Vedanta Ltd (Earlier known as Sterlite Industries (India) Ltd.), Gurgaon V. ACIT, Circle- 26(1), New Delhi

ITA 1454/DEL/2019

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 8437 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 21-02-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SULEKHA VERMA
• Keywords: Reopening of assessment; Business income; Opportunity of being heard; Application of stay; Cost of acquisition; Initiation of penalty proceedings; Assessment record; Prejudicial to interest; Right to appeal; Reassessment proceedings; TDS; Set aside; Liquidation
• Section: 43B; 143(3); 234B; 201; 144C; 208; 64; 147; 145; 263; 28; 154; 92

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 1454/DEL/2019 (ASSESSMENT YEAR: 2010 - 11 ) VEDANTA LTD. (EARLIER KNOWN AS STERLITE INDUSTRIES (INDIA) LTD,) CORE - 6, 3 RD FLOOR, SCOPE COMPLEX, 7, LODHI ROAD, NEW DELHI PAN: AACCS7101B VS. ACIT, CIRCLE - 26(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SACHIT JOLLY, ADV REVENUE BY: SMT SULEKHA VERMA, CIT DR DATE OF HEARING 11/07 / 201 9 DATE OF PRONOUNCEMENT 0 9 / 10 / 2019 O R D E R PER PRASHANT MAHARISHI, A. M. 1 . THE ABOVE APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT (A) - 9, NEW DELHI DATED 28.12.2018 FOR THE ASSESSMENT YEAR 2010 - 11 , WHEREIN, THE DISALLOWANCE OF COPPER CONCENTRATE PURCHASE P ROVISION MADE BY THE ASSESSEE OF RS. 259.31 LAKHS WAS UPHELD. 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THAT THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)] IS PERVERSE, ERRONEOUS ON FACTS AND BAD IN LAW TO THE EXTENT THE SAME IS DETRIMENTAL TO THE APPELLANT. 2. THAT ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION O F THE ASSESSING OFFICER (AO) IN COMPUTING THE INCOME OF THE APPELLANT FOR THE RELEVANT ASSESSMENT YEAR (AY) AT RS.988,61,12,327/ - AFTER MAKING DISALLOWANCE OF RS. 259,31,00,000 BEING EXPENDITURE INCURRED UNDER THE HEAD PROVISION FOR COPPER CONCENTRATE PURCHASE. 3 THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE RATIO OF THE ORDER PASSED BY THE CIT(A) AND HON'BLE INCOME TAX APPELLATE TRIBUNAL IN THE APPELLANT'S OWN CASE FOR AY 2004 - 05 WAS NOT APPLICABLE, WITHOU T APPRECIATING THAT THE FINDINGS PAGE | 2 RENDERED THEREIN WERE DIRECTLY APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THIS CASE. 4. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO BY DISALLOWING THE PROVISI ON FOR PURCHASE OF COPPER BY ERRONEOUSLY HOLDING THAT THE APPELLANT HAD SIMPLY RELIED UPON THE GUIDELINES OF ACCOUNTING STANDARDS WITHOUT APPRECIATING THAT THE APPELLANT HAD ALSO ESTABLISHED THAT THE PROVISION WAS IN - FACT IN THE NATURE OF AN ASCERTAINED LI ABILITY. 5. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN UPHOLDING THE INTERPRETATION OF THE AO THAT PROVISION FOR PURCHASE OF COPPER WAS IN THE NATURE OF AN UNASCERTAINED LIABILITY DESPITE HAVING RECORDED THAT THE SAID ACTI ON OF THE APPELLANT WAS IN CONFORMITY WITH THE APPLICABLE ACCOUNTING PRINCIPLES AND THAT THE SAME WAS EVEN FOLLOWED BY THE APPELLANT IN PRIOR YEARS.. 6. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE C1T(A) ERRED IN CONFIRMING THE ORDER PASSE D BY THE AO BY PASSING AN ILLEGAL ORDER SHOWING COMPLETE JUDICIAL IMPROPRIETY INASMUCH AS THE C1T(A) IGNORED THAT THE VALIDITY OF THE ORIGINAL ASSESSMENT PROCEEDINGS OF THE APPELLANT ITSELF WERE SUB - JUDICE BEFORE THE HONBLE MADRAS HIGH COURT AND THE HON'B LE COURT HAD GRANTED STAY AGAINST THE OPERATION OF THE ASSESSMENT ORDER PASSED FOR AY 2010 - 11. 7. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING THE AMOUNT OF RS.259,31,00,000 TOWA RDS PROVISION FOR COPPER PURCHASE DESPITE HAVING RECORDED THAT NO DIRECTIONS IN THIS REGARD WERE ISSUED BY THE PRINCIPAL COMMISSIONER OF INCOME TAX (PCIT) IN THE ORDER DATED 27.03.2017 PASSED UNDER SECTION 263 OF THE ACT 8. THAT ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, THE C1T(A) ERRED IN HOLDING THAT ONCE THE PCIT ISSUED DIRECTIONS UNDER SECTION 263 OF THE ACT, THE ENTIRE ASSESSMENT WAS OPEN FOR SCRUTINY. 9. WITHOUT PREJUDICE, THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) DESPITE SPECIFICALLY RECORDING THE ISSUE OF NETTING OFF RAISED BY THE APPELLANT, I.E., REDUCING RS. 140,67,55,306, BEING THE PROVISION UNDER THE SAME HEAD IN THE PRIOR YE AR FROM THE DISALLOWANCE OF RS.259,31,00,000 BEING PROVISION FOR THE CURRENT YEAR, ABJECTLY FAILED TO RENDER A FINDING, MUCH LESS, EVEN DEAL WITH THE SAID ISSUE. 10. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN NOT GRANTING T HE FULL TDS CLAIM OF THE APPELLANT DESPITE HAVING SPECIFICALLY RECORDED THAT THE AO HAD NOT MADE ANY OBSERVATIONS IN THIS REGARD. 11. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO OF LEVYING INT EREST UNDER SECTION 234B AND 234C OF THE ACT 12. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN NOT DELETING THE INITIATION OF PENALTY PROCEEDINGS BY THE AO UNDER SECTION 271(1 )(C) OF THE ACT. PAGE | 3 3 . THE BRIEF FACTS OF THE CASE SHOW S THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROCESSING OF COPPER FROM COPPER CONCENTRATE, MANUFACTURING /GENERATION AND / OR TRADING OF NON - FERROUS METALS, PHOSPHORIC ACID, SULPHURIC ACID, POWER SLIME, DORE ETC . IT FILED ITS RETURN OF INCOM E ON 08.10.2010 DECLARING TOTAL INCOME OF RS. 3158744760/ - WHICH WAS SUBSEQUENTLY REVISED ON 1 8.10. 2010 OF RS. 3246648940/ - . SUBSEQUENTLY, ASSESSMENT U/S 143(3) OF THE ACT WAS COMPLETED ON 02.052014 DETERMINING TOTAL INCOME OF RS. 7293012330/ - . THEREAFTER , ACTION U/S 263 OF THE ACT WAS TAKEN AND THE ORDER PASSED BY THE LD AO WAS FOUND TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. SUBSEQUENTLY, THE ORDER U/S 263 WAS PASSED SETTING ASIDE THE ISSUE TO THE FILE OF THE LD AO. ONE OF THE ISSUES IN PROCEEDINGS U/S 263 OF THE ACT WAS THAT THE ASSESSEE HAS MADE A PROVISION OF RS. 259.31 CRORES PENDING FINAL PRICE PAYABLE FOR THE PURCHASE OF CO PPER CONCENTRATE RECEIVED DURING THE YEAR , FOR WHICH ACTUAL PURCHASE PRICE COULD NOT BE FINALIZED BEFORE THE CLOSE OF THE FINANCIAL YEAR BUT SOON THEREAFTER . THEREFORE, THIS ISSUE WAS RAISED BY LD AO IN THE ASSESSMENT PROCEEDINGS PURSUANT TO ORDER U/S 263 OF THE ACT. 4 . THEREFORE, THE LD AO RAISED THE ABOVE QUERY TO THE ASSESSEE. THE ASSESSEE SUBMI TTED ITS REPLY STATING THAT IN THE ORDER U/S 263 OF THE ACT DATED 27.03.2017 PASSED BY THE PR. CIT , PR CIT NOWHERE HAS SAID ABOUT THE ABOVE SUM AND THEREFORE, SUCH DISALLOWANCE NOW CANNOT BE MADE IN ASSESSMENT PROCEEDINGS PURSUANT TO THE ORDER U/S 263 OF THE ACT. THE LD AO REFERRED TO THE NOTICE U/S 263 DATED 01.02.2007 AND REFERRED TO PARA NO. 3(1) OF THE ABOVE LETTER AND STATED THAT SAME HAS BEEN DISCUSSED IN THE SHOW CAUSE NOTICE AND THEREFORE THE CONTENTION OF THE ASSESSEE IS NOT CORRECT. 5 . ON THE MERI TS OF THE ISSUE THE LD AO CONSIDERED THE REPLY OF THE ASSESSEE , HE DEALT WITH THE WHOLE ISSUE AT PARA NO. 1 4 TO 17 OF HIS ORDER AT PAGE NO. 9 TO 12 OF THE ASSESSMENT ORDER AS UNDER: - 14. THE ASSESSEE IN HIS REPLIES ON EVEN DATES FURTHER CLAIMED: 'WITHOU T PREJUDICE TO ABOVE IT IS SUBMITTED THAT, THE ASSESSEE COMPANY HAS PROVIDED FOR RS.259.31 AS OTHER PROVISIONS DURING THE FINANCIAL YEAR ENDED 31 - MARCH - 2010 WHICH WAS THE LIABILITY RECOGNIZED AS FINAL PRICE SETTLEMENT ON PURCHASE OF COPPER CONCENTRATE. THE ASSESSEE COMPANY PURCHASES COPPER CONCENTRATE FOR PRODUCTION OF COPPER ANODE/ COPPER CATHODE. IN VIEW OF FLUCTUATIONS IN PRICE OF COPPER PAGE | 4 AND AS PER PREVAILING INTERNATIONAL PRACTICES, THE ASSESSEE COMPANY PURCHASES COPPER CONCENTRATE ON THE BASIS OF PROVI SIONAL PRICE FOR THE QUOTATIONAL PERIOD. THE FINAL PRICE PAYABLE ON COPPER CONCENTRATE IS FINALIZED AT THE END OF THE QUOTATIONAL PERIOD. WHEN THE QUOTULIONUL PERIOD ENDS AFTER THE CLOSE OF THE FINANCIAL YEAR, THE ASSESSEE COMPANY RECOGNIZES THE LIABILITY AS AT THE END OF THE FINANCIAL YEAR, AS THE FINAL PRICE COULD BE FINALIZED AFTER THE END OF THE FINANCIAL YEAR WHEN QUOTATIONAL PERIOD IS DETERMINED. LIABILITY RECOGNIZED UNDER THIS CLASS FOR THE FINANCIAL YEAR 2010 - 11 WAS RS.259.31 CR WHICH WAS OUTSTANDIN G AS ON 31 - MARCH - 2010. THIS AMOUNT IS SHOWN AS 'OTHER PROVISIONS' IN SCHEDULE 12(2) TO THE ACCOUNTS. WHEN THE FINAL PRICE IS SETTLED AT THE END OF THE QUOTATIONAL PERIOD, THE ASSESSEE COMPANY APPROPRIATES THE SETTLEMENT PRICE AGAINST THE LIABILITY RECOGNIZ ED AS ON 31 - MARCH - 2010. THE DIFFERENCE, IF ANY, IS CREDITED/ DEBITED TO PROFIT AND LOSS ACCOUNT OF THE NEXT YEAR. IN THIS CONTEXT THE ACCOUNTING TREATMENT CONSISTENTLY FOLLOWED BY THE ASSESSEE COMPANY IS REPRODUCED BELOW WHICH APPEARS IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY FOR THE FY 2010 - 11: - THE COMPANY HAS RECOGNIZED LIABILITY BASED ON SUBSTANTIAL DEGREE OF ESTIMATION FOR: FINAL PRICE PAYABLE ON PURCHASE OF COPPER CONCENTRATE FOR WHICH THE QUOTATION PERIOD PRICE WAS NOT FINALIZED AS ON 31S T MARCH 2009, A PROVISION OF RS. 140.68 CR BASED ON FORWARD LME RATE OF COPPER AND LBMA RATE OF PRECIOUS METALS WAS MADE. /IS AGAINST IT, DURING THE YEAR RS. 153.31 CR HAS BEEN INCURRED TOWARDS FINAL PRICE SETTLEMENT THE ADDITIONAL AMOUNT OF RS. 12.63 CR H AS BEEN CHARGED TO PROFIT AND LOSS ACCOUNT UNDER RAW - MATERIALS CONSUMPTION. LIABILITY RECOGNIZED UNDER THIS CLASS FOR THE YEAR IS RS. 259.31 CR WHICH IS OUTSTANDING AS ON 31ST MARCH 2010. ACTUAL OUTFLOW IS EXPECTED ON FINALIZATION OF QUOTATION PERIOD PRICE IN THE NEXT FINANCIAL YEAR.' IN THIS CONTEXT THE NOTE WHICH APPEARS IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY FOR THE FY 2010 - 11 ALSO IS REPRODUCED BELOW: - THE COMPANY HAS RECOGNIZED LIABILITY BASED ON SUBSTANTIAL DEGREE OF ESTIMATION FOR: - FINAL P RICE PAYABLE ON PURCHASE OF COPPER CONCENTRATE FOR WHICH THE QUOTATIONAL PERIOD PRICE WAS NOT FINALISED AS ON 31ST MARCH 2010, A PROVISION OF RS. 259.31 CR BASED ON FORWARD LME RATE OF COPPER AND LBMA RATE OF PRECIOUS METALS WAS MADE. /4S AGAINST IT, DURIN G THE YEAR RS. 248.26 CR HAS BEEN INCURRED TOWARDS FNAL PRICE SETTLEMENT. THE BALANCE AMOUNT OF RS. 11.05 CR HAS BEEN CREDITED TO PROFIT AND LOSS ACCOUNT UNDER RAW - MATERIALS CONSUMPTION. LIABILITY RECOGNISED UNDER THIS CLASS FOR THE YEAR IS RS. 152.77 CR W HICH IS OUTSTANDING AS ON 31S' MARCH 2011. ACTUAL OUTFLOW IS EXPECTED ON FMALISATION OF QUOTATIONAL PERIOD PRICE IN THE NEXT FINANCIAL YEAR.' THE ASSESSEE COMPANY SUBMITS THAT THE LIABILITY RECOGNIZED TO THE EXTENT OF RS.259.31 CR IS AN ALLOWABLE DEDUCTION IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS VS CIT (245 ITR 428). THIS VIEW HAS BEEN UPHELD BY THE JURISDICTIONAL TRIBUNAL, CHENNAI PAGE | 5 IN THE CASE OF COGNIZANT TECHNOLOGY CONCLUSIONS LTD IN ITA 114 AND 1400/ MDS/ 2011 DATED 23 - JAN - 2013. EXTRACTS ARE GIVEN BELOW: - THE NEXT GROUND OF THE REVENUE IS THAT THE PROVISION MADE BY THE ASSESSEE FOR LIABILITIES OF EXPENDITURE WAS IN THE NATURE OF PROVISION AND SHOULD NOT HAVE BEEN ALLOWED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) AS E XPENDITURE IN COMPUTING THE INCOME. THE ASSESSEE IS PROVIDING PROVISION FOR EXPENDITURE INCURRED IN THE PREVIOUS YEAR ITSELF. THE AMOUNT WAS NOT PAID BY THE END OF THE YEAR AND IN CERTAIN CASES BILLS WERE NOT RECEIVED BY THE END OF THE YEAR AND IN SUCH CAS ES THE ASSESSEE IS MAKING A PROVISION FOR SUCH EXPENDITURE ALREADY INCURRED DURING THE RELEVANT PREVIOUS YEAR. IN THE COURSE OF THE NEXT PREVIOUS YEAR THE ASSESSEE IS MAKING THE PAYMENT AND THE DIFFERENTIAL AMOUNT, IF ANY, IS ADJUSTED IN ITS PROFIT AND LOS S ACCOUNT. THIS IS A CONSISTENT PRACTICE FOLLOWED BY THE ASSESSEE. THE PROVISION FOR UNPAID EXPENSES IS NOT IN THE NATURE OF CONTINGENT EXPENDITURE. IT IS A PROVISION MADE AGAINST ACTUAL EXPENDITURE. THEREFORE, THE DECISION OF THE HON'BLE SUPREME COURT REN DERED IN THE CASE OF BHARAT EARTH MOVERS VS. CIT, 245 ITR 428, SQUARELY APPLIES HERE. 15 THIS PART OF THE REPLY OF THE ASSESSEE WAS CONSIDERED. IT IS IMPORTANT TO NOTE HERE THAT THE ASSESSEE IS MAKING PROVISION ON THE DATE OF CLOSING OF THE YEAR. IT IS UNASCERTAINABLE FOR THE ASSESSEE WHETHER THE SAME AMOUNT IS PAYABLE OR A DIFFERENT AMOUNT IS PAYABLE. THE JUDGMENT CITED BY THE ASSESSEE CLEARLY DEMARCATES THE FACT THAT AN ASCERTAINABLE LIABILITY IS THE ONE WHICH NEEDS TO BE ALLOWED. SINCE THE LIABILITY DISCUSSED ABOVE IS OF HIGHLY UNASCERTAINABLE NATURE, DEPENDING ON THE FUTURE PROSPECTS OF THE MARKET OF THE COMMODITY. THE ORDER OF PR. CIT WHILE SETTING ASIDE THE ORDER HAS ALSO, CLEARLY DISTINGUISHED THE SAID ARGUMENTS JUDGMENTS . THE RELEVANT PORTIONS ARE REPRODUCED HERE: HONBLE HIGH COURT OF MADRAS STAYING THE ASSESSMENT PROCEEDINGS WOULD ALS O BAR THE PROCEEDINGS CURRENTLY INITIATED U/S.263 OF THE I.T. ACT, 1961 IS NOT ACCEPTABLE. 9. IN VIEW OF THE FACTS NARRATED ABOVE, ALSO TAKING INTO ACCOUNT THAT THE ISSUE ON HAND GETS TIME BARRED BY LIMITATION ON 31.03.2017, COUPLED WITH THE FACT THAT THE ASSESSEE HAS FAILED TO FURNISH ANY DETAILS W.R.T. THE PRESENT PROCEEDINGS, 1 AM CONSTRAINED TO PASS THIS ORDER U/S.263 OF THE 1.1. ACT. 1961 BASED ON FACTS OF THE CASE. THE ISSUES INVOLVED HAVE BEEN NARRATED, IN DETAIL, IN THE NOTICE ISSUED ON 01.02.2017.1 0. IN RESPECT OF THE ISSUE ON HAND, IT IS PERTINENT TO MENTION THAT A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN: I. AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT. II. IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION: AND III. A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW' FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION PAGE | 6 IS CALLED AS AN OBLIGAT ING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RE COGNIZED AS A PROVISION. IN ACCORDANCE WITH IHE PROVISIONS OF THE I T. ACT, 1961, THOUGH AN ASSESSEE COMPANY HAS TO INCUR THE EXPENDITURE FOR ITS BUSINESS, THE CREATION OF A MERE PROVISION IN LIEU OF THIS EXPENDITURE IS NOT ENTITLED FOR DEDUCTION UNDER THE I.T ACT, 1961, IT IS PERTINENT TO NOTE THAT A SPECIAL BENCH OF THE HONBLE IT A T, MUMBAI IN THE CASE OF DCFT VS. BANK OF BAHRAIN AND KUWAIT HAS HELD THAT ANTICIPATED LIABILITY WHICH ARE CONTINGENT IN NATURE ARE NOT ALLOWABLE, AND ANLIEIPALED LIABILITY CO UPLED WITH A PRESENT OBLIGATION CAN BE SAID TO BE A CRYSTALLIZED LIABILITY. IF AN EVENT HAS ALREADY TAKEN PLACE, SUCH AS THE ENTERING INTO THE CONTRACT AND UNDERTAKING OF AN OBLIGATION TO MEET THE LIABILITY, AND ONLY THE CONSEQUENTIAL EFFECT OF THE SAME IS TO BE DETERMINED, THEN THE LIABILITY IS NOT A CONTINGENT LIABILITY (WOODWARD GOVERNOR 312 TTR 254 (SC) & BHARAT EARTH MOVERS 245 ITR 428 (SC). IN THE FOLLOWING 2 VERDICTS DELIVERED BY THE HONBLE RAJASTHAN AND MADRAS HIGH COURTS RESPECTIVELY, VIZ. RAJASTH AN STATE MINES AND MINERALS VS. CIT ( RAJ) 208. ITR 101 AND T.N. SMALL INDUSTRIES DEVELOPMENT CORPORATION VS CIT (MAD) 242 ITR 122, IT WAS CATEGORICALLY HELD THAT IF ONLY ESTIMATES ARE MADE, THIS AMOUNTS TO A CONTINGENT LIABILITY AND THAT IF THE LIABILITY, BEING CONTINGENT, IS ALLOWED THEN IT WOULD AMOUNT TO ALLOWING THE APPREHENDED LOSSES IN FUTURE FROM THE PROFITS OF THE CURRENT YEAR WHICH IS NOT ACCEPTED ON ANY PRINCIPAL OL LAW OR ACCOUNTANCY. THE SAME VIEW WAS ECHOED BY THE HON'BLE APEX COURT IN THE CAS ES OF SHREE SAJJAN MILL LTD. VS. CIT (SC) 156 ITR 5S5 AND INDIAN MOLLASSES CO (P) LTD. VS. CIT (SC) 37 ITR 66, WHEREIN IT WAS CLEARLY HELD THAT CONTINGENT LIABILITIES DO NOT CONSTITUTE EXPENDITURE AND CANNOT BE THE SUBJECT MATTER OF DEDUCTION EVEN UNDER TH E MERCANTILE SYSTEM OF ACCOUNTING. EXPENDITURE WHICH IS DEDUCTIBLE (OR INCOME LAX PURPOSES IS TOWARDS A LIABILITY ACTUALLY EXISTING AL THE TIME HUT SETTING APART MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENING OF EVENTS IS NOL EXPENDITURE AM THESE VE RDICTS CLEARLY REINFORCE THE STAND OF THE DEPARTMENT IN SO TAR AS THE ISSUE IN THE ASSESSEES CASE IS CONCERNED IN THE ASSESSEE COMPANYS CASE, CERTAIN DEDUCTIONS TOWARDS PROVISIONS MADE BY IT. WERE LO BE ALLOWED ONLY ON ACTUAL PAYMENT BASIS AND SINCE SOME OF THESE AMOUNTS HAVE NOT BEEN PAID BY IT WITHIN THE SPECIFIED TIME, A DISALLOWANCE U/S.43 B OF THE I.T ACT, 1961 WAS CALLED FOR. 11. IT IS ACCORDINGLY EVIDENT THAT THE AO WAS REQUIRED TO CONDUCT A PROPER VERIFICATION AND/OR ENQUIRY IN RESPECT OF ABOVE ME NTIONED ISSUE. HIS FAILURE TO DO SO HAS RESULTED IN AN ASSESSMENT ORDER WHICH IS NOT ONLY ERRONEOUS BUT IS ALSO PREJUDICIAL TO THE INTEREST OF REVENUE. IT IS PLACED ON RECORD THAT THERE IS NO RIGHT OF APPEAL WHICH IS AVAILABLE TO THE REVENUE AGAINST SUCH E RRONEOUS ASSESSMENT ORDERS PASSED BY THE AOS, TO COMPENSATE WHICH THE REVISIONARY POWERS U/S 263 OF THE I.T. ACT, 1961 HAVE BEEN CONFERRED ON THE CIT/PC1T IN THE STATUTE. FURTHERMORE, SUCH POWERS WERE HELD TO HE OF WIDE AMPLITUDE BY THE HONBLE SUPREME COU RT IN THE CASE OF CIT V/S. SHREE MANJUNATHCSWARC PACKING PRODUCTS & CAMPHUT WORKS (1998) 231 ITR 53/96 TAXMAN I. THEREFORE, NORMALLY WHEN AN AO HAS NOT CONDUCTED A PROPER ENQUIRY ON A PARTICULAR ISSUE LEADING TO A LOSS OF REVENUE, THEN SUCH ORDER'S HAS TO BE CONSTRUED AS ERRONEOUS AND PREJUDICIAL LO THE INTERESTS OF REVENUE MOREOVER, IN TERMS OF THE SPECIFIC LANGUAGE OF EXPLANATION 2 TO SECTION 263( I) OF THE I T. ACT, 1961 AN ORDER PASSED BY THE AO IS DEEMED TO BE ERRONEOUS AND PAGE | 7 PREJUDICIAL TO THE INTERESTS OF REVENUE IF THE ORDER IS PASSED WITHOUT MAKING ENQUIRIES OR VERIFICATION WHICH SHOULD HAVE BEEN MADE. IN VIEW OF THE ABOVE, THE IMPUGNED ASSESSMENT ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE SINCE THE AO FAILED TO CO NDUCT THE REQUISITE ENQUIRY/VERIFICATION IN RESPECT OF THE ISSUE ON HAND. 16 THE ASSESSEE HAS FURTHER STATED IN ITS REPLY: FURTHER IT IS SUBMITTED THAT THE REOPENING OF ASSESSMENT PROCEEDINGS FOR THE A Y 2009 - 10 WAS ALSO INITIATED BY THE DEPTT. ON THE BASIS OF THE SAME REASON AS IN YEAR UNDER CONSIDERATION. AGAINST THE SAME THE ASSESSEE HAD FILED A WP1129 OF 2016 BEFORE THE GOA BENCH OF THE HON'BLE BOMBAY HIGH COURT. THE HC FINDING MERIT IN THE ISSUE WAS PLEASED TO ISSUE AN INTERIM STAY ORDER AGAINST TH E REASSESSMENT PROCEEDINGS FOR THE AY 2009 - 10. THE REASONS RECORDED IN WRITING FOR THE AY 2009 - 10 AND THE HON'BLE HC ORDER ARE ATTACHED HEREWITH IN ANNEXURE C&H RESPECTIVELY. WE REQUEST YOUR HONOR TO KINDLY TAKE THE HC ORDER ON RECORD AND REQUEST NOT TO IN ITIATE ASSESSMENT PROCEEDINGS U/S 143(3) RWS 263 OF THE ACT BASED ON THE REASONS AS THE ASSESSEE HAS GOT A FAVORABLE ORDER FROM THE HO ON THE SAME ISSUE FOR THE PRECEDING ASSESSMENT YEAR ASSESSMENT YEAR 2009 - 10. 16.1 THIS CONTENTION OF THE ASSESSEE WAS CO NSIDERED. IT IS TO BE NOTED HERE THAT EACH ASSESSMENT YEAR IS A SEPARATE ASSESSMENT YEAR AND THEREFORE, LINKING PROCEEDING OF ONE ASSESSMENT YEAR AND ISSUES OF ONE ASSESSMENT YEAR TO ANOTHER IS ERRONEOUS. 17 THE ASSESSEE HAD FURTHER STATED THAT: 'WITHOUT PREJUDICE AND UNDER PROTEST, WE SUBMIT THAT EVEN IF YOUR HONOR PROCEEDS TO MAKE THE DISALLOWANCE IN THIS REGARD, THEN THE DISALLOWANCE SHOULD BE DONE ONLY ON NET PROVISION BASIS. DURING THE PREVIOUS A Y 2009 - 10 AS ON MARCH 31, 2009, THE PROVISION UNDER THE SAME HEAD OF FINAL PRICE PAYABLE FOR COPPER CONCENTRATE WAS RS. 140,67,55,306 AND DURING THE IMPUGNED AY 2010 - 11 AS ON MARCH 31, 2010, THE PROVISION UNDER THE HEAD WAS RS. 259,31,35,883. HENCE, THE NET AMOUNT OF RS.L 18,63,80,577 ONLY CAN BE DISALLOWED IF AT ALL YOUR HONOR PROCEED TO DISALLOW THE SAME. THE RELEVANT PAGE OF THE FINANCIALS FOR THE FY 2009 - 10 (ASSESSMENT YEAR 2010 - 11) SHOWING THE AMOUNTS OF THE PROVISION FOR BOTH THE FY 2009 - 10 AND FY 2008 - 09 IS ATTACHED HEREWITH IN ANNEXURE I. ' HOWEVER, IT IS TO BE NOTED THAT THE ASSESSEE IN ITS REPLY ITSELF HAS STATED THAT THE SAID PROVISION ARE MADE FOR COPPER PURCHASES IN TRANSIT. THEREFORE, THE SAID PROVISION IN ITS ENTIRETY HAS BEEN MADE FOR COPPER PURCHASES IN TRANSIT DURING THE YEAR AND THEREFORE, IS LIABLE TO BE DISALLOWED DURING THE YEAR. (DISALLOWANCE: RS. 259,31,00,000/ - ) 6 . BASED ON THE ABOVE FINDINGS, DISALLOWANCE OF RS. 259.31 CRORES WAS MADE AND TOTAL INCOME WAS ASSESSED AT RS. 9886112327/ - AS PER ORDER DATED 29.12.2017 U/S 143 (3) RWS 263 OF THE ACT . 7 . A SSESSEE AGGRIE VED WITH THE ORDER OF THE LD AO, PREFERRED APPEAL BEFORE THE LD CIT(A) WHO DEALT WITH THE ABOVE ISSUE ON THE GROUND THAT WHETHER SAME PAGE | 8 WAS CONSIDERED U/S 263 OR NOT AS WELL AS ON THE MERITS OF THE ISSUE AS UNDER: - 5.2 DURI NG THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT FILED WRITTEN SUBMISSION ON DATED 19.07.2018. THE RELEVANT PORTION IS REPRODUCED HERE UNDER: 3.2.1 THE LD. AO ASSUMED POWER WITHOUT SPECIFIC DIRECTION FROM CIT IN 263 ORDER. THE PR. CIT ISSUED SHOW - CAUSE NOTICE U/S. 263 ON TWO GROUNDS AS BELOW: - YOU HAD MADE A PROVISION OF RS.259.31 CRORE BEING FINAL PRICE PAYABLE FOR THE PURCHASE OF COPPER CONCENTRATE FOR WHICH THE QUOTATION PRICE COULD NOT BE FINALIZED. THE ACTUAL OUTFLOW OF MONEY WAS EXPECTED TO BE MADE AFTER FINALISATION OF QUOTATION PRICE IN THE NEXT FY. IN VIEW OF THIS AN AMOUNT OF RS.259.31 CRORES WHICH WAS DEBITED IN THE RAW MATERIAL CONSUMPTION ACCOUNT WAS A MERE PROVISION WHICH IS LIABLE TO BE DISALLOWED. IT IS ALS O NOTICED FROM THE STATEMENT OF CONSUMPTION OF INCOME FILED BY YOU HAD DISALLOWED A SUM OF RS.4,00,25,257 - U/S.43B OF THE IT ACT,1961 AS PER DETAILS GIVEN BELOW: 1. CUSTOMS DUTY: RS.3,03,19,098 2. GRATUITY : RS.44,54,591 3. LEAVE ENCASHMENT: RS.52,51,568 FROM 3CD FILED ALONG WITH THE RETURN OF INCOME HOWEVER, SHOWS THAT THE FOLLOWING AMOUNTS WERE LIABLE TO BE DISALLOWED U/S. 43B OF IT ACT 1961, 1. CUSTOMS DUTY : RS.3,03,19,098 2. GRATUITY : RS.74,10, 164 3. LEAVE ENCASHMENT: RS.2,65,39,303 AGGREGATING RS. 6,42,68,565 CONSEQUENTLY, THE DIFFERENTIAL AMOUNT OF RS.2,42, 43,308/ - WAS ALSO REQUIRED TO BE DISALLOWED U/S. 43 B OF IT ACT 1961. (REFER POINT 3 II AND 3 II OF THE NOTICE UNDER SECTION 263 PAGE NO 104 PAPER BOOK) 3.2.2 THE APPELLANT COMPANY VIDE ITS SU BMISSIONS DATED 15.02.2017 (REFER PAPER BOOK PAGE NO. 105) STATED THAT 263 PROCEEDINGS SHOULD NOT BE UNDERTAKEN AS MATTER IS SUBJUDICED BEFORE THE CHENNAI HIGH COURT. 3.2.3 PR. CIT IN ITS ORDER U/S 263 OF THE ACT DT 27.03.2017 HAS NEITHER DIRECTED NOR DIS CUSSED ALLOWANCE OF PROVISION FOR PAGE | 9 PURCHASE OF COPPER CONDENSATE. POINT 10 OF THE CIT ORDER DISCUSSES ABOUT DISALLOWANCE UNDER SECTION 43B AND POINT 12 GIVES DIRECTION TO AO TO PASS THE NECESSARY ORDERS IN RESPECT OF 43B DISALLOWANCE AFTER GIVING OPPORTUNIT Y. THE RELEVANT PARAS ARE AS BELOW: - PARA 10 IN THE ASSESSEE COMPANYS CASE, CERTAIN DEDUCTIONS TOWARDS PROVISIONS MADE BY IT, WERE TO BE ALLOWED ONLY ON ACTUAL PAYMENT BASIS AND SINCE SOME OF THESE AMOUNTS HAVE NOT BEEN PAID BY IT WITHIN THE SPECIFIED TI ME, A DISALLOWANCE U/S. 43 B OF THE IT ACT, 1961 WAS CALLED FOR. PARA 12. IN THIS BACKDROP THE ASSESSMENT ORDER DATED 02.05.2014, PASSED IN THIS CASE U/S. 143(3) AND SECTION 92 CA R.W.S 144C OF THE IT ACT, 1961 FOR AY 2010 - 11 IT SET ASIDE WITHIN THE MEANI NG OF SEC.263 OF THE IT ACT, 1961. THE ASSESSING OFFICER IS DIRECTED TO COMPLETE THE REASSESSMENT PROCEEDINGS AFRESH, AFTER MAKING NECESSARY ENQUIRY/ VERIFICATION IN RESPECT OF THE ABOVE MENTIONED ISSUE AND AFTER AFFORDING THE ASSESSEE AN OPPORTUNITY OF BE ING HEARD BEFORE PASSING A FRESH ASSESSMENT ORDER IN ACCORDANCE WITH LAW. IN SO FAR AS THE ISSUES CONSIDERED BY THE ASSESSING AUTHORITY IN THE ORDER DATED 02.05.2014, WHICH IS PRESENTLY STAYED BY THE HONBLE HIGH COURT OF MADRAS VIDE ITS ORDER DATED 20.06. 2014 ARE CONCERNED SUITABLE ACTION WILL BE TAKEN IN ACCORDANCE WITH THE DIRECTIONS OF THE HONBLE HIGH COURT, AS AND WHEN THE WRIT PETITIONS ARE DISPOSED. 3.2.4 THUS, YOUR HONOUR WILL NOTE THAT CIT IN HIS FINAL ORDER NEVER DIRECTED THE AO TO COMPLETE THE ASSESSMENT PROCEEDINGS ON THE PROVISION FOR PURCHASE OF COPPER CONCENTRATE. THUS, AO ORDER DISALLOWING PROVISION FOR PURCHASE OF COPPER CONCENTRATE IS WITHOUT JURISDICTION AND NEEDS TO BE QUASHED. THE FOLLOWING JUDICIAL PRECEDENTS ARE RELIED UPON IN CIT VS D.N. DOSANI (200 CTR 76) HONBLE HIGH COURT OF GUJARAT HELD THAT: 12. THE SCHEME OF THE ACT HAS PROVIDED DIFFERENT POWERS TO DIFFERENT AUTHORITIES AND THESE ARE REQUIRED TO BE EXERCISED AFTER SATISFYING THE PRE - REQUISITE CONDITIONS AND JURISDICTIONAL FAC TS. THE AO CAN DISTURB/REOPEN A FINALIZED ASSESSMENT BY INVOKING HIS POWERS EITHER UNDER S. 154 OR UNDER S. 147 OF THE ACT, PROVIDED HE CAN SHOW THAT THE NECESSARY REQUIREMENTS ARE FULFILLED. IF, WHAT REVENUE CONTENDS TODAY, IS ACCEPTED, THESE AND OTHER SU CH PROVISIONS WHICH EMPOWER DIFFERENT AUTHORITIES TO EXERCISE JURISDICTION AT DIFFERENT POINT OF TIME IN DISTINCT SETTING WOULD BE RENDERED OTIOSE AND THAT CAN NEVER BE THE LEGISLATIVE INTENT. IT IS ALMOST AKIN TO PROVIDING SEPARATE KEYS FOR SEPARATE LOCKE D DOORS AND THE PERSON WANTING TO OPEN A PARTICULAR DOOR IS REQUIRED TO APPLY THE CORRECT KEY WHICH MATCHES THE CONCERNED LOCK. THEREFORE, IN PROCEEDINGS TO GIVE EFFECT TO ORDER UNDER S. 263 OF THE ACT, THE AO CANNOT BE PERMITTED TO UNDERTAKE AN EXERCISE N OT WARRANTED BY THE LEGISLATIVE SCHEME. PAGE | 10 13. THE TRIBUNAL WAS, THEREFORE, RIGHT IN HOLDING THAT THE OPERATIVE PART OF THE ORDER UNDER S. 263 OF THE ACT HAS TO BE READ IN CONTEXT OF WHAT HAD PRECEDED, NAMELY, THE DISCUSSION IN THE REVISIONAL ORDER, AND BOTH THE NOTICE AND THE ORDER UNDER S. 263 OF THE ACT, HAVE TO BE READ AS A WHOLE. THAT THE DIRECTION TO THE AO TO REDO THE ASSESSMENTS IS AFTER LOOKING INTO THE ASPECTS DISCUSSED BY THE CIT IN HIS ORDER AND THE DIRECTIONS MADE IN THE BODY OF THE ORDER.' THE SE NTENCE RECORDED IN PARA NO. 7 OF THE REVISIONAL ORDER CANNOT BE READ IN ISOLATION, NOR CAN IT BE READ BY OMITTING CERTAIN PORTION OF THE SENTENCE SO AS TO MEAN THAT THE AO WAS ENTITLED TO PROCESS FURTHER ITEMS WHILE GIVING EFFECT TO THE ORDER UNDER S. 263 OF THE ACT. THE TRIBUNAL WAS, THEREFORE, JUSTIFIED IN HOLDING THAT THE AO HAD TRAVELLED BEYOND HIS JURISDICTION. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. VS ACIT 32 SOT 428 ITAT , MUMBAI HELD THAT 10. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS, WE FIND THAT THE CIT HAS REVISED THE ASSESSMENT ORDER U/S 143(3) BY ISSUING SHOW CAUSE NOTICE ONLY WITH REGARD TO NOT REDUCING THE EXPENDITURE INCURRED IN TH E FOREIGN CURRENCY FOR THE TOTAL EXPORT TURNOVER WHOLE COMPUTING THE DEDUCTION U/S 10A OF THE I. T. ACT. BUT IN THE REVISED ORDER, THE ASSESSMENT WAS SET ASIDE ALSO ON THE OTHER GROUND THAT SOME OF THE SALE PROCEEDS WAS YET TO BE RECEIVED BY THE ASSESSEE. THE REVISION U/S 263 IS NOT LIKE THE REOPENING OF THE ASSESSMENT WHERE ONCE THE ASSESSMENT IS REOPENED ENTIRE ASSESSMENT IS OPEN BEFORE THE ASSESSING OFFICER TO BE RECONSIDERED IN ACCORDANCE WITH LAW 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE, THE GROU NDS OF APPEAL, THE ORDER OF THE AO AND THE SUBMISSIONS OF THE APPELLANT. THE APPELLANT VIDE THESE GROUNDS OF APPEAL, HAS CHALLENGED THE LEGAL VALIDITY OF THE ASSESSMENT ORDER, BY CLAIMING THAT THE ASSESSMENT ORDER SEEKS TO MAKE AN ADDITION WHICH IS IN CONT RAST WITH THE DIRECTIONS ISSUED BY THE PR CIT VIDE ORDER U/S 263. THE APPELLANT HAS SUBMITTED THAT THE ADDITION, SO MADE, HAS NOT BEEN DIRECTED BY THE PR CIT IN THE REVISIONARY ORDER U/S 263. THE APPELLANT HAS STRONGLY CONTENDED THAT THE PR CIT VIDE THE OR DER U/S 263 HAD CONSIDERED THE ORDER OF THE AO TO BE PREJUDICIAL TO THE INTEREST OF THE REVENUE ONLY TO THE EXTENT OF RS.4,00,25,257/ - , U/S 43B OF THE ACT. THE APPELLANT CONTENDED THAT DURING THE ENTIRETY OF THE PROCEEDINGS U/S 263, IE, FROM THE SHOW CAUSE NOTICE TO THE FINAL ASSESSMENT ORDER, THERE WAS NO DISCUSSION OF THE NOW MADE ADDITION OF RS . 259,31,00,000/ - . IT IS ALSO CONTENDED THAT SINCE THERE IS NO COMMENT OF THE PR CIT, TO THE SAID EXTENT, THEREFORE, NO ADDITION CAN BE MADE BY THE AO IN THE ORDE R U/S 143(3) RWS 263, WHICH IS THE ORDER CONSIDERED IN THE PRESENT APPELLATE PROCEEDINGS. 5.4 AT THE OUTSET OF THIS DISCUSSION, AND BEFORE ADJUDICATING THE LEGALITY OF THE ASSESSMENT ORDER, AS HAS BEEN CHALLENGED BY THE APPELLANT, IT IS SIGNIFICANT TO FIRS T REFER TO THE PROVISIONS OF SEC 263 OF THE ACT, WHICH IS QUOTED AS UNDER: PAGE | 11 263. (1) THE PRINCIPAL COMMISSIONER OR COMMISSIONER MAY CALL FOR AND EXAMINE THE RECORD OF ANY PROCEEDING UNDER THIS ACT, AND IF HE CONSIDERS THAT ANY ORDER PASSED THEREIN BY THE A SSESSING OFFICER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE, HE MAY, AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND AFTER MAKING OR CAUSING TO BE MADE SUCH INQUIRY AS HE DEEMS NECESSARY, PASS SUCH ORDER THEREON AS THE CIRCUMSTANCES OF THE CASE JUSTIFY, INCLUDING AN ORDER ENHANCING OR MODIFYING THE ASSESSMENT, OR CANCELLING THE ASSESSMENT AND DIRECTING A FRESH ASSESSMENT. HERE, ATTENTION IS OUTRIGHTLY DRAWN TOWARDS THE LAST LIMB OF THE PROVISION, WHICH NECESSITA TES THE POWERS OF THE PR CIT UNDER THE PROVISIONS OF SEC 263 OF THE ACT. NOW, AS STATED, THE PR CIT, UNDER THE PROVISIONS OF SEC 263, HAS THE POWER FOR DIRECTING A FRESH ASSESSMENT. THE TERM FRESH ASSESSMENT', OBVIOUSLY MEANS THAT THE AO CAN PROCEED TO VIEW THE RECORDS OF THE ASSESSEE, FROM THE BARE BASIC SCRATCH, AND NOT MERELY BE CONFINED ONLY TO THE ISSUES DISCUSSED BY THE PR CIT IN THE ORDER. THIS TERM OF FRESH ASSESSMENT, PROVIDES AN AO WITH THE OPPORTUNITY OF REOPENING THE ENTIRE PANDORAS BOX AN D TO EVEN ADJUDICATE AND CONSIDER ANY FRESH MATTER THAT HAS SUBSEQUENTLY COME IN THE SIGHT OF THE AO. 5.5 NOW, ON CONSIDERING THE ORDER U/S 263, THE PR CIT IS FOUND TO HAVE PASSED ORDER U/S 263 MENTIONING AND REFERRING THE NOTICE DATED 01.02.2017 WHEREIN I SSUES PERTAINING TO PROVISION OF RS.259.31 CRORE ON ACCOUNT OF PURCHASES OF COPPER CONCENTRATE AND RS.24243308/ - RELATING TO DIFFERENCE OF CUSTOMS DUTY, GRATUITY AND LEAVE ENCASHMENT U/S 43B HAVE BEEN MENTIONED EXPLICITLY AND THEREON, MADE A CLEAR OBSERVAT ION AS UNDER: SINCE THESE AND OTHER RELATED ASPECTS WERE NOT EXAMINED BY THE AO DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS HE FAILED TO ADHERE TO THE PROVISIONS OF THE INCOME TAX ACT, 1961. ACCORDINGLY THE ORDER PASSED BY THE AO IS FOUND TO BE ERRONE OUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE.' THE PR. CIT CATEGORICALLY STATED THAT: THE ASSESSING OFFICER IS DIRECTED TO COMPLETE THE REASSESSMENT PROCEEDINGS AFRESH, AFTER MAKING NECESSARY ENQUIRY/VERIFICATION IN RESPECT OF THE ABOVE M ENTIONED ISSUE.... THE ABOVE EXTRACT MORE THAN CLEARLY STATES THAT THE PR CIT HAD DIRECTED THE AO, TO PROCEED ITH THE ASSESSMENT ORDER AFRESH, BUT WITH ALSO CONSIDERING THE INFIRMITIES POINTED THEREIN IN THE ORDER U/S 263 OF THE ACT. THE ORDER NO WHERE DI RECTS THE AO TO SIMPLY STICK ON TO ONE ISSUE, IE, THE ISSUE MENTIONED U/S 263 OF THE ACT, WHILE NOT CONSIDERING ANY OTHER ISSUE THAT COMES IN THE SIGHT OF THE AO. 5.6 AS HAS BEEN STATED ABOVE, SINCE THE PR CIT HAS DIRECTED THE AO TO CONSIDER THE ASSESSMENT ORDER AFRESH THE AO, AS APPARENT FROM THE PAGE | 12 ASSESSMENT RECORDS, HAS VERY WELL CONSIDERED ALL THE MATTERS AND RECORDS OF THE APPELLANT. IT IS ONLY AFTER VERIFICATION OF THE RECORDS OF THE APPELLANT, IN CONSONANCE WITH THE DIRECTION OF THE PR CIT THAT THE AO HAS FOUND THE SO DIRECTED ADDITION UNDER SEC 43B, TO BE JUSTIFIED AND NOT FIT FOR ADDITION, WHILE ON THE OTHER HAND, NOTICED INFIRMITY WITH THE BASIS OF PROVISIONING A SUM OF RS 259,31,00,000/ - FOR PURCHASE OF COPPER CONCENTRATE. IN THE FACTUAL MATRIX, I D O NOT FIND ANY LEGAL INFIRMITY IN THE ASSESSMENT ORDER. ACCORDINGLY GROUND NOS 2 TO 4 OF THE APPEAL ARE DISMISSED. 6. GROUNDS NO. 5 TO 9 ARE DIRECTED AGAINST THE GRIEVANCE OF THE APPELLANT THAT THE DISALLOWANCE OF RS.25931000/ - MADE BY THE AO IS ARBITRARY AND UNWARRANTED IN AS MUCH AS THE SAID PROVISION ARE ASCERTAINED LIABILITY. 6.1 RELEVANT FACTS EXTRACTED FROM THE IMPUGNED ORDER WHEREIN THE AO MADE DISALLOWANCE OF PROVISION FOR COPPER CONCENTRATE AMOUNTING TO RS.2593100000/ - , ARE AS UNDER: 15. THIS PAR T OF THE REPLY OF THE ASSESSEE WAS CONSIDERED. IT IS IMPORTANT TO NOTE HERE THAT THE ASSESSEE IS MAKING PROVISION ON THE DATE OF CLOSING OF THE YEAR. IT IS UNASCERTAINABLE FOR THE ASSESSEE WHETHER THE SAME AMOUNT IS PAYABLE OR A DIFFERENT AMOUNT IS PAYABLE . THE JUDGEMENT CITED BY THE ASSESSEE CLEARLY DEMARCATES THE FACT THAT AN ASCERTAINABLE LIABILITY IS THE ONE WHICH NEEDS TO BE ALLOWED. SINCE THE LIABILITY DISCUSSED ABOVE IS OF HIGHLY UNASCERTAINABLE NATURE, DEPENDING ON THE FURTHER PROSPECTS OF THE MARKE T OF THE COMMODITY. THE ORDER PR. CIT WHILE SETTING ASIDE THE ORDER HAS ALSO, CLEARLY DISTINGUISHED THE SAID ARGUMENTS JUDGMENTS. THE RELEVANT PORTIONS ARE REPRODUCED HERE: HONBLE HIGH COURT OF MADRAS STAYING THE ASSESSMENT PROCEEDINGS WOULD ALSO BAR THE PROCEEDINGS CURRENTLY INITIATED U/S.263 OF THE I.T.ACT,1961 IS NOT ACCEPTABLE. 9. IN VIEW OF THE FACTS NARRATED ABOVE, ALSO TAKING INTO ACCOUNT THAT THE ISSUE ON HAND GETS TIME BARRED BY LIMITATION ON 31.03.2017 COUPLED WITH THE FACT THAT THE ASSESSEE HAS FAILED TO FURNISH ANY DETAILS W.R.T THE PRESENT PROCEEDINGS, I AM CONSTRAINED TO PASS THIS ORDER U/S.263 OF THE IT ACT, 1961 BASED ON FACTS OF THE CASE. THE ISSUES INVOLVED HAVE BEEN NARRATED IN DETAIL IN THE NOTICE ISSUED ON 01.02.2017. 10. IN RESPECT O F THE ISSUE ON HAND, IT IS PERTAIN TO MENTION THAT A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNISED WHEN: I. AN ENTERPRISE HAS PRESENT OBLIGATION AS A RESULT OF PAST EVENT PAGE | 13 II. IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND III. A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNISED. LIABILITY IS DEFINED AS A PRESEN T OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. A PAST EVENT THAT LEADS TO PRESENT OBLIGATION IS CALLED AS AN OBLIGATION EVENT. THE OBLIGATION EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNISED AS A PROVISION. IN ACCORDANCE WITH THE PROVISIONS OF THE IT ACT,1961. THOUGH AN ASSESSEE COMPANY HAS TO INCUR THE EXPENDITURE FOR ITS BUSINESS THE CREATION OF A MERE PROVISION IN LIEU OF THIS EXPENDITURE IS NOT ENTITLED FOR DEDUCTION UNDER IT ACT, 1961. IT IS PERTINENT TO NOTE THAT A SPECIAL BENCH OF THE HONBLE ITAT, MUMBAI IN THE CASE OF DCIT VS. BANK OF BAHRAIN AND KUWAIT HAS HELD THAT ANTICIPATED LIABILITY WHICH ARE CONTINGENT IN NATURE ARE NOT ALLOWABLE AND ANTICIPATED LIABILITY COUPLED WITH A PRESENT OBLIGATION CAN B E SAID TO BE CRYSTALLISED LIABILITY. IF AN EVENT HAS ALREADY TAKEN PLACE, SUCH AS THE ENTERING INTO THE CONTRACT AND UNDERTAKING OF AN OBLIGATION TO MEET THE LIABILITY, AND ONLY THE CONSEQUENTIAL EFFECT OF THE SAME IS TO BE DETERMINED, THEN THE LIABILITY I S NOT A CONTINGENT LIABILITY ( WOODWARD GOVERNOR 312 ITR 254 (SC) & BHARAT EARTH MOVERS 245 ITR 428 (SC). IN FOLLOWING 2 VERDICTS DELIVERED BY THE HONBLE RAJASATHAN AND MADRAS HIGH COURTS RESPECTIVELY. VIZ. RAJASTHAN SATE MINES AND MINERALS VS. CIT (RAJ) 208 ITR101 AND TN SMALL INDUSTRIES DEVELOPMENT CORPORATION VS. CIT (MAD) 242 ITR 122, IT WAS CATEGORICALLY HELD THAT IF ONLY ESTIMATES ARE MADE THIS AMOUNTS TO A CONTINGENT LIABILITY AND THAT IF THE LIABILITY BEING CONTINGENT ALLOWED THEN IT WOULD AMOUNT T O ALLOWING THE APPREHENDED LOSSES IN THE FURTURE FROM THE PROFITS OF THE CURRENT YEAR WHICH IS NOT ACCEPTED ON ANY PRINCIPAL OF LAW OR ACCOUNTANCY. THE SAME VIEW WAS ECHOED BY THE HONBLE APEX COURT IN THE CASES OF SHREE SAJJAM MILL LTD VS. CIT (SC) 156 IT R 585 AND INDIAN MOLLASSES CO (P) LTD VS CIT (SC) 37 ITR 66, WHEREIN IT WAS CLEARLY HELD THAT CONTINGENT LIABILITIES DO NOT CONSTITUTE EXPENDITURE AND CANNOT BE SUBJECT MATTER OF DEDUCTION EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. EXPENDITURE WHICH I S DEDUCTIBLE FOR INCOME TAX PURPOSES IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME BUT SETTING APART MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENING OF EVENTS IS NOT EXPENDITURE. ALL THESE VERDICTS CLEARLY REINFORCE THE STAND OF THE PAGE | 1 4 DEPARTMENT IN SO FAR AS THE ISSUE IN THE ASSESSEES CASE IN CONCERNED. IN THE ASSESSEE COMPANYS CASE, CERTAIN DEDUCTIONS TOWARDS PROVISIONS MADE BY IT, WERE TO BE ALLOWED ONLY ON ACTUAL PAYMENT BASIS AND SINCE SOME OF THESE AMOUNTS HAVE NOT BEEN PAID BY IT WITHIN T HE SPECIFIED TIME, A DISALLOWANCE U/S.43B OF THE IT ACT, 1961 WAS CALLED FOR. 11. IT IS ACCORDINGLY EVIDENT THAT THE AO WAS REQUIRED TO CONDUCT A PROPER VERIFICATION AND / OR ENQUIRY IN RESPECT OF ABOVE MENTIONED ISSUE. HIS FAILURE TO DO SO HAS RESULTED IN AN ASSESSMENT ORDER WHICH IS NOT ONLY ERRONEOUS BUT IS ALSO PREJUDICIAL TO THE INTEREST OF REVENUE. IT IS PLACED ON RECORD THAT THERE IS NO RIGHT OF APPEAL WHICH IS AVAILABLE TO THE REVENUE AGAINST SUCH ERRONEOUS ASSESSMENT ORDERS PASSED BY THE AOS, TO CO MPENSATE WHICH THE REVISIONARY POWER U/S.263 OF THE IT ACT,1961. HAVE BEEN CONFERRED ON THE PCIT/CIT IN THE STATUTE. FURTHERMORE, SUCH POWERS WERE HELD TO BE OF WIDE AMPLITUDE BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SHREE MANJUNATHESWARE PACKIN G PRODUCTS & CAMPHOR WORKS (1998) 231 ITR 53/96 TAXMAN 1. THEREFORE, NORMALLY WHEN AN AO HAS NOT CONDUCTED A PROPER ENQUIRY ON PARTICULAR ISSUE LEADING TO A LOSS OF REVENUE. MOREOVER, IN TERMS OF THE SPECIFIC LANGUAGE OF EXPLANATION 2 TO SECTION 263(1) OF THE IT ACT,1961 AN ORDER PASSED BY THE AO IS DEEMED TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE IF THE ORDER IS PASSED WITHOUT MAKING ENQUIRIES OR VERIFICATION WHICH SHOULD HAVE BEEN MADE. IN VIEW OF THE ABOVE, THE IMPUGNED ASSESSMENT ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO INTEREST OF REVENUE SINCE THE AO FAILED TO CONDUCT THE REQUISITE ENQUIRY/ VERIFICATION IN RESPECT OF THE ISSUE IN HAND. 16 THE ASSESSEE HAS FURTHER STATED IN ITS REPLY : FURTHER IT IS SUBMITTED THAT THE REO PENING OF THE ASSESSMENT PROCEEDINGS FOR THE AY 2009 - 10 WAS ALSO INITIATED BY THE DEPTT. ON THE BASIS OF THE SAME REASON AS IN YEAR UNDER CONSIDERATION AGAINST THE SAME THE ASSESSEEE HAD FILED A WP 1129 OF 2016 BEFORE THE GOA BENCH OF THE HONBLE BOMBAY HI GH COURT. THE HC FINDING MERIT IN THE ISSUE WAS PLEASED TO ISSUE AN INTERIM STAY ORDER AGAINST THE REASSESSMENT PROCEEDINGS FOR THE AY 2009 - 10. THE REASONS RECORDED IN WRITING FOR THE AY 2009 - 10 AND THE HONBLE HC ORDER ARE ATTACHED HEREWITH IN ANNEXURE G& H RESPECTIVELY. WE REQUEST YOUR HONOUR TO KINDLY TAKE THE HC ORDER ON RECORD AND REQUEST NOT TO INITIATE ASSESSMENT PROCEEDINGS U/S. 143(3) RWS 263 OF THE ACT BASED ON THE REASONS AS THE PAGE | 15 ASSESSEE HAS GOT A FAVOURABLE ORDER FROM HC ON THE SAME ISSUE FOR THE PRECEDING ASSESSMENT YEAR AY 2009 - 10. 16.1 THIS CONTENTION OF THE ASSESSEE WAS CONSIDERED. IT IS TO BE NOTED HERE THAT EACH ASSESSMENT YEAR IS A SEPARATE ASSESSMENT YEAR AND THEREFORE, LINKING PROCEEDING OF ONE ASSESSMENT YEAR AND ISSUE OF ONE ASSESSMENT YEAR TO ANOTHER IS ERRONEOUS. 17. THE ASSESSEE HAD FURTHER STATED THAT: WITHOUT PREJUDICE AND UNDER PROTEST, WE SUBMIT THAT EVEN IF YOUR HNOUR PROCEEDS TO MAKE THE DISALLOWANCE IN THIS REGARD THEN THE DISALLOWANCE SHOULD BE DONE ONLY ON NET PROVISION BAS IS. DURING THE PREVIOUS AY 2009 - 10 AS ON MARCH 31,2009 THE PROVISION UNDER THE SAME HEAD OF FINAL PRICE PAYABLE FOR COPPER CONCENTRATE WAS RS. 140,67,55,306 AND DURING THE IMPUGNED AY 2010 - 11 AS ON MARCH 31, 2010 THE PROVISION UNDER THE HEAD WAS RS.259,31, 25,883/ - . HENCE THE NET AMOUNT OF RS. 118,63,80,577 ONLY CAN BE DISALLOWED IF AT ALL YOUR HONOUR PROCEED TO DISALLOW THE SAME. THE RELEVANT PAGE OF THE FINANCIALS FOR THE FY 2009 - 10 ( AY 2010 - 11_ SHOWING THE AMOUNTS PROVISION FOR BOTH OF THE FY 2009 - 10 AN D FY 2008 - 09 ATTACHED HEREWITH IN ANNEXURE 1 HOWEVER, IT IS TO BE NOTED THAT THE ASSESSEE IN ITS REPLY ITSELF HAS STATED THAT THE SAID PROVISION ARE MADE FOR COPPER PURCHASES IN TRANSIT. THEREFORE THE SAID PROVISION IN ITS ENTIRETY HAS BEEN MADE FOR COPPER PURCHASES IN TRANSIT DURING THE YEAR AND THEREFORE, IS LIABLE TO BE DISALLOWED DURING THE YEAR.' 6.1 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT FILED WRITTEN SUBMISSION ON DATED 19.07.2018. THE RELEVANT PORTION IS REPRODUCED UNDER: - 'APPELL ANT SUBMISSIONS THAT PROVISION FOR COPPER CONCENTRATE PURCHASES IS ALLOWABLE EXPENSE : 3.3.1 THE APPELLANT COMPANY CARRIES ON THE BUSINESS OF MANUFACTURING COPPER RODS, COPPER CATHODES, DORE ANODE, SULPHURIC ACID AND PHOSPHORIC ACID. THE RAW MATERIAL COPP ER CONCENTRATE IS IMPORTED WHICH IS PROCESSED AT THE SMELTER DIVISION OF THE COMPANY AT TUTICORIN INTO A PRODUCT CALLED COPPER ANODE. THIS IS FURTHER REFINED BY ELECTROLYTE PROCESS AT TUTICORIN AND SILVASSA WORKS INTO A PRODUCT CALLED CATHODE WHICH MAY FUR THER BE DRAWN INTO CAST COPPER RODS DEPENDING ON THE MARKET REQUIREMENT. 3.3.2 THE APPELLANT COMPANY PURCHASES COPPER CONCENTRATE FOR PRODUCTION OF COPPER ANODE/ COPPER CATHODE. PAGE | 16 3.3.3 THE COPPER CONCENTRATES ARE INITIALLY INVOICED AT A PROVISIONAL PRICE AND PROVISIONAL METAL CONTENT. SUBSEQUENTLY, BASED ON THE DETERMINATION OF APPLICABLE PAYABLE PRICE AND FINAL METAL CONTENT, THE SUPPLIER RAISES THE FINAL INVOICE AND THE APPELLANT HAS TO SETTLE THE BILLS ON THE BASIS OF FINAL PRICING. IN BETWEEN THE DATE OF PROVISIONAL INVOICE AND THE FINAL INVOICING, THE COPPER PURCHASE IS SUBJECTED TO TWO TYPES OF RISK I.E., 1) ON ACCOUNT OF FLUCTUATION IN THE RATE OF COPPER ON LONDON METAL STOCK EXCHANGE AND 2) ON ACCOUNT OF FLUCTUATION IN THE EXCHANGE RATE OF RUPEE VIS - A - VIS USD. 3.3.4 IN VIEW OF THE INCREASE IN THE PRICE OF COPPER ON LME, THE APPELLANTS LIABILITY TO PAY FOR THE COPPER CONCENTRATE FOR WHICH FINAL INVOICING WAS NOT YET DONE ON 31ST MARCH,2010 WENT UP SUBSTANTIALLY AND ACCORDINGLY COMPANY PROVIDED FOR THE INCREASED LIABILITY. 3.3.5 AS PER, THE CLAUSE NO 2 OF SCHEDULE 12 REFERRED TO HEREINABOVE IS REPRODUCED HEREIN BELOW: - THE COMPANY HAS RECOGNISED LIABILITY BASED ON SUBSTANTIAL DEGREE OF ESTIMATION FOR: FINAL PRICE PAYABLE ON PURCHASE OF COPPER CONCE NTRATE FOR WHICH THE QUOTATIONAL PERIOD PRICE WAS NOT FINALISED AS ON 31 MARCH, 2009, A PROVISION OF RS. 140.68 CRORE BASED ON FORWARD LONDON METAL EXCHANGE (LME) RATE OF COPPER AND LONDON BULLION MARKET ASSOCIATION (LBMA) RATE OF PRECIOUS METALS WAS MADE. AS AGAINST IT, DURING THE YEAR RS. 153.31 CRORE HAS BEEN INCURRED TOWARDS FINAL PRICE SETTLEMENT. THE ADDITIONAL AMOUNT OF RS. 12.63 CRORE HAS BEEN CHARGED TO PROFIT AND LOSS ACCOUNT UNDER RAW - MATERIAL CONSUMPTION. LIABILITY RECOGNISED UNDER THIS CLASS FO R THE YEAR IS RS. 259.31 CRORE WHICH IS OUTSTANDING AS ON 31 MARCH 2010. ACTUAL OUTFLOW IS EXPECTED ON FINALISATION OF QUOTATIONAL PERIOD PRICE IN THE NEXT FINANCIAL YEAR. THE SAID NOTE FORMS PART OF THE ANNUAL REPORT AND IS REPRODUCED ABOVE ENCLOSED AT PA GE NO.... TO ... OF THE PAPER BOOK. 3.3.6 THE NOTE GIVEN IN FINANCIALS FOR FY 2011 - 12 (NEXT YEAR) IS AS BELOW. THE COMPANY HAS RECOGNISED LIABILITY BASED ON SUBSTANTIAL DEGREE OF ESTIMATION FOR: FINAL PRICE PAYABLE ON PURCHASE OF COPPER CONCENTRATE FOR WHICH THE QUOTATIONAL PERIOD PRICE WAS NOT FINALISED AS ON 31 MARCH 2010, A PROVISION OF RS. 259.31 CRORE BASED ON FORWARD LME RATE OF COPPER AND LBMA RATE OF PRECIOUS METALS WAS MADE. AS AGAINST IT , DURING THE YEAR RS. 248.26 CRORE HAS BEEN INCURRED TOWARDS FINAL PRICE SETTLEMENT. THE BALANCE AMOUNT OF RS.11.05 CRORE HAS BEEN CREDITED TO PROFIT & LOSS ACCOUNT UNDER RAW - MATERIAL CONSUMPTION. LIABILITY RECOGNISED UNDER THIS CLASS FOR THE YEAR IS RS.15 2.77 CRORE WHICH IS OUTSTANDING AS ON 31 MARCH 2011. ACTUAL OUT FLOW IS EXPECTED ON FINALISATION OF QUOTATIONAL PERIOD PRICE IN THE NEXT FINANCIAL YEAR. PAGE | 17 3.3.7 THUS, YOUR HONOUR WILL APPRECIATE THAT THE PROVISION IS ACTUALISED EVERY YEAR AND THE DIFFERENTI AL AMOUNT IS DEBITED / CREDIT TO PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH THE STATED POLICY OF THE APPELLANT COMPANY. PROVISION FOR COPPER CONCENTRATE PROVIDED IS AS PER NOTIFIED ACCOUNTING STANDARDS: 3.3.8 THE APPELLANT'S ACCOUNTING IN RESPECT OF COPPER CONCENTRATE PURCHASES WHICH WERE OUTSTANDING AS ON 31ST MARCH TO MARK THEM TO MARKET TO TAKE INTO ACCOUNT THE EFFECT OF THE INCREASE IN THE LIABILITY OF THE APPELLANT WHICH WAS ASCERTAINED. FROM FINANCIAL YE AR 2003 - 04 ONWARDS COMPANY CONSISTENTLY FOLLOWING THIS PRACTICE. IN THIS REGARD, YOUR HONOUR MAY PLEASE NOTE THE PROVISIONS OF SECTION 145 AND SECTION 145A OF THE INCOME - TAX ACT, 1961 WHICH STOOD AS FOLLOWS: - [METHOD OF ACCOUNTING. 145. (1) INCOME CHARGEAB LE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR INCOME FROM OTHER SOURCES' SHALL, SUBJECT TO THE PROVISIONS OF SUBSECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNE SS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB - SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB - SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN [METHOD OF ACCOUNTING IN CERTAIN CASES. 145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN, THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE (A) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; AND (B) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACT UALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION. EXPLANATION. FOR THE PURPOSES OF THIS SECTION, ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) UNDER ANY LAW FOR THE TIM E BEING IN FORCE, SHALL INCLUDE ALL SUCH PAYMENT PAGE | 18 NOTWITHSTANDING ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT.] 3.3.9 A COMBINED READING OF THE PROVISIONS OF SECTION 145 AND SECTION 145A BRINGS OUT THE FOLLOWING PRINCIPLES THAT ARE TO BE FOLLOWED BY AN ASSESSEE: - O INCOME CHARGEABLE UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION HAS TO BE DETERMINED AS PER THE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE. O THE CENTRAL GOVERNMENT HAS PRESCRIBED CERTAIN ACCOUNTING STANDARDS WHICH ARE MANDAT ORILY REQUIRED TO BE FOLLOWED BY THE ASSESSEE WHILE PREPARING ITS ACCOUNTS. 3.3.10 IN THE LIGHT OF THE ABOVE, YOUR HONOUR MAY PLEASE NOTE AS FOLLOWS: I. THE INCOME CHARGEABLE UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION HAS TO BE DETERMINED ON THE B ASIS OF METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE APPELLANT. THE TERM REGULARLY FOLLOWED BY THE APPELLANT DOESNT MEAN THAT ONCE A METHOD IS ADOPTED, IT CAN NEVER BE CHANGED. THE STATUTE STIPULATES THAT THE INCOME SHALL BE COMPUTED ON THE BASIS OF THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED BY THE APPELLANT. IT SHOULD MEAN DURING THE PERIOD UNDER CONSIDERATION. HOWEVER, THE PROVISIONS CANNOT BE INTERPRETED TO MEAN THAT ONCE A SYSTEM OF ACCOUNTING IS ADOPTED, IT CAN NEVER BE CHANGED. 'REGULAR CANNOT IN THE PRESENT CONTEXT MEAN PERMANENT. THERE IS NO PROVISION THAT A CHANGE IS IMPERMISSIBLE OR BARRED EVEN WHEN IT IS WARRANTED BY THE EXISTING SITUATION. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF PUNJAB & HARYANA HIGH COURT JUDGEMENT IN THE CAS E OF COMMISSIONER OF INCOME - TAX VS. PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD REPORTED AT 255 ITR 351. II. THE APPELLANT HAD FOLLOWED THIS POLICY CONSISTENTLY AND THE AUDITED BALANCE SHEET OF THE APPELLANT CAN BE REFERRED TO IN THIS REGARD. 3.3. 11 AS PER THE INCOME - TAX ACT, 1961 THERE ARE CERTAIN ACCOUNTING STANDARDS WHICH ARE MANDATORILY REQUIRED TO BE FOLLOWED BY THE ASSESSEE WHILE COMPUTING THE INCOME UNDER THE HEADING BUSINESS AND PROFESSION. AS PER NOTIFICATION NO. SO 69(E) DATED 25TH JANUAR Y, 1996 THE FOLLOWING ACCOUNTING STANDARDS HAVE BEEN PRESCRIBED TO BE MANDATORILY FOLLOWED BY THE ASSESSEE: - NOTIFIED ACCOUNTING STANDARDS - THE FOLLOWING ACCOUNTING STANDARDS ARE NOTIFIED, TO BE FOLLOWED BY ALL ASSESSEES FOLLOWING MERCANTILE SYSTEM OF ACC OUNTING, NAMELY: A. ACCOUNTING STANDARD I RELATING TO DISCLOSURE OF ACCOUNTING POLICIES: PAGE | 19 I. ALL SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS SHALL BE DISCLOSED. II. THE DISCLOSURE OF THE SIGNIFICANT ACCOUNTING POLICIES SHALL FORM PART OF THE FINANCIAL STATEMENTS AND THE SIGNIFICANT ACCOUNTING POLICIES SHALL NORMALLY BE DISCLOSED IN ONE PLACE. III. ANY CHANGE IN AN ACCOUNTING POLICY WHICH HAS A MATERIAL EFFECT IN THE PREVIOUS YEAR OR IN THE YEARS SUBSEQUENT TO THE PREVIOUS YEARS SHALL BE DISCLOSED. THE IMPACT OF, AND THE ADJUSTMENTS RESULTING, FROM, SUCH CHANGE, IF MATERIAL, SHALL BE SHOWN IN THE FINANCIAL STATEMENTS OF THE PERIOD IN WHICH SUCH CHANGE IS MADE TO REFLE CT THE EFFECT OF SUCH CHANGE. WHERE THE EFFECT OF SUCH CHANGE IS NOT ASCERTAINABLE, WHOLLY OR IN PART, THE FACT SHALL BE INDICATED. IF A CHANGE IS MADE IN THE ACCOUNTING POLICIES WHICH HAS NO MATERIAL EFFECT ON THE FINANCIAL STATEMENTS FOR THE PREVIOUS YEA R BUT WHICH IS REASONABLY EXPECTED TO HAVE A MATERIAL EFFECT IN ANY YEAR SUBSEQUENT TO PREVIOUS YEAR, THE FACT OF SUCH CHANGE SHALL BE APPROPRIATELY DISCLOSED IN THE PREVIOUS YEAR IN WHICH THE CHANGE IS ADOPTED. IV. ACCOUNTING POLICIES ADOPTED BY AN ASSES SEE SHOULD BE SUCH SO AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS, PROFESSION OR VOCATION IN THE FINANCIAL STATEMENTS PREPARED AND PRESENTED ON THE BASIS OF SUCH ACCOUNTING POLICIES. FOR THIS PURPOSE, THE MAJOR CONSIDERATIO NS GOVERNING THE SELECTION AND APPLICATION OF ACCOUNTING POLICIES ARE FOLLOWING, NAMELY: (I) PRUDENCE: PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BEST EST IMATE IN THE LIGHT OF AVAILABLE INFORMATION; (II) SUBSTANCE OVER FORM: THE ACCOUNTING TREATMENT AND PRESENTATION IN FINANCIAL STATEMENTS OF TRANSACTIONS AND EVENTS SHOULD BE GOVERNED BY THEIR SUBSTANCE AND NOT MERELY BY THE LEGAL FORM; (III) MATERIALITY: FINANCIAL STATEMENTS SHOULD DISCLOSE ALL MATERIAL ITEMS, THE KNOWLEDGE OF WHICH MIGHT INFLUENCE THE DECISIONS OF THE USER OF THE FINANCIAL STATEMENTS. V. IF THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS RELATING TO GOING CONCERN, CONSISTENCY AND ACCRUAL ARE FOLL OWED IN FINANCIAL STATEMENTS, SPECIFIC DISCLOSURE IN RESPECT OF SUCH ASSUMPTIONS IS NOT REQUIRED. IF A FUNDAMENTAL ACCOUNTING ASSUMPTION IS NOT FOLLOWED, SUCH FACT SHALL BE DISCLOSED. VI. FOR THE PURPOSES OF THE PARAGRAPHS (1) TO (5), THE EXPRESSIONS, (A ) 'ACCOUNTING POLICIES MEANS THE SPECIFIC ACCOUNTING PRINCIPLES AND THE METHODS OF APPLYING THOSE PRINCIPLES ADOPTED PAGE | 20 BY THE ASSESSEE IN THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS; (B) 'ACCRUAL REFERS TO THE ASSUMPTION THAT REVENUES AND COST S ARE ACCRUED, THAT IS, RECOGNISED AS THEY ARE EARNED OR INCURRED (AND NOT AS MONEY IS RECEIVED OR PAID) AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIODS TO WHICH THEY RELATE; (C) 'CONSISTENCY REFERS TO THE ASSUMPTION THAT ACCOUNTING POLICIES ARE C ONSISTENT FROM ONE PERIOD TO ANOTHER; (D) FINANCIAL STATEMENTS MEANS ANY STATEMENT TO PROVIDE INFORMATION ABOUT THE FINANCIAL POSITION, PERFORMANCE AND CHANGES IN THE FINANCIAL POSITION OF AN ASSESSEE AND INCLUDES BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND OTHER STATEMENTS AND EXPLANATORY NOTES FORMING PART THEREOF; (E) GOING CONCERN' REFERS TO THE ASSUMPTION THAT THE ASSESSEE HAS NEITHER THE INTENTION NOR THE NECESSARY OF LIQUIDATION OR OF CURTAILING MATERIALLY THE SCALE OF THE BUSINESS, PROFESSION OR VOCATION AND INTENDS TO CONTINUE HIS BUSINESS, PROFESSION OR VOCATION FOR THE FORESEEABLE FUTURE. B. ACCOUNTING STANDARD II RELATING TO DISCLOSURE OF PRIOR PERIOD AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTING POLICIES: I. PRIOR PERIOD ITEMS SHALL BE SEPARATELY DISCLOSED IN THE PROFIT AND LOSS ACCOUNT IN THE PREVIOUS YEAR TOGETHER WITH THEIR NATURE AND AMOUNT IN A MANNER SO THAT THEIR IMPACT ON PROFIT OR LOSS IN THE PREVIOUS YEAR CAN BE PERCEIVED. II. EXTRAORDINARY ITEMS OF THE ENTERPRISE DURING THE PREVIOUS YEAR SHALL BE DISCLOSED IN THE PROFIT AND LOSS ACCOUNT AS PART OF TAXABLE INCOME. THE NATURE AND AMOUNT OF EACH SUCH ITEM SHALL BE SEPARATELY DISCLOSED IN A MANNER SO THAT THEIR RELATIVE SIGNIFICANCE AND EFFECT ON THE OPERATING RESULTS OF THE PREV IOUS YEAR CAN BE PERCEIVED. III. A CHANGE IN AN ACCOUNTING POLICY SHALL BE MADE ONLY IF THE ADOPTION OF A DIFFERENT ACCOUNTING POLICY IS REQUIRED BY STATUTE OR IF IT IS CONSIDERED THAT THE CHANGE WOULD RESULT IN A MORE APPROPRIATE PREPARATION OR PRESENTAT ION OF THE FINANCIAL STATEMENTS BY AN ASSESSEE. IV. ANY CHANGE IN AN ACCOUNTING POLICY WHICH HAS A MATERIAL EFFECT SHALL BE DISCLOSED. THE IMPACT OF, AND THE ADJUSTMENTS RESULTING FROM SUCH CHANGE, IF MATERIAL, SHALL BE SHOWN IN THE FINANCIAL STATEMENTS O F THE PERIOD IN WHICH SUCH CHANGE IS MADE TO REFLECT THE EFFECT OF SUCH CHANGE. WHERE THE EFFECT OF SUCH CHANGE IS NOT ASCERTAINABLE, WHOLLY OR IN PART, THE FACT SHALL BE INDICATED. IF A CHANGE IS MADE IN THE ACCOUNTING POLICIES WHICH HAS NO MATERIAL EFF ECT ON THE FINANCIAL STATEMENTS FOR THE PREVIOUS YEAR BUT WHICH IS REASONABLY EXPECTED TO HAVE A MATERIAL EFFECT IN YEARS SUBSEQUENT TO THE PREVIOUS YEARS, THE FACT PAGE | 21 OF SUCH CHANGE SHALL BE APPROPRIATELY DISCLOSED IN THE PREVIOUS YEAR IN WHICH THE CHANGE IS ADOPTED. V. A CHANGE IN AN ACCOUNTING ESTIMATE THAT HAS A MATERIAL EFFECT IN PREVIOUS YEAR SHALL BE DISCLOSED AND QUANTIFIED. ANY CHANGE IN AN ACCOUNTING ESTIMATE WHICH IS REASONABLY EXPECTED TO HAVE A MATERIAL EFFECT IN YEARS SUBSEQUENT TO PREVIOUS YEAR SHALL ALSO BE DISCLOSED. VI. IF A QUESTION ARISES AS TO WHETHER A CHANGE IS A CHANGE IN ACCOUNTING POLICY OR A CHANGE IN AN ACCOUNTING ESTIMATE, SUCH A QUESTION SHALL BE REFERRED TO THE BOARD FOR DECISION. VII. FOR THE PURPOSES OF ABOVE, THE EXPRESSIONS , (A) ACCOUNTING ESTIMATE MEANS AN ESTIMATE MADE FOR THE PURPOSE OF PREPARATION OF FINANCIAL STATEMENTS WHICH IS BASED ON THE CIRCUMSTANCES EXISTING AT THE TIME WHEN THE FINANCIAL STATEMENTS ARE PREPARED; (B) ACCOUNTING POLICIES MEANS THE SPECIFIC A CCOUNTING PRINCIPLES AND THE METHOD OF APPLYING THOSE PRINCIPLES ADOPTED BY THE ASSESSEE IN THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS; (C) EXTRAORDINARY ITEMS' MEANS GAINS OR LOSSES WHICH ARISE FROM EVENTS OR TRANSACTIONS WHICH ARE DISTINCT FROM THE ORDINARY ACTIVITIES OF THE BUSINESS AND WHICH ARE BOTH MATERIAL AND EXPECTED NOT TO RECUR FREQUENTLY OR REGULARLY. EXTRAORDINARY ITEMS INCLUDE M ATERIAL ADJUSTMENTS NECESSITATED BY CIRCUMSTANCES WHICH THOUGH RELATED TO YEARS PROCEEDING TO THE PREVIOUS YEARS ARE DETERMINED IN THE PREVIOUS YEAR: PROVIDED THAT INCOME OR EXPENSES ARISING FROM THE ORDINARY ACTIVITIES OF THE BUSINESS OR PROFESSION OR VOC ATION OF AN ASSESSEE, THOUGH ABNORMAL IN AMOUNT OR INFREQUENT IN OCCURRENCE, SHALL NOT QUALIFY AS EXTRAORDINARY ITEM; (D) FINANCIAL STATEMENTS MEANS ANY STATEMENT TO PROVIDE INFORMATION ABOUT THE FINANCIAL POSITION, PERFORMANCE AND CHANGES IN THE FINANC IAL POSITION OF AN ASSESSEE AND INCLUDES BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND OTHER STATEMENTS AND EXPLANATORY NOTES FORMING PART THEREOF; (E) PRIOR PERIOD ITEMS MEANS MATERIAL CHARGES OR CREDITS WHICH ARISE IN THE PREVIOUS YEAR AS A RESULT OF ERRO RS OR OMISSIONS IN THE PREPARATION OF THE FINANCIAL STATEMENTS OF ONE OR MORE PREVIOUS YEARS: PROVIDED THAT THE CHARGE OR CREDIT ARISING ON THE OUTCOME OF A CONTINGENCY, WHICH AT THE TIME OF OCCURRENCE COULD NOT BE ESTIMATED ACCURATELY SHALL NOT CONSTITUTE THE CORRECTION OF AN ERROR BUT A CHANGE IN ESTIMATE AND SUCH AN ITEM SHALL NOT BE TREATED AS A PRIOR PERIOD ITEM. PAGE | 22 VIII. THIS NOTIFICATION SHALL COME INTO FORCE WITH EFFECT FROM 1ST DAY OF APRIL, 1996 AND SHALL, ACCORDINGLY, APPLY TO THE ASSESSMENT YEAR 1 997 - 98 AND SUBSEQUENT ASSESSMENT YEARS. IX. AS PER THE ABOVE NOTIFICATION, THE TWO ACCOUNTING STANDARDS AS REFERRED TO HEREINABOVE ARE REQUIRED TO BE MANDATORILY FOLLOWED BY THE ASSESSEE WHILE COMPUTING ITS INCOME FROM BUSINESS AND PROFESSION. IT IS IMPOR TANT TO NOTE THAT THE HIGHLIGHTED WORDS WHICH HAVE BEEN EMPHASIZED BY THE APPELLANT. 3.3.12 ACCORDING TO ACCOUNTING STANDARD 1, THE PRINCIPLE OF PRUDENCE REQUIRES THAT PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CA NNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. 3.3.13 THE APPELLANT ON THE DATE OF BALANCE SHEET KNEW THAT ITS LIABILITY TO PAY ON ACCOUNT OF COPPER CONCENTRATE HAVE GONE UP SUBSTANTIALLY IN VIE W OF THE INCREASE IN THE PRICES OF COPPER CONCENTRATE AND BY NOT ACCOUNTING FOR SUCH INCREASE, THE ASSESSEE WOULD HAVE HAD VIOLATED THE MANDATORY PROVISIONS OF ACCOUNTING STANDARD 1. 3.3.14 THE ACCOUNTING STANDARD 1 REQUIRED THAT ACCOUNTING POLICIES ADOPT ED BY AN ASSESSEE SHOULD BE SUCH SO AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS, PROFESSION OR VOCATION IN THE FINANCIAL STATEMENTS PREPARED AND PRESENTED ON THE BASIS OF SUCH ACCOUNTING POLICIES. 3.3.15 THUS, AS PER AS - 1, THE ACCOUNTS HAVE TO BE PREPARED SO AS TO PRESENT A TRUE AND FAIR VIEW AND AS PER THE AS - 1 ITSELF, THE ACCOUNTS CANNOT BE SAID TO HAVE BEEN TRUE AND FAIR UNLESS IT FOLLOWS THE PRINCIPLES OF PRUDENCE AS MENTIONED IN POINT NO. 1 HEREINABOVE. 3.3.16 THEREFO RE, THE APPELLANT HAVING KNEW THAT THE ITS LIABILITY TO PAY ON ACCOUNT OF COPPER CONCENTRATE HAVING GONE UP SUBSTANTIALLY WITH A VIEW TO DECLARE TRUE AND FAIR RESULTS OF THE APPELLANT AND CORRECT ASCERTAINMENT OF INCOME UNDER THE HEADING BUSINESS AND PROFE SSION. THE LIABILITY TO PAY THIS INCREASED AMOUNT HAD BEEN ACCRUED AS PER THE CONTRACTS WHICH THE APPELLANT WAS HAVING WITH THE VENDORS FOR COPPER CONCENTRATE AND THIS BEING THE CASE, THE APPELLANT WAS BOUND TO ACCOUNT FOR THIS INCREASE IN THE LIABILITY. R ELIANCE IN THIS REGARD IS ALSO PLACED ON THE DECISION OF HONBLE SUPREME COURT IN CIT VS WOODWARD GOVERNOR INDIA (P) LTD. AND HONDA SIEL POWER PRODUCTS LTD (312 ITR 254). 21. IN CONCLUSION, WE MAY STATE THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUC TIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE PAGE | 23 EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURS ED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE ; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND G AINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTE D ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 3.3.17 HOWEVER, THE LD. AO WITHOUT APPRECIATING THE FACTS OF THE CASE, DISALLOWED THE PROVISION MADE FOR COPPER CONCENTRATE PURCHASES TREATING THE SAME AS IN TRANSIT. 3.3.18 THE LD. AO FAILED TO APPRECIATE THE FACT THAT THE APPELLANT WAS DEALING IN A COMMODITY THE PRICING OF WHICH WAS NOT IN THE HANDS OF THE APPELLANT AND WAS DEPENDENT UPON VARIOUS FACTORS LIKE FOREIGN EXCHANGE, LME PRICES ETC. AND AS SUCH IT WAS THE INHERENT DUTY OF THE APPELLANT AND THE RESPONSIBILITY TO SHOW THE TRUE RESULTS BY TAKING INTO ACCOUNT ALL LIABILITIES WHICH THE APPELLANT KNEW THAT WOULD HAVE BECOME PAYABLE AS ON THE DATE OF PREPARATION OF THE BALANCE SHEET. IT WAS THE MANDATORY DUTY CAST UPON THE APPELLANT NOT ONLY B Y THE SHAREHOLDERS, BUT EVEN AS PER THE MANDATORY PROVISIONS OF SECTION 145 AND SECTION 145A OF THE INCOME - TAX ACT, 1961. 3.3.19 SECTION 145A OF THE INCOME - TAX WHICH STARTS WITH A NON - OBSTANTE CLAUSE IN PRECEDENCE TO SECTION 145 IN THE MATTERS OF CONFLICT S RELATING TO VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY WHICH HAS TO BE DONE IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IN CASES RELATING TO VALUATION OF PURCHASE AND SALE OF GOODS, THUS THE PROVISIONS OF SE CTION 145A MUST PREVAIL OVER SECTION 145 AND THE LD. AO HAS NO POWER TO RECOMPUTED THE VALUE OF PURCHASE AND SALE OVER THAT AS DONE BY THE APPELLANT IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY FOLLOWED AND THE APPELLANT HAVING SHOWN THAT THE METH OD OF ACCOUNTING HAS BEEN REGULARLY FOLLOWED BY HIM , THE LD. AO HAD NO POWER TO REJECT THE SAME IN VIEW OF THE MANDATORY PROVISIONS OF SECTION 145A WHICH TAKES PRECEDENCE OVER SECTION 145 IN VIEW OF THE NON - OBSTANTE CLAUSE. THUS, THE ADDITION OF RS. 259.3 1 CRORES WAS TOTALLY WRONG. PROVISION FOR COPPER CONCENTRATE ALLOWABLE AS PER JUDICIAL DECISIONS PAGE | 24 3.3.20 IT IS NOT IN DISPUTE AS PER THE DISCLOSURES IN FINANCIAL STATEMENTS THAT PROVISION IS IN RESPECT OF PURCHASES OF COPPER CONCENTRATE MADE BY THE APPELLA NT COMPANY. THUS, SAME IS AN ASCERTAINED LIABILITY & TO BE ALLOWED AS AN EXPENSE UNDER SECTION 37 OF THE ACT. 3.3.21 AS PER SETTLED LAW, IT FOLLOWS THAT WHILE COMPUTING BUSINESS INCOME CHARGEABLE TO TAX UNDER SECTION 28 OF THE ACT, THE MERCANTILE SYSTEM O F ACCOUNTING HAS TO BE FOLLOWED AND PROVISION FOR ANTICIPATED LOSSES AND FORESEEABLE LIABILITIES WILL HAVE TO BE TAKEN INTO ACCOUNT. TO SUBSTANTIATE THE CLAIM THAT ASCERTAINED LIABILITY EVEN ON ACCRUAL BASIS COULD BE ALLOWED UNDER SECTION 28 OF THE ACT, TH E APPELLANT RELIES ON THE DECISION OF HONBLE SUPREME COURT IN CALCUTTA COMPANY LIMITED VS. CIT, WEST BENGAL 37 ITR 1 (SC), WHEREIN IT WAS OBSERVED THE PROFITS AND GAINS OF THE BUSINESS CANNOT BE DETERMINED UNLESS AND UNTIL THE EXPENSES OR THE OBLIGATIONS WHICH HAVE BEEN ACCRUED ARE SET OFF AGAINST THE RECEIPTS. 3.3.22 IT IS ALTERNATIVELY CLAIMED THAT THE CLAIM OF THE APPELLANT MAY BE ALLOWED UNDER SECTION 37 OF THE ACT. SECTION 37 OF THE ACT PROVIDES FOR THE DEDUCTION OF ALL EXPENDITURE WHOLLY AND EXCLUSI VELY LAID OUT OR EXPANDED FOR THE PURPOSES OF BUSINESS, WHERE SUCH EXPENDITURE IS NOT EXPRESSLY COVERED BY ANY OTHER PROVISION OF THE ACT. THE COPPER CONCENTRATE PROVISION BEING A CONTRACTUAL LIABILITY, COMPUTED CONSIDERING THE PREVAILING PRICES AS ON 31S T MARCH AND ACCRUED IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING CONSISTENTLY, IS ALLOWABLE DEDUCTION UNDER THE ACT. TO SUBSTANTIATE THE CLAIM THAT ACCRUED LIABILITY IS AN ALLOWABLE DEDUCTION EVEN THOUGH IT IS ESTIMATED THE APPELLANT RELIES ON FOLLOWING AUTHORITIES: - I) HONBLE SUPREME COURT IN BHARAT EARTH MOVERS VS. CIT [2000] 245 ITR 428 (SC) HAS HELD THAT THE LAW IS WELL SETTLED THAT IF A LIABILITY HAD BEEN INCURRED OR HAS ACCRUED DURING THE YEAR, DEDUCTION MUST BE ALLOWED THOUGH THE LIABIL ITY MAY BE QUANTIFIED AT A LATER DATE. II) RELIANCE IS ALSO PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: CIT VS. BURHAL SUGAR MILLS CO. LIMITED, (82 ITR 784) (ALL.) CIT VS. SINGARI BAI [1945] 13 ITR 224 (ALL.) POONA ELECTRIC SUPPLY CO. LTD. VS. C.I.T. 57 ITR 521 (SC) METAL BOX CO. OF INDIA VS. THEIR WORKMAN 73 ITR 53 (SC) KEDARNATH JUTE MANUFACTURING CO. LTD. VS. CIT 82 ITR 363 (SC) CIT VS. VINITEC CORPORATION (P) LTD. (196 CTR 369) [DELHI] CIT TAMIL NADU VS. SITALAKSHMI MILLS LTD. (141 ITR 415) [MAD] PAGE | 25 ITAT CHENNAI & COMMISSIONER APPEALS HAS DECIDED THIS ISSUE FAVORABLE IN AY 2004 - 05 3.3.23 SIMILAR ISSUE CAME BEFORE CIT(A) - XI, CHENNAI IN AY 2004 - 05 FIRST YEAR OF ADOPTION THIS POLICY OF ACCOUNTING PROVISION FOR COPPER CONCENTRATE WHERE CIT(A) HELD IN FAV OUR OF THE APPELLANT AND DELETED THE ADDITION. RELEVANT EXTRACT CIT(A) ORDER PRODUCED BELOW: IN THE LIGHT OF THE ABOVE DISCUSSION AS ABOVE THE APPELLANT IS BOUND TO SUCCEED AND THE ADDITION IS LIABLE TO BE DELETED AS THE FALL IN NET PROFIT IS DULY EXPLAIN ED IN MY CONSIDERED OPINION AND THE CHANGE IN THE METHOD OF ACCOUNTING HAVING BEEN FOLLOWED CONSISTENTLY AND HAVING NOT BEEN DEMONSTRATED TO BE MALAFIDE THE ADDITION IN THIS REGARD WAS WRONG. THE APPELLANT'S DETAILED REASONING IN THIS REGARD HAS BEEN SEEN AND ANALYSED. THE APPELLANT IN THE LAST PARA OF HIS WRITTEN SUBMISSION THAT THE PROVISIONS OF SECTION 145A IN RESPECT OF METHOD OF VALUATION OF PURCHASES AND SALES AND THE SAID 145A STARTS WITH NON - OBSTANTE CLAUSE AND THEREFORE SUPERSEDES ALL OTHER PROVISI ONS OF THE INCOME TAX ACT AND HAS TO BE READ IN ISOLATION. IN THE INSTANT CASE, THE APPELLANT HAD VALUED HIS PURCHASES IN ACCORDANCE WITH METHOD OF ACCOUNTING WHICH HAS BEEN SHOWN TO HAVE BEEN REGULARLY FOLLOWED, THE PROVISION OF SECTION 145A SHOULD PREVAI L OVER SECTION 145 OF THE INCOME TAX ACT, 1961. COPY OF CIT(A) ORDER FOR AY 2004 - 05 ENCLOSED AT PAGE NO... TO ... OF PAPER BOOK. 3.3.24 THE HONBLE ITAT, CHENNAI BENCH IN THE ABOVE REFERRED CASE CONFIRMED CIT(A) ORDER AND HELD THAT 18. WE HAVE CONSIDER ED THE RIVAL SUBMISSIONS ON EITHER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS RIGHTLY SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, A COMPANY CAN ADOPT ANY ONE OF THE METHODS PERMISSIBLE FOR COMPUTING THE PROFIT. ONCE THE ASSESSEE CHAN GED ITS METHOD OF ACCOUNTING AND CONSISTENTLY FOLLOWED THE SAME IN SUBSEQUENT YEARS, THE DEPARTMENT CANNOT DOUBT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. IN THE INITIAL YEARS, THERE MAY BE FLUCTUATION IN THE PROFIT OF THE ASSESSEE DUE TO INCREASE IN PURCHASE PRICE BY CHANGING THE METHOD OF ACCOUNTING. HOWEVER, WHEN THE ASSESSEE WAS CONSISTENTLY FOLLOWING THE SAME, THERE WILL BE REVENUE NEUTRAL, HENCE THERE CANNOT BE LOSS TO THE REVENUE. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT TH E CIT(APPEALS) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE UNDER THE PROVISIONS OF SECTION 145A OF THE ACT. THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 3.3.25 FROM THE A BOVE DECISIONS IT IS CLEAR THAT PROVISION FOR COPPER CONCENTRATE IS AN ASCERTAINED LIABILITY AND TO BE ALLOWED WHILE COMPUTING PROFITS AND GAINS OF BUSINESS OR PAGE | 26 PROFESSION. HENCE, WE REQUEST YOUR HONOUR TO KINDLY TAKE THE SAID ORDERS (REFER PAPER BOOK PAGE NO... TO ....) ON RECORD AND CONSIDER WHILE DISPOSING OFF OUR APPEAL NO FOR THE AY 2010 - 11. NETTING OFF OF OPENING COPPER CONCENTRATE PROVISION WITH CLOSING COPPER CONCENTRATE PROVISION: 3.3.26 WITHOUT PREJUDICE, FOR THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO NOT REDUCED RS. 140,67,55,306 BEING THE PROVISION UNDER THE SAME HEAD FOR THE AY 2009 - 10 AS ON MARCH 31, 2009, WHICH WAS REVERSED IN BOOKS IN AY 2009 - 10 AND DULY OFFERED T O TAX. FROM THE DISALLOWANCE OF RS. 259,31,00,000 TOWARDS PROVISION FOR PURCHASE OF COPPER CONCENTRATE LAST YEAR PROVISION RS. 140,67,55,306 NEED TO BE REDUCED. SUCH DISALLOWANCE, WITHOUT PREJUDICE, CAN BE ONLY MADE ON NET BASIS AS PER, THE CLAUSE NO 2 OF SCHEDULE 12 REFERRED TO HEREINABOVE IS REPRODUCED HEREIN BELOW: - THE COMPANY HAS RECOGNISED LIABILITY BASED ON SUBSTANTIAL DEGREE OF ESTIMATION FOR: FINAL PRICE PAYABLE ON PURCHASE OF COPPER CONCENTRATE FOR WHICH THE QUOTATIONAL PERIOD PRICE WAS NOT FINAL ISED AS ON 31 MARCH, 2009, A PROVISION OF RS. 140.68 CRORE BASED ON FORWARD LME RATE OF COPPER AND LBMA RATE OF PRECIOUS METALS WAS MADE. AS AGAINST IT, DURING THE YEAR RS. 153.31 CRORE HAS BEEN INCURRED TOWARDS FINAL PRICE SETTLEMENT. THE ADDITIONAL AMOUN T OF RS. 12.63 CRORE HAS BEEN CHARGED TO PROFIT AND LOSS ACCOUNT UNDER RAW - MATERIAL CONSUMPTION. LIABILITY RECOGNISED UNDER THIS CLASS FOR THE YEAR IS RS. 259.31 CRORE WHICH IS OUTSTANDING AS ON 31 MARCH 2010. ACTUAL OUTFLOW IS EXPECTED ON FINALISATION OF QUOTATIONAL PERIOD PRICE IN THE NEXT FINANCIAL YEAR. THE SAID NOTE FORMS PART OF THE ANNUAL REPORT AND IS REPRODUCED AT PAGE NO.... TO ... OF THE PAPER BOOK 3.3.27 FROM THE ABOVE, IT CAN BE SEEN THAT THE LD. AO COMPLETELY IGNORED THE DETAILED SUBMISSIONS MADE BY THE APPELLANT IN THIS REGARD AND DID NOT EVEN REFER TO THE SAME IN THE ASSESSMENT ORDER WHILE FRAMING HIS ORDER. THE LD. AO WRONGLY AND ARBITRARILY MADE THIS ADDITION IGNORING OPENING COPER CONCENTRATE PROVISION REVERSED DURING THE YEAR. WITHOUT PR EJUDICE, OPENING COPPER CONCENTRATE PROVISION REVERSED DURING THE YEAR NEED TO BE ADJUSTED.' 6.2 I HAVE CONSIDERED THE FACTS OF THE CASE, THE GROUNDS OF APPEAL, THE ORDER OF THE AO AND THE SUBMISSIONS OF THE APPELLANT. THE AO HAS DISALLOWED THE PROVISION OF RS 259,31,00,000/ - ON ACCOUNT OF PROVISIONAL ACCOUNTING FOR PURCHASES OF COPPER CONCENTRATE. 6.3 THE APPELLANT HAS SUBMITTED THAT THE COPPER CONCENTRATE PURCHASED BY IT IS INITIALLY BOOKED AT A PROVISIONAL PRICE, SINCE THE PRICE PAGE | 27 OF METALS KEEPS ON CHAN GING AND FLUCTUATING CONTINUOUSLY. IT IS ALSO SUBMITTED THAT AS A SUBSEQUENT EVENT BASED ON THE DETERMINATION OF APPLICABLE PAYABLE PRICE AND FINAL METAL CONTENT, THE SUPPLIER ISSUES THE APPELLANT WITH A FINAL INVOICE. THE APPELLANT STATED THAT FOR THE YEA R UNDER CONSIDERATION, THE FINAL INVOICING IN THE CASE OF THE APPELLANT WAS NOT DONE, ON ACCOUNT OF AN INCREASE IN THE PRICE OF COPPER ON LONDON METAL EXCHANGE (IN SHORT LME) AND HENCE, THE APPELLANTS LIABILITY TO PAY FOR THE COPPER CONCENTRATE, FOR WHICH FINAL INVOICING WAS NOT YET DONE ON 31ST MARCH2010, WENT UP SUBSTANTIALLY AND ACCORDINGLY APPELLANT PROVIDED FOR THE INCREASED LIABILITY. THE APPELLANT ALSO STATED THAT THE SAID ACCOUNTING TREATMENT IS IN LINE WITH THE ACCOUNTING PRACTICES AND PRINCIPLES, THAT HAS BEEN ADOPTED BY THE APPELLANT IN EARLIER YEARS AS WELL. FURTHER, THE APPELLANT HAS RELIED UPON A CATENA OF JUDGEMENTS SO AS TO CLAIM THAT A PROVISION MADE ON A SCIENTIFIC BASIS, IS ALLOWABLE AND HENCE, STATED THAT IN ITS CASE AS WELL, THE PROVISI ON IS NOT UNASCERTAINED AND HENCE, IS ALLOWABLE TO THE APPELLANT. LASTLY, THE APPELLANT ALSO RELIED ON THE ORDER OF THE CIT(A) AND THE ITAT, IN ITS OWN CASE OF AY 2004 - 05, WHEREIN, THE APPELLANT CLAIMED, THAT ON SIMILAR ISSUE, THE ITAT HAD PROVIDED RELIEF TO THE APPELLANT FROM THE ADDITION SO MADE. 6.4 THE APPELLANTS MAJOR CONTENTION IS THAT THE PROVISIONAL ACCOUNTING IT HAS SO ADOPTED, IS IN LINE WITH THE ACCOUNTING CONCEPTS AND PRINCIPLES. AGAINST THE SAID CONTENTION, IT IS QUITE ESSENTIAL TO STATE THAT THE TAXABLE INCOME AND THE ACCOUNTING INCOME ARE TWO SEPARATE AND MUTUALLY EXCLUSIVE ITEMS. THE TREATMENT OF BOOKS OF ACCOUNTS CANNOT BE A GUIDING FACTOR AS TO THE TAXABILITY OF AN ITEM, AND VICE VERSA, THE TAXABILITY OF AN ITEM CANNOT DETERMINE ITS TREA TMENT IN THE BOOKS OF ACCOUNTS OF THE APPELLANT. NOW, THE APPELLANT HAS SIMPLY VOUCHED ON THE FACT THAT A SET OF ACCOUNTING STANDARDS PERMITS THE APPELLANT TO ACCOUNT FOR THE PROVISIONAL PURCHASES, IN THE MANNER IT HAS SO DONE IN ITS BOOKS. HOWEVER, EVEN T HOUGH THE ACCOUNTING STANDARD MIGHT ALLOW SUCH TREATMENT, EVEN STILL, THE MAIN MATTER TO BE CONSIDERED, PRIOR TO ALLOWING A PROVISION, IS WHETHER OR NOT, THE SAME IS ASCERTAINABLE OR NOT. SIMPLY TAKING THE STAND OF SOME ACCOUNTING STANDARD, DOES NOT PROVE THE ASCERTAINABILITY OF AN EXPENDITURE. THEREFORE, TO THIS EXTENT, THE CONTENTION OF THE APPELLANT FAILS. 6.5 COMING TO THE ASPECT OF THE ASCERTAINABLY OF THE PROVISION SO CREATED BY THE APPELLANT, IT HAS BEEN STATED THAT THE PURCHASE PRICE OF COPPER KEEPS ON FLUCTUATING. IT IS ON ACCOUNT OF THIS FLUCTUATION THAT THE SELLER DOES NOT SELL THE COPPER WITH A FINAL PRICE TAG. HOWEVER, WHAT IS ESSENTIAL TO NOTE IN THIS ENTIRE PROCESS IS THAT THE APPELLANT, INDEED HAS ACCEPTED THE VOLITALITY AND THE EXCESSIVE FLU CTUATIONS IN THE PRICES OF COPPER, AND HENCE, THE APPELLANT ITSELF HAS ACCEPTED THE UNASCERTAINABLENESS OF THE COST TOWARDS SUCH PURCHASES. AS A MATTER OF FACT, THE STAND OF THE APPELLANT THAT THE INCREASE IN THE PRICES OF LME HAS LED TO THE EXCESSIVE PRO VISION BEING CREATED BY IT GOES ON TO PROVE THAT THE PURCHASE PRICE IS INTURN UNASCERTAINABLE AND NOT PREDICTIVE. THIS INFIRMITY HAS RIGHTLY BEEN OBSERVED AND POINTED OUT BY THE AO, IN HIS ASSESSMENT ORDER. PAGE | 28 AT THE COST OF REPETITION, IT IS ESSENTIAL TO STA TE THAT THIS INFIRMITY IS ACTUALLY APPARENT FROM THE SUBMISSIONS OF THE APPELLANT ITSELF. HERE, IT IS ALSO AN UTMOST SIGNIFICANT FACT TO POINT OUT THAT EVEN THE APPELLANT HAS NOT BEEN ABLE TO PROVIDE ANY SUBSTANTIAL BASIS OR LOGICAL REASONING, OF IT BEING ABLE TO DERIVE THE VALUE OF THE PURCHASE COST. THE APPELLANT HAS NOT PROVIDED ANY REASONABLE DERIVATION, AS TO HOW, IT HAS REACHED THE AMOUNT OF PROVISION OF RS 259,31,00,000/ - . THE APPELLANT HAS NOWHERE COMMENTED UPON ANY ASPECT OF ITS PROVISION BEING ASC ERTAINABLE, BUT HAS SIMPLY CRAMED UPON THEORETICAL JUSTIFICATIONS. SINCE, IN THE LIGHT OF THE FACT THAT THE APPELLANT ITSELF HAS NOT PROVIDED ANY BASIS OR JUSTIFICATION OF ITS PROVISION BEING ASCERTAINED, THE ENTIRE GAMUT OF CASE LAWS AND THE JUDGEMENTS RE LIED UPON BY THE APPELLANT ARE NOT APPLICABLE IN ITS CASE. LASTLY, EVEN THE ORDERS OF THE CIT(A) AND THE ITAT IS NOT APPLICABLE IN ITS OWN CASE, SINCE THE SAID ORDERS WERE BASED ON DIFFERENT FOOTING, WHEREIN, THE QUESTION WAS WITH RESPECT TO THE LOSS BEING EXCESSIVE IN NATURE, WHILE IN THE PRESENT CASE, THE MOOT ISSUE IS WITH RESPECT TO THE ASCERTAINABILITY OF THE EXPENDITURE. SINCE, EVEN THE SAID PLEA OF THE APPELLANT FAILS. IN VIEW OF MY DETAILED DELIBERATION, I AM OF THE CONSIDERED VIEW THAT THE AO HAS R IGHTLY DISALLOWED THE PROVISION CLAIM OF RS.259,31,00,000/ - . ACCORDINGLY, THE GROUNDS OF APPEAL OF THE APPELLANT ARE REJECTED AND THE ADDITION IS UPHELD IN THIS REGARDS. 8 . THEREFORE, ASSESSEE AGGRIEVED WITH THE ORDER OF THE LEARNED CIT A HAS PREFERRED THIS APPEAL. 9 . ASSAILING THE FINDINGS OF THE LOWER AUTHORITIES, THE LEARNED AUTHORISED REPRESENTATIVE REFERRED TO THE ANNUAL ACCOUNTS OF THE ASSESSEE FOR THE YEAR ENDED ON 31 /03/2010. HE DREW OUR ATTENTION TO SCHEDULE 12 OF THE BALANCE SHEET WHEREIN AT SERIAL NUMBER 2 PROVISIONS ARE MENTIONED. HE REFERRED TO THE LAST ITEM THEREIN WHEREIN THE OTHER PROVISIONS ARE MENTIONED AT RS 2 59,31,00,000. HE ALSO REFERRED TO THE FOOTNOT E THEREIN WHEREIN IT IS MENTIONED THAT COMPANY HAS RECOGNIZED LIABILITY BASED ON SUBSTANTIAL DEGREE OF ESTIMATION FOR FINAL PRICE PAYABLE ON PURCHASE OF COPPER CONCENTRATE FOR WHICH THE QUOTATIONAL PERIOD PRICE WAS NOT FINALIZED AS ON 31 MARCH, 2009, A PR OVISION OF RS. 140.68 CRORE BASED ON FORWARD LME RATE OF COPPER AND LBMA RATE OF PRECIOUS METALS WAS MADE. AS AGAINST IT, DURING THE YEAR RS. 153.31 CRORE HAS BEEN INCURRED TOWARDS FINAL PRICE SETTLEMENT. THE ADDITIONAL AMOUNT OF RS. 12.63 CRORE HAS BEEN C HARGED TO PROFIT AND LOSS ACCOUNT UNDER RAW - MATERIAL CONSUMPTION. LIABILITY RECOGNIZED UNDER THIS CLASS FOR THE YEAR IS RS. 259.31 CRORE, WHICH IS OUTSTANDING AS ON 31 PAGE | 29 MARCH 2010. ACTUAL OUTFLOW IS EXPECTED ON FINALIZATION OF QUOTATIONAL PERIOD PRICE IN THE NEXT FINANCIAL YEAR. HE SUBMITTED THAT THIS IS THE PROVISION MADE BY THE ASSESSEE, WHICH HAS BEEN DISALLOWED BY THE REVENUE. HE EXPLAINED THAT HOW THE PROVISIONS ARE MADE LOOKING AT THE PROVISION MADE IN THE YEAR ENDED ON 31/3/2009, HOW IT WAS SETTLED IN NEXT YEAR WHEN THE PRICES WERE FINALIZED, HOW THE EXCESS AMOUNT OF LIABILITY WAS DEBITED TO THE PURCHASE ACCOUNT AND HOW FOR THE YEAR 2010 THE FURTHER LIABILITY IS CREATED. HE STRESSED THAT THIS METHOD OF ACCOUNTING IS FOLLOWE D BY THE ASSESSEE ON YEAR TO YEAR BASIS, ACCEPTED BY REVENUE IN EARLIER YEARS, BASED ON SOUND PRINCIPLES OF PRUDENT, ACCEPTED BY THE AUDITORS, MCA, VAT AUTHORITIES, SHAREHOLDERS ETC. HE ALSO REFERRED TO INDUSTRIAL PRACTICE AND CITED OTHER COMPANIES AN NUAL ACCOUNTS TO SHOW THAT SUCH PROVISION IS MANDATORY IN VIEW OF THE DIFFERENCE BETWEEN THE PRICES AGREED AS PER SHIPMENT DATE, CONTRACT DATE AND ACTUAL RECEIPT OF GOODS DATE. HE ALSO REFERRED TO THE ACCOUNTING STANDARDS OF THE ICAI, WHICH MADE THE ABOVE PROVISION MANDATORY FOR THE ASSESSEE, AS ASSESSEE IS A CORPORATE ENTITY. 10 . HE SUBMITTED THAT THIS ISSUE WAS NOT REMITTED BY THE PRINCIPAL COMMISSIONER OF INCOME TAX U/S 263 OF THE INCOME TAX ACT , STILL THE ASSESSING OFFICER HAS MADE THE ADDITION WHI CH IS NOT SENT BY THE LEARNED P CIT AND CIT APPEAL ALSO CONFIRMED IT . HE THEREFORE SUBMITTED THAT ABOVE ISSUE WAS IS NOT THE SUBJECT MATTER UNDER SECTION 263 OF THE INCOME TAX ACT AND THEREFORE THE LEARNED ASSESSING OFFICER COULD NOT HAVE MADE THE ABOVE ADDITION IN ASSESSMENT ORDER PASSED IN PURSUANCE OF ORDER U/S 263 OF THE ACT. 11 . HE OTHERWISE SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE COORDINATE BENCH IN EARLIER YEARS, H E REFERRED TO THE NOTE NUMBER 14 AT PAGE NUMBER 119 OF THE PAPER BOOK WHEREIN FOR FINANCIAL YEAR 2003 04 AND IDENTICAL ISSUE AROSE WHEREIN IT IS MENTIONED THAT IN VIEW OF SHARP FLUCTUATION IN LME/L MBA PRICES OF COPPER, GOLD AND SILVER DURING THE YEAR THE COMPANY HAS REINSTATED THE COS T OF PURCHASE OF COPPER CONCENTRATE AND EXPORT OF SLIME AT CLOSING LME RATE OF COPPER AND L MBA RATE OF PRECIOUS METAL IN THOSE CASES WHERE POTENTIAL. PRICE IS NOT FINALIZED AS AT YEAR AND AS AGAINST THE EARLIER PRACTICE OF ACCOUNTING THESE ON PROVISIONAL INVOICE BASIS ONLY. THIS HAS RESULTED IN INCREASED IN PAGE | 30 TURNOVER, CONSUMPTION OF COPPER CONCENTRATE ON INVENTORY BY INR 8 .27 MILLIONS, INR 5 59.55 MILLIONS AND INR 1 62.99 MILLIONS RESPECTIVELY AND DECREASE IN PROFIT FOR THE YEAR BY INR 2 48.99 MILLIONS ( NET OF TAXES). HE FURTHER REFERRED TO PAGE NUMBER 120 OF THE PAPER BOOK WHICH IS ALSO PART OF THE ANNUAL REPORT FOR FINANCIAL YEAR 2004 05 WHEREIN IN SCHEDULE 11, NOTE NUMBER 2 ( II ) IT IS MENTIONED THAT FINAL PRICE PAYABLE ON PURCHASE OF COPPER CONCENTR ATE FOR WHICH QUOTATION PRICE IS NOT FINALISED HAVING AN ADDITIONAL PROVISION OF INR 559,500,000 BASED ON C LOSING LME RATE OF COPPER AND L MBA RATE OF PRECIOUS METALS. DURING THE YEAR INR 320,500,000 WAS UTILISED TOWARDS THE FINAL PRICE SETTLEMENT AND UN USED BALANCE OF RS. 2 3,90,00,000 WAS REVERSED. LIABILITY RECOGNIZED UNDER THIS CLASS FOR THE YEAR IS INR 553,500,000 WHICH IS OUTSTANDING AS ON 31 ST OF MARCH 2005. ACTUAL OUTFLOW IS EXPECTED ON FINALISATION OF QUOTATION PRICE IN THE NEXT FINANCIAL YEAR. HE FURTHER REFERRED TO THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS ) I, CHENNAI DATED 14/11/2007 FOR ASSESSMENT YEAR 2004 05 WHEREIN IDENTICAL ADDITION WAS MADE BY THE LEARNED ASSESSING OFFICER WAS CHALLENGED. HE REFERRED TO PARA NUMBER 4 O F THE ORDER WHERE THE GROUNDS OF APPEAL WERE RAISED. HE SPECIFICALLY REFERRED TO GROUND NUMBER 3 TO SHOW THAT THE IDENTICAL ISSUE WAS RAISED. HE FURTHER REFERRED TO PAGE NUMBER 242 OF THE PAPER BOOK PARA NUMBER 7 WHEREIN GROUND NUMBER 3 OF THE APPEAL WAS DECIDED BY THE LEARNED CIT A. THEREAFTER HE REFERRED TO PARA NUMBER 7.6 OF THE ORDER AT PAGE NUMBER 263 OF THE PAPER BOOK WHEREIN THE LEARNED CIT A HAS DELETED THE ADDITION. HE THEN SUBMITTED THAT REVENUE PREFERRED AN APPEAL BEFORE THE COORDINATE BE NCH WHO PASSED AN ORDER FOR ASSESSMENT YEAR 2004 05, 2005 06 AND 2006 06 BY CONSOLIDATED ORDER DATED 29/3/2017. HE REFERRED TO PARA NUMBER 18 OF THE ORDER OF THE COORDINATE BENCH WHEREIN THE APPEAL OF THE LEARNED ASSESSING OFFICER IS DISCUSSED AND T HE ORDER OF THE LEARNED CIT A DELETING THE ABOVE ADDITION WAS UPHELD. HE FURTHER REFERRED TO PARA NUMBER 52 OF THE ORDER OF THE COORDINATE BENCH FOR ASSESSMENT YEAR 2005 06 WHEREIN AT PARA NUMBER 64 67 THE IDENTICAL ISSUE WAS CONSIDERED FOR ASSESSME NT YEAR 2005 06 AND THE ORDER OF THE LEARNED CIT A DELETING THE ABOVE ADDITION ON PURCHASE PROVISION WAS DELETED. HE THEREFORE SUBMITTED THAT THE ISSUE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. PAGE | 31 12 . HE FURTHER EXPLAINED THE NATURE OF THE PROVISION BY SUBMITTING A NOTE ON THE ABOVE PROVISION AND ALSO SUBMITTED THE DETAILS OF SUCH PROVISIONS MADE ALONG WITH THE COPIES OF THE BILLS TO SHOW THAT ASSESSEE IS FOLLOWING THE METHOD OF ACCOUNTING OF MAKING PROVISIONS FOR THE PURCHASES WHERE THE PRICE OF THE GOO DS THOUGH PURCHASE BY THE ASSESSEE ARE NOT FINALISED REGULARLY. HE THEREFORE SUBMITTED THAT THE PROVISION MADE BY THE ASSESSEE IS AN ACTUAL PROVISION OF THE LIABILITIES INCURRED BY THE ASSESSEE ON ESTIMATED BASIS ACCORDING TO THE STANDARD LONDON METAL EXC HANGE RATES OF THE COPPER. HE FURTHER STATED THAT ABOVE LIABILITY IS NOT AT ALL CONTINGENT. HE FURTHER CONTESTED THAT THE FINDING OF THE LEARNED CIT A AND STATED THAT THE ABOVE LIABILITY HAS ACCRUED ON THE ASSESSEE AND THEREFORE IT IS PERFECTLY IN CONS ONANCE WITH THE ACCOUN TING STANDARDS ISSUED BY THE ICAI AS WELL AS THE CONCEPT OF ACCRUAL AS UNDERSTOOD UNDER THE INCOME TAX ACT. HE FURTHER STATED THAT THE CONCEPT OF ACCRUAL FOR THE ACCOUNTS AND CONCEPT OF ACCRUAL FOR THE PURPOSES OF INCOME TAX CANNOT BE DIFFERENT. HE FURTHER SUBMITTED THAT THE LEARNED CIT A HAS MISUNDERSTOOD THE FLUCTUATION IN THE PRICE OF THE COPPER AS THE UNASCERTAINIABILITY OF THE COST OF PURCHASES OF COPPER. HE FURTHER SUBMITTED THAT THE LEARNED CIT A HAS FURTHER ADDED IN RE JECTING THE ARGUMENT OF THE ASSESSEE THAT THE ISSUE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE COORDINATE BENCH FOR NUMBER OF YEARS. HE FURTHER SUBMITTED THAT ASSESSEE IS FOLLOWING THE ABOVE METHOD OF ACCOUNTING CONTINUOUSLY YEAR TO YEAR. HE FURTHER SUBMITTED THAT IF THERE IS ANY ADJUSTMENT ARISING OUT OF THE EX CCESS AND SHORTAGE OF THE PROVISION, SAME ARE ADJUSTED IN THE ACCOUNTS OF THE NEXT YEAR AS INCOME OR FURTHER EXPENDITURE. IN VIEW OF THIS, HE SUBMITTED THAT THE ADDITION MAD E BY THE LEARNED ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT A DESERVES TO BE DELETED. 13 . THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT ASSESSEE HAS OBJECTED THAT THE ISSUE WAS NOT THE SUBJECT MATTER OF ORDER U/S 263 OF THE ACT, THIS DESERVE S TO BE REJECTED . SHE SUBMITTED THAT IN RESPONSE TO NOTICE U/S 263 OF THE INCOME TAX ACT AND THE REPLY OF THE APPELLANT IS REPRODUCED IN PARA NUMBER 4 OF THE ORDER OF 263. THE P CIT H AS MENTIONED IN PARA NUMBER 5 OF THE ORDER OF THAT THE HONOURABLE HIGH CO URT OF MADRAS HAS ONLY PASSED AN ORDER OF INTERIM STAY OF DEMAND ON THE CONDITIONAL PAYMENT IN PAGE | 32 INTERIM STAY ON PENALTY. THIS FACT IS ALSO ASCERTAINABLE FROM PAGE NUMBER 42 AND 43 OF THE PAPER BOOK FILED BY THE APPELLANT WHERE THE ORDER OF THE HONOURABLE H IGH COURT OF MADRAS IN MP NUMBER 1 OF 2014 IN WP 15937 OF 2014 IS ENCLOSED. THE CIT HAS FURTHER STATED IN PARA NUMBER 7 OF THE ORDER THAT IN THIS PROCEEDINGS NEW ISSUE HAS BEEN CONSIDERED WHICH WAS NOT THE SUBJECT MATTER OF THE WRIT PETITION FILED BY THE APPELLANT OF THE STAY GRANTED BY THE HONOURABLE HIGH COURT OF MADRAS. THE CIT HAS ALSO MENTIONED IN PARA NUMBER 12 OF THE ORDER THAT INSOFAR AS THE ISSUE IS CONSIDERED BY THE AUTHORITY IN THE ORDER, WHICH IS PRESENTLY STA Y ED BY THE H ONOURABLE HIGH COURT O F MADRAS V IDE ORDER DATED 20/6/2014 , SUITABLE ACTION WILL BE TAKEN IN ACCORDANCE WITH THE DIRECTION OF THE HONOURABLE HIGH COURT, AS AND WHEN THE WRIT PETITIONS ARE DISPOSED. FURTHER, IN PARA NUMBER 8 AND 9 OF THE ORDER OF THE CIT, IT IS CLEARLY MENTION ED THAT THE APPELLANT HAS NOT FURNISHED ANY REPLY OF THE SHOW CAUSE NOTICE U/S 263 EXCEPT MENTIONING THE STA Y GRANTED BY THE HIGH COURT OF M ADRAS. IN PARA NUMBER 10 OF THE ORDER OF THE CIT HAS CLEARLY MENTIONED HOW THE PROVISIONS OF RS 2 59,31,00,000 WAS INQUIRED INTO BY THE AO AND ORDER WAS PASSED WITHOUT MAKING ENQUIRY FOR VERIFICATION WHICH SHOULD HAVE BEEN DONE BY THE LEARNED ASSESSING OFFICER. SHE FURTHER EXTENSIVELY REFERRED TO THE ORDER U/S 263 OF THE INCOME TAX ACT. THEREFORE SHE SUBMITTED THAT THE ISSUE IS ARISING FROM THE ORDER PASSED U/S 263 OF THE INCOME TAX ACT AND THEREFORE THE ARGUMENT OF THE ASSESSEE THAT THE LEARNED CIT HAS NOT GIVEN ANY DIRECTION ON THIS ISSUE DESERVES TO BE REJECTED. 14 . ON THE ISSUE ON THE MERITS EXTENSIVELY REFERRED TO THE ORDER OF THE LEARNED ASSESSING OFFICER AND RELIED UPON THE ORDER OF THE LOWER AUTHORITIES SUBMITTING THAT THE PROVISION MADE BY THE ASSESSEE IS NOT ALLOWABLE. SHE FURTHER STATED THAT ASSESSEE HAS RELIED UP ON CERTAIN BILLS AND METHOD OF PROVISIONS WHICH WERE NOT SUBMITTED BEFORE THE LD LOWER AUTHORITIES, SO THEY SHOULD NOT BE CONSIDERED, THEREFORE, IT WAS SUBMITTED THAT THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT A DESERVES TO BE CONFIRMED ON THIS GROUND. 15 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. PAGE | 33 16 . WE COME TO THE 1 ST ARGUMENT OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE LEARNED PRINCIPAL COMMISSIONER OF INCOME TAX HAS NOT GIVEN ANY DIRECTION ON THIS ISSUE WHILE PASSING ORDER U/S 263 OF THE ACT AND THEREFORE THE ADDITION MADE BY THE LEARNED ASSESSING OFFICER IN THE ASSESSMENT ORDER PASSED IN PURSUANCE OF THE ORDER U/S 263 OF THE INCOME TAX ACT IS INCORRECT. ON CAREFUL EXAMINATION OF THE SAME , WE FOUND THAT IN THE SHOW CAUSE NOTICE ISSUED BY THE LEARNED P CIT DATED 01/02/2017, IT IS CATEGORICALLY STATED THAT ASSESSEE HAD MADE A PROVISION OF RS. 2 59,31,00,000 BEING THE FINAL PRICE PAYABLE FOR THE PURCHASE OF COPPER CONCENTRATE, FOR WHICH THE QUOTATION PRICE COULD NOT BE FINALIZED . THE ACTUAL OUTFLOW OF MONEY WAS EXPECTED TO BE MADE AFTER THE FINALISATION OF THE QUOTATION PRICE IN THE NEXT FINANCIA L YEAR. IN VIEW OF THIS, AN AMOUNT OF RS. 2 59,31,00,000 WHICH WAS DEBITED IN THE RAW MATERIAL CONSUMPTION ACCOUNT WAS MADE A PROVISION WHICH WAS LIABLE TO BE DISALLOWED. FURTHER AT THE TIME OF PASSING OF THE ORDER U/S 263 OF THE INCOME TAX ACT , IN PARA NUMBER 10 THE ORDER , LEARNED PRINCIPAL COMMISSIONER OF INCOME TAX HAS CATEGORICALLY HELD THAT IN RESPECT OF THE ISSUE ON HAND THE PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION AND IF CERTAIN CONDITIONS ARE NOT MET THE PROVISIONS CANNOT BE RECOGNISED. FURTHER, IN PARA NUMBER 11 THE LEARNED CIT A REFERRING TO THE PROVISIONS MADE BY THE ASSESSEE DIRECTED THE LEARNED ASSESSING OFFICER TO CONDUCT A PROPER VERIFICATION. IT WAS ALSO FOUND THAT THE LEARNED A O IN THE ORIGINAL ASSESSMENT PROCEEDINGS DID NOT MAKE ADEQUATE ENQUIRY AND THEREFORE IT WAS HELD THAT THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE IN PARA NUMBER 12 THE LEARNED PRINCIPAL COMMISSI ONER OF INCOME TAX ALSO DIRECTED THE LEARNED ASSESSING OFFICER TO COMPLETE THE REASSESSMENT PROCEEDINGS OF FRESH AFTER MAKING NECESSARY ENQUIRY VERIFICATION IN RESPECT OF THE ISSUES MENTIONED. THEREFORE IT IS APPARENT THAT THE LEARNED PRINCIPAL COMMISSION ER OF INCOME TAX INVOKED HER POWERS U/S 263 OF THE INCOME TAX ACT TO VERIFY WHETHER THE PROVISIONS MADE BY THE ASSESSEE ARE ALLOWABLE OR NOT. WHILE LOOKING AT THE ACCOUNTS OF THE ASSESSEE FOR FINANCIAL YEAR ENDED ON 31 ST OF MARCH 2010, IN SCHEDULE NUMBER 12, CURRENT LIABILITIES AND PROVISIONS ARE MENTIONED. THE POINT NUMBER 2 OF THAT SCHEDULE DEALS WITH THE VARIOUS PROVISIONS MADE BY PAGE | 34 THE ASSESSEE WHEREIN UNDER THE HEAD OF THE OTHER PROVISIONS, SUM OF RS 2 59,31,00,000 WAS MENTIONED. LD PCIT REFERRED TO TH E PROVISIONS OF THIS AMOUNT IN SHOW CAUSE NOTICE, DEALT WITH THE ISSUE OF ALLOWABILITY OF SUCH PROVISION IN A HER ORDER, HELD THAT A O HAS NOT VERIFIED THIS ASPECT, CLEARLY SHOWS THAT, THIS ISSUE WAS DEALT WITH BY THE LD PCIT. IN VIEW OF THIS , IT CANNO T BE SAID THAT THE LEARNED P CIT AS NOT GIVEN ANY DIRECTION TO THE LEARNED ASSESSING OFFICER TO VERIFY THE ABOVE DEDUCTION CLAIMED BY THE ASSESSEE. HENCE, WE REJECT THE ARGUMENT OF THE LEARNED AUTHORISED REPRESENTATIVE THAT ABOVE ADDITION MADE BY THE LEARN ED ASSESSING OFFICER WAS NOT EMANATING FROM THE ORDER OF THE LEARNED PRINCIPAL COMMISSIONER OF INCOME TAX PASSED U/S 263 OF THE INCOME TAX ACT. ACCORDINGLY GROUND NUMBER 7 TO THE EXTENT OF CLAIM OF THE ABSENCE OF DIRECTION IN THE ORDER OF THE LEARNED C IT U/S 263 OF THE INCOME TAX ACT AND GROUND NUMBER 8 OF THE APPEAL OF THE ASSESSEE ARE DISMISSED. 17 . COMING TO THE MERITS OF THE ADDITION, THE ASSESSEE COMPANY CARRIES ON THE BUSINESS OF MANUFACTURING COPPER RODS, COPPER CATHODES, SULPHURIC ACID AND PHOSPHORI C ACID. THE RAW MATERIAL COPPER CONCENTRATE IS IMPORTED, WHICH IS PROCESSED AT THE SMELTER DIVISION OF THE COMPANY AT TUTICORIN INTO A PRODUCT, CALLED COPPER ANODE. THE ABOVE PRODUCT IS FURTHER REFINED BY THE ELECTROLYTE PROCESS AT TUTICORIN AND SELLER S OF WORKS INTO A PRODUCT CALLED CATHODE, WHICH MAY FURTHER BE DRAWN INTO COPPER ROADS DEPENDING ON THE MARKET REQUIREMENTS. THE ASSESSEE IS BUYING COPPER CONCENTRATE AT LONDON METAL EXCHANGE LINK ED PRICES FOR COPPER LESS TREATMENT CHARGES AND REFINEMENT CHARGES. FURTHER, THE ASSESSEE SELLS REFINED COPPER AT LME LINK PRICES IN THE DOMESTIC AND EXPORT MARKETS. THE ASSESSEE IS SOURCING COPPER CONCENTRATE FROM VARIOUS GLOBAL SUPPLIERS AND FROM ITS AUSTRALIAN MINES. THE ASSESSEE PURCHASES COPPER CONCENTRATE AT THE PRICES OF THE COPPER CONCENTRATE FINALIZED AFTER GETTING THE QUOTATIONS FROM THE SUPPLIERS. THE COPPER CONCENTRATES ARE NORMALLY TRADED IN OPEN MARKET BASED ON LONDON METAL EXCHANGE PRICES AS PERTAINING TO THE AGREED QUOTATION WITHIN APPROPRIATE DEDUCTION FOR TREATMENT CHARGES AND REFINEMENT CHARGES, WHICH ARE NEGOTIATED WITH THE SUPPLIERS. THE ASSESSEE MAKES THE INITIAL PAYMENT TO THE SUPPLIERS BASED ON PROVISIONAL INVOICES, WHICH ARE PREPARED BASED ON THE APPROPRIATE WEIGHT, QUALIT Y, AND PURCHASE PRICE PREVAILING AT THE TIME OF PAGE | 35 LOADING THE COPPER CONCENTRATE. FINAL INVOICING IS DONE AFTER CONSIDERING THE WEIGHT OF THE CARGO AT THE PORT, THE QUALITY OF THE COPPER CONCENTRATE AND ADJUSTMENT FOR TREATMENT CHARGES AND REFINEMENT CHARGE S. THE ASSESSEE ALSO UNDERTAKES THE HEDGING FUNCTION FOR ANY PRICE DIFFERENTIATION BETWEEN THE PRICE AT THE TIME OF SHIPMENT AND AT THE TIME OF FINAL INVOICING. THUS IF THE GOODS ARE PURCHASED DURING THE YEAR AND FINAL PRICES ARE NOT FINALIZED AT THE END OF THE YEAR, ASSESSEE MAKES A PROVISION OF THOSE PURCHASES BASED ON LME RATES AS AT THE END OF THE ACCOUNTING YEAR. FOR THIS YEAR, PROVISION WAS MADE ACCORDINGLY. IN THE NOTES TO SCHEDULE 12 OF THE ANNUAL ACCOUNTS, THE ASSESSEE HAS ALSO DISCLOSED T HE METHODOLOGY BY WHICH THE PURCHASE PRICE IS BEING FINALIZED. COPPER CONCENTRATE ARE NORMALLY TRADED IN OPEN MARKET BASED ON LONDON METAL EXCHANGE (LME) PRICES WITH AN APPROPRIATE DEDUCTION FOR TREATMENT CHARGES AND REFINEMENT CHARGES. TREATMENT CHARGES AND REFINEMENT CHARGES ARE NEGOTIATED WITH THE SUPPLIER ON THE BASIS OF THE PREVAILING MARKET RATE AND ARE DEDUCTIONS OFFERED TO MEET THE COST OF TREATING AND REFINING THE MATERIAL TO EXTRACT PURE COPPER, WHICH IS USED IN THE MANUFACTURING OF COPPER ROADS AND COPPER WIRES. THE LONDON METAL EXCHANGE PUBLISHES A SET OF DAILY REFERENCE PRICE THAT BASED ON THE LIQUID TRADING SESSIONS OF THE DAY. THEY ARE USED THE WORD OVER BY INDUSTRIAL AND FINANCIAL PARTICIPANTS FOR PURPOSE OF REFERENCING, HEDGING, PHYSICAL SETTLEMENT, CONTRACT NEGOTIATION AND MARGINING AND ARE INDICATORS OF WHERE THE MARKET IS AT ANY POINT IN TIME. THE LONDON METAL EXCHANGE PROVIDES REGULATED, TRANSPARENT FORUM FOR THE TRADING OF FUTURE AND OPTION CONTRACT. AS A RESULT THE DAILY PRICES AR E PUBLISHED WHICH IS USED AS A REFERENCE BY THE INDUSTRY. THE LONDON METAL EXCHANGE PRICES AVAILABLE AS ON THE DATE OF THE RECEIPT OF THE CONSIGNMENT LESS THE TREATMENT CHARGES AND REFINEMENT CHARGES IS CONSIDERED THE TRANSACTION PRICE. THE TREATMENT CHA RGES AND REFINEMENT CHARGES ARE NEGOTIATED BY THE PARTIES BASED ON VARIOUS FACTORS INCLUDING COPPER CONTENT IN THE CONCENTRATE, PAYMENT TERMS, OTHER TERMS AND CONDITIONS OF THE PURCHASES. THE PRICING OF THE COPPER CONCENTRATE IS GOVERNED BY THE QUOTATION PRICES A S AGREED CONTRACTUALLY WITH THE SUPPLIER OF THE COPPER CONCENTRATE. THE COPPER CONCENTRATE IS USUALLY PRICE THAT THE AVERAGE OF THE DAILY SETTLEMENT PRICE/QUOTATIONS FOR COPPER OF THE LONDON METAL EXCHANGE DURI NG THE CORRESPONDING QUOTATION PERIO D . PAGE | 36 QUOTATIONAL PRICES U SUALLY COMPLETES WITH THE ARRIVAL OF THE GOODS CONSIGNMENT AT THE END OF THE ASSESSEE. THE QUOTATIONAL ERIOD MAY BE MAY BE MONTH AVERAGE OF THE MONTH OF THE ARRIVAL. IN SUCH CASES THE COURT NATIONAL. SHALL BE THE MONTH OF ARRIV AL OF THE STATEMENT. ACCORDINGLY, THE PRICE PAYABLE SHALL BE THE LONDON METAL EXCHANGE MONTH AVERAGE PRICE OF THE PAYABLE COPPER 4 TO THE MONTH OF ARRIVAL OF THE STATEMENT AND AS REDUCED BY THE AGREED TREATMENT CHARGES AND REFINEMENT CHARGES. THE MONTH A VERAGE FOLLOWING THE MONTH OF ARRIVAL COURT NATIONAL PRIZES SHALL BE THE MONTH FOLLOWING THE MONTH OF ARRIVAL OF THE STATEMENT. ACCORDINGLY THE PRICE PAYABLE SHALL BE THE LONDON METAL EXCHANGE MONTH AVERAGE PRICE OF THE PAYABLE COPPER FOR THE MONTH FOLLOW ING THE MONTH OF ARRIVAL OF THE SHIPMENT AND AS REDUCED BY THE TREATMENT CHARGES AND REFINEMENT CHARGES THIS METHODOLOGY OF THE PRICING IS SCOPE AND IN KNOWN AS 1 MAMA. FURTHER THE COURT NATIONAL. MAY ALSO BE 2 ND MONTH AVERAGE FOLLOWING THE MONTH OF ARRI VAL. IN SUCH CASES THE COURT NATIONAL. SHALL BE THE 2 ND MONTH FOLLOWING THE MONTH OF ARRIVAL OF THE SHIPMENT. ACCORDINGLY THE PRICE PAYABLE SHALL BE THE LONDON METAL EXCHANGE MONTH AVERAGE PRICE OF THE PAYABLE COPPER FOR THE 2 ND MONTH FOLLOWING THE MONT H OF ARRIVAL OF THE SHIPMENT AS REDUCED BY THE TREATMENT CHARGES AND REFINEMENT CHARGES. THIS METHODOLOGY OF THE PRICING IS NOMINALLY KNOWN AS 2 - MAMA. THE ASSESSEE HAS CREATED THE PROVISION IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE BASED ON THE PRICE OF THE COPPER CONCENTRATE AT THE LONDON METAL EXCHANGE WHICH IS ACTUALLY BEEN RECEIVED BY THE ASSESSEE BEFORE THE END OF THE RELEVANT FINANCIAL YEAR AND CREATED ON THE BASIS OF THE PRICE OF COPPER CONCENTRATE ON THE LAST DATE OF THE FINANCIAL YEAR. THE LIAB ILITY IS THEREFORE AWKWARD AND CRYSTALLISED. SLIGHT VARIATION IN THE PRICE AT THE END OF THE COURT NATIONAL. DOES NOT MEAN THAT THE LIABILITY IS CONTINGENT. THE ASSESSEE IS FOLLOWING THIS METHOD SINCE FINANCIAL YEAR 2003 04 AND HAS BEEN ACCEPTED AS SU CH BY THE INCOME TAX DEPARTMENT. IN FINANCIAL YEAR 2003 04 WHEN THE ASSESSEE STARTED FOLLOWING THE AFORESAID PROVISIONING THE REVENUE DISALLOWED THE DEDUCTION FOR THE SAID PROVISION WHICH WAS REVERSED BY THE LEARNED CIT A AS PER ORDER DATED 14 STRICT/ 11/2007 AND THE ORDER OF THE CIT A WAS CONFIRMED BY THE COORDINATE BENCH AS PER ORDER DATED 29/3/2017 IN ITA NUMBER 318 AND 319/MDS/2008. THE ABOVE METHOD OF MAKING THE PROVISION IS REGULARLY PAGE | 37 FOLLOWED BY THE ASSESSEE WHICH HAS NEVER BEEN CHALLENGED BY T HE OTHER STATUTORY AUTHORITY INCLUDING MINISTRY OF CORPORATE AFFAIRS AND THE AUDITORS HAS ALSO FOUND THE CREATION OF THE PROVISION IN ACCORDANCE WITH THE APPLICABLE ACCOUNTING STANDARD. EVEN THE ABOVE ACCOUNTS AND THE PROVISIONS ARE APPROVED BY THE SHAREH OLDERS. THE ASSESSEE HAS ALSO SUBSTANTIATED THE METHODOLOGY ADOPTED BY THE ASSESSEE STATING THAT ANOTHER INDUSTRY IN SIMILAR BUSINESS IS ALSO FOLLOWING THE IDENTICAL ACCOUNTING METHOD AND SAME ARE ALSO DISCLOSED IN THE ANNUAL REPORT OF THAT COMPANY. THE ASSESSEE REFERRED TO THE ACCOUNT OF THE HINDALCO INDUSTRIES LTD FOR FINANCIAL YEAR 2009 10. THE ASSESSEE ALSO REFERRED TO THE 11 INVOICES FOR FINANCIAL YEAR 2009 10 WHEREIN THOSE CONSIGNMENTS ARE SETTLED ON INVOICE BASIS PRIMARILY AND FINAL INVOICES W ERE RECEIVED A LETTER ON. THE 1 ST SUCH INVOICES IS FROM GLENCOE OR INTERNATIONAL AG WHERE THE INVOICES BASED ON THE CONTRACT NUMBER 101 09 18112 003 AS DATED 24/02/2010 49554.217 METRIC TON OF SOME NON - COPPER CONCENTRATE WAS THE ASSESSEE. THE SHI PMENT WAS MADE IN FEBRUARY 2010. HOWEVER THE FINAL INVOICE WAS RAISED ON 09/06/2010 BY THE ABOVE COMPANY ON THE ASSESSEE. THE ORIGINAL INVOICE WAS FOR 51899640 USD 8.94 WHEREAS THE FINAL INVOICE WAS RAISED ON THAT DATE WHEREIN THE ASSESSEE WAS GRANTED TH E CREDIT OF 30482 USD 8.05. THE ASSESSEE HAS FURTHER REFERRED CONSIGNMENT NAMED ANDINA - 35 FROM SUPPLIER FROM CHILE WHICH WAS PROVISIONALLY BUILT ON 6/12/2009 AND FINALLY BUILD ON 14/FILE/2010. THE ANOTHER CONSIGNMENT CCORNA - 1, WAS PROVISIONALLY BILLED O N 30/12/2009 BY RBS SEMPRA COMMODITIES, FOR WHICH FINAL BILL WAS RAISED AND SETTLED ON 30/4/2010. ACCORDINGLY THE COMPLETE DETAILS OF THE PROVISION OF RUPEES TO 59,31,00,000 WAS PROVIDED BY THE ASSESSEE. THE PROVISIONING MADE BY THE ASSESSEE IS BASED ON THE PRINCIPLES OF PRODUCTIONS WHERE THE PROVISION SHOULD BE MADE FOR ALL LOAN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. IT IS NOT IN DISPUT E THAT THE ASSESSEE IS NOT MAKING THE ABOVE PROVISIONS ON THE BASIS OF INDUSTRY ACCEPTED STANDARDS ON YEAR TO YEAR BASIS. IF THERE IS A DIFFERENCE IN THE PROVISIONING MADE BY THE ASSESSEE IN ONE YEAR IS IN EXCESS OF THE ACTUAL LIABILITY LATER REALISED, THE RESULTANT SUM ALWAYS GOES TO THE CREDIT OF THE PROFIT AND LOSS ACCOUNT AND FURTHER IF THERE IS AN EXCESS, THE PAGE | 38 SAME IS ALSO DEBITED TO THE PURCHASE ACCOUNT. ON CAREFUL ANALYSIS OF THE NOTE PLACED AT 12 OF THE ANNUAL ACCOUNTS IT IS APPARENT THAT AS ON 3 1 ST OF MARCH 2009 THE ASSESSEE MADE A PROVISION OF INR 1,406,800,000 BASED ON THE ABOVE METHODOLOGY. THE ABOVE PROVISION WAS SHORT AS THE ACTUAL LIABILITY WAS INR 1,533,100,000 TOWARDS THE FINAL SETTLEMENT PRICE. THUS THE BALANCE SUM OF INR 126,300,000 WAS CHARGED TO THE PROFIT AND LOSS ACCOUNT UNDER MATERIAL CONSUMPTION. THEREFORE IF THERE IS AN EXCESS OVER THE ESTIMATE MADE BY THE ASSESSEE SAME IS CHARGED TO THE RAW MATERIAL CONSUMPTION ACCOUNT WHEN PRICES ARE FINALISED. SIMILARLY IF THE PROVISION MADE IS HIGHER AND THE LIABILITY CRYSTALLISED IS LESS, THE SAME IS ALSO CREDITED TO THE RAW MATERIAL CONSUMPTION ACCOUNT AT THE TIME OF FINALISATION OF THE PRICES. THUS FOLLOWING THE SAME SYSTEM OF ACCOUNTING THE ASSESSEE MADE A PROVISION OF RU PEES TO 59,31,00,000 DURING THIS YEAR. THEREFORE, THE ABOVE PROVISIONING HAS BEEN MADE BY THE ASSESSEE BASED ON THE PRUDENT METHOD OF ACCOUNTING FOLLOWED BY IT ON YEAR TO YEAR BASIS. AS THE MATERIAL HAS BEEN RECEIVED BY THE ASSESSEE DURING THE FINANCIAL YEAR ENDED ON 31 ST OF MARCH 2010 THE ASSESSEE HAS A PRESENT OBLIGATION TO MAKE PAYMENT FOR THE PURCHASES MADE. ON THE BASIS OF THE PROBABILITY, THE ASSESSEE HAS MADE A PROVISION FOR WHICH IT HAS ALREADY INCURRED AN OBLIGATION AT THE TIME OF THE RECEIPT OF THE GOODS. ESTIMATE MADE BY THE ASSESSEE IS ALSO A RELIABLE ESTIMATE AS SAME IS ACCEPTED BY THE INDUSTRY AS STATED IN THE ANNUAL ACCOUNTS OF ANOTHERS SIMILAR COMPANY, BASED ON THE LONDON METAL EXCHANGE PRICES. THEREFORE THE PROVISION CREATED BY THE ASS ESSEE IS A LIABILITY WHICH HAS BEEN MEASURED BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. THE LEARNED CIT A HAS ADDED IN HOLDING THAT SUCH PROVISION MADE IN THE BOOKS OF ACCOUNT IS NOT DEDUCTIBLE WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. WE D ISAGREE WITH THE ABOVE FINDING OF THE LEARNED CIT A FOR THE REASON THAT ASSESSEE HAS RECEIVED THE GOODS DURING THE FINANCIAL YEAR FOR WHICH THE PRICES WOULD BE PAYABLE LETTER ON BUT THE RELIABLE ESTIMATE IS MADE BASED ON THE LONDON METAL EXCHANGE PRICES. SUCH PROVISION HAS GONE INTO THE PURCHASE ACCOUNT OF THE ASSESSEE. FURTHER IF, IT IS CARRIED INTO THE STOCK, IT BECOMES THE COST OF THE UNDERLYING INVENTORY OF THE ASSESSEE. THEREFORE IF THE PROVISION IS NOT GRANTED TO THE ASSESSEE AS DEDUCTION THEN EQ UIVALENT AMOUNT OF THE CLOSING STOCK IS ALSO REQUIRED TO BE PAGE | 39 REDUCED. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE PROVISION MADE BY THE ASSESSEE HAS NOT BEEN SUBSEQUENTLY DISCHARGED BY PAYMENT TO THE RESPECTIVE PARTIES OR IF THERE IS AN EXCESS OR SHORT HAS NOT BEEN CARRIED TO THE RAW MATERIAL CONSUMPTION ACCOUNT OF THE SUBSEQUENT YEAR. IT IS NOT THE CASE OF THE REVENUE THAT ASSESSEE IS MERELY CARRYING ON A PROVISION IN ITS BOOKS OF ACCOUNT WITHOUT DISCHARGING IT REVERSING IT INTO THE SUBSEQUENT YEAR. FURTHER THE FINDING OF THE LEARNED CIT A IS ALSO INCORRECT THAT ASSESSEE HAS NOT PROVIDED THE BASIS OF WORKING OF THE PROVISIONS OF RUPEES TO 59,31,00,000. THE ABOVE PROVISION HAS BEEN MADE ON THE BASIS OF THE LONDON METAL EXCHANGE PRICES AND CERTIFIED BY THE AUDITORS AS WELL AS APPROVED BY THE SHAREHOLDERS OF THE COMPANY. FURTHER, THE IDENTICAL ISSUE HAS ARISEN IN THE CASE OF THE COMPANY IN EARLIER YEARS WHEN THE ASSESSEE CHAIN THE METHOD OF ACCOUNTING WITH RESPECT TO THE PURCHASE PRICE AND THE MATTER REACHED TO THE LEVEL OF THE COORDINATE BENCH WHICH DID NOT FIND ANY INFIRMITY IN THE ACCOUNTING TREATMENT MADE BY THE ASSESSEE FOR PROVISIONS FOR PURCHASES. IN THE RESULT WE DO NOT FIND ANY REASON TO UPHOLD THE ORDER OF THE LOWER AUTHORITIES WHEREIN THE D ISALLOWANCE MADE BY THE LEARNED ASSESSING OFFICER IS UPHELD BY THE LEARNED CIT A. ACCORDINGLY WE DIRECT THE LEARNED ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF RUPEES TO 59,31,00,000 MADE ON ACCOUNT OF THE PROVISION FOR PURCHASES. ACCORDINGLY GROUN D NUMBER 2, 3, 4, 5 AND GROUND NUMBER 7 TO THE EXTENT OF THE ADDITION CONFIRMED BY THE LEARNED CIT A OF RUPEES TO 593100000/ TOWARDS THE PROVISIONS FOR COPPER PURCHASE PRICE IS ALLOWED. 18 . GROUND NUMBER 6 OF THE APPEAL WAS NOT ARGUED BY THE PARTIES BEFORE US AND THEREFORE SAME IS DISMISSED. 19 . IN VIEW OF OUR FINDING GIVEN WITH RESPECT TO THE DELETION OF THE ADDITION CONFIRMED BY THE LEARNED CIT APPEAL OF RUPEES TO 593100000 TOWARDS THE PROVISION FOR THE COPPER PURCHASE PRICE GROUND NUMBER 9 OF THE APPEAL BECOM ES INFRUCTUOUS AND HENCE SAME IS DISMISSED. 20 . GROUND NUMBER 10 OF THE APPEAL IS WITH RESPECT TO NOT GRANTING THE FULL CLAIM OF THE TAX DEDUCTION AT SOURCE TO THE APPELLANT AMOUNTING TO INR 4 863657/ . IN PARA NUMBER 8.2 OF THE ORDER OF THE LEARNED CIT A T HE DIRECTION HAS BEEN GIVEN TO THE LEARNED ASSESSING OFFICER TO GRANT THE CREDIT OF THE AMOUNT OF TAX DEDUCTION AT SOURCE OF INR 4 863657/ TO THE ASSESSEE. PAGE | 40 THE AO IS DIRECTED TO THE FOLLOW THE DIRECTION OF THE LEARNED CIT CAPITAL AND GRANT THE CREDIT O F THE ABOVE TAX DEDUCTION AT SOURCE AFTER PROPER VERIFICATION. ACCORDINGLY GROUND NUMBER 10 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 21 . GROUND NUMBER 11 OF THE APPEAL IS WITH RESPECT TO THE CHARGING OF INTEREST U/S 234B AND 234C OF THE INCOME TAX ACT. NO S PECIFIC ARGUMENTS WERE ADVANCED BY EITHER OF THE PARTIES AND THEREFORE THE SAME IS DISMISSED. 22 . GROUND NUMBER 12 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE INITIATION OF THE PENALTY PROCEEDINGS BY THE LEARNED ASSESSING OFFICER U/S 271 (1) OF THE ACT. TH E ABOVE GROUND IS PREMATURE AS NO PENALTY HAS BEEN LEVIED BY THE LEARNED ASSESSING OFFICER. ACCORDINGLY SAME IS DISMISSED. 23 . GROUND NUMBER 1 OF THE APPEAL OF THE ASSESSEE IS GENERAL IN NATURE AND THEREFORE SAME IS DISMISSED. 24 . ACCORDINGLY APPEAL OF THE ASSESS EE IN ITA NUMBER 1454/DEL/2019 FOR ASSESSMENT YEAR 2000 11 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 09 / 10 / 2019 . - SD/ - - SD/ - ( AMIT SHUKLA ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 9 / 1 0 / 2019 A K KEOT COPY FORWARDED TO 1 . APPLICANT 2 . RESPONDENT 3 . CIT 4 . CIT (A) 5 . DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI