Hindustan Paper Corporation Ltd., Kolkata V. DCIT, Circle - 5, Kolkata, Kolkata

CO 19/KOL/2011

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1527 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 7 month(s) 20 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 05-11-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 08-09-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 16-03-2011
• Court: TRIBUNAL
• Department Lawyers: D S DAMLE
• Keywords: Earning of tax free income; Wholly owned subsidiary; Valuation report; Condonation of delay
• Section: 43B; 143(3); 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI M. BALAGANES H, AM] I.T.A NO.1692/KOL/2010 ASSESSMENT YEAR: 2007-08 DEPUTY COMMISSIONER OF INCOME-TAX VS. M/S. HINDUST HAN PAPER CORPN. LTD. CIRCLE-5, KOLKATA. (PAN: AAACH9463K) ( APPELLANT ) ( RESPONDENT ) & C.O. NO. 19/KOL/2011 IN I.T.A NO.1692/KOL/2010 ASSESSMENT YEAR: 2007-08 M/S. HINDUSTHAN PAPER CORPN. LTD. VS. DEPUTY COMMI SSIONER OF INCOME-TAX CIRCLE-5, KOLKATA. (CROSS OBJECTOR) (RESPONDENT) DATE OF HEARING: 05.10.2015 DATE OF PRONOUNCEMENT: 05.11.2015 FOR THE APPELLANT: SHRI SANJAY MUKHERJEE, JCIT FOR THE RESPONDENT: SHRI D. S. DAMLE, FCA ORDER PER SHRI MAHAVIR SINGH, JM: THIS APPEAL OF REVENUE AND CROSS OBJECTION BY ASSES SEE ARE ARISING OUT OF ORDER OF CIT(A)-VI, KOLKATA IN APPEAL NO. 840/CIT(A)-VI/0 9-10/CIR-5/KOL DATED 30.06.2010. ASSESSMENT WAS FRAMED BY ACIT, CIRCLE-5 , KOLKATA U/S. 143(3) & 115WE(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER R EFERRED TO AS THE ACT) FOR AY 2007-08 VIDE ORDER DATED 04.12.2009. 2. FIRST WE TAKE UP ITA NO. 1692/KOL/2010 (REVENUE S APPEAL). THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AGAINST THE ORDER OF CIT( A) DELETING THE DISALLOWANCE MADE BY AO OF PROVISIONS FOR WRITE OFF OF SPARES AT RS.10 L ACS. FOR THIS, REVENUE HAS RAISED FOLLOWING GROUND NO.1: 1. THAT LD. CIT(A)-VI, KOLKATA HAS ERRED IN LAW A S WELL AS ON FACTS OF THE CASE IN DELETING THE ADDITION ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR WRITE OFF OF SPARES OF RS.10 LACS WITHOUT GOING INTO THE MERIT OF THE CASE . 3. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE HAS D EBITED A SUM OF RS. 10 LAC UNDER THE HEAD LOSS ON ACCOUNT OF DIMINUTION IN VALUE OF STORES AND SPARES. THE AO REQUIRED 2 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 THE ASSESSEE TO EXPLAIN THE SAME. THE ASSESSEE EXP LAINED VIDE REPLY DATED 26.10.2009 BUT THE AO HAS NOT ACCEPTED THE REPLY OF THE ASSESS EE AND HENCE, HE DISALLOWED THE PROVISION FOR WRITE OFF OF STORES AND SPARES AS NOT ALLOWABLE EXPENDITURE. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO ALLOWE D THE CLAIM OF THE ASSESSEE BY RELYING ON THE ORDER OF AY 2004-05 AND ALSO OBSERVI NG THAT EVEN THE AO HAS NOT MADE ANY ADDITION ON THE SAME ISSUE FOR AY 2006-07. FOR THIS, HE OBSERVED AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLAN T AND ALSO THE DETAILS FURNISHED BY THE APPELLANT. THE AO MADE THE DISALLOWANCE SINCE THE PROVISION FOR WRITE OFF OF STORES AND SPARES IS NOT AN ALLOWABLE EXPENDITURE, STORES AND SPARES ARE CONSUMABLE ITEMS OF A MANUFACTURING BUSINESS AND, THEREFORE, C ONSUMPTION OF STORES IS AN ORDINARY INCIDENCE OF MANUFACTURING BUSINESS. I AGREE WITH THE DECISION OF CIT(A)-V, IN ITA NO. 262 IN THE APPELLANTS OWN CASE FOR THE AY 2004-05, BASED ON WHICH THE AO HAS NOT MADE ANY ADDITION ON THE SAME ISSUE FOR THE AY 2006 -07. SINCE FACTS AND CIRCUMSTANCES OF THE PRESENT APPEAL ARE THE SAME, AO IS DIRECTED TO ALLOW THE SUM OF RS.10,00,000. THIS GROUND IS ALLOWED. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE US. 4. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT ASSESSEE HAD WRITTEN OFF IN ITS PROFIT & LOSS ACCOUNT THE VALUE OF OBSOLETE STORES AND SPARES AMOUNTING TO RS. 656. 36 LACS. THE ASSESSEE DEDUCTED THE PROVISION CREATED TILL 31.03.2006 FOR AN AMOUNT O F RS. 646.36 LACS AND THE REMAINING SUM OF RS. 10 LACS WAS DEBITED TO THE PROFIT AND LO SS ACCOUNT FOR THE YEAR ENDED 31.03.2007. ASSESSEE CLAIMED THAT IT CARRIES SUBSTA NTIAL INVENTORY OF RAW MATERIALS, STORES AND SPARES. ACCORDING TO THE ASSESSEE, I TS PLANTS ARE LOCATED IN REMOTE AND INACCESSIBLE AREAS OF ASSAM AND HENCE THESE PLANT S CARRY SUBSTANTIAL INVENTORY OF RAW MATERIAL STORES AND SPARES. DUE TO HEAVY RAI NS AS ALSO SUBSTANTIAL USE OF WATER AND CHEMICALS IN MANUFACTURING PROCESS, T HERE IS HIGH INCIDENCE OF CORROSION AND DAMAGE. FROM THE RECORDS, WE FIND THAT THE ASSE SSEE REGULARLY CARRIES OUT PHYSICAL INSPECTION OF MATERIALS, STORES AND ASCERTAIN THE D IMINUTION IN VALUE OF STORES AND ALSO DAMAGED AND OBSOLETE STOCK. IT IS ALSO A FACT THAT PHYSICAL INSPECTION IS CONDUCED BOTH DEPARTMENTALLY AS ALSO BY EXTERNAL AGENCIES. DURING THE YEAR UNDER CONSIDERATION M/S. BANDYOPADHYAY & ASSOCIATES, CO ST ACCOUNTANTS, CARRIED OUT THE VALUATION OF SPARES AT NAGAON AND CACHAR PAPER MIL LS AND IDENTIFIED ITEMS OF OBSOLETE AND DAMAGED STORES AND SPARES AND FURNISHED REPORT ON VALUATION OF STORES AND SPARES. BASED ON THE VALUATION REPORT THAT ASSESSEE WRITTEN OFF RS.656.36 LACS IN ITS PROFIT AND 3 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2007. HOWEVE R, IN RESPECT OF THE VERY SAME ITEMS ASSESSEE HAD CREATED PROVISION IN THE EARLIER YEARS TO THE EXTENT OF RS.646.36 LACS AND THEREFORE ADJUSTING SUCH PROVISIONS, THE NET AD DITIONAL SUM OF RS. 10 LACS ONLY WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT. WE FUTHER F IND THAT SIMILAR WRITE OFF WERE ALSO MADE BY THE ASSESSEE IN THE FINANCIAL YEAR 2003-04 AND 2005-06. THE DISALLOWANCE MADE BY THE AO IN AY 2004-05, WAS DELETED BY THE CI T(A) AND THEREAFTER COD REFUSED PERMISSION TO FILE APPEAL AGAINST THE SAID APPELLATE ORDER. IN AY 2006-07 ALSO THE ASSESSEE HAD WRITTEN OFF RS.184. 07 LACS. IN T HE REGULAR ASSESSMENT U/S. 143(3) FOR A. Y. 2006-07 THE SAME AO AFTER DUE CONSIDERATION OF THE EXPLANATION AND THE CIT(A)S ORDER FOR AY 2004-05, HAD REFRAINED FROM M AKING ANY DISALLOWANCE. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE CLAIM OF ASSESSEE, WRITING OFF IN ITS PROFIT & LOSS ACCOUNT, THE VALUE OF OBSOLETE STORES AND SPARES, IS A GENUINE CLAIM AND CIT(A) HAS RIGHTLY A LLOWED THE SAME. 5. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) DELETING THE DISALLOWANCE MADE BY AO BY INVOKING THE PROVISI ONS OF SECTION 14A READ WITH RULE 8D OF THE I. T. RULES, 1962 (HEREINAFTER REFER RED TO AS THE RULES). FOR THIS, REVENUE HAS RAISED FOLLOWING GROUND NO.2: 2. THAT LD. CIT(A)-VI, KOLKATA HAS ERRED IN LAW A S WELL AS ON FACTS, IN DELETING THE ENTIRE ADDITION U/S. 14A AND NOT RESTRICTING IT TO CERTAIN AMOUNT APPLYING THE PROVISION OF RULE 8D, IN VIEW OF THE DECISION OF THE ITAT, SP ECIAL BENCH, MUMBAI, PRONOUNCED IN THE CASE OF DAGA CAPITAL MANAGEMENT LTD. 6. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE HAS E ARNED DIVIDEND INCOME OF RS.907.94 LACS AND CLAIMED THE SAME AS EXEMPT U/S. 10(34) OF THE ACT. THE AO MADE DISALLOWANCE OF AVERAGE OF INVESTMENT AT 0.5% AFTER TAKING CALCULATION FROM ASSESSEE IN VIEW OF RULE 8D OF THE RULES. ACCORDINGLY, THE AO MADE DISALLOWANCE OF RS.98.23 LACS AS EXPENDITURE LINKED TO EARNING OF EXEMPT INC OME U/S. 14A OF THE ACT READ WITH RULE 8D OF THE RULES. AGGRIEVED, ASSESSEE PREFERRE D APPEAL BEFORE CIT(A), WHO DELETED THE DISALLOWANCE ONLY ON THE PREMISE THAT T HE ASSESSEE HAS RECEIVED DIVIDEND FROM A WHOLLY OWNED SUBSIDIARY VIZ. HINDUTHAN NEWSP RINT LTD. AND NO NEW INVESTMENT HAS BEEN MADE AFTER 1983. ACCORDING TO ASSESSEE, T HIS DIVIDEND DECLARED BY SUBSIDIARY BUT HAD NOT ACTUALLY PAID THOUGH ADJUSTED IN VIEW O F THE BOOK ENTRIES PASSED IN THE ACCOUNTS OF THE SUBSIDIARY AS WELL AS THE ASSESSEE COMPANY. ACCORDING TO ASSESSEE, 4 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 EXCEPT PASSING OF JOURNAL ENTRY IN THE BOOKS OF THE ASSESSEE AS WELL AS THE SUBSIDIARY, NO EXPENDITURE IS INCURRED FOR THE PURPOSE OF THIS DIV IDEND. AGGRIEVED AGAINST DELETION, REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE AO MADE DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. WE F IND THAT THE AO HAS MADE ADDITION OF RS.98.23 LACS U/S 14A OF THE ACT WHICH IS AT 0.5 % OF RS.1,96,46,30,000 BEING INVESTMENT IN SHARES OF ITS WHOLLY OWNED SUBSIDIARY HINDUSTAN NEWSPRINTS LTD. (HNL) FROM WHOM ASSESSEE HAD RECEIVED DIVIDEND OF RS. 907 .94 LACS. THE FACTS ARE THAT IN 1970S THE ASSESSEE HAD SET UP A NEWSPRINT MILL IN K ERALA AND AFTER THE NEWSPRINT DIVISION STARTED MANUFACTURING, GOVERNMENT OF INDIA DECIDED TO CORPORATISE THE NEWSPRINT PAPER DIVISION AND ACCORDINGLY DIRECTED T HE ASSESSEE TO CONVERT THE SAID NEWSPRINT PAPER DIVISION INTO A WHOLLY OWNED SUBSID IARY UNDER THE NAME AND STYLE OF HINDUSTAN NEWSPRINT LTD. SINCE 1983-84 THE SAID HNL IS FUNCTIONING AS AN INDEPENDENT CORPORATE ENTITY. AFTER 1983 THE ASSESS EE HAS NOT MADE FRESH INVESTMENTS IN THE SAID SUBSIDIARY. THE DIVIDEND IS DECLARED BY THE SUBSIDIARY BUT IS NOT ACTUALLY PAID BUT IT IS ADJUSTED INTER SE BY PASSING BOOK EN TRIES IN THE ACCOUNTS OF SUBSIDIARY AS WELL AS THE ASSESSEE COMPANY. NO DIVIDEND IS ACTUAL LY DISBURSED. THE ACCOUNTING ENTRY OF DIVIDEND DECLARATION IS PASSED ONLY ONCE, ANNUAL LY. EXCEPT FOR PASSING OF THE JOURNAL ENTRY IN THE BOOKS, OF BOTH COMPANIES, NO EXPENDITU RE IS INCURRED FOR THE PURPOSE OF COLLECTION OF THE DIVIDEND. WE FIMND THAT THE AO IN THE IMPUGNED ORDER HAS MADE THE DISALLOWANCE BY INVOKING RULE 8D(2)(III) OF THE RUL ES. RULE 8D(L) OF THE RULES PROVIDES THAT WHERE AN AO, HAVING REGARD TO THE ACC OUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR IS NOT SATISFIED WITH THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME; HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN ACC ORDANCE WITH SUB RULE(2). RULE 8D(1), THEREFORE, REQUIRES THAT BEFORE SUB RULE (2) IS INVOKED THE AO SHOULD HAVE REGARD TO THE ACCOUNTS OF THE ASSESSEE FOR THE RELEVANT PR EVIOUS YEAR BEFORE RESORTING TO SUB RULE(2). IN THE PRESENT CASE WITH REFERENCE TO ASSE SSEE'S ACCOUNTS FOR FY 2006-07; THE ASSESSEE HAD PROVED THAT NO EXPENDITURE WAS ACTUALL Y INCURRED BY THE ASSESSEE. THE AO WITHOUT DEALING WITH OR WITHOUT HAVING REGARD TO AS SESSEE'S ACCOUNTS FOR THE FY 2006- 5 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 07, ARBITRARILY PROCEEDED TO MAKE DISALLOWANCE UNDE R RULE 8D(2)(III) RULES. HAVING REGARD TO THE AFORESAID FACTS, WE ARE OF THE VIEW T HAT THE AO WAS UNJUSTIFIED IN MAKING THE DISALLOWANCE OF RS.98.23 LACS MERELY BY ADOPTIN G AN ARITHMETICAL FORMULA PRESCRIBED IN RULE 8D(2)(III) OF THE RULES. WE ARE OF THE VIEW THAT DISALLOWANCE U/S 14A OF THE ACT CAN BE MADE ONLY IF THE FACTS OF THE CASE PROVE THAT AT LEAST SOME EXPENDITURE WAS ACTUALLY INCURRED BY THE ASSESSEE F OR EARNING EXEMPT INCOME. IF, HOWEVER, THE FACTS ON RECORD AND THE ASSESSEE'S ACC OUNTS FOR THE RELEVANT YEAR ESTABLISH THAT IN FACT NO EXPENDITURE WAS INCURRED IN RELATIO N TO EARNING TAX FREE INCOME THEN NO DISALLOWANCE IS PERMISSIBLE UNDER THE SUBSTANTIVE P ROVISIONS OF SEC 14A OF THE ACT. WE, THEREFORE ARE OF THE VIEW THAT CIT(A) HAS RIGHT LY DELETED THE DISALLOWANCE OF RS. 98.23 LACS, ARBITRARY MADE BY THE AO WITHOUT BRING ON RECORD ANY MATERIAL WHICH EVEN SUGGESTED THAT SAME EXPENDITURE WAS IN FACT INCURRE D BY THE ASSESSEE FOR EARNING DIVIDEND FROM ITS WHOLLY OWNED SUBSIDIARY ACCORDING LY, WE CONFIRM THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMIS SED. 8. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) DIRECTING THE AO TO ALLOW REBATE U/S. 88E OF THE ACT WHILE CO MPUTING BOOK PROFIT U/S. 115JB OF THE ACT. FOR THIS, REVENUE HAS RAISED FOLLOWING GR OUND NO.3: 3. THE CIT(A)-VI, HAS ERRED IN LAW IN DIRECTING T O COMPARE TAX ON NORMAL INCOME BEFORE REBATE U/S. 88E WITH 10% OF BOOK PROFIT FOR APPLYING SEC.115JB. 9. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THE ABOVE GROUND IS NOT ARISING OUT OF THE ORDER OF CIT(A). WHEN THIS WAS CONFRONTED TO LD. SR. DR HE FAIRLY CONCEDED THE ISSUE AND EVEN WE HAVE GONE THROUGH TH E ORDER OF CIT(A) AND NOTICED THAT NO SUCH ISSUE BE RAISED BEFORE CIT(A), HENCE T HE SAME IS DISMISSED AS INFRUCTUOUS. 10. NOW, WE ARE COMING TO ASSESSEES CO NO. 19/KOL. 2011. AT THE OUTSET, IT IS NOTICED THAT THE CO OF THE ASSESSEE IS BARRED BY LI MITATION FOR 164 DAYS BUT ASSESSEE HAS FILED ONE CONDONATION PETITION ALONG WITH AFFIDAVIT STATING THE REASON THAT THIS APPEAL WAS NOT FILED ON THE ADVICE OF THE COUNSEL THAT THE REVENUES APPEAL IS LIABLE TO BE DISMISSED AS NOT MAINTAINABLE AS REVENUES APPEAL W AS FILED FOR OBTAINING APPROVAL OF COD AT THAT TIME THE SAME WAS MANDATORY IN ALL CASE S INVOLVING UNDERTAKINGS OWNED BY THE CENTRAL GOVERNMENT. THE ASSESSEE HAS STATED THE REASONS IN ITS AFFIDAVIT AT PARA 4 TO 9, WHICH READS AS UNDER: 6 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 4. ON RECEIPT OF THE INTIMATION REGARDING FILING OF SECOND APPEAL THE COUNSEL OF THE RESPONDENT COMPANY ADVISED THAT THE APPEAL OF THE R EVENUE WAS LIABLE TO BE DISMISSED AS IT WAS FILED WITHOUT OBTAINING PRIOR APPROVAL OF COD WHICH WAS THEN MANDATORY IN ALL CASES INVOLVING UNDERTAKINGS OWNED BY THE CENTR AL GOVERNMENT. 5. THE RESPONDENT COMPANY WAS ADVISED THAT A CROS S OBJECTION CAN BE FILED ONLY WHERE AN APPEAL WAS VALIDLY FILED AND THEREFORE NO USEFUL PURPOSE WOULD BE SERVED SINCE THE APPEAL FILED WITHOUT OBTAINING COD APPROV AL WAS LIABLE TO BE DISMISSED. 6. BASED ON THE ADVICE RECEIVED FROM THE COUNSEL A T THE RELEVANT TIME THE CROSS OBJECTIONS FOR THE AY 2007-08 WAS NOT FILED ON OR B EFORE 03.10.2010. 7. IN FIRST WEEK OF MARCH 2011 THE COMPANYS COUNS EL INFORMED THE RESPONDENT COMPANY ABOUT THE JUDGMENT OF THE SUPREME COURT IN WHICH REQUIREMENT OF OBGTAINING COD APPROVALS WAS DISPENSED WITH AND ACCORDINGLY RE SPONDENT COMPANY WAS INFORMED THAT THE APPEAL FILED BY THE REVENUE AY 20 07-08 WOULD BE ADMITTED FOR HEARING BY THE ITAT. 8. THE RESPONDENT COMPANY WAS ALSO ADVISED THAT IN RESPECT OF ISSUES DECIDED AGAINST BY THE CIT(A) CROSS OBJECTIONS SHOULD NOW BE FILED SINCE THE APPEAL FILED BY THE REVENUE AUTHORITIES WOULD BE ADMITTED EVEN THOUGH T HE SAME WAS FILED WITHOUT OBTAINING PRIOR COD APPROVAL. 9. IMMEDIATELY ON RECEIPT OF THE ADVICE FROM THE C OUNSEL THE RESPONDENT COMPANY TOOK IMMEDIATE STEPS FOR FILING OF CROSS OBJECTIONS AND THE SAME WAS FILED ON 16.03.2011. 11. IN VIEW OF THE ABOVE REASONS, THE BENCH REQUIRE D THE LD. SR. DR AS TO WHY THE DELAY BE NOT CONDONED. THE LD. SR. DR ALTHOUGH OBJ ECTED FOR CONDONATION OF DELAY BUT HE ALSO CONCEDED THAT THE CAUSE IS REASONABLE. WE FIND THAT THE CAUSES SHOWN BY THE ASSESSEE ARE REASONABLE, HENCE, WE CONDONE THE DELA Y AND ADMIT THE ASSESSEES CO. 12. THE FIRST ISSUE IN THE CROSS OBJECTION OF THE A SSESSEE IS AS REGARDS TO THE ORDER OF CIT(A) CONFIRMING THE ADDITION OF PRIOR PERIOD ADJU STMENT. FOR THIS, ASSESSEE HAS RAISED FOLLOWING THREE GROUNDS: 1. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN LAW IN UPHOLDING THE ADDITION MADE IN THE ASSESSMENT ORDER IN RESPECT OF PRIOR PERIOD ADJUSTMENTS. 2. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A0 FAILED TO APPRECIATE THAT THE AMOUNT DISALLOWED INTER ALIA IN CLUDED CENVAT ACTUALLY PAID DURING THE RELEVANT YEAR AMOUNTING TO RS.198.09 LACS, FOR WHICH DEDUCTION WAS PERMISSIBLE U/S. 43B. 3. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AUTHORITIES BELOW BE DIRECTED TO ALLOW DEDUCTION FOR RS.172.05 LACS DEBI TED UNDER THE HEAD PRIOR PERIOD ADJUSTMENTS AS THE LIABILITY TO PAY THE EXPENDITURE HAD CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. 13. BRIEFLY STATED FACTS ARE THAT THE AO NOTICED FR OM SCHEDULE -23 TO THE ACCOUNTS FORMING PART OF BALANCE SHEET THAT IT HAS DEBITED N ET PRIOR PERIOD EXPENSES OF RS.172.05 LACS IN ITS P&L ACCOUNT. ACCORDING TO AO, THE ASSE SSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. HENCE, PRIOR PERIOD EXPENSES IS NOT ALLOWABLE AS AN EXPENDITURE 7 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 AS PER THE PROVISIONS OF THE ACT. HENCE, HE ADDED BACK THE PRIOR PERIOD EXPENSES AT RS.172.05 LACS. AGGRIEVED, ASSESSEE PREFERRED APPEA L BEFORE CIT(A), WHO ONLY DIRECTED THE AO TO ALLOW ONLY THE ITEM SUCH AS REBATE AND DI SCOUNT, SALARY AND WAGES AND OTHER MISCELLANEOUS EXPENDITURE AFTER VERIFICATION BUT HA S NOT ALLOWED BASIC OF EXCISE DUTY, EDUCATION CESS, STATUTORY INTEREST ETC. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 14. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUG H FACTS AND CIRCUMSTANCES OF THE CASE. AT THE OUTSET, LD. COUNSEL FOR THE ASSES SEE DREW OUR ATTENTION TO THE DETAILS OF PRIOR PERIOD ADJUSTMENT, GIVEN AT ASSESSEES PAPER BOOK PAGE 32, WHICH READS AS UNDER: HINDUSTAN PAPER CORPORATION LTD. (TAX CELL) DETAILS OF PRIOR PERIOD ADJUSTMENT F.Y 2006-07 (AY 2007-08) (RS. IN LAKH) PARTICULARS NPM CPM CHQ & MKT DEBIT DR CR DR CR DR CR SALARIES, WAGES & OTHERS 1.66 POSTAGE & TELEGRAM 0.10 CHEMICAL CONSUMED 0.84 RAW MATERIAL CONSUMED 8.65 PROFESSIONAL & OTH CHARGES 0.07 SECURITY EXPENSES 6.98 SALES RETURN 6.16 PRINTING & STATIONERY 0.34 REBATE & OTHER DISCOUNT 40.27 REPAIRS & MAINTENANCE 0.10 CENVAT CREDIT 198.09 PACKING MATERIALS 0.65 OTHER MISC 6.81 CREDIT R & MAINTENANCE PLANT 15.41 R & MAINTENANCE VEHICLES 0.69 FREIGHT & HANDLING 0.43 1.04 INSURANCE 11.42 SERVICE TAX 67.48 VAT CREDIT 2.20 TOTAL 204.25 11.85 18.71 83.58 47.76 3.24 NET BALANCE DEBIT : 270.72 LAKH CREDIT: 98.67 LAKH NET 172.05 LAKH IT ALSO PRODUCED DETAILS OF PAYMENT MADE TO EXCISE DEPARTMENT I.E. BASIC EXCISE DUTY AND EDUCATION CESS AS WELL AS INTEREST ON EDUCATION CESS AND INTEREST ON BASIC EXCISE 8 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 DUTY AND THESE DETAILS ARE AVAILABLE AT ASSESSEES PAPER BOOK PAGE 33, WHICH READS AS UNDER: HINDUSTAN PAPER CORPORATION LTD. (TAX CELL) DETAILS OF PAYMENT MADE TO EXCISE DEPARTMENT DURING THE F.Y 2006-07 DATE OF PAYMENT BASIC EXCISE DUTY(RS.) EDUCATION CE SS(RS.) TOTAL (RS.) 04.12.2006 10,00,000.00 10,00,000.00 04.01.2007 20,00,000.00 20,00,000.00 05.02.2007 41,10,849.00 41,10,849.00 04.03.2007 30,00,000.00 30,00,000.00 21.03.2007 82,398.00 82,398.00 TOTAL 1,31,10,849.00 82,398.00 1,31,93,247.00 DATE OF PAYMENT INTEREST ON BASIC EXCISE DUTY INTEREST ON EDUCATION CESS TOTAL 24.03.2007 65,84,647.00 23,463.00 66,08,110.00 GRAND TOTAL 1,98,01,357.00 IN VIEW OF THE ABOVE FACTS OF THE CASE, WE FIND THA T THE ASSESSEE DEBITED THESE AMOUNTS UNDER THE NOMENCLATURE PRIOR PERIOD ADJUSTMENT AND NOT UNDER PRIOR PERIOD EXPENSES. FOR TAXATION PURPOSES EXPENDITURE CAN BE CONSIDERED TO BE PRIOR PERIOD EXPENDITURE IF AND ONLY IF THE LIABILITY TO PAY THE EXPENDITURE WA S INCURRED OR CRYSTALISED DURING THE EARLIER ACCOUNTING PERIOD BUT IN RELATION TO TRANSA CTION CONDUCTED IN EARLIER ACCOUNTING PERIOD, IF NEW LIABILITY ACCRUES OR CRYSTALLIZES IN THE LATER YEAR, THAN SUCH LIABILITY CANNOT BE REGARDED AS PRIOR PERIOD EXPENDITURE EVEN THOUGH IN ACCOUNTING PARLANCE THE SAME MAY BE CONSIDERED TO BE PRIOR PERIOD ADJUSTMENT. T HE ASSESSEE BEING A GOVERNMENT UNDERTAKING WHOSE PLANTS ARE SITUATED IN ASSAM AND REGISTERED OFFICE AT CALCUTTA BESIDES ADMINISTRATIVE OFFICE AT DELHI AND ITS SEVE RAL OFFICE AND DEPOTS IN DIFFERENT PART OF THE COUNTRY. THE ACCOUNTING PROCEDURE PRESCRIBED BY C&AG HAS INSTITUTIONALIZED SYSTEM OF CHECKS AND BALANCES AND ACCORDINGLY CERTA IN EXPENSES REQUIRED CLEARANCES FROM DIFFERENT AUTHORITIES LOCATED AT DIFFERENT LOC ATIONS AND CITIES. THIS TYPE OF MAJOR EXPENDITURE DEBITED UNDER THE HEAD CENVAT CREDIT WR ONGLY CLAIMED IN EARLIER YEARS, IN WHICH EXCESS CENVAT CREDIT WAS CLAIMED ON PRODUC TION OF PAPER. DURING THE YEAR UNDER CONSIDERATION, ON INSPECTION OF EXCISE RECORD BY CENTRAL EXCISE OFFICIALS, CERTAIN PROCEDURAL IRREGULARITIES WERE DETECTED WHILE CLAIM ING CENVAT CREDIT. ON DETECTION OF IRREGULARITIES THE ASSESSEE WAS DIRECTED TO PAY BASIC EXCISE DUTY OF RS.1,31,10,849/-, EDUCATION CESS OF RS.83,298/- AND STATUTORY INTERES T OF RS.66,08,110/-. THE ASSESSEE 9 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 PROVIDED LIABILITY OF CENVAT OF RS.198.09 CR. FOR T HE YEAR ENDED 31.03.2007. THIS STATUTORY LIABILITY WAS DISCHARGED DURING FY 2006-0 7 RELEVANT TO THIS AY 2007-08 AND ACCORDING TO US, THE SAME WAS ALLOWABLE U/S. 43B OF THE ACT. ACCORDINGLY, WE ARE OF THE VIEW THAT THIS LIABILITY IS ALLOWABLE LIABILITY AND WE DIRECT ACCORDINGLY. 15. THE NEXT ISSUE IN THIS CROSS OBJECTION OF THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN DISALLOWING THE CLAIM OF WRITE OFF OF LOO SE TOOLS. FOR THIS, ASSESSEE HAS RAISED FOLLOWING GROUND NOS. 4 AND 5: 4. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) WAS UNJUSTIFIED IN DISALLOWING THE CLAIM FOR WRITE OFF OF LOOSE TOOLS AMOUNTING TO RS.23.63 LACS. 5. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AUTHORITIES BELOW WERE UNJUSTIFIED IN REJECTING ASSESSEES CLAIM FOR WRITE OFF OF LOOSE TOOLS IGNORING THE FACT THAT ASSESSEES METHOD OF WRITING OFF COST OF TOOLS IN F IVE EQUAL INSTALMENTS WAS ACCEPTED BY THE DEPARTMENT IN ALL THE PAST ASSESSMENTS. 16. BRIEFLY STATED FACTS ARE THAT THE AO NOTICED FR OM SCHEDULE 19 OF THE BALANCE SHEET AND NOTED THAT THE ASSESSEE HAS WRITTEN OFF L OOSE TOOLS OF RS.23.63 LACS. THE AO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THIS WRI TE OFF OF LOOSE TOOLS BE NOT DISALLOWED. THE ASSESSEE EXPLAINED THAT LOOSE TOOL S ARE USED FOR MAINTENANCE OF PLANT AND MACHINERY AND THESE ARE DEPRECIABLE ITEMS AND A CCORDINGLY DIMINUTION IN THE VALUE OF SUCH ITEMS IS CHARGED TO THE P&L ACCOUNT OF THE ASSESSEE AND DEPRECIATED VALUE OF THE LOOSE TOOLS ARE SHOWN IN THE BALANCE SHEET. AC CORDINGLY, IT WAS CLAIMED AS DEDUCTION. THE AO WAS NOT CONVINCED AND HE DISALLO WED THE CLAIM OF THE ASSESSEE. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO ALSO CONFIRMED THE ACTION OF AY BY OBSERVING AS UNDER: I HAVE GONE THROUGH THE SUBMISSIONS OF THE APPELL ANT AND THE ORDER OF THE AO. THE APPELLANT ADMITS THAT THE LIFE OF THESE TOOLS AND C ONSUMABLES ARE WRITTEN OFF IN EQUAL INSTALMENTS. IT IS A FACT THAT THE ASSESSEE HAS SH OWN THE LOOSE TOOLS UNDER THE HEAD INVENTORIES IN THE BALANCE SHEET AND IS AMORTISING THE EXPENSES OVER A PERIOD OF 5 YEARS IN EQUAL INSTALMENTS. AS SUBMITTED BY THE AP PELLANT, THE TOOLS AND CONSUMABLES HAVE A LIFE OF 5 YEARS. THEY CANNOT BE WRITTEN OFF IN EQUAL INSTALMENTS, SINCE THE EXPENDITURE IS NOT IN THE NATURE OF PREOPERATIVE OR PRELIMINARY IN NATURE. I AGREE WITH THE ARGUMENTS GIVEN BY THE AO IN THE ASSESSMENT ORD ER. THE DISALLOWANCE MADE BY THE AO IS CONFIRMED. TAKING INTO CONSIDERATION THE ALTERNATIVE PLEA OF THE APPELLANT, AFTER EXAMINATION OF THE TOOLS AND CONSUMABLES DETA ILS FURNISHED BY THE APPELLANT, THE AO IS DIRECTED TO ALLOW THE DEDUCTION FOR THE TOOLS AND CONSUMABLES PURCHASED AND CONSUMED IN THE YEAR UNDER CONSIDERATION, AFTER NEC ESSARY VERIFICATION. THESE GROUNDS ARE PARTLY ALLOWED. AGGRIEVED, ASSESSEE IS IN SECOND APPEAL BEFORE TRIB UNAL. 10 ITA NO.1692/K/2010 & CO NO.19/K/2011 HINDUSTHAN PAPER CORPN. LTD. AY 2007-08 17. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUG H FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT ASSESSEE IS FOLLOWING A CON SISTING ACCOUNTING PRACTICE OF WRITING OFF OF LOOSE TOOLS IN FIVE ANNUAL EQUAL INSTALMENT S IN THE PAST. THE ASSESSEE HAS FILED DETAILS BEFORE US FOR THE AY 2004-05, 2005-06 AND 2 006-07 AS UNDER: ASSESSMENT YEAR AMOUNT 2004-05 RS.25.65 LACS 2005-06 RS.26.44 LACS 2006-07 RS.25.94 LACS THE METHOD ADOPTED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT IN ALL THE PAST ASSESSMENT YEARS BY THE SAME AO. IN THE IMMEDIATEL Y THREE PRECEDING YEARS, WHILE COMPLETING REGULAR ASSESSMENT THE AO HAD ALLOWED TH E REGULAR DEDUCTION FOR THE WRITE OFF OF LOOSE TOOLS ON AMORTIZATION BASIS. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THE CIT(A) HAS ERRED IN NOT ALLOWING THE DEDUCTION. WE REVERSE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF DEDUCTION OF WRITE OFF OF LO OSE TOOLS. WE ORDER ACCORDINGLY. THIS ISSUE OF ASSESSEES CO IS ALLOWED. 18. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISS ED AND ASSESSEES CO IS ALLOWED. 19. ORDER IS PRONOUNCED IN THE OPEN COURT ON 05.11. 2015 SD/- SD/- (M. BALAGANESH) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 5TH NOVEMBER, 2015 JD. SR. P.S COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT DCIT, CIRCLE-5, KOLKATA. 2 RESPONDENT M/S. HIDNUSTHAN PAPER CORPN. LTD., 75C , PARK STREET, KOLKATA-16. 3 . THE CIT(A), KOLKATA 4. 5. CIT KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .