GUJARAT ALKALIES AND CHEMICALS LIMITED, VADODARA V. DEPUTY COMMISIONER OF INCOME TAX, CIRCLE 1(1)(1), VADODARA

ITA 322/AHD/2022

AI Insights

The case involves cross-appeals by Gujarat Alkalies and Chemicals Ltd. and the Deputy Commissioner of Income Tax, Vadodara, concerning the assessment year 2010-11. The primary issues were the treatment of expenses related to the replacement of Membrane Cells and the adjustment of prior period expenses in the computation of book profits under Section 115JB of the Income Tax Act. The Tribunal examined whether the expenses should be classified as capital or revenue in nature and whether the prior period expenses were correctly adjusted in the computation of book profits for the purpose of Minimum Alternate Tax (MAT). The Tribunal's decision was influenced by precedents set in earlier years and judgments by higher courts, which favored the assessee's position.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133680 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 12-04-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 17-08-2022
• Other Referred Cases: CIT-I, Baroda vs. Gujarat Alkalies & Chemicals Ltd. (Supreme Court), Pr.CIT, Vadodara-1 vs. Gujarat Alkalies and Chemicals Ltd. (Gujarat High Court), Gujarat Alkalies & Chemicals Ltd. vs. DCIT (Cross-appeals) (ITAT A.Y 2010-11), Gujarat Alkalies and Chemicals Ltd. vs. DCIT (Cross-appeals) (ITAT A.Y 2011-12), Gujarat Alkalies and Chemicals Ltd. & DCIT (Cross-appeals) (ITAT A.Y 2012-13), ACIT vs. M/s.Gujarat Alkalies & Chemicals Ltd. (ITAT A.Y 2013-14)
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Revenue expenditure
• Section: 115JB

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘बी’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD BEFORE MRS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No. 322/Ahd/2022 /Assessment Year: 2010-11 Gujarat Alkalies and Chemicals Ltd. PO Petrochemicals Ranoli Baroda – 391 346 PAN: AAACG 8896 M V s. The Dy.CIT Circle(1)(1) Vadodara ITA No. 319/Ahd/2022 िनधा रणवष /Assessment Year: 2010-11 The Dy.CIT Circle(1)(1) Vadodara Vs. Gujarat Alkalies and Chemicals Ltd. PO Petrochemicals Ranoli Baroda – 391 346 PAN: AAACG 8896 M ी / (Appellant) / (Respondent) Assessee by : Shri Sunil Talati, AR Revenue by : Shri Sudhendu Das, CIT-DR /Da te of Hear ing : 13. 04. 202 3 /Da te of Pro noun ce men t: 1 2.0 7.2 023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: These cross-appeals preferred by the Assessee and the Revenue are against the order dated 20/06/2022 passed by the learned Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre (in short “Ld.CIT(A) NFAC”) pertaining to Assessment Year ( AY )2010-11. 2 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 2. We shall first deal with the appeal of the assessee in ITA No.322/Ahd/2022 for AY 2010-11. 3. Ground No.1 raised by the assessee is a general ground and, therefore, the same is not being dealt with us. 4. Ground No.2 reads as under:- i) The learned CIT(A), NFAC has erred in confirming the net disallowance of Rs.2,28,91,059/- (after allowing depreciation of Rs.40,39,599/-) made by Ld.AO, being expenditure incurred of replacement of Membrane Cells, treating the same as of capital in nature. The appellant submits that the replacement were carried out in the ordinary course of business and hence it is rightly claimed as revenue expenditure. ii) It is also submitted that the expenditure in question, although large in quantum, did not represent any capital outlay for acquisition of new asset but was merely replacement cost of membrane cells in company’s Baroda unit, therefore it is revenue expenditure. It be held so now and the expenditure as claimed be allowed in full. iii a) Without prejudice to the above, Claim of appellant was rightly allowed by CIT(A) in AY 2008-2009 to AY 2011-12 following the decision of Hon’ble ITAT Ahmedabad in appellant’s own case in AY 199-2000, AY 2000-2001, AY 2003-04, AY 2004-05, and ITAT decision for AY 2012-13 & 2013-14. In Recent decision of CIT(A) – 1 for AY 2012-13, the ground in respect of Disallowance of Membrane Cell has been held in favor of the appellant, trea ting such expenses as of revenue in nature. iii b) The appellant would like to draw the attention of your honor that, the Appellant in its own case the decision of Hon.Supreme Court for A.Y. 1999- 2000 SLP 33888/2015 (High Court 798/2010) and A.Y. 2003-04 SLP CC 8189/2017 (High Court 634 of 2012), wherein the identical issue was covered and the same was held in favor of Appellant. As is evident from the above, the assessee seeks relief from us on the allowance of claim of an expenditure of the nature of replacement of Membrane Cells amounting to Rs.2,28,91,059/- which has been treated by 3 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 the AO and confirmed by the Ld.CIT(A) NFAC as being in the nature of capital expenditure and the basis of seeking relief before us is that this expenditure has consistently been allowed to the assessee ,held as revenue expenditure by the ITAT, confirmed by the Hon’ble High Court and also by the Hon’ble Supreme Court, in preceding years. We have noted that this contention was raised by the assessee before the Ld.CIT(A) NFAC also as reproduced at page No.6 of the order, however without giving any cognizance to the same, the Ld.CIT(A)NFAC upheld the disallowance of impugned expenses and treated them to be capital in nature. 5. Before us, Ld.DR was unable to controvert the contention of the ld.counsel for the assessee that the issue was covered in favour of assessee by various orders of the ITAT, the Hon’ble Gujarat High Court and even the Hon’ble Apex Court in the case of the assessee itself in preceding years. The ld.counsel for the assessee placed copies of all the orders before the us as under:- Sl.No. Decision ITA No./Reported in 1. CIT-I, Baroda vs. Gujarat Alkalies & Chemicals Ltd.( Supreme Court) 798/2010 2. Pr.CIT, Vadodara-1, vs. Gujarat Alkalies and Chemicals Ltd. (Gujarat High Court) Tax Appeal No.577 of 2016 3. Gujarat Alkalies & Chemicals Ltd. vs. DCIT (Cross-appeals)( ITAT A.Y 2010- 11) ITA No.1684/2014 & 1794/Ahd/2014 4. Gujarat Alkalies and Chemicals Ltd. vs. DCIT (Cross-appeals)( ITAT A.Y 2011- 12) ITA No.688/Ahd/2015 & 937/Ahd/2015 5. Gujarat Alkalies and Chemicals Ltd. & DCIT (Cross-appeals) (ITAT A.Y 2012- 13) ITA 1455/Ahd/2016 & ITA No.1589/Ahd/2016 6. ACIT vs. M/s.Gujarat Alkalies & Chemicals Ltd.( ITAT A.Y 2013-14) ITA No.1425/Ahd/2018 4 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 In view of the same, we unhesistantingly hold that the ld.CIT(A) has grossly and unjustly erred in confirming the order for treating the expenses incurred of replacement of Membrane Cells amounting to Rs.2,28,91,059/- as capital in nature despite the assessee demonstrating before him that the issue had been decided in its favour by various judicial authorities in the preceding years. 6. Ground No.2 of appeal raised by the assessee is allowed. 7. Ground No.3 reads as under:- i) The learned CIT(A), NFAC has erred in confirming the part addition of Rs.4,63,88,745/- on account of Prior Period Expenses under the provision of Section 115JB of the Act without ignoring the fact that the said liability was crystallized and quantified during the year. ii) It is also submitted that the aforementioned liability was crystallized during the year but only accounting of the same has been booked under the head prior period expenses and shown accordingly in the annual accounts.] iii) Moreover, the appellant would like to draw attention of your honour that, it is apparent from the copies debit note produced during the Appeal proceedings that the same was received during the year and accordingly claimed during the year. iv) Without prejudice to the above, the claim of appellant was rightly allowed by CIT(A) in the appeal proceedings against the assessment order issued u/s.143(3) of the Act for the same year i.e. AY 2010-2011 where the same ground has been challenged and the same was held in favor or Appellant. The issue relates to the adjustment made to the book profits of the assessee computed in terms of provisions of Section 115JB of the IT Act for 5 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 the levy of Minimum Alternate Tax (MAT) on the same on account of prior period expenses amounting to Rs.4,63,88,745/-. 8. We have heard both the parties and gone through the orders of the authorities and have noted that the Assessing Officer had held the impugned expenses to be disallowable while computing the book profits of the assessee u/s.115JB of the Act. The Ld.CIT(A), however, held the impugned expenses cannot be treated as prior period expenses as is evident from the paragraph Nos.5.3.3.3 and 5.3.3.4 of the order of the Ld.CIT(A), which read as under: “5.3.3.3. A thoughtful consideration was given to all these arguments and reasons of addition given by Ld.A.O. in the impugned Asst.Order as well as submissions of the appellant. It is found that details and bifurcation thereof Prior period Expenses show that amount of depreciation of Rs.23,42,581 and loss on Assets demolished Rs.164377 were added back while computing the income. So they could not be added in computation of book profit. In view of this fact, this becomes a matter of verification. Ld.AO is therefore directed to verify if Book Profit computation as made by appellant includes addition of these 2 items i.e. amount of depreciation of Rs.23,42,581 and loss on Assets demolished Rs.164377 or not? If they were added by appellant in computation of profit as per normal provisions of the Act only (related to which it was given relief perhaps by CIT appeal against original assessment order) it should also be added while computing book profit. But even if they were not added; items of expenditure of prior period would have to be added to Compute Book Profits as per following discussion:- 5.3.3.4 However let us now consider the main item of PRIO PERIOD EXPENSES as was submitted by the appellant. These are as under:- Manufacturing & operating expenses Rs.4,63,88,745: 1. Debit notes raised by GIPCL due to change in billing pattern of power consumption for FY 2008-09 and 2. Debit notes raised by GSFC for raw water received during FY 2007-08 for Rs.2,40,147. Prima facie, these 2 items of exp pertaining to prior period to FY 2010- 11 i.e. FY relevant to AY under consideration viz. AY 2011-12 seem to 6 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 have crystallized during the year only and therefore are to be treated as expenses of prior period but arisen and crystallized during the year. The principle of crystallization of liability (i.e. when the amount became due and payable) is inherent in the Mercantile system of Accounting and is matching principle. This principle has been well accepted by the Courts also while allowing such claims. It is also none of the case of the Ld.AO that these expenses were not related to business of appellant company “wholly and exclusively”. However, he went on to confirm the adjustment made to the book profits of the assessee on account of the same u/s.115JB of the Act. 9. If the impugned expenses do not qualify as prior period expenses, we fail to understand how the same could be eligible for adjustment to the book profits of the assessee as being in the nature of prior period expenses. The findings of the ld.CIT(A) holding the impugned expenses to be not in the nature of prior period expenses, but confirming the adjustment made to the book profits of the assessee as being in the nature of prior period expenses, is nothing but contrary findings. Once the ld.CIT(A) has appreciated the nature of the expenses ,categorized by the assessee as prior period expenses, to be not so and categorically held so, the expenses clearly as per the findings of the Ld.CIT(A) do not qualify as prior period expenses. Therefore, there is no question for making any adjustment of the same to the book profits of the assessee by treating them as period expenses. For this reason alone, the adjustment made confirmed by the Ld.CIT(A) of alleged prior period expenses amounting to Rs.4,63,88,745/- is set aside. Ground No.3 of assessee’s appeal is allowed. 10. In effect, the appeal of the assessee in ITA No.322/Ahd/2022 for AY 2010-11 is allowed. 7 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 11. Now we take up the Revenue’s appeal in ITA No.319/Ahd/2022 for AY 2010-11, wherein the following grounds have been taken:- (1) On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) has erred in deleting the addition of Rs.4,63,56,702/- made by the Assessing Officer on account of disallowance of prior period expenses in the computation of Book Profit u/s.115JB of the I.T. Act, without appreciating the fact that the assessee has debited the amount of prior period expenses of Rs.4,63,56,702/- in the Profit & Loss Account for the year under consideration and the same is not allowable as deduction of working out the Net Profit as per Profit & Loss Account for the purpose of computation of Book Profit u/s.115JB of the I.T.Act. (2) On the facts and in the circumstances of the case and ion law, the Ld.CIT(Appeals) has erred in deleting the addition of Rs.4,63,56,702/- made by the Assessing Officer on account of disallowance of prior period expenses in the computation of Book Profit u/s.115JB of the IT Act, without appreciating the fact that the ratio laid down by the Hon’ble Kerala high Court in the case of Sree Bhagawathy Textiles Ltd. Vs. ACIT (2011) 199 Taxman 14 (Ker.) is clearly applicable in this case wherein it was held that “obviously unless the deduction made by the assessee is permissible in terms of clauses (i) to (ix) of Explanation to Section 115JA, the same is inadmissible and the assessee has no case that the prior period expenses is an item that could be deducted from the profit in terms of any of the clauses covered by Explanation to Section 115JA”. Here in the instant case, the assessee has debited the above amount of prior period expenses of Rs.4,63,56,702/- in the Profit & Loss Account for the year under consideration and the same is not allowable as deduction as per the provisions of the Companies Act and also in terms of clause (i) to (viii) of Explanation-1 to Section 115JB of the IT Act for working out the Net Profit for the purpose of computation of Book Profit u/s.115JB of the IT Act. 10. The solitary grievance as is evident from the grounds raised above is against the deletion of adjustment made to the book profits of the assessee of prior period expenses in terms of the provisions of section 115JB of the Act, but we have noted from the order of Ld.CIT(A) that he had confirmed this adjustment against which the assessee has raised ground before us in its appeal in ITA No.322/Ahd/2022 for AY 2010-11 (supra). 8 ITA No. 322/Ahd2022 & ITA No.319/Ahd/2022 Gujarat Alkalies and Chemicals Ltd. vs. DCIT (cross-appeals) AY :2010-11 In sum and substance, therefore there is no grievance of the Revenue against the deletion made in the order of Ld.CIT(A) of adjustment made to the book profits of the assessee on account of prior period expenses. The grounds raised therefore are no consequence and accordingly dismissed. As a result, Revenue’s appeal in ITA No.319/Ahd/2022 for AY 2010-11 is dismissed. 11. In effect, the appeal of the assessee is allowed, whereas the appeal of the Revenue is dismissed. Order pronounced in the open Court on 12 /07/2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad; Dated 12/07/2023 TC Nair /Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. ! / Concerned CIT 4. ! ) (/ The CIT(A)-concerned 5. $% & ' , ( ),/DR,ITAT, Ahmedabad, 6. & *+ , - /Guard file. ' / BY ORDER, //TRUE COPY// ह ज (Asstt. Registrar) ( ) ITAT, Ahmedabad 1. Date of dictation ......12.07.2023........ 1. Date on which the typed draft is placed before the Dictating Member :..... 12.07.2023...... 2. Other Member...... 3. Date on which the approved draft comes to the Sr.P.S./P.S.................... 4. Date on which the fair order is placed before the Dictating Member for pronouncement...... 5. Date on which the fair order comes back to the Sr.P.S./P.S...................12.7.23 6. Date on which the file goes to the Bench Clerk................ 12.7.23 7. Date on which the file goes to the Head Clerk....... 8. The date on which the file goes to the Assistant Registrar for signatureon the order............ 9. Date of Despatch of the Order..................