ACIT, Bangalore V. M/s. Karnataka State Industrial Investment & Development Corporaton Ltd., Bangalore

ITA 1178/BANG/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9535 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-07-2009
• Assessment Year: 1999-2000
• Appeal Filed On: 04-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reopening of assessment; General deduction; Bad and doubtful debts; Revised return
• Section: 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI K.P.T. THANGAL, VICE PRESIDENT AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.1178/BANG/08 ASSESSMENT YEAR : 1999-2000 THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 11(5), BANGALORE. : APPELLANT VS. M/S. KARNATAKA STATE INDUSTRIAL INVESTMENT & DEVELOPMENT CORPORATION LTD., NO.49, KHANIJA BHAVAN, 4 TH FLOOR, EAST WING, RACE COURSE ROAD, BANGALORE 560 001. : RESPONDENT C.O. NO.109/BANG/2008 (IN ITA 1178/BANG/08) BY ASSESSEE REVENUE BY : SMT. JACINTA ZIMIK VASHAI ASSESSEE BY : SHRI DINESH O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THESE ARE TWO APPEALS ONE PREFERRED BY THE REVENUE AND THE ANOTHER BY M/S. KARNATAKA STATE INDUSTRIAL INVESTMENT AND DEVELOPME NT CORPORATION LIMITED [ KSIIDC ], THE ASSESSEE COMPANY AGAINST THE ORDER OF THE CIT(A)-I, FOR THE ASSESSMENT YEAR 1999-2000. 2. EVEN THOUGH, THE REVENUE HAS RAISED FIVE GROUNDS , THE CRUX OF THE ISSUE IS THAT ITA NO.1178 & CO 109 OF 08 PAGE 2 OF 9 THE CIT(A) ERRED IN ALLOWING THE ASSESSEES CLAIM FOR DEDUCTION U/S 36(1)(VIII) IN RESPECT OF THE SPECIAL RESERVE PARTICULARLY WHEN THERE WAS A LOSS AND THE SPECIAL RESERVE WAS BY WAY OF AN ADJUS TMENT ENTRY IN THE BALANCE SHEET. 3. LIKEWISE THE ASSESSEE COMPANY HAS ALSO RAISED FIVE GROUNDS IN ITS CROSS OBJECTIONS . ON A PERUSAL, WE FIND THAT THE GRIEVANCE OF THE ASSESSEE COMPANY, IN A NUT-SHELL, IS THAT THE REOPENING OF THE ASSESSMENT BEYOND THE TIME LI MIT OF FOUR YEARS WAS BAD IN LAW AND THAT THE CIT(A) OUGHT TO HAVE CANCEL LED THE ASSESSMENT BY HOLDING THAT THE REOPENING WAS BARRED BY LIMITAT ION. 4. BEFORE GETTING INVOLVED WITH THE ISSUES RAISED B Y EITHER PARTY, WE FIND THAT THERE WAS A DELAY IN PREFERRING OF CROSS OBJEC TIONS BY THE ASSESSEE COMPANY. AN AFFIDAVIT DATED: 30/1/09 WAS FILED ON BEHALF OF THE ASSESSEE COMPANY, IN WHICH, IT WAS SUBMITTED THAT THE GROUNDS OF APPEAL RECEIVED FROM THE DEPARTMENT ON 19/9/2008 HAD GOT MIXED UP W ITH OTHER COURT PAPERS IN THE LEGAL DEPARTMENT AND CONSEQUENTLY NO IMMEDIATE ACTION COULD BE TAKEN. AFTER THOROUGH SEARCH, THESE PAPERS WERE RETRIEVED AND ACTION WAS TAKEN TO INSTRUCT THE COUNSEL FOR FILING THE CROSS OBJECTIONS. THE CROSS OBJECTIONS WERE FILED BEFORE THIS HONBLE TRIBUNAL ON 15.12.2008. THERE IS A DELAY OF 57 DAYS FOR FILING THE CROSS OBJECTIONS. THIS DELAY WAS SOLELY DUE TO MIX UP OF THE PAPERS IN UNCONNECTED FILES AND DU E TO THE TIME TAKEN FOR RETRIEVING THE SAME. IT WAS, THEREFORE, PRAYED THAT THE DELAY IN FILING THE CROSS OBJECTIONS MAY BE CONDONED IN THE INTEREST OF JUSTICE AND EQUITY. 4.1. THE PLEA OF THE ASSESSEE COMPANY WAS DULY CONS IDERED. AS THE ASSESSEE COMPANY WAS PREVENTED BY A REASONABLE CAUS E IN NOT FILING ITS CROSS OBJECTIONS WITHIN THE STIPULATED TIME FRAME, THE DELAY WAS CONDONED ITA NO.1178 & CO 109 OF 08 PAGE 3 OF 9 AND THE REGISTRY WAS DIRECTED TO TAKE THE CROSS OBJ ECTIONS OF THE ASSESSEE COMPANY ON RECORD FOR FURTHER ADJUDICATION. 5. AS THE ISSUES RAISED BY THE REVENUE AS WELL AS T HE ASSESSEE COMPANY WERE AGAINST THE IMPUGNED ORDER OF THE CIT (A) WHICH IS IN DISPUTE, THESE APPEALS ARE CONSIDERED TOGETHER AND DISPOSED OFF IN THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. LET US NOW ADDRESS TO THE REVENUES GRIEVANCE. 6. THE PRIME CONTENTION OF THE REVENUE IS THAT THE CIT(A) HAD GROSSLY FAILED TO APPRECIATE THE FACTS AND THE CIRCUMSTANCE S UNDER WHICH DEDUCTION U/S 36(1)(VIII) WAS CLAIMED, PARTICULARLY WHEN THER E WAS A LOSS AND THE SPECIAL RESERVE WAS BY WAY OF AN ADJUSTMENT ENTRY I N THE BALANCE SHEET. 6.1. IN THE ASSESSMENT ORDER [U/S 143(3) RWS.147 OF THE ACT], WITH REGARD TO THE ALLOWABILITY OF DEDUCTION U/S 36(1) (VIII), THE AO HAD REASONED AS UNDER: AS SEEN FROM THE P & L ACCOUNT, THE ASSESSEE HAS A LOSS OF RS.1,78,90,425/- BEFORE APPROPRIATION. FOR THE PURPOSE OF APPROPRIA TION, THE ASSESSEE HAS ADDED THE BALANCE AS PER THE LAST BALANCE SHEET OF RS.5,45,854/- AND TRANSFERRED AN AMOUNT OF RS.19,97,294/- FROM THE G ENERAL RESERVES RESULTING IN A LOSS OF RS.1,53,47,095/- WHICH IS AV AILABLE FOR APPROPRIATION. THIS AMOUNT HAS BEEN APPROPRIATED AS UNDER: SPECIAL RESERVES U/S 36(1)(VIII) RS. 1,25,00,00 0 RESERVE FOR BAD & DOUBTFUL DEBTS RS.20,23,07,125 LOSS CARRIED TO BALANCE SHEET (RS.23,01, 52,220) FROM THE ABOVE, IT IS CLEAR THAT THE CREATION OF TH E SPECIAL RESERVE U/S 36(1) (VIII) IS NOT FROM OUT OF THE PROFITS OF THE ASSESS EE, BUT BY AN ADJUSTMENT ENTRY IN THE BALANCE SHEET. ITA NO.1178 & CO 109 OF 08 PAGE 4 OF 9 HENCE, AS THE SPECIAL RESERVE U/S 36(1)(VIII) HAS N OT BEEN CREATED FROM OUT OF PROFITS OF THE ASSESSEE, BUT BY AN ADJUSTMENT ENTRY TO THE BALANCE SHEET, THE ASSESSEE IS ENTITLED TO THE DEDUCTION U/S 36(1)(VII I). FROM THE DETAILS FILED BY THE ASSESSEE IT WAS STATE D VIDE ITS LETTER DATED 12.10.2006, UNDER THE SAID SECTION DEDUCTION OF 40% IS ALLOWABLE FROM THE ELIGIBLE BUSINESS SUBJECT TO THE CONDITIONS THAT TH E ASSESSEE CREATES AND MAINTAINS SUCH AMOUNT IN A SPECIAL RESERVE. ACCORD INGLY, THE ASSESSEE IS ELIGIBLE FOR DEDUCTION IF THE NET INCOME AS COMPUTE D UNDER THE INCOME-TAX ACT IS A POSITIVE FIGURE. THE PROFITS OR LOSS FOR T HE YEAR OR THE ACCUMULATED BALANCE IN THE PROFIT AND LOSS ACCOUNT COMPUTED UND ER THE PROVISIONS OF THE COMPANIES ACT 1956 IS NOT RELEVANT SO FAR AS INCOME -TAX ACT IS CONCERNED. THE ABOVE EXPLANATION IS NOT CORRECT FOR THE REASON BEING THE POSITIVE FIGURE OF INCOME HAS ARRIVED VIDE ORDER U/S 143(3) DATED 2 8.3.2002 AND SINCE THE CASE WAS RE-OPENED WITH THE REASON THAT THE EXCESSI VE CLAIM OF DEDUCTION WAS ALLOWED IN THE SAID ORDER. HENCE, THE ASSESSEE CANNOT TAKE THE PLEA THAT THE INCOME RETURNED IS A POSITIVE FIGURE. IN THE L IGHT OF THE ABOVE FACT AND CIRCUMSTANCES AND NO FURTHER EXPLANATIONS WERE SUB MITTED BY THE ASSESSEE, THE EXCESSIVE CLAIM OF RS.28,20,816/- IS DISALLOWED .. 7. ON AN APPEAL, THE CIT(A), AFTER DUE CONSIDERATIO N OF THE ASSESSEES CONTENTIONS, HAS OBSERVED THAT 4.4..THE ITAT, BANGALORE BENCH A HAS, AT PARAGRAPH 6 IN THE ORDER CITED ABOVE, WHICH IS A CO MMON ORDER FOR THE ASSESSMENT YEARS 1998-99 AND 1999-2000, OBSERVE D THAT THE AMOUNT OF RS.28,20,86/- BEING SPECIAL RESERVE CREAT ED BY THE APPELLANT FOR THE ASSESSMENT YEAR 1999-2000 HAD BEE N RIGHTLY ALLOWED BY THE AO UNDER SECTION 36(1)(VIII) IN THE ORIGINAL ASSESSMENT ORDER. IN THE CIRCUMSTANCES, THE DISALL OWANCE OF THIS AMOUNT AS MADE BY THE AO IN THE REASSESSMENT ORDER FOR THE ASSESSMENT YEAR IN QUESTION IS DELETED. 7.1. WITH RESPECTS, WE HAVE PERUSED THE FINDING OF THE HONBLE TRIBUNAL. THE HONBLE TRIBUNAL IN ITA NOS:400 & 401/B/2005 DA TED: 27.4.2007 FOR THE AYS 1998-99 AND 1999-2000 IN THE ASSESSEE COMPANYS OWN CASE, AFTER ILLUSTRATING THE WORKING OF DEDUCTION U/S 36(1)(III ) BY THE ASSESSEE AS WELL THE AO, HAD OBSERVED THAT - 5. THE FUNDAMENTAL DIFFERENCE BETWEEN THE CLAIM OF THE ASSESSEE AND AS WORKED OUT BY THE ASSESSING OFFICER IS THAT THE ASSESSEE HAS ITA NO.1178 & CO 109 OF 08 PAGE 5 OF 9 DRAWN UP THE PROFIT FIGURE BY MAKING CERTAIN ADDITI ONS LIKE DIVIDEND AND SHORT TERM FINANCE AND DEDUCTION OF DIVIDEND IN COME RECEIVED. THE STARTING POINT OF ASSESSMENT AS IS EVIDENT FROM THE TABLE ABOVE IS THE INCOME FROM BUSINESS AS COMPUTED BY THE ASSESSE E IN THE REVISED RETURNS. THE AO HAS CALCULATED THE AMOUNT OF LONG TERM FINANCE IN THE SAME MANNER AS THE ASSESSEE HAS WORKED OUT THE RECEIPT FROM THE LONG TERM FINANCE. THE DISCREPANCY IN THE CLAI M OF ASSESSEE IS WITH REFERENCE TO THE INCOME FROM BUSINESS. THE IN COME FROM BUSINESS WHICH IS THE STARTING POINT IN THE ORDER O F ASSESSMENT WHICH IS REPRODUCED ABOVE, AND IT IS THAT AMOUNT THAT THE AO HAS PROPOSED TO FIND OUT THE EXTENT OF INCOME FROM LONG TERM FIN ANCE INCLUDED IN THE INCOME FROM PROFIT AND GAINS FROM THE BUSINESS. THEREFORE, IT IS QUITE OBVIOUS THAT THE INCOME FROM BUSINESS AS WORK ED OUT BY THE ASSESSEE IS NOT THE INCOME FROM BUSINESS AS ASSESSE D. THEREFORE, THE CLAIM OF THE ASSESSEE WAS RIGHTLY REJECTED BY THE C IT(A). 6. FOR THE ASSESSMENT YEAR 1998-99, THOUGH TH E ASSESSEE HAD CREATED RESERVE TO THE EXTENT OF RS.2 CRORES, 40% O F LONG TERM FINANCE WORKS OUT TO RS.1,09,26,581/-. FOR THE ASS ESSMENT YEAR 1999-2000, THE AO HAD FOUND THAT 40% OF INCOME FROM LONG TERM FINANCE IS RS.28,20,816 AS AGAINST THE RESERVE CREA TED IN THE BOOKS OF RS.2 CRORES. SECTION 36(1)(VIII) OF THE ACT PER MITS DEDUCTION NOT EXCEEDING 40% OF THE PROFITS ON THE CONDITION THAT TO THAT EXTENT A RESERVE IS CREATED BY THE ASSESSEE. THE EXTENT OF RESERVE THAT THE ASSESSEE SHOULD HAVE CREATED BEING TO THE EXTENT OF 40% ONLY, WHICH FOR THE ASSESSMENT YEAR 1998-99 IS RS.1,09,26,581/- AND FOR THE ASSESSMENT YEAR 1999-2000 IS RS.28,20,816/- RESPECT IVELY, THE AMOUNT OF DEDUCTION HAS BEEN RIGHTLY ALLOWED BY THE ASSESSING OFFICER TO THAT EXTENT ONLY. 7.2. DURING THE COURSE OF HEARING, THE LD. D R HAD PLACED STRONG RELIANCE ON THE JURISDICTIONAL HIGH COURTS FINDING IN THE CASE OF KARNATAKA STATE FINANCIAL CORPORATION V. CIT REPORTED IN (19 88) 174 ITR 206. 7.3. WITH DUE RESPECTS, WE HAVE PERUSED THE SAI D ORDER. THE HONBLE COURT HAS HELD THUS SEC. 36(1)(VIII) ALLOWS A SPECIAL DEDUCTION ON THE SPECIAL RESERVE CREATED BY THE SPECIFIED FINANCIAL INSTITUTIONS, CO MPUTING THE SAME IN THE MANNER SPECIFIED THEREIN. THE DEDUCTION ALLOWE D IS NOT A GENERAL DEDUCTION TO ALL TAXPAYERS OF ALL THEIR INC OMES BUT A SPECIAL DEDUCTION ONLY ON SPECIAL RESERVE TO THE EXTENT AND IN THE MANNER INDICATED THEREIN. THE MANNER AND METHOD OF ALLOWI NG THE ITA NO.1178 & CO 109 OF 08 PAGE 6 OF 9 DEDUCTION IS INDICATED IN THE SECTION ITSELF AND TH E SAME MUST BE WORKED OUT ONLY IN TERMS OF THAT SECTION AND ON NO OTHER BASIS. WHETHER THAT SHOULD BE DONE BEFORE OR AFTER COMPUTI NG THE TOTAL INCOME WAS EXCLUSIVELY FOR THE LEGISLATURE TO DECID E. IF THE LEGISLATURE PROVIDES THAT THE SAME SHOULD BE DONE B EFORE COMPUTING THE TOTAL INCOME, THEN THAT MUST BE DONE ONLY BEFOR E THAT AND NOT AFTER THAT AS SUGGESTED BY THE ASSESSEE. 7.4. IT CAN BE INFERRED FROM THE ABOVE FINDING OF THE HONBLE COURT THAT THE MANNER AND METHOD OF ALLOWING THE DEDUCTION IS INDICATED IN THE SECTION ITSELF AND SAME MUST BE WORKED OUT ONLY IN TERMS OF THAT SECTION AND ON NO OTHER BASIS.. WHAT SECTION 36(1)(VIII) SAYS? [PRIOR TO ITS SUBSTITUTION W.E.F.1/4/2008, CLAUSE ( VIII) READS AS UNDER] (VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED A ND MAINTAINED BY A FINANCIAL CORPORATION WHICH IS ENGAGED IN PROVIDING LONG-TERM FINANCE FOR INDUSTRIAL OR AGRICULTURAL DEVELOPMENT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA OR BY A PUBLIC COM PANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARRYIN G ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSES, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUS INESS OF PROVIDING LONG-TERM FINANCE (COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RESERVE ACCOUNT. 7.5. ON A CAREFUL READING OF THE ORIGINAL ASSESSME NT ORDER [WHIC H WAS THE SUBJECT MATTER OF APPEAL BEFORE THE HONBLE TRIBUNAL REFERRED SUPRA ], WE FIND THAT THE AO HAD WORKED OUT THE DEDUCTION U/ S 36(1)(VIII) IN ACCORDANCE WITH THE PROVISIONS OF S.36(1)(VIII) OF THE ACT. THIS HAS BEEN AFFIRMED BY THE HONBLE TRIBUNAL REFERRED SUPR A THAT THE AMOUNT OF ITA NO.1178 & CO 109 OF 08 PAGE 7 OF 9 DEDUCTION HAS BEEN RIGHTLY ALLOWED BY THE ASSESSING OFFICER TO THAT EXTENT ONLY. 7.6. IN OVER ALL CONSIDERATION OF THE FACTS AND CI RCUMSTANCES OF THE ISSUE AND ALSO IN VIEW OF THE FACT THAT THE WOR KING OF DEDUCTION U/S 36(1)(VIII) OF THE ACT IN THE ORIGINAL ASSESSMENT O RDER WAS IN CONFORMITY WITH THE RULING OF THE JURISDICTIONAL HIGH COURT RE FERRED SUPRA AND THAT THE WORKING HAS SINCE BEEN CONFIRMED BY THE HONBLE TRIBUNAL REFERRED SUPRA, WE ARE OF THE FIRM VIEW THAT THE REVENUES G RIEVANCE IS UNFOUNDED WHICH REQUIRES TO BE REJECTED. IN EFFECT , THE REASONING OF THE CIT (A) IS CONFIRMED ON THIS COUNT. LET US NOW DEAL WITH THE CROSS OBJECTIONS OF THE ASSESSEE COMPANY. 8. THE GIST OF THE ARGUMENT OF THE ASSESSEE COMPANY IS AS UNDER: (I) THE ASSESSEE COMPANY HAVING FILED THE RETURN ORIGIN ALLY AND HAVING DISCLOSED ALL THE PRIMARY MATERIALS AND FURT HER ASSESSMENT HAVING COMPLETED U/S 143(3) OF THE ACT, THE RE- OPENING OF THE ASSESSMENT BEYOND THE TIME LIMIT OF FOUR YEARS WAS BAD IN LAW AND THE ASSESSMENT WAS BARRED BY LIM ITATION; (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) OUGHT TO HAVE CANCELLED THE ASSESSMENT BY HOLDING T HAT THE REOPENING WAS BAD IN LAW; - THE RE-OPENING OF THE ASSESSMENT U/S 147 OF THE ACT BY ISSUANCE OF NOTICE U/S 148 WAS BAD IN LAW AND, ACCORDINGLY, THE ASSESSMENT REQUIRES TO BE CANCELLE D; - THERE BEING NO OMISSION MUCH LESS AN OMISSION OF DECLARATION OF INCOME IN THE RELEVANT AY IN THE RET URN OF INCOME FILED BY THE ASSESSEE, THE REOPENING OF THE ASSESSMENT U/S 147 WAS WITHOUT JURISDICTION AND, CONSEQUENTLY, THE RE-ASSESSMENT IS LIABLE TO BE ANN ULLED. 8.1. THE CIT(A), IN THE IMPUGNED ORDER, HAS OBS ERVED THUS ITA NO.1178 & CO 109 OF 08 PAGE 8 OF 9 IT IS SEEN THAT THE NOTICE UNDER SECTION 148 WAS I SSUED ON 31/3/2006 WHICH HAS BEEN DONE WELL WITHIN THE TIME STIPULATED IN AS MUCH AS THE ASSESSMENT ORDER WAS PASSED ON 28/3/200 2. THE LAW IN REGARD TO REOPENING OF ASSESSMENT IS NOW WELL-SETTL ED IN THAT WHAT IS REQUIRED IS THAT IT IS SUFFICIENT IF THE NOTICE U/S 148 IS ISSUED WITHIN THE STIPULATED TIME AND NOT NECESSARILY BE SERVED O N THE ASSESSEES CONCERNED AS HAS BEEN HELD BY THE HONBLE SUPREME C OURT IN THE CASE OF R.K.UPADHYAYA V. SHANABAI PATEL [166 ITR 16 3]. HENCE, THE REOPENING OF THE ASSESSMENT AS DONE BY THE AO I S VALID AND IS, THEREFORE, UPHELD. 8.2. AFTER PERUSING THE WELL REASONING OF THE CI T(A) WHO DREW STRENGTH FROM THE RULING OF THE HONBLE APEX COURT REFERRED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THE CONTENTION OF THE ASSESSEE COMPANY IS UNFOUNDED AND, THUS, DISMISSED. 9. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED AND THAT OF THE CROSS OBJECTION OF THE ASSESSEE COMPANY IS ALSO DIS MISSED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF AUGUST, 2009. SD/- SD/- ( K.P.T. THANGAL) (A. MOHAN ALANKAMONY ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 31 ST AUGUST, 2009. DS/- ITA NO.1178 & CO 109 OF 08 PAGE 9 OF 9 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.