DCIT, CHENNAI V. M/s. Tebma Shipyards Ltd., CHENNAI

ITA 2507/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4681 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 26-08-2016
• Court: TRIBUNAL
• Department Lawyers: K PARASHIVAIAH
• Assessee Lawyers: B RAMAKRISHNAN
• Keywords: Capital asset; Business income; Depreciation; Audit objection; Reasonable cause; Tangible material; Speculation loss; Difference of opinion; Competent authority; Reason to believe; Change of opinion; Revenue expenditure; Reassessment proceedings; Capital expenditure
• Section: 43(5); 37; 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , ! ' . #$ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER . / ITA NOS. 2008 & 2009/MDS/2016 / ASSESSMENT YEARS : 2008-09 & 2009-10 & C.O.NOS. 165 & 166/MDS/2016 AND . /ITA NOS. 2507, 2508 & 2509/MDS/2016 % ( )( / ASSESSMENT YEARS : 2010-11, 2011-12 & 2012-13 THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-3(1), CHENNAI. ( /APPELLANT) V. M/S. TEBMA SHIPYARDS LTD ., MOOTHA CENTRE, III FLOOR,NEW NO.23 (OLD NO.9),KODAMBAKKAM HIGH ROAD, NUNGAMBAKKAM,CHENNAI - 34. PAN AACT1281B ( RESPONDENT/CROSS OBJECTOR) DEPARTMENT BY : SHRI K. PARASHIVAIAH, CIT ASSESSEE BY : SHRI B. RAMAKRISHNAN, FCA / DATE OF HEARING : 27.02.2017 / DATE OF PRONOUNCEMENT: 01.05.2017 * / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THE APPEALS BY THE REVENUE AND THE CROSS OBJECTIO NS BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME-TAX(APPEALS) FOR THE ASSESSM ENT YEARS 2008-09, 2009-10, 2010-11, 2011-12 AND 2012-13. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 2 2. THERE IS A DELAY OF 6 DAYS FOR THE A.YS 2008-09 AND 2009-10 AND 3 DAYS FOR THE AYS 2010-11, 2011-12 AND 2012-13 IN FILING THE APPEALS BY THE REVENUE BEFORE THIS T RIBUNAL. THE REVENUE FILED CONDONATION PETITIONS SEEKING CONDON ATION OF DELAY IN FILING THESE APPEALS. 3. AFTER GOING THROUGH THE REASONS, WE ARE OF THE OPINION THAT THERE IS A REASONABLE CAUSE IN FILING THESE AP PEALS BELATEDLY BY THE REVENUE. ACCORDINGLY, WE CONDONE THE ABOVE SHORT DELAY IN FILING THE ABOVE APPEALS AND ADMIT THE APPEALS F ILED BY THE REVENUE FOR ADJUDICATION. 4. THE FIRST COMMON GROUND RAISED BY THE REVENUE IN ITA NOS.2008 & 2009/MDS/2016 IS THAT THE CIT(APPEALS) E RRED IN DELETING THE DISALLOWANCE OF FOREX LOSS INCURRED IN RELATION TO THE FORWARD CONTRACTS ENTERED BY THE ASSESSEE IN ORDER TO HEDGE THE FOREIGN CURRENCY RISK OF THE OUTSTANDING SALE PROCE EDS IN BALANCE SHEET. 5. THE FACTS OF THE CASE AS NARRATED IN ITA NO.2008/MDS/2016 FOR THE A.Y 2008-09 ARE THAT THE A SSESSING OFFICER OBSERVED THAT AS PER SEC.43(5) OF THE ACT, THE CONTRACTS - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 3 FOR PURCHASE AND SALE OF ANY COMMODITY INCLUDING ST OCK AND SHARES ALSO INCLUDE DERIVATIVES. ACCORDING TO THE AO, THE EXCLUSION UNDER THE PROVISO (D) TO SEC.43(5) IS APP LICABLE ONLY TO SUCH CONTRACTS THAT ARE TRADED IN RECOGNIZED STOCK EXCHANGE. THE AO OBSERVED THAT THE ASSESSEES MAIN OBJECT IS TO SPECULATE BY WAY OF FORWARD COVER AND HAS NO RELATIONSHIP WHA TSOEVER WITH THE ASSESSEES BUSINESS AND THEREFORE, SUCH LOSSES ARE SPECULATIVE LOSSES AND CANNOT BE ALLOWED AS DEDUCTI ON. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS), WHO, FOLLOWING THE JUDGMENT OF THE SU PREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA PVT. LTD.(2009) 179 TAXMAAN 326 AS WELL AS TRIBUNAL DECISIONS RELIE D ON BY THE ASSESSEE, OBSERVED THAT ON FOREX DERIVATIVES CANNOT BE TREATED AS SPECULATIVE LOSS U/S 43(5) OF THE ACT AND ALLOWE D THE GROUND OF APPEAL. AGAINST THIS, THE REVENUE IS IN APPEAL B EFORE US. 6. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT SIMILAR ISSUE CAME FOR CONS IDERATION BEFORE THIS TRIBUNAL IN THE CASE IN THE CASE OF M/S . AMBATTUR - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 4 CLOTHING LTD, IN ITA NO.1643/MDS/2014 AND ITA NO.910/MDS/2015 DATED 28.12.2015 WHEREIN HELD THAT: 19. THE FACTS OF THE ISSUE ARE THAT THE DISALLOWAN CE OF CLAIM OF LOSS OF RS.69,26,01,324/- ON ACCOUNT OF CANCELL ATION OF FORWARD CONTRACTS IN FOREX DERIVATIVES TREATING IT AS A SPECULATION LOSS. THE ASSESSEE HAD CLAIMED THE SAID LOSS AS AGAINST THE BUSINESS INCOME. THE AO AFTER ANALYZING THE ASSESSEE'S TRANSACTIONS IN THE LIGHT OF THE DEFINIT ION GIVEN IN SEC.43(5), HELD THAT THEY ARE IN THE NATURE OF SPEC ULATIVE TRANSACTION, SINCE IT SATISFIES THE SAID PROVISION. RELIANCE WAS ALSO PLACED ON COMFUND FINANCIAL SERVICES (I) LTD V S. DCIT (ITAT BANGALORE BENCH) AND ACIT VS. K.MOHAN & CO. (EXPORTS) (P) LTD (2010) (39 DTR 97). IN VIEW OF THE DETAILED DISCUSSIONS, THE AO HAS CONCLUDED THAT THE INCOME/L OSS FROM OPTIONS AND FORWARD CONTRACTS ENTERED BY THE ASSESS EE FORMS PART OF THE SPECULATION BUSINESS AS PER EXPLANATION 2 TO SECTION 28 AND DISALLOWED THE ENTIRE AMOUNT CLAIMED BY THE ASSESSEE HOWEVER, THE AO HAS ALLOWED THE SAME TO BE CARRIED FORWARD FOR SET OFF AGAINST ANY FUTURE SPECULATIVE INCOME. FURTHER, THE AO HAS OBSERVED THAT AS PER THE INFORM ATION GIVEN BY THE ASSESSEE THE CONTRACTS WERE NOT SETTLE D BY ACTUAL DELIVERY BUT BY CANCELLATION OR PREMATURE CLOSURE B Y PAYING OR RECEIVING THE DIFFERENCE IN AMOUNT BETWEEN THE RATE AT WHICH THE CONTRACT HAS BEEN ENTERED AND THE PREVAILING EX CHANGE RATE ON THE DATE OF CANCELLATION OF THE SETTLEMENT. 20. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APPE ALS) OBSERVED THAT THE AO HAS DISALLOWED THE LOSS ON ACC OUNT OF - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 5 CANCELLATION OR POSTPONEMENT OF FORWARD CONTRACTS H OLDING THAT THE LOSS SO ARRIVED AT IS NOT DERIVED FROM THE BUSINESS OF THE ASSESSEE AND ALSO AS PER SEC 43(5) THE LOSS IS TO BE TREATED AS 'LOSSES FROM SPECULATION BUSINESS'. THE ASSESSEE HAS CONTENDED T HAT FOREIGN CURRENCY LOSSES ARE ON REVENUE ACCOUNT ONLY AND ARE INCIDENTAL TO THE CORE BUSINESS OF THE ASSESSEE OF MANUFACTURE AND EXPORT OF GARMENTS AND HENCE ALLOWABLE AS BUSIN ESS EXPENDITURE. THIS ISSUE HAS ENGAGED THE ATTENTION O F VARIOUS COURTS FOR QUITE SOMETIME. THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA 312 ITR 254 (SC) HELD THAT THE LOSS IN FOREIGN EXCHANGE, IF ANY, AS AT THE END OF THE Y EAR WOULD BE DEDUCTIBLE U/S 37 BY VALUING THE OUTSTANDING LIABIL ITY AT THE RATE MARKED TO MARKET AS ON DATE OF CLOSING OF ACCO UNTS, AND THE METHOD OF ACCOUNTING THAT HAS BEEN REGULARLY FO LLOWED WOULD HAVE TO BE CONTINUED FOR THE SAKE OF CONSISTE NCY. IN COMING TO THESE CONCLUSIONS, THE SUPREME COURT FOLL OWED THE RATIONALE OF ITS EARLIER DECISION IN SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 WHERE IT WAS HELD THAT PROFIT OR LOSS IN FLUCTUATION OF FOREIGN CURRENCY WOULD ORDINARILY BE A TRADING PROFIT OR LOSS, IF HELD ON THE REVENUE ACCOUNT AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EARMARKED I N BUSINESS. THE ID. AR HAS CLARIFIED THAT THE FORWARD CONTRACT WAS ON REVENUE ACCOUNT AND NOT FOR CAPITAL ASSETS. THE DEC ISION SO RENDERED IN WOODWARD GOVERNOR INDIA (SUPRA) WAS APP LIED AND THE LAW WAS REITERATED IN ONGC VS CIT, 322 ITR 180 (SC) REVERSING THE DECISION OF THE UTTARAKHAND HIGH COUR T IN THE SAME CASE REPORTED IN 301 ITR 415 (UTTARAKHAND), WH ICH HAD TREATED THE EXCHANGE LOSS BOTH RELATING TO CURRENT AND CAPITAL - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 6 ACCOUNT AS A CONTINGENT LIABILITY. SUPREME COURT IN CIT V. MARUTI UDYOG, 320 ITR 729 (SC) DECIDED THAT DEPRECI ATION ON COST ENHANCED BY CAPITALIZATION OF FOREIGN EXCHANGE LOSS WAS DEDUCTIBLE FOLLOWING THE DECISION IN WOODWARD GOVER NOR INDIA (SUPRA). THE COMMISSIONER OF INCOME TAX (APPEALS) A LSO NOTICED THE RELEVANCE OF THE CASE LAW RELIED ON BY THE ASSESSEE WITH REGARD TO CLOSURE OF FORWARD CONTRACT S. THE LOSS, AS A RESULT OF CLOSURE OF FORWARD CONTRACT, HAS BEE N RECOGNIZED AS BUSINESS LOSS BY VARIOUS COURTS AND IT REMAINED AS SETTLED BY NOW. THE COMMISSIONER OF INCOME TAX (APPEALS) AL SO AGREE WITH THE ASSESSEE THAT THE FORWARD CONTRACT E NTERED AS A TOOL OF HEDGING HAS ALSO BEEN RECOGNIZED BY VARIO US DECISIONS, MORE SO, WHEN THEY ARE FULLY COVERED BY THE EXPORT INVOICES AND AS PER THE REGULATIONS OF RBI AND FEMA NO BUSINESS MAN CAN ORDINARILY ENGAGE HIMSELF IN SPECU LATION ACTIVITY. HOWEVER, THE PRESENT ISSUE IN QUESTION IS WHETHER THE LOSS ON ACCOUNT OF PREMATURE CLOSURE OF THE FORWARD CONTRACTS CAN BE ALLOWED AS BUSINESS LOSS. THIS SPECIFIC QUES TION HAS BEEN ANSWERED BY THE ITAT MUMBAI IN THE CASE OF LON DON STAR DIAMOND COMPANY (I) P LTD V DCIT IN ITA NO.6169/M/2012, RELIED ON BY THE ASSESSEE, AS AN AL TERNATE PLEA. AS PER THIS DECISION THE TRIBUNAL HAS OBSERVE D THE REASONS FOR FORECLOSURE OF THE FORWARD CONTRACTS AS A GUIDE TO DECIDE WHETHER THE LOSS INCURRED DUE TO SUCH ACTION SHOULD BE ALLOWED AS BUSINESS LOSS OR NOT. IT WAS HELD THAT A LOSS ARISING FROM CANCELLATION OF MATURED CONTRACTS IS ALLOWED I N FAVOUR OF THE ASSESSEE. IT IS A SETTLED ISSUE THAT THE ASSESS EE HAS TO DISCHARGE THE ONUS ON WHY HE HAS TO RESORT TO PREMA TURE CANCELLATION. WHILE SETTING ASIDE THE ORDER OF THE AO IN THE - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 7 ABOVE REFERRED CASE, THE IT AT HAS DIRECTED THE AO TO DISALLOW THE LOSS IN THE ABSENCE OF SPECIFIC EXPLANATION AS TO WHY THE FORWARD CONTRACTS WERE CANCELLED PREMATURELY. IN TH E ABOVE REFERRED CASE, THE ITAT HAS ALLOWED ONE SEGMENT OF FORWARD CONTRACTS WHICH WERE CLOSED THREE DAYS BEFORE THE D UE DATE AND THE EXPLANATION GIVEN BY THE ASSESSEE AS WEEK-E ND DAYS WAS ACCEPTED. IN ANOTHER SEGMENT OF FORWARD CONTRAC TS WHICH WERE CANCELLED PREMATURELY, THE EXPLANATION GIVEN B Y THE ASSESSEE WAS VERY GENERAL AND THE DELAY WAS MORE TH AN THREE DAYS (MORE THAN A MONTH). THE COMMISSIONER OF INCOM E TAX (APPEALS) DIRECTED THE ASSESSING OFFICER TO VERIFY WHETHER ANY FORWARD CONTRACTS HAVE BEEN CANCELLED PREMATURELY A ND VERIFY THE REASON SUBMITTED FOR SUCH PREMATURE CANCELLATIO N AND ALLOWED THE APPEAL FOR STATISTICAL PURPOSES. AGAINS T THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 21. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. IN THIS CASE, THE COMMISSIONER OF INCOME TA X (APPEALS) GIVEN AN DIRECTION TO THE ASSESSING OFFIC ER TO VERIFY ANY FORWARD CONTRACTS HAVE BEEN CANCELLED PREMATURE LY AND VERIFY THE REASONS FOR PREMATURE CANCELLATION IN TH E LIGHT OF THE ORDER OF THE TRIBUNAL IN THE CASE OF LONDON STAR DI AMOND COMPANY (I) P. LTD VS. DCIT IN ITA NO.6169/M/2012, DATED 11.10.2013 WHEREIN IT WAS OBSERVED THAT LOSS ARISIN G FROM CANCELLATION OF PREMATURE IS ALLOWED AS BUSINESS LO SS. BEING SO, THE ASSESSEE CANNOT HAVE ANY GRIEVANCE ON THIS ISSUE AS COMMISSIONER OF INCOME TAX (APPEALS) HAS GIVEN DIRE CTION TO FOLLOW THE TRIBUNAL ORDER. FURTHER, WE MAKE IT CLEA R THAT LOSS ARISING OUT OF DERIVATIVE TRANSACTION IN EXCESS OF EXPORT TURNOVER HAS TO BE CONSIDERED AS SPECULATIVE LOSS B ECAUSE EXCESS DERIVATIVE TRANSACTION HAS NO PROXIMITY WITH EXPORT - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 8 TURNOVER. WITH THESE OBSERVATIONS, WE REJECT THE GR OUND OF THE ASSESSEE. THE APPEALS OF THE ASSESSEE IN TA NO.1643/MDS/2014 AND ITA NO.910/MDS/2015 ARE PARTLY ALLOWED. IN VIEW OF THIS, WE REMIT THE ISSUE TO THE FILE OF AO ON SIMILAR DIRECTION. THIS GROUND RAISED IN BOTH THE APPEALS OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 7. THE NEXT COMMON ISSUE RAISED BY THE REVENUE IN I TA NOS. 2008, 2009,2507 & 2508, 2509/MDS/2016 IS THAT THE CIT(APPEALS) ERRED IN DELETING THE ADDITIONS MADE O N ACCOUNT OF SUBSIDY INCOME NOT OFFERED TO TAX BY THE ASSESSEE E VEN THOUGH THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING AND INCOME HAS BEEN CALCULATED ON PERCENTAGE COMPLETION METHOD. 8. THE FACTS OF THE ISSUE AS NARRATED IN ITA NO. 2008/MDS/2016 ARE THAT THE AO OBSERVED THAT THE COM PANY HAD ACCOUNTED FOR SUBSIDY AMOUNTING TO 58,29,04,000/- DURING THE FY 2007-08 RELEVANT TO AY 2008-09. THE AO OBSERVED THAT THERE IS NO SCOPE FOR MAKING ANY CHANGES EXCEPT TO THE EXTENT - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 9 AS PROVIDED FOR IN THE EXPLANATION TO SEC.115JB OF THE ACT. ACCORDING TO THE AO, THE INCOME OF A RESIDENT HAS T O BE TAXED DURING THE PREVIOUS YEAR IN THE HANDS OF A RESIDENT DERIVED FROM WHATEVER SOURCE. HENCE, THE SUBSIDY INCOME SHOULD HAVE BEEN OFFERED TO TAX UNDER THE NORMAL PROVISIONS OF THE A CT AS WELL. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 8.1 BEFORE THE CIT(APPEALS), THE LD. AR SUBMITTED T HAT THE AFORESAID SUBSIDY WAS CREDITED TO THE PROFIT AND LO SS ACCOUNT FOR THE YEAR 2007-08. HOWEVER, WHILE FILING THE RETURN OF INCOME, IN THE COMPUTATION OF INCOME, THE AFORESAID SUBSIDY WA S NOT OFFER FOR TAXATION. IN THE COURSE OF ASSESSMENT PROCEEDI NGS, DETAILED SUBMISSIONS WERE MADE BEFORE THE AO AS TO WHY THE A FORESAID SUBSIDY WAS NOT TAXABLE. ACCORDINGLY, THE AO PASSE D THE ASSESSMENT ORDER U/S.143(3) OF THE ACT BY ACCEPTING THE ASSESSEES STAND AND THE SUBSIDY WAS NOT CONSIDERED AS TAXABLE. THEREFORE, ACCORDING TO THE LD. AR, THE R EOPENING OF THE ASSESSMENT U/S.147 OF THE ACT IS ONLY A CHANGE OF O PINION. FURTHER, THE LD. AR, SUBMITTED BEFORE LD.CIT(A) THA T THE - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 10 GOVERNMENT OF INDIA VIDE PRESS NOTE NO..(2003) SY12025/3/98 SBR DATED 7 TH MARCH 2003 HAD ANNOUNCED A SHIP BUILDING SUBSIDY FOR SHIP CONSTRUCTED AND EXPORTED AT 30% ON THE VALUE OF PRICE REASONABLENESS CERTIFICATE (PRC) ISS UED BY DIRECTOR OF GENERAL OF SHIPPING. THE SUBSIDY WILL BE SANCTIONED ON THE ASSESSEE OBTAINING IN PRINCIPLE APPROVAL FRO M MINISTRY OF SHIPPING. THE SCHEME HAD VARIOUS CONDITIONS TO BE FULFILLED BY THE SHIPYARD BEFORE BECOMING ELIGIBLE FOR THE SUBSI DY. THE ASSESSEE COMPANY HAD ACCOUNTED FOR SUBSIDY AS INCOM E IN THE BOOKS OF ACCOUNT BASED ON THE PERCENTAGE COMPLETION METHOD THOUGH NOT ELIGIBLE FOR THE SUBSIDY. UPON SCRUTINY OF THE PROCEDURES/GUIDELINES FOR SHIP BUILDING SUBSIDY I SSUED BY THE MINISTRY OF SHIPPING, GOVERNMENT OF INDIA VIDE ANNE XURE TO MINISTRY OF SHIPPING LETTER NO.(2003) SY 12025/3/9 8 SBR DATED 7 TH MARCH 2003, IT IS OBSERVED THAT : A. AS THE SAID ORDERS HAVE BEEN RECEIVED BY APPELLA NT, A PRIVATE SHIPYARD, ON NEGOTIATION BASIS, AS PER CLAU SE 1(B), THE SUBSIDY IS ADMISSIBLE ONLY FOR AN EXPORT ORDER. B. CLAUSE 3.3 OF THE SAID GUIDELINES PRESCRIBES THA T SUBSIDY BECOMES ADMISSIBLE IN CASE OF PRIVATE SECTO R SHIPYARD AFTER DELIVERY OF THE VESSEL. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 11 C. AS PER CLAUSE 2.2, APPLICATION NEEDS TO BE SUBMI TTED TO DIRECTOR GENERAL OF SHIPPING TO DETERMINE THE REASONABLENESS OF THE PRICE. THE DG SHIPPING MAY E VEN DECLINE TO ISSUE THE PRICE REASONABLENESS CERTIFICA TE OR NOT AGREE WITH THE PRICE INDICATED BY THE SHIPYARD. D. AS PER CLAUSE 3, FOR ORDERS RECEIVED ON NEGOTIA TION BASIS, THE SHIPYARD SHOULD APPLY TO THE MINISTRY OF SHIPPING FOR IN PRINCIPLE APPROVAL WITH A COPY OF THE PRIC E REASONABLENESS CERTIFICATE FROM THE DG SHIPPING. E. AS PER CLAUSE 3.2, THE ADMINISTRATIVE MINISTRY, SUBJECT TO SATISFYING THE CONDITIONS LAID DOWN IN THE SUBSI DY SCHEME, WOULD ACCORD OR DECLINE TO ACCORD, BY RECOR DING REASONS IN WRITING THE IN PRINCIPLE APPROVAL. THE SUBSIDY BECOMES ADMISSIBLE ONLY AFTER THE IN PRINCIPLE APPR OVAL IS ACCORDED. 8.2 FURTHER, THE LD. AR, SUBMITTED THAT THE EVENT R ELEVANT TO THE SUBSIDY UNDER DISCUSSION ARE AS UNDER : A. THE COMPANY RECEIVED ORDERS FOR TEN SHIPS FROM TWO MAJOR CUSTOMERS. THE SUBSIDY WAS ACCOUNTED IN THE BOOKS OF ACCOUNTS BASED ON THE CONTRACT VALUE. B. SUBSEQUENTLY SIX OF THE CONTRACTS WERE CANCELLED AND HENCE THE SUBSIDY ACCOUNTED IN THE BOOKS HAD TO BE REVERSED. C. FURTHER, THE COMPANY RECEIVED PRICE REASONABLENESS CERTIFICATE FROM THE DIRECTOR GENERA L OF SHIPPING FOR YARD NOS. 116, 117, 118 & 119 ON 19 TH JULY 2010 AT A MUCH LOWER VALUE OF USD 11,400,304/- AS AGAINST THE CONTRACT VALUE OF USD 18,318,300/- - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 12 D. HENCE, BASED ON THE PRICE REASONABLENESS CERTIFICATE RECEIVED, THE SUBSIDY WAS CALCULATED. THE DETAILS OF THE SUBSIDY CALCULATED BASED ON THE PRIC E REASONABLENESS CERTIFICATE IS GIVEN IN POINT NO. (I ) BELOW. THE EXCESS SUBSIDY OF 33.80 CRFORES WAS REVERSED. E. IT IS SUBMITTED THAT TILL MARCH 2009, THE COMPAN Y HAD NOT EXPORTED ANY SHIP AND THE IN PRINCIPLE APPROVAL HAS NOT BEEN ISSUED BY THE MINISTRY OF SHIPPING. THEREFORE, THE RIGHT TO RECEIVE THE SUBS IDY IS NOT ESTABLISHED WITH RESPECT TO THESE SHIPS AND HEN CE, THE SUBSIDY HAD NOT ACCRUED, THUS THE SAME WAS NOT INCLUDED IN THE TAXABLE INCOME OF THE COMPANY. F. THE COMPANY HAD RECEIVED THE IN-PRINCIPLE CERTIFICATE FOR YARD NOS.116, 117, 118 & 119 ONLY O N 17 TH DECEMBER 2012. G. SUBSIDY SANCTIONED BY THE MINISTRY OF SHIPPING FOR HULL NO.116 AND 117 WAS ONLY 19.54 CRORES WHEREAS BASED ON THE PRICE REASONABLENESS CERTIFICATE IT WORKS OUT TO 31.08 CRORES. OUT OF THE SANCTIONED SUBSIDY FOR HULL NO. 116 AND 117, 80% WA S RELEASED ON 31 OCTOBER 2013 AMOUNTING TO 15.63 CRORES. THE BALANCE IS YET TO BE RECEIVED BY THE APPELLANT. FURTHER, SUBSIDY FOR HULL 118 AND 119 A RE YET TO BE SANCTIONED AND NOT RECEIVED TILL DATE. H. HOWEVER SINCE THE APPELLANT IS FOLLOWING ACCRUAL SYSTEM OF ACCOUNTING EVEN THOUGH THE SUBSIDY FOR YA RD NO. 118, 119 WAS NOT RECEIVED, THE APPELLANT HAD OFFERED TO TAX THE ENTIRE SUBSIDY OF 62.17 CRORES AS INCOME CALCULATED ON THE BASIS OF THE PRICE REASONABLENESS CERTIFICATE UPON RECEIPT OF THE IN PRINCIPLE APPROVAL IN THE ASST YEAR 2013-14. I. THE SUBSIDY CALCULATION BASED ON THE PRC RECEIVED IS AS UNDER : - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 13 VESSEL NO. CUSTOMER PRC VALUE USD EXCHANGE RATE PRC VALUE IN LACS SUBSIDY RATE SUBSIDY IN LACS 116 117 118 119 TIRCO SUB- SEA AS TIRCO SUB- SEA AS LUTHERA, SINGAPORE NIKRASH INVESTMENTS LTD., NIGERIA 1,14,00,304 1,14,00,304 1,14,00,304 1,14,00,304 45.44511 45.44511 45.44511 45.44511 5,181 5,181 5,181 5,181 30% 30% 30% 30% 1,554 1,554 1,554 1,554 TOTAL 6,217 J. FURTHER, INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IS DEFINED UNDER SECTION 28 WHICH INCLUDE, CASH ASSISTANCE (BY WHATEVER NAME CALLED) RECEIVED OR RECEIVABLE BY ANY PERSON AGAINST EXPORTS UNDER ANY SCHEME OF THE GOVERNMENT OF INDIA (SECTION 28(III) B). THE SUBSIDY IN QUESTION IS A CASH ASSISTANCE AS PROVIDED IN THE ABOVE SECTION. HENCE IT IS TAXABLE ONLY WHEN IT IS RECEIVABLE OR RECEIVED. K. SINCE THE APPELLANT HAD NO RIGHT TO RECEIVE THE SUBSIDY IN THE ASSESSMENT YEAR 2008-09 THE SAID SUBSIDY CANNOT BE TREATED AS INCOME. IT IS ALSO TO BE NOTED THAT THE APPELLANT HAD OFFERED THE SUBSIDY FO R TAX IN THE YEAR IN WHICH IN PRINCIPLE APPROVAL WAS RECE IVED. L. THE AO HAS RELIED UPON THE JUDGEMENT BY THE HONORABLE SUPREME COURT IN THE CASE OF APOLLO TYRES VS CIT AND MALAYALA MANORAMA VS. CIT. HOWEVER, THE SAID JUDGEMENTS ARE RELEVANT FOR ASSESSMENT UND ER 1157-J AND NOT FOR ASSESSMENT UNDER NORMAL PROVISIONS OF THE ACT. M. THE SUBSIDY IS ADMISSIBLE ONLY WHEN THE IN PRINCIPLE APPROVAL IS ISSUED BY THE MINISTRY OF SHI PPING AS PER THE GUIDELINES ISSUED BY THE SAID MINISTRY. THEREFORE THE RIGHT TO RECEIVE THE SUBSIDY IS NOT ESTABLISHED AND HENCE THE SUBSIDY HAD NOT ACCRUED T O - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 14 THE APPELLANT AND HENCE NOT TO BE INCLUDED IN THE TAXABLE INCOME UNDER NORMAL PROVISIONS OF THE ACT. THIS WAS ACCEPTED BY THE ORIGINAL ASSESSMENT OFFICE R AND ORIGINAL ASSESSMENT WAS PASSED ACCORDINGLY. THE AO REOPENING THE ASSESSMENT HAS ERRED IN APPLYING THE JUDGEMENT OF THE HONORABLE SUPREME COURT MENTIONED ABOVE FOR NORMAL ASSESSMENT WHILE THE DECISION WAS RELATING THE ASSESSMENT UNDER 115- J. 8.3 THE LD.A.R HAS ALSO RELIED ON THE FOLLOWING CA SE LAWS BEFORE LD.CIT(A) : A) GODHRA ELECTRICITY CO. LTD. VS. CIT (225 ITR 74 6) B) CIT VS. BOKARO STEELS LTD. (236 ITR 315) C) SUTLEJ COTTON MILLS LTD. VS. CIT (116 ITR 1[SC ]) 8.4 THE LD. AR FURNISHED THE FOLLOWING DOCUMENTS IN SUPPORT OF HIS SUBMISSION BEFORE LD.CIT(A) : 1. PROCEDURES/GUIDELINES FOR SHIP BUILDING SUBSIDY ISSUED BY THE MINISTRY OF SHIPPING, GOVERNMENT OF I NDIA VIDE ANNEXURE TO MINISTRY OF SHIPPING LETTER NO(2003)SY12025/3/98 SBR DATED 7 TH MARCH 2003 2. COPY OF PRICE REASONABLENESS CERTIFICATE ISSUED BY DIRECTOR GENERAL OF SHIPPING. 3. IN PRINCIPLE APPROVAL ISSUED BY THE MINISTRY OF SHIPPING 4. NOTICE OF CANCELLATION IN RESPECT OF HULL NO 123 AND 124 DATED 03 JAN 2011. 5. NOTICE OF CANCELLATION IN RESPECT OF HULL NO 120 , 121, 128 AND 129 DATED 16 JULY 2010. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 15 9. THE CIT (APPEALS) OBSERVED THAT THE AO HAS NOT G ONE INTO THE DETAILS OF THE FACTS AND CIRCUMSTANCES REL ATED TO THE ISSUE OF SUBSIDY INCOME BEFORE BRINGING THE SAME TO TAX. THE CIT(APPEALS) OBSERVED THAT THE ASSESSEE HAS CATEGOR ICALLY STATED THAT IN THE RELEVANT AY 2008-09, THE ASSESSE E HAD ONLY APPLIED FOR IN-PRINCIPLE APPROVAL. THE MINISTRY OF SHIPPING, THE COMPETENT AUTHORITY, HAD NOT GRANTED APPROVAL FOR T HE SUBSIDY INCOME IN THE RELEVANT ASSESSMENT YEAR 2008-09. TH E ASSESSEE HAS POINTED OUT THAT IT HAD APPLIED FOR THE IN-PRIN CIPAL APPROVAL FOR THE EXPORT OF SHIPS BUT THE APPROVAL WAS NOT RECEIV ED FROM THE MINISTRY OF SHIPPING AND THEREFORE, THE RIGHT TO RE CEIVE THE SUBSIDY HAD NOT CRYSTALLIZED WITH RESPECT TO THOSE SHIPS AND HENCE, THE SUBSIDY HAD NOT ACCRUED TO THE ASSESSEE. FURTHER, THE CIT(APPEALS) OBSERVED THAT DURING THE RELEVANT AY 2008-09, THERE WAS NO EXPORT OF SHIP. THEREFORE, THE CIT(A) OBSERVED THAT AS PER THE AR, THE SUBSIDY INCOME SHOULD NOT BE CON SIDERED AS TAXABLE INCOME IN THIS AY 2008-09. FURTHER, THE CIT(APPEALS) OBSERVED THAT ON 17.12.2012, THE ASSESSEE RECEIVED THE IN- PRINCIPLE APPROVAL CERTIFICATE FOR THE EXPORT OF SH IPS AND THE - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 16 CORRESPONDING SUBSIDY INCOME FOR THE SAME WAS RECEI VED PARTLY FOR TWO SHIPS ON 31.10.2013 AMOUNTING TO 8.10 CRORES AND 7.10 CRORES AND THE SAME WAS DULY OFFERED TO TAX IN THE A.Y. 2013-14. THE CIT(APPEALS) FURTHER OBSERVED THAT ALTHOUGH THE ASSESSEE HAD NOT ACTUALLY RECEIVED THE ENTIRE SUBSI DY, IT OFFERED THE ENTIRE SUBSIDY INCOME OF 62.17 CRORES FOR WHICH IN-PRINCIPLE APPROVAL WAS RECEIVED IN AY 2013-14, WHICH WAS DONE IN LINE WITH MERCANTILE SYSTEM OF ACCOUNTING. 9.1 ACCORDING TO THE CIT(APPEALS), FROM THE ASSESSE ES SUBMISSION, THE FOLLOWING POINTS EMERGE: (I) THE APPELLANT HAD ONLY APPLIED FOR PRICE REASONABLENESS CERTIFICATE (PRC) AND IN-PRINCIPLE APPROVAL FOR THE SUBSIDY INCOME IN THE A.Y. 2008-09 . (II) AS THE IN-PRINCIPLE APPROVAL WAS NOT RECEIVED THEN, THE SAME WAS NOT OFFERED TO TAX. (III) THE APPELLANT HAS PROMPTLY DECLARED THE ENTIR E SUBSIDY INCOME IN THE RELEVANT A.Y. 2013-14 ON RECEIPT OF T HE IN- PRINCIPLE APPROVAL CERTIFICATE. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 17 (IV) THEREFORE, THE SAME SUBSIDY INCOME CANNOT BE T AXED TWICE. 9.2 ACCORDING TO THE CIT(A), THE DECISIONS OF THE S UPREME COURT WERE RELIED ON BY THE AO IN THE ASSESSMENT OR DER IN THE CASES OF APOLLO TYRES VS CIT(122 TAXMANN 562) AND M ALAYALA MANORAMA CO. LTD. VS. CIT(169 ITR 471)(SC), WHEREIN THE APEX COURT HAS DECIDED IN FAVOUR OF THE ASSESSEE ON A CO MPLETELY DIFFERENT ISSUE. THE ISSUE BEFORE THE APEX COURT I N BOTH THE DECISIONS IS WHETHER WHILE COMPUTING INCOME U/S.115 J, THE AO HAS ONLY POWER OF EXAMINING WHETHER THE BOOKS OF AC COUNTS ARE CERTIFIED BY THE AUTHORITIES UNDER COMPANIES ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH COMPANIES AC T AND THEREAFTER HE HAS LIMITED POWERS OF MAKING ADDITION S AND REDUCTIONS AS PROVIDED FOR IN EXPLANATION TO THE SA ID SECTION. FURTHER, THE CIT(A) OBSERVED THAT IN BOTH THE CASE S, THE APEX COURT HAS CONCLUDED THAT THE AO DOES NOT HAVE JURIS DICTION TO GO BEHIND NET PROFIT SHOWN IN THE P&L ACCOUNT EXCEPT T O THE EXTENT PROVIDED IN EXPLANATION TO SEC.115J. WHEREAS, THE ISSUE UNDER CONSIDERATION IS WHETHER THE SUBSIDY INCOME WHICH H AD NOT - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 18 ACCRUED TO THE ASSESSEE SHOULD BE BROUGHT TO TAX UN DER THE NORMAL PROVISIONS OF THE ACT. 9.3 THE CIT(APPEALS) AFTER GOING THROUGH THE DECISI ONS RELIED ON BY THE ASSESSEE OBSERVED THAT THESE DECISIONS AR E VERY MUCH APPLICABLE TO THE ASSESSEES CASE AND SUPPORT ITS P OINT OF VIEW. ACCORDINGLY, THE CIT(APPEALS) HELD THAT THE AOS A SSESSMENT OF SUBSIDY INCOME IN THE AY 2008-09 UNDER CONSIDERA TION WAS PREMATURE AND NOT ACCEPTABLE AND DIRECTED THE AO TO DELETE THE ADDITION OF SUBSIDY INCOME. AGAINST THIS, THE REVE NUE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE PRINCIPLE APPROVAL OF RELEASE OF SH IP BUILDING SUBSIDY FOR CONSTRUCTION OF 4 NOS. MULTIPURPOSE PL ATFORM SUPPLY VESSELS TYPE-VS 470 FOR J.HAGENACS SHIPPING AS, NO RWAY WAS APPROVED BY MINISTRY OF SHIPPING, GOVERNMENT OF IND IA VIDE THEIR LETTER DATED 17 TH DECEMBER, 2012, WHICH WAS PLACED ON RECORD AT PAGE 145 OF PAPER BOOK. BEING SO, IT CANNOT BE SAID THAT THE INCOME WAS ACCRUED TO THE ASSESSEE IN EARLIER TO T HE ASSESSMENT YEAR 2013-2014 SO AS TO BRING IT TO PRES ENT - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 19 ASSESSMENT YEARS UNDER CONSIDERATION. ACCORDINGLY, WE ARE OF THE OPINION THAT THOUGH THE ASSESSEE FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT CANNOT BE CONSIDERED AS IN COME IN THE ASSESSMENT YEARS 2008-09, 2009-10, 2011-12 & 2012-1 3. THIS GROUND RAISED IN THE APPEALS OF REVENUE IS REJECTE D. 11. THE NEXT ISSUE RAISED BY THE REVENUE IN ITA NO.2508/MDS/2016 IS THAT THE CIT(APPEALS) ERRED IN DELETING THE DISALLOWANCE OF EXPENSES ON CORPORATE DEBT RESTRUCT URING (CDR) HOLDING THAT THE SAME IS REVENUE EXPENDITURE WHEREAS THE EXPENSES ARE RELATING TO DEBENTURES AND HENCE C APITAL IN NATURE. 12. THE FACTS OF THE CASE ARE THAT THE AO HAD DISAL LOWED THE EXPENSES ON CORPORATE DEBT RESTRUCTURING STATING TH AT IT IS AN ENDURING BENEFIT IN THE FORM OF LESSENED FINANCIAL BURDEN AND THESE EXPENSES BEING CAPITAL IN NATURE CANNOT BE CL AIMED AS EXPENDITURE. AGGRIEVED, THE ASSESSEE WENT IN APPEA L BEFORE THE CIT(APPEALS). 12.1 BEFORE THE CIT(APPEALS), THE LD. AR HAS SUBMIT TED THAT - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 20 THE ASSESSEE HAD GONE FOR CORPORATE DEBT RESTRUCTUR ING OF ITS TOTAL DEBTS PAYABLE TO LENDERS (I.E. PUBLIC SECTOR BANKS) AND ACCORDINGLY HAD CONVERTED SOME PORTION OF THEIR LOA NS INTO CONVERTIBLE PREFERENCE SHARES AND RESTRUCTURING OF THE BALANCE LOAN TO AN EXTENDED TENURE. BY THIS PROCESS, THE A SSESSEE COMPANY GOT AN EXTENDED TIME LIMIT TO REPAY THEIR L OANS TO THE BANKERS IN VIEW OF THEIR FINANCIAL DIFFICULTIES APA RT FROM SEEKING SOME REDUCTION IN INTEREST RATES. THE LD. AR, FURT HER SUBMITTED THAT FOR THE ABOVE RESTRUCTURING THE ASSESSEE COMPA NY HAD ENGAGED THE SERVICES OF SBI CAPITAL MARKETS LTD. AN D INCURRED CONSULTANCY FEES, TRAVELLING EXPENSES AND ACCOMMODA TION EXPENSES. IT IS FURTHER SUBMITTED THAT SUCH EXPENS ES ARE NOT ENDURING IN NATURE AND NO ASSET IS BROUGHT INTO EXI STENCE. FURTHER, THE LD. AR SUBMITTED THAT HAD THE ASSESSEE NOT RESTRUCTURED THE DEBTS WITH THE BANKS, THE PUBLIC S ECTOR BANKS WOULD SEIZE THE ASSETS OF THE COMPANY AND FREEZE TH EIR BANK ACCOUNTS, ONLY TO AVOID SUCH SITUATIONS AND FOR SMO OTH BUSINESS OPERATIONS SUCH RESTRUCTURING WAS DONE. THEREFORE, ACCORDING TO THE LD. AR, SUCH EXPENDITURE IS REVENUE IN NATURE A ND ALLOWABLE AS DEDUCTION U/S.37 OF THE ACT. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 21 13. THE CIT(APPEALS) OBSERVED THAT THE ASSESSEE HAS OBJECTED TO THE AOS DISALLOWANCE BY STATING THAT T HE AFORESAID EXPENDITURE IS TOWARDS CONSULTANCY FEES, TRAVELLING EXPENSES AND ACCOMMODATION EXPENSES PAID FOR THE SERVICES OF SBI CAPITAL MARKETS LTD., WHICH WAS ENGAGED FOR THE ASS ESSEES CORPORATE DEBT RESTRUCTURING. THE CONTENTION OF TH E ASSESSEE IS THAT SUCH EXPENDITURE IS NOT ENDURING IN NATURE AS NO ASSET HAS BEEN BROUGHT INTO EXISTENCE. ACCORDING TO THE CIT( APPEALS), THE AO HAS NOT ELABORATED HOW THE EXPENDITURE ON CORPOR ATE DEBT RESTRUCTURING WOULD PROVIDE AN ENDURING BENEFIT TO THE ASSESSEE SO AS TO HOLD IT AS A CAPITAL EXPENDITURE. THE CIT (APPEALS) OBSERVED THAT THE ASSESSEE HAS CLARIFIED THE NATURE OF EXPENDITURE AS MENTIONED ABOVE JUSTIFYING THAT IT I S ONLY A REVENUE EXPENDITURE. THE CIT(APPEALS) RELIED ON TH E DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF CIT-I VS. GUJ ARAT STATE FERTILIZERS & CHEMICALS LTD. (358 ITR 323), WHEREIN IT IS HELD THAT THE CORPORATE DEBT RESTRUCTURING EXPENDITURE IS A R EVENUE EXPENDITURE AND IT IS NOT CAPITAL IN NATURE. ACCOR DINGLY, FOLLOWING THE AFORESAID DECISION, HE DIRECTED THE AO TO ALLOW THE SAME AS - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 22 REVENUE EXPENDITURE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE CAME FOR CONSIDERATION BEFOR E THE GUJARAT HIGH COURT IN THE CASE OF GUJARAT STATE FERTILIZERS AND CHEMICALS LTD., REPORTED IN [2013] 358 ITR 323 (GUJ ). THE GIST OF THE SAME ARE REPRODUCED HEREIN BELOW FOR READY R EFERENCE:- CDR EXPENSES TO TUNE OF RS.2.57 CRORE HAVE BE EN RIGHTLY HELD BY BOTH THE LD. CIT (A) AND TRIBUNAL AS REVENUE IN NAT URE. FOR WAIVER OF LOAN, PAYMENT HAS BEEN MADE TO FINANCIAL CONSULTANT S. SAME WAS FOR PURPOSE OF BUSINESS AND SAME WAS HELD TO BE ALLOWAB LE U/S. 37(1). HAVING HELD THE SAID AMOUNT TO BE REVENUE IN NATURE APPLYING THE DECISION OF THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD., WHEN AMOUNT HAS BEEN S PREAD OVER A PERIOD OF SIX YEARS, NO ERROR IS COMMITTED BY BOTH AUTHORITIES. ONCE EXPENDITURE IS HELD TO BE REVENUE IN NATURE INCURRE D WHOLLY AND EXCLUSIVELY FOR PURPOSE OF BUSINESS, IT CAN BE ALLO WED IN ITS ENTIRETY IN YEAR IN WHICH IT IS INCURRED. WHEN SPREADING IS DON E FOR OVER A PERIOD FOR SIX YEARS AND AS ASSESSEE HAS NO OBJECTION TO S UCH REVENUE EXPENDITURE BEING SPREAD OUT, THOUGH IT COULD HAVE INSISTED FOR THIS AMOUNT ALLOWED IN YEAR UNDER CONSIDERATION, WITH NO SUCH OBJECTION HAVING BEEN RAISED, EXPENDITURE IS HELD TO BE REVEN UE IN NATURE. ACCORDINGLY, THIS GROUND OF APPEALS OF REVENUE IS REJECTED. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 23 14.1 IN THE RESULT, THE APPEALS OF REVENUE IN ITA NOS.2008 & 2009/MDS./16 ARE PARTLY ALLOWED FOR STATISTICAL P URPOSES AND IN ITA NOS.2507, 2508 & 2509 & 2009/MDS./16 ARE DISMIS SED. CO NOS. 165 & 166/MDS/2016 15. THE COMMON ISSUE IN THESE CROSS-OBJECTIONS IS W ITH REGARD TO REOPENING OF THE ASSESSMENT. 16. THE FACTS OF THE CASE AS NARRATED IN ITA NO.200 8/MDS/2016 ARE THAT THE AO TURNED DOWN THE ASSESSEES REQUEST TO DROP THE REASSESSMENT PROCEEDINGS BY STATING THAT THE OBJECT ION RAISED BY THE ASSESSEE COMPANY WAS UNTENABLE AS MERE PRODU CTION OF BOOKS OF ACCOUNTS, BALANCE SHEET AND PROFIT AND LOS S ACCOUNT WOULD NOT NECESSARILY AMOUNT TO DISCLOSURE NECESSAR Y FOR ASSESSMENT AS PER EXPLANATION 1 TO SEC.147. THE AO OBSERVED THAT THE INCOME HAD ESCAPED ASSESSMENT WITH RESPECT TO THE DEDUCTION CLAIMED BY THE ASSESSEE IN RESPECT OF SPE CULATIVE LOSS AND CONSULTANCY FEE DUE TO NON-DEDUCTION OF TA XES AT SOURCE, AND NON-DEDUCTION OF SUBSIDY AS TAXABLE INC OME. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 24 16.1 BEFORE THE CIT(APPEALS), THE LD. AR SUBMITTED THAT ON RECEIPT OF REASONS, THE NOTICE IS ENTITLED TO FILE OBJECTIONS TO ISSUANCE OF NOTICE AND THE ASSESSING OFFICER IS BOU ND TO DISPOSE OF THE SAME BY PASSING A SPEAKING ORDER. ACCORDIN G TO THE LD. AR, THE AO HAD NOT PASSED A SPEAKING ORDER AND DIRE CTLY PASSED THE ASSESSMENT ORDER IN THESE CIRCUMSTANCES, THE RE- OPENING IS INVALID AND BAD IN LAW IN VIEW OF THE DE CISION IN GKN DRIVESHAFTS (INDIA) LTD. (259 ITR 12) . THE LD. AR , FURTHER SUBMITTED THAT THE POWER TO REOPEN AN ASSESSMENT IS CONDITIONAL ON THE FORMATION OF A REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. THE POWER IS NOT AK IN TO A REVIEW. THE EXISTENCE OF TANGIBLE MATERIAL IS NE CESSARY TO ENSURE AGAINST AN ARBITRARY EXERCISE OF POWER. A CCORDING TO THE LD. AR, ALL THE MATERIALS WERE SUBMITTED BEFORE THE AO, AT THE TIME OF SCRUTINY ASSESSMENT U/S.143(3) OF THE ACT A ND THE AO AFTER GOING THROUGH THE SAID MATERIAL ACCEPTED IT. THERE ARE NO TANGIBLE MATERIALS WITH PRESENT AO TO REOPEN THE AS SESSMENT FOR THE AY 2008-09. ACCORDING TO THE LD. AR, EVEN ON T HE REASONS RECORDED, THERE IS NO MENTION THAT THE AO HAD GOT TANGIBLE - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 25 MATERIAL TO EXERCISE HIS POWER TO REOPEN THE CONCL UDED ASSESSMENT AND HENCE, THE PRESENT NOTICE ISSUED TO REOPEN THE ASSESSMENT. THEREFORE, THE PRESENT NOTICE ISSUED U /S.148 OF THE ACT, IS TOTALLY WITHOUT JURISDICTION. 16.2 FURTHER, THE LD. AR, RELIED ON THE FOLLOWING C ASE LAWS TO ESTABLISH THAT CHANGE OF OPINION IS NOT PERMISSIBLE IN LAW AND REASSESSMENT HELD TO BE INVALID : 1. SIEMENS INFORMATION SYSTEMS LTD. VS. ACIT (295 A TR 333) 2. CIT VS. KELVINATOR OF INDIA LTD. ( 320 ITR 561) 3. CIT VS. USHA INTERNATIONAL LTD. (348 ITR 485) 4. CIT VS. BHANJI LAVJI (79 ITR 582)(SC) 5. SIRPUR PAPER MILLS LTD. VS. ITO (114 ITR 404)(AP ) 6. FLUORESCENT FIXTURES (P) LTD. VS. ITO (34 SOT 48 )(MUM.) 7. KAMALCHAND VS. ITO (128 ITR 290)MP) 8. CIT VS. SMITHKLINE BEECHAM CONSUMERS BRANDS LTD. (126 TAXMAN 104)(CHD.) 9. J.P.BAIPAI (HUF) VS. CIT (140 TAXMAN 31) (ALL.) 10.GIDHAR GOPAL GULATI VS. UNION OF INDIA (140 TAXM AN 312)(ALL. 11. SWETA ORGANISORS (P) LTD. VS. ACIT (118 TTJ 426 )(AHD.) - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 26 12. ASST. CIT VS. ROLTA INDIA LTD. (132 ITD 98) (MU M.)(TM) 13. CIT VS. AMITABH BACHCHAN (BOMBAY) 14. YASH RAJ FILMS P. LTD. VS. ACIT (332 ITR 428)(B OM.) 16.4 THE LD. AR, FURTHER SUBMITTED THAT THE ASSES SEE HAD MADE AN APPLICATION FOR SEEKING INFORMATION UNDER T HE RIGHT TO INFORMATION ACT, 2005, AND IT CAN BE SEEN THAT THE REOPENING WAS ON THE BASIS OF AUDIT OBJECTIONS. THE ASSESSME NT WAS REOPENED ONLY ON THE BASIS OF AUDIT OBJECTIONS. IN THIS REGARD, THE LD. AR BROUGHT TO THE NOTICE OF THE CIT (A) THA T THE SUPREME COURT IN THE CASE OF CIT VS. LUCAS TVS LTD. IN 249 ITR 306(SC) HAD HELD THAT:- APART FROM INFORMATION FURNISHED BY AUDIT PARTY, T HE AO HAD NO INFORMATION FOR REOPENING THE ASSESSMENT. N O SPECIFIC ERROR IN THE ORDER OF CIT(A) COULD BE POIN TED OUT BY THE LD. DR. HE ALSO COULD NOT CONTROVERT THE FIN DING OF THE CIT(A). THUS, REOPENING OF THE ASSESSMENT MADE ON THE BASIS OF AUDIT OBJECTION COULD NOT BE A JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) AND CANCELLE D THE REASSESSMENT ORDER. FURTHER, THE LD. AR, RELIED O N THE DECISION OF THE SUPREME COURT WHEREIN IT HAS HELD T HAT THE AO HAVING ALLOWED ASSESSEES CLAIM OF DEPRECIATION IN THE REGULAR ASSESSMENT AND REOPENED THE ASSESSMENT BASE D ON AUDIT OBJECTIONS, IT CANNOT BE SAID THAT HE HAD CONFIRMED ITS OWN OPINION THAT THE INCOME HAD ESCAPED ASSESSM ENT AND REOPENING BEING BASED ON MERE CHANGE OF OPINION , SAME WAS NOT VALID . 16.5 ACCORDING TO THE LD. AR, SINCE THE INCOME WA S NEVER - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 27 REALIZED, THE FACT OF WHICH WAS GIVEN IN THE NOTES TO ACCOUNTS AND WAS EXPLAINED TO THE AO, AT THE TIME OF ASSESSM ENT PROCEEDING AND THE VIEW OF THE ASSESSEE WAS ACCEPTE D, THEN REOPENING ON THE SAME SET OF FACTS DOES NOT WARRANT REOPENING OF THE ASSESSMENT. THEREFORE, THE LD. AR, SUBMITTE D THAT THE REOPENING OF THE COMPLETED ASSESSMENT ON THIS ISSUE IS NOTHING BUT A CHANGE OF OPINION AND THERE IS NO FRESH TAN GIBLE MATERIAL AVAILABLE WITH THE AO WARRANTING REOPENING OF ASSES SMENT WHICH IS NOT IN ACCORDANCE WITH LAW AND THE PROCEEDING IN ITIATED U/S.147 OF THE ACT BY ISSUE OF NOTICE U/S.148 OF TH E ACT IS BAD IN LAW AND NEEDS TO BE DROPPED. 17. THE CIT(APPEALS) OBSERVED THAT THE SCRUTINY ASS ESSMENT WAS REOPENED WITHIN 4 YEARS AS PER LAW. JUST BECA USE AN ASSESSMENT WAS COMPLETED U/S.143(3) OF THE ACT, IT DOES NOT MEAN THE AO HAS CONSIDERED ALL THE ISSUES AND THE R ELEVANT PROVISIONS OF THE ACT. IT IS POSSIBLE THAT SOMETI MES, THE AO MAY HAVE MISSED CERTAIN CRUCIAL POINTS LEADING TO ESCAP EMENT OF INCOME. THE CIT(APPEALS) RELIED ON THE FOLLOWING J UDGMENT IN FAVOUR OF THE REVENUE ON THE ISSUE UNDER CONSIDERAT ION : - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 28 1. PRAFUL PATEL VS. ACIT (236 ITR 832)(GUJ.) 2. VENUS INDUSTRIAL CORPORATION VS. ACIT (236 ITR 7 42)(P & H) 3. INDIA FORGE AND DROP STAMPING LTD. VS. CIT (233 ITR 112)(MAD) 17.1 FOLLOWING THE AFORESAID DECISIONS, THE CIT(AP PEALS) OBSERVED THAT THE ASSESSEES CONTENTION WITH REGARD TO THE RE- OPENING IS NOT ACCEPTABLE AND CONFIRMED THE REOPENI NG OF THE ASSESSMENT U/S.147 OF THE ACT. AGAINST THIS, THE A SSESSEE IS IN CROSS-OBJECTION BEFORE US. 17.2 THERE IS ALSO A DELAY OF 83 DAYS IN FILING T HE CROSS OBJECTIONS BY THE ASSESSEE. THE CONDONATION PETITI ONS ARE FILED BY THE ASSESSEE IN BOTH THESE ASSESSMENT YEARS WHER EIN THE ASSESSEE EXPLAINED THE DELAY IN FILING THESE CROSS OBJECTIONS AS FOLLOWS:- (A) MR.RAMANATHAN,CHIEF EXECUTIVE OFFICER OF THE P ETITIONER COMPANY, BEING THE AUTHORIZED SIGNATORY, HAS UNDERGONE EYE TREATMENT FOR VISUAL IMPROVEMENT BETWEEN 29.07.2016 TO 21.08.2016 AND WAS UNDER MEDICATION AND WAS ADVISED TO BE QUARANTINED TO PREVENT ANY DETRIMENTAL DAMAGES TO THE EYES. (B) FURTHER, THE COMPANY WAS FACING HEAVY LOSSES I N RECENT YEARS AND HENCE THE SAME IS UNDERGOING THE PROCESS OF CORPORATE DEBT RESTRUCTURING (C.D.R). HENCE, THE AUTHORISED SIGNATORY OF THE COMPANY WAS STATIONED I N BOMBAY FOR NEGOTIATIONS WITH BANK OFFICIALS IN RESP ECT OF - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 29 C.D.R. (C) FURTHER, THE AUTHORISED SIGNATORY WAS TRAVELLI NG TO DELHI FOR PURSUING THE SUBSIDY FOR SHIP-BUILDING APPROVED BY THE GOVERNMENT OF INDIA IN A.Y 2013-14. AS SEEN FROM PARA (A) ABOVE CONDONATION PETITION, T HE ASSESSEE EXPLAINED THAT THE AUTHORISED SIGNATORY OF THE COMPANY HAS UNDERGONE EYE TREATMENT FOR VISUAL IMPR OVEMENT BETWEEN 29.07.2016 TO 21.08.2016 AND WAS UNDER MEDI CATION AND WAS ADVISED TO BE QUARANTINED TO PREVENT ANY DE TRIMENTAL DAMAGES TO THE EYES. FURTHER, THE ABOVE STATEMENT O F THE ASSESSEE WAS NOT AT ALL SUPPORTED BY ANY MEDICAL CE RTIFICATE EITHER FROM THE DOCTOR OR FROM THE HOSPITAL WHERE T HE ASSESSEE HAS UNDERGONE SUCH MEDICAL TREATMENT. BEING SO, UNSUBSTANTIATED BALD CONTENTION BY THE LD.A.R, EXPL AINED THE REASONS FOR DELAY DURING THIS PERIOD 29.07.2016 TO 21.08.2016 CANNOT BE CONDONED. 17.3 FURTHER, IN PARA (B) & (C) ABOVE WHEREIN THE ASSESSEE EXPLAINED THAT THE ASSESSEE ASSESSEE WAS PRE-OCCUPI ED WITH SOME OTHER OFFICIAL WORK. HEREIN ALSO, THE ASSESSEE HAS NOT EXPLAINED THE PERIOD UNDER WHICH THE ASSESSEE HAS P RE- OCCUPIED ON OFFICIAL WORK. THUS, THE REASONS GIVEN BY THE - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 30 ASSESSEE IN PARA (B) & (C) IS ALSO UNSUPPORTED AN D THE ASSESSEE HAS NOT ESTABLISHED THE GOOD AND SUFFICIEN T REASONS TO FILE THE CROSS OBJECTIONS IN THESE TWO ASSESSMEN T YEARS BELATEDLY BEFORE THIS TRIBUNAL. FURTHER, THE DELA Y CANNOT BE CONDONED SIMPLY BECAUSE THE APPELLANTS CASE IS HAR D AND CALLS FOR SYMPATHY OR MERELY OUT OF BENEVOLENCE TO THE PA RTY SEEKING RELIEF. IN GRANTING THE INDULGENCE AND CONDONING TH E DELAY IT MUST BE PROVED BEYOND THE SHADOW OF DOUBT THAT THE APPELLANT WAS DILIGENT AND WAS NOT GUILTY OF NEGLIGENCE WHATS OEVER. THE SUFFICIENT CAUSE WITHIN THE CONTEMPLATION OF THE LI MITATION PROVISION MUST BE A CAUSE WHICH IS BEYOND THE CONTR OL OF THE PARTY INVOKING THE AID OF THE PROVISIONS. THE HONB LE SUPREME COURT IN THE CASE OF RAMLAL V. REWA COALFIELDS LTD. AIR 1962 SC 361 HAS HELD THAT THE CAUSE FOR THE DELAY IN FIL ING THE APPEAL WHICH BY DUE CARE AND ATTENTION COULD HAVE BEEN AVO IDED CANNOT BE A SUFFICIENT CAUSE WITHIN THE MEANING OF THE LIMITATION PROVISION. WHERE NO NEGLIGENCE, NOR INACTION, OR WA NT OF BONA FIDES CAN BE IMPUTED TO THE APPELLANT A LIBERAL CON STRUCTION OF THE PROVISIONS HAS TO BE MADE IN ORDER TO ADVANCE S UBSTANTIAL JUSTICE. SEEKERS OF JUSTICE MUST COME WITH CLEAN HA NDS. - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 31 17.4 IN OUR OPINION, THE DELAY WAS DUE TO GROSS NE GLIGENCE AND INACTION ON THE PART OF THE ASSESSEE. THE ASSESSEE COULD HAVE VERY WELL AVOIDED THE DELAY BY EXERCISE OF DUE CARE AND ATTENTION. IN OUR OPINION, THERE EXISTS NO SUFFICIE NT AND GOOD REASONS FOR CONDONE OF 83 DAYS OF DELAY BEFORE THE TRIBUNAL, AS THE REASONS ADVANCED BY THE ASSESSEE CANNOT BE CONSIDERED AS GOOD AND SUFFICIENT REASONS. FURTHER , IT IS NOT OUT OF PLACE TO MENTION HEREIN THAT THOUGH THE CROSS OB JECTIONS AND CONDONATION PETITIONS WERE SIGNED BY THE AUTHORISED SIGNATORY OF THE COMPANY, THE ASSESSEE HAS NOT PLACED ON RECO RD ANY RESOLUTION AUTHORISING THAT PERSON TO SIGN THE COMP ANY AND CONDONATION PETITIONS. FURTHER, AS PER SEC.140(C) O F THE ACT, IN THE CASE OF A COMPANY, THE APPEAL PAPERS, CROSS OBJ ECTIONS TO BE SIGNED BY THE MANAGING DIRECTOR THEREOF, OR WHER E FOR ANY UNAVOIDABLE REASON SUCH MANAGING DIRECTOR IS NOT AB LE TO VERIFY THE RETURN OR WHERE THERE IS NO MANAGING DIR ECTOR, BY ANY DIRECTOR THEREOF TO BE SIGNED. HOWEVER, IN THE PRE SENT CASE THE ASSESSEE IS NOT ABLE TO EXPLAIN THE REASONS FOR SIG NING THE CROSS OBJECTIONS AND CONDONATION PETITIONS BY THE AUTHORISED SIGNATORY OF THE COMPANY AND THE CIRCUMSTANCES UNDE R WHICH - - ITA 2008, 2009 & CO 165, 166/M/16 ETC . 32 THE CHIEF EXECUTIVE OFFICER HAS SIGNED THE CROSS OB JECTIONS AND CONDONATION PETITIONS. FROM THIS POINT OF VIEW ALS O, WE ARE OF THE OPINION THAT THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE NOT MAINTAINABLE. ACCORDINGLY, BOTH THE CROSS OBJE CTIONS FILED BY THE ASSESSEE ARE DISMISSED AS UN-ADMITTED. 18. TO SUM UP, THE APPEALS OF REVENUE IN ITA NOS. 2008 & 2009/MDS./16 ARE PARTLY ALLOWED FOR STATISTICAL PUR POSES AND IN ITA NOS.2507, 2508 & 2509 & 2009/MDS./16 ARE DISMIS SED AND BOTH THE CROSS OBJECTIONS BY THE ASSESSEE ARE DISMI SSED. ORDER PRONOUNCED ON 1 ST MAY, 2017 AT CHENNAI. SD/- SD/- ( ! . ' #$% ) ( &'( ) * ) ( DUVVURU RL REDDY ) (CHANDRA POOJARI) 677 897 /JUDICIAL MEMBER # 897/ACCOUNTANT MEMBER  /CHENNAI, A8' /DATED, THE 1 ST MAY, 2017. K S SUNDARAM !8#B CDE F#E / COPY TO: 1 . / APPELLANT 3. !7 !7 G ( ) / CIT(A) 5. EHI 7 CJ / DR 2. CK7 / RESPONDENT 4. !7 !7 G / CIT 6. I% L / GF