
Accordingly, we set aside the order of ld. CIT(A) and restore this issue to
the file of AO with a direction to examine this issue afresh by considering
the information and explanation that may be furnished by the assessee
and take appropriate decision in accordance with law.
14
32.
ITA. No4035/Mum/2006 and
other two appeals
The next issue relates to disallowance made u/s 40A(2)(b) of the
Act. The AO noticed that the assessee had purchased paper tubes from a
related concern named M/s Arya Industries and the aggregate amount of
purchase made during the year relevant to AY 2005-06 was Rs.4.78
crores. The AO noticed that the Chairman of the assessee company is a
Partner in the above said concern. Hence, the AO compared the purchase
rate of the products purchased from the above said concern and the
purchase rates of purchases made from unrelated party. The AO noticed
that the rates charged by M.s Arya Industries were higher by 10 to 15 % in
respect of purchases made up to 7.10.2004.
Accordingly, the AO
disallowed 12% of purchase value of paper tubes purchased from M/s
Arya Industries during the period from 1st April 2004 to 7th October, 2004,
by invoking the provisions of section 40A(2)(a) of the Act, which worked
out to Rs.19 lakhs. The ld. CIT(A) also confirmed the above said addition.
33.
The ld. Counsel of the assessee submitted that the assessee has
been making purchases from M/s Arya Industries since 1998 and no
addition has been made till last year. He further submitted that the price of
the product ranges between 7.5 to 9.5 depending on the size and quality.
Accordingly, he submitted that the AO was not correct in comparing the
price quoted by M/s Arya Industries and some other concern, without
establishing parity of the quality, size. He further submitted that the price
would also depend upon the quantity of the purchases.
Accordingly, he
submitted that the disallowance of Rs.19 lakhs made under section
40A(2)(a) is not justified.
In the alternative, he submitted that the
disallowance was very much on the higher side.
34.
On the contrary, the ld.
CIT(A).
DR strongly defended the order of ld.
15
35.
ITA. No4035/Mum/2006 and
other two appeals
We notice from the assessment order that the AO has compared the
rates of M/s Arya Industries with that of M/s Excel Tubes and Cones.
The AO has tabulated the said comparison in a Tabular form. Admittedly,
there is a variation in the price. From the table prepared by the AO, we
notice that the AO has noted down the description of the product, quality,
size and quantity.
However,
we notice that the AO has adopted the
average rate of 12% for making the disallowance, with the observation that
the variation ranges from 10 to 15%. However, we notice that, on three
occasions, the purchase rate of products purchased from M/s Arya
Industries was lower than the rate of M/s Excel Tubes and Cones. This
factual aspect gives indication that there is some merit in the contention of
the assessee that the purchase rate was dependent upon various factors.
Under these set of facts, we are of the view that the disallowance of 12%
made out of purchases made from M/s Arya Industries is on higher side.
Accordingly, to put this matter at rest, we direct the AO to compute the
disallowance at the rate of 6% of the aggregate purchase value of
purchases made from M/s Arya Industries. The order of the CIT(A) on this
issue stands modified accordingly.
36.
The next issue relates to enhancement of book profit computed u/s
115JB by the assessee by Rs.275 lakhs. The assessee had booked a
sum of Rs.398.48 lakhs as “Impairment loss” in the Profit and Loss
account. However, the assessee transferred a sum of Rs.275 lakhs from
General Reserve account and reduced the same from the “Impairment
loss” stated above and accordingly a sum of Rs.123.48 lakhs was shown
in the debit side of the Profit and Loss account. While computing the Book
Profit u/s 115JB of the Act, the assessee reduced the above said amount
of Rs.275 lakhs from the net profit. The assessee submitted before the
assessing officer that the amount transferred from General Reserve is
required to be deducted from the Net Profit as per Clause (i) of Explanation
1 to Section 115JB of the Act. However, the AO noticed that the assessee
16
ITA. No4035/Mum/2006 and
other two appeals
has accounted for “Impairment to Assets” of Rs.398.48 lakhs for the first
time during the year, out of which a sum of Rs.275 lakhs represented the
impairment to assets pertaining to earlier years. Accordingly, the AO took
the view that the assessee has transferred a sum of Rs.275 lakhs from the
general reserve only to take care of expenditure of earlier years under
“matching principle”. Accordingly, the AO held that the above said amount
of Rs.275 lakhs is not required to be deducted from the Net profit. The Ld
CIT(A) also confirmed the same.
37.
We heard the parties on this issue. The main contention of the Ld
A.R was that the tax authorities did not consider the submission of the
assessee that the amount of Rs.275 lakhs transferred from General
Reserve is required to be deducted from the Net Profit as per Clause (i) of
Explanation 1 to Section 115JB of the Act.
We find merit in the said
submission, as we notice that both the tax authorities have not examined
about the applicability of the above said provision. In fact, the AO has
rejected the claim of the assessee on the reasoning that the above said
amount of Rs.275 lakhs represent expenditure relating to the earlier years.
In our view, the claim of the assessee needs to be examined in terms of
clause (i) of Explanation 1 to sec. 115JB of the Act. Accordingly, we set
aside the order of Ld CIT(A) on this issue and restore the same to the file
of the assessing officer with the direction to examine this issue afresh in
terms of clause (i) of Explanation 1 to sec. 115JB of the Act by duly
considering the submissions of the assessee and take appropriate
decision in accordance with the law.
ITA. No4035/Mum/2006 and
other two appeals
17
38.
In the result, the appeal filed by the revenue for assessment year
2002-03 is partly allowed and the appeals filed by the assessee for
assessment years 2004-05 and 2005-06 are treated as partly allowed.
The above order was pronounced in the open court on 17th Dec, 2014.
घोषणा खल
ु े यायालय म* +दनांकः 17th
Dec,2014 को क" गई ।
sd
sd -
(संजय गग /SANJAY GARG)
यायक सदय / JUDICIAL MEMBER
मुंबई Mumbai: 17th
( बी.आर.बाकरन / B.R. BASKARAN)
लेखा सदय / ACCOUNTANT MEMBER
Dec,2014.
व.न.स./ SRL , Sr. PS
आदे श क !त#ल$प अ%े$षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2.
यथ / The Respondent.
3.
आयकर आयु.त(अपील) / The CIT(A)- concerned
4.
आयकर आयु.त / CIT concerned
5.
/वभागीय तन1ध, आयकर अपील&य अ1धकरण, मुंबई /
DR, ITAT, Mumbai concerned
गाड फाईल / Guard file.
6.
आदे शानस
ु ार/ BY ORDER,
true copy
सहायक पंजीकार (Asstt. Registrar)
आयकर अपील&य अ1धकरण, मुंबई /ITAT, Mumbai