DCIT, CHENNAI V. M/s. Shree Ambika Sugars Ltd., CHENNAI

ITA 560/CHNY/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7814 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 22-09-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 29-03-2011
• Court: TRIBUNAL
• Department Lawyers: JAIRAM RAIPURA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Cost of acquisition

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ' # , $ #% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER . /ITA NOS.1469/MDS/2009, 2019/MDS/2010, 12/MDS/2011, 560/MDS/2011 & 256/MDS/2015 / ASSESSMENT YEARS: 2004-05 TO 2008-09 THE ASSISTANT COMMISSIONER M/S. SHREE AMBIKA SUGARS LTD ., OF INCOME-TAX, EL DORADO, 5 TH FLOOR, LARGE TAX PAYER UNIT/THE DY. V. 112, N.H.ROAD, CIT, LARGE PAYER UNIT-II CHENNAI 600101. ( /APPELLANT) CHENNAI 600 001. PAN AABCS 5163 J (/ RESPONDENT) . /ITA NOS. 162/MDS/2015 / ASSESSMENT YEAR : 2008-09 M/S. SHREE AMBIKA SUGARS LTD., THE ASSISTANT COMMISSIONER OF CHENNAI -600001. PAN AABCS 5163 J ( /APPELLANT) V. INCOME-TAX , LTU / THE DY. CIT, LTU-II, CHENNAI. (/ RESPONDENT) REVENUE BY : SHRI JAIRAM RAIPURA, CIT ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE !' / DATE OF HEARING : 22.09.2016 #$ !' / DATE OF PRONOUNCEMENT : 19.12.2016 - - ITA 1469/MDS/09, 162/MDS/15 ETC. 2 & / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THE APPEALS IN ITA NOS. 1469/MDS/2009, 2019/MDS/2 010, 12/MDS/2011, 560/MDS/2011 ARE FILED BY THE REVENUE FOR THE ASSESSMENT YEARS 2004-05, 2005-06, 2006-07 AND 2007 -08. THERE ARE CROSS APPEALS FOR THE ASSESSMENT YEAR 200 8-09 BY THE REVENUE IN ITA NO.256/MDS/2015 AND BY THE ASSESSEE IN ITA NO.162/MDS/2015. THEY ARE DIRECTED AGAINST DIFFERE NT ORDERS OF THE CIT(APPEALS). 2. FIRST, WE TAKE UP THE APPEAL IN ITA NO.1469/MDS/ 2009 (REVENUE) FOR AY 2004-05. 2.1 THE FIRST GROUND IS THAT THE CIT(APPEALS) ERRED IN HOLDING THAT RESTRICTION OF THE DEPRECIATION CLAIM OF THE A SSESSEE IN TERMS OF EXPLANATION 2 TO SEC.43(6) WAS NOT CALLED FOR, T HUS, DELETED THE ADDITION OF 58,66,647/-. 3. THE FACTS OF THE CASE ARE THAT CERTAIN CAPITAL ASSETS HAD BEEN ACQUIRED BY THE ASSESSEE COMPANY THROUGH T HE PROCESS OF AMALGAMATION OF ITS SUBSIDIARY COMPANIES WITH - - ITA 1469/MDS/09, 162/MDS/15 ETC. 3 IT. THE ASSESSEE COMPANY HAD CLAIMED DEPRECIATION ON THE ACTUAL COST AS PROVIDED IN RULE 5(1A) AS PROVIDED I N APPENDIX-1A. THE ASSESSEE COMPANY RELIED ON EXPLANA TION 7 TO SEC.43 OF THE ACT IN SUPPORT OF SUCH COMPUTATI ON OF THE ELIGIBLE DEPRECIATION ALLOWANCE. THE AO, ON THE OTH ER HAND, RELIED UPON EXPLANATION 2 TO SEC.43(6) OF THE ACT, WHICH STIPULATED THAT IN THE CASE OF AN AMALGAMATION THE ACTUAL COST OF A BLOCK OF ASSETS IN THE CASE OF THE AMALGA MATED COMPANY SHALL BE THE WRITTEN DOWN VALUE OF THE VALU E OF THE BLOCK OF ASSETS AS IN THE CASE OF THE AMALGAMATING COMPANY FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLO WED. THUS, BY CHANGING THE BASE FOR COMPUTATION OF DEPRE CIATION ALLOWANCE FROM THE ACTUAL COST OF ACQUISITION AS CL AIMED BY THE ASSESSEE TO THE WRITTEN DOWN VALUE OF SUCH BLOC K OF ASSETS FOR THE PERIOD UNDER CONSIDERATION, THE EXCE SS DEPRECIATION WAS COMPUTED BY THE AO AT 58,66,647/- AND THE SAME WAS DISALLOWED AND ADDED TO THE RETURNED INCOME. AGGRIEVED BY THE ORDER OF A.O., THE ASSESS EE - - ITA 1469/MDS/09, 162/MDS/15 ETC. 4 CARRIED THE APPEAL BEFORE THE LD. LEARNED COMMISSIO NER OF INCOME TAX(A). 3.1 ON APPEAL, THE LD. CIT(A) OBSERVED THAT THE AO WHILE CONCLUDING, HAS MISSED OUT THE FACT THAT THE CONCER NED ASSETS ARE POWER PLANT EQUIPMENT FOR WHICH DEPRECIATION AL LOWANCE IN TERMS OF SEC.32(1)(I) IS PERMISSIBLE AT SUCH PERCEN TAGE ON THE ACTUAL COST THEREOF TO THE ASSESSEE AS MAY BE PRESC RIBED IF SUCH ASSETS ARE OF AN UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER. SINCE SPECIF IC PROVISIONS APPLICABLE TO THE FACTS OF THE ASSESSEES CASE WOU LD OVERRIDE THE GENERAL PROVISIONS DEALT BY EXPLANATION 2 TO SEC.43 (6) OF THE ACT, RESTRICTION OF THE DEPRECIATION CLAIM IN TERMS OF E XPLANATION 2 TO SEC.43(6) WAS NOT CALLED FOR. ACCORDINGLY, THE CIT (APPEALS) ALLOWED THE APPEAL OF THE ASSESSEE ON THIS GROUND. AGAINST THIS, REVENUE IS IN APPEAL BEFORE US . 4. BEFORE US, THE LD. AR SUBMITTED THAT SPECIAL TREATMENT OF DEPRECIATION FOR THE MACHINERY IN BUSI NESS OF GENERATING ELECTRICITY TO BE CONSIDERED. ACCORDING TO HIM, AS PER SEC.32(I) AND RULE 5(1A), DEPRECIATION IS TO BE CO MPUTED ON THE ACTUAL COST ON A STRAIGHT LINE BASIS. FURTHER, THE LD.A.R SUBMITTED - - ITA 1469/MDS/09, 162/MDS/15 ETC. 5 THAT IT DOES NOT FORM PART OF ANY BLOCK ASSETS U/S. 32(II) OF THE ACT. HE DREW OUT ATTENTION TO THE PROVISION OF SECTION-4 1(2) OF THE ACT WHICH PRESCRIBES THE METHOD OF COMPUTATION OF DEPRE CIATION ON ASSETS ACQUIRED ON MERGER OF ELECTRICITY GENERATING MACHINERY. ACCORDING TO HIM, EXPLANATION-2 TO SEC.43(6) APPLIE S TO ONLY TRANSFER OF BLOCK ASSETS. EXPLANATION-7 TO SEC.43( 1) DEALS WITH THE COST OF ACQUISITION ON AMALGAMATION. 4.1 ON THE OTHER HAND, LD.D.R RELIED ON EXPLANATIO N-2 TO SEC.43(6) OF THE ACT. ACCORDING TO HIM, AS PER THIS EXPLANATION, THE IN CASE OF AN AMALGAMATION THE ACTUAL COST OF A BLOCK OF ASSETS IN CASE OF A THE AMALGAMATED COMPANY SHALL B E THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AS IN THE CASE OF THE AMALGAMATING COMPANY FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUA LLY ALLOWED, AS SUCH THERE IS AN EXCESS DEPRECIATION CLAIMED BY THE ASSESSEE AT ` 58,66,647/-. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, ASSESSEE-COMPANY ACQUIRED CERTAIN FIXED ASSETS FROM ITS SUBSIDIARY COMPANY THROUGH AMALGAMA TION, WHICH INCLUDES CERTAIN POWER PLANT EQUIPMENTS. IN CASE OF - - ITA 1469/MDS/09, 162/MDS/15 ETC. 6 POWER PLANT EQUIPMENTS, DEPRECIATION TO BE CONSIDER ED IN TERMS OF SEC.32(1)(I) OF THE ACT, WHICH PRESCRIBES DEPREC IATION AT CERTAIN PERCENTAGE ON ACTUAL COST THEREOF, IN RESPECT OF U NDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTIO N OF POWER. THE AO APPLIES EXPLANATION-2 TO SEC.43(6) OF THE AC T. THIS IS A GENERAL PROVISION. THERE IS A SPECIFIC PROVISION IN RESPECT OF ASSESSEE ENGAGED IN GENERATION OR GENERATION AND D ISTRIBUTION OF POWER, I.E EXPLANATION-7 TO SEC.43(1) READ WITH RULE-5(1A) OF THE INCOME TAX RULES. BEING SO, LD.CIT(A) DIRECTE D THE AO TO APPLY EXPLANATION-7 TO SEC.43(6) OF THE ACT TO GRA NT DEPRECIATION ON ACTUAL COST TO ASSESSEE AND WE DO NOT FIND ANY INFIRMITY IN APPLYING THIS PROVISIONS TO THIS SECTI ON AND RULE-5(1A) GIVING OPTION TO THE ASSESSEE TO ADOPT ACTUAL COST TO CLAIM THE DEPRECIATION ON THE AMALGAMATION. ACCORDINGLY, WE CONFIRM THE ORDER OF THE LD.CIT(A) AND DISMISS THE GROUND TAKEN BY THE REVENUE. 6. THE NEXT GROUND IS THAT THE CIT(APPEALS) ERRED I N HOLDING THAT IT CANNOT BE SAID THAT ANY RECEIPT OR BENEFIT HAD ACCRUED TO THE ASSESSEE COMPANY ON ACCOUNT OF REDUC TION OF FACE VALUE OF EQUITY SHARES FROM 10 EACH TO 2.50 EACH, - - ITA 1469/MDS/09, 162/MDS/15 ETC. 7 AS UNDERSTOOD BY SEC.28(IV) OF THE ACT, THUS, DELET ING THE ADDITION OF 74.27 CRORES. 7. THE FACTS OF THE CASE ARE THAT THROUGH A SCHEME OF ARRANGEMENT BETWEEN SHREE AMBIKA SUGARS LTD., THE ASSESSEE COMPANY, AND SUPREME RENEWABLE ENERGY LTD. AND AURO ENERGY LTD., TWO OF ITS SUBSIDIARIES, APPR OVED BY THE MADRAS HIGH COURT, THE FACE VALUE OF EQUITY SHA RES HELD BY THE RESPECTIVE SHAREHOLDERS WAS REDUCED FROM 10 EACH TO 2.50 EACH. SUCH REDUCTION HAD BEEN EFFECTED BY CANCELLATION OF PAID-UP EQUITY SHARE CAPITAL OF THE FACE VALUE OF 7.50 PER EQUITY SHARE AND THE RESULTING BALANCE OF 74,27,37,750/- WAS UTILISED BY ADJUSTING AGAINST DE BIT BALANCE IN THE PROFIT AND LOSS ACCOUNT, UNAMORTIZED BALANCES OF MISCELLANEOUS EXPENDITURE, AND BY TRANS FER TO REVALUATION RESERVE AND GENERAL RESERVE. 7.1 AFTER CONSIDERING THE IMPLICATION OF THE ACCOUN TING ENTRIES MADE, THE AO OBSERVED THAT RESPECTIVE SHAREHOLDERS HAD AGREED FOR REDUCTION OF THE VALUE OF THEIR SHARE CAPITAL WHICH HAD, IN TURN, RESULTED IN A GAI N OF 7.50 - - ITA 1469/MDS/09, 162/MDS/15 ETC. 8 PER SHARE TO THE ASSESSEE COMPANY. AS A RESULT OF SUCH REDUCTION OF SHARE CAPITAL, THE ASSESSEE COMPANYS LIABILITY GOT REDUCED BY 74.27 CRORES AND ITS ASSETS GOT ENHANCED TO THAT EXTENT. FOR THE SURRENDER OF A PORTION OF THE SHARE CAPITAL BY THE SHAREHOLDERS THE ASSESSEE COMPANY HA D NOT PAID ANYTHING IN RETURN TO SUCH SHAREHOLDERS. THER EFORE, THE ASSESSEE COMPANY HAD DERIVED A BENEFIT IN THE C OURSE OF RUNNING ITS BUSINESS WHICH WAS TAXABLE IN TERMS OF SEC.28(IV) OF THE ACT. 7.2 THE ASSESSEE COMPANY IN THE COURSE OF APPELLATE PROCEEDINGS HAS CONTENDED THAT BY REDUCTION OF SHAR E CAPITAL NO BENEFIT ACCRUED TO THE ASSESSEE COMPANY AND THAT THERE WAS NO REDUCTION OF LIABILITY OF THE ASS ESSEE COMPANY TO ITS SHAREHOLDERS, AS THE PAID-UP VALUE O F THE SHARES REPRESENTED ONLY THE AMOUNT SUBSCRIBED BY TH E SHAREHOLDERS AND DOES NOT REPRESENT ANY LIABILITY O F THE ASSESSEE COMPANY. 7.3 THE RELEVANT ACCOUNTING ENTRIES MADE WERE IN PURSUANCE OF A DECISION OF THE MADRAS HIGH COURT. IT IS A - - ITA 1469/MDS/09, 162/MDS/15 ETC. 9 BASIC FACT THAT ACCUMULATED LOSSES REPRESENT ERODED CAPITAL. HENCE, INSTEAD OF SHOWING THE FULL CAPITA L ON ONE SIDE AND ACCUMULATED LOSSES ON THE OTHER SIDE OF TH E BALANCE SHEET, WHAT THE ASSESSEE COMPANY DID WAS TO ADJUST THE ACCUMULATED LOSSES AGAINST THE SHARE CAP ITAL. THIS WAS ONLY AN ADJUSTMENT ENTRY. IT DOES NOT AFF ECT THE ASSETS, LIABILITIES, NET WORTH OR THE VALUE OF SHAR ES OR THE RIGHTS OF THE SHAREHOLDERS. AGAIN, THE SHARE CAPIT AL WAS REDUCED AND A CORRESPONDING INCREASE HAS BEEN REFLE CTED IN THE RESERVES. BOTH SHARE CAPITAL AND RESERVES A PPEAL UNDER THE HEAD LIABILITIES IN THE BALANCE SHEET. REDUCING ONE AND INCREASING THE OTHER HAS NO EFFECT ON THE O VERALL SUM OF LIABILITIES REFLECTED IN THE BALANCE SHEET. THE NUMBER OF SHAREHOLDERS AND THEIR PROPORTION OF HOLD ING HAS REMAINED THE SAME EVEN AFTER THE ADJUSTMENT ENTRIES PRESENTLY UNDER DISCUSSION. THE VOTING POWERS AND THE RIGHT TO RETURNS ARE ALSO UNCHANGED. TO PUT THE FA CTS IN THEIR PROPER PERSPECTIVE, THE ENTIRE EXERCISE WAS M EANT ONLY TO RE-DRAW THE BALANCE SHEET TO REPRESENT THE FAIR NET WORTH OF THE ASSESSEE COMPANY AFTER ADJUSTING THE ACCUMUL ATED - - ITA 1469/MDS/09, 162/MDS/15 ETC. 10 LOSSES AND THE IMPACT OF AMALGAMATION. SUCH ACCOUN TING TREATMENTS REPRESENTS ONLY A DRESSING UP OF THE B ALANCE SHEET AND HAS NO MATERIAL IMPACT ON THE NET WORTH O F THE ASSESSEE COMPANY OR ITS RIGHTS AND OBLIGATIONS TOWA RDS ITS SHAREHOLDERS. MERE ACCOUNTING ENTRIES PASSED, BY THEMSELVES; DO NOT CREATE A BENEFIT OR AN INCOME CHARGEABLE TO TAX. THEREFORE, ACCORDING TO THE CIT (A) ANY RECEIPT OR BENEFIT ACCRUED TO THE ASSESSEE COMPANY AS UNDERSTOOD BY THE PROVISIONS OF SEC.28(IV) OF THE A CT AND ASSESSMENT OF SUCH REDUCTION IN SHARE CAPITAL IS NO T JUSTIFIED. ACCORDINGLY, LD. LEARNED COMMISSIONER O F INCOME TAX(A) ALLOWED THIS GROUND OF APPEAL. AGGRI EVED, THE REVENUE IS IN APPEAL BEFORE US. THE LD. A.R PL ACED RELIANCE IN THE FOLLOWING CASES:- I) IN THE CASE OF BENETT COLEMAN & CO.LTD., IN 133 ITR 1 (MUM SB) II) IN THE CASE OF QUINTEGRA SOLUTIONS P LTD VS. IT O IN 148 TTJ 471(CHENNAI) III) IN THE CASE OF LEARNED COMMISSIONER OF INCOME TAX VS. TVS MOTOR LTD IN 128 ITD 47 (CHENNAI) IV) IN THE CASE OF LEARNED COMMISSIONER OF INCOME T AX VS. G.NARASIMHAN IN 236 ITR 327 SC V) IN THE CASE OF BHAVANGA BONE & FERTILIZERS CO. I N 166 ITR 316(GUJ.) - - ITA 1469/MDS/09, 162/MDS/15 ETC. 11 VI) IN THE CASE OF LEARNED COMMISSIONER OF INCOME T AX VS. GENERAL INDUSTRIAL SOCIETY LTD. IN 261 ITR 01 (CALC UTTA) VII) IN THE CASE OF ELSCOPE P LTD. VS. LEARNED COMM ISSIONER OF INCOME TAX IN 313 ITR 293(GUJ.) VIII) IN THE CASE OF MAHINDRA & MAHINDRA LTD VS. LE ARNED COMMISSIONER OF INCOME TAX IN 262 ITR 501(BOM.) IX) IN THE CASE OF LEARNED COMMISSIONER OF INCOME T AX VS. CHETAN CHEMICALS IN 267 ITR 770(GUJ.) 7.4 THE LD.D.R SUBMITTED THAT AS PER SCHEME OF ARRANGEMENT, THE ASSESSEE WHO HAD SHARE CAPITAL WOR TH OF ` 99,03,17,000/- WAS REDUCED TO ` 24,75,79,250/-, IN OTHER WORDS ` 9,90,31,700/- SHARES OF ` 10.00 EACH REDUCED TO SHARE OF ` 2.50/-. THUS, THE ASSESSEE GOT THE BENEFIT OF ` 74,27,37,750/-, WHICH IS TO BE CONSIDERED AS BUSINE SS PROFIT U/S.28(IV) OF THE ACT. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. AS SEEN FROM THE FACTS OF THE CASE, THER E IS A REDUCTION OF SHARE CAPITAL AND THERE IS NO DISTRIBU TION OF ASSETS FOR THE BENEFIT OF ANY PERSON. THE RIGHT OF SHARE H OLDERS AS WELL AS THE ASSESSEE COMPANY CONTINUED TO BE THE SAME AN D THIS IS ONLY A NOTIONAL IN NATURE. BEING SO, LOSS/PROFIT A RISING OF - - ITA 1469/MDS/09, 162/MDS/15 ETC. 12 REDUCTION IN SHARE CAPITAL CANNOT BE SUBJECT TO ANY TAXATION EITHER SEC.28(IV) OF THE ACT, OR U/S.45 R.W.S.48 OF THE AC T AS BEING ONLY NOTIONAL LOSS. FURTHER, SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF B ENETT COLEMAN & CO. LTD IN 133 ITR 1 (MUM.SB) WHEREIN HEL D THAT DEDUCTION IN SHARE CAPITAL IS ONLY A NOTIONAL PROFIT/LOSS. IT CANNOT BE SUBJECT TO THE PROVISIONS OF THE INCOM E TAX ACT, 1961. FOLLOWING THE SAME, WE ARE OF THE OPINI ON THAT LD. COMMISSIONER OF INCOME TAX(A) IS JUSTIFIED IN H OLDING THAT THERE IS NO GAIN TO THE ASSESSEE IN TERMS OF S EC.28(IV) OF THE ACT ON REDUCTION OF SHARE CAPITAL. THIS GROU ND OF APPEAL OF THE REVENUE IS DISMISSED. 9. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN HOLD ING THAT THE AOS ACTION WAS NOT CORRECT WHILE DISALLOW ING SET OFF OF BOOK LOSS OF EARLIER YEARS OF 18.27 CRORES ON THE GROUND THAT ENTIRE BOOK LOSS AS ON 31.3.2003 WAS WI PED OUT BY ADJUSTMENT AGAINST RECONSTRUCTION RESERVE GENERA TED BY REVALUATION OF ASSETS AND REDUCTION OF SHARE CAPITA L. - - ITA 1469/MDS/09, 162/MDS/15 ETC. 13 10. THE FACTS OF THE CASE ARE THAT IN THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE HAD FILED A LET TER STATING THAT DURING THE PERIOD RELEVANT TO THE IMME DIATELY PRECEDING ASSESSMENT YEAR INTEREST OF 6.37 CRORES HAD BEEN CONVERTED INTO A TERM LOAN AND IF THE SAME WAS DISALLOWED IN THE ASSESSMENT FOR THAT PERIOD, THEN THE INTEREST PAID OUT OF THE ABOVE AMOUNT FOR THE PERIO D UNDER CONSIDERATION AMOUNTING TO 79,62,062/- MAY BE ALLOWED. THE AO HAD NOT PERMITTED SUCH DEDUCTION AS NO SUCH DISALLOWANCE HAD BEEN MADE FOR THE PRECEDING ASSESS MENT YEAR UP TO THE DATE OF THE ASSESSMENT ORDER UNDER CONSIDERATION. THE ASSESSEE COMPANY HAS CONTENDED BEFORE THE CIT(A) THAT INTEREST CONVERTED INTO LOAN WAS DISALLOWED FOR THE PRECEDING ASSESSMENT YEAR AND THEREFORE, CLAIM OF INTEREST ON SUCH PART OF THE LO AN SHOULD BE ALLOWED FOR THE PERIOD UNDER CONSIDERATION. THE RELEVANT FACTS ARE NOT AVAILABLE WITH THE CIT(A). THEREFORE , THE CIT(A) DIRECTED THE AO TO VERIFY IF INTEREST CONVER TED INTO TERM LOAN IN THE PRECEDING ASSESSMENT YEAR WAS DISA LLOWED - - ITA 1469/MDS/09, 162/MDS/15 ETC. 14 OR NOT AND CARRY OUT THE CONSEQUENTIAL EFFECT FOR T HE PERIOD UNDER CONSIDERATION AFTER SUCH VERIFICATION. 10.1 IN THE COMPUTATION OF BOOK PROFITS CHARGEABLE TO TAX UNDER SEC.115JB OF THE ACT, THE ASSESSEE IN ITS RET URN OF INCOME HAD CLAIMED SET OFF OF BROUGHT FORWARD LOSSE S OF 18.27 CRORES. THE AO NOTED THAT THE ASSESSEE COMPA NY AS A RESULT OF REVALUATION OF THE ASSETS AND REDUCT ION OF SHARE CAPITAL HAD GENERATED A RECONSTRUCTION RESERV E OF 142.57 CRORES. OUT OF SUCH RECONSTRUCTION RESERVE THE DEBIT BALANCE IN THE PROFIT AND LOSS ACCOUNT HAD BE EN ADJUSTED AND CONSEQUENTIALLY THE ENTIRE BOOK LOSS H AD BEEN WIPED OUT AS ON 31.3.2003. ACCORDINGLY, NO BOOK LO SS BROUGHT FORWARD FROM EARLIER YEARS WAS AVAILABLE TO THE ASSESSEE FOR SET OFF AGAINST THE BOOK PROFITS OF TH E PERIOD UNDER CONSIDERATION AS ON THE DATE OF DRAWING UP OF THE BALANCE SHEET. 10.2 BEFORE THE CIT(A), THE ASSESSEE COMPANY HAS RE LIED ON THE DECISION OF THIS TRIBUNAL, HYDERABAD B BEN CH IN ITA NO.442/HYD/2001 DATED 27.6.2008 IN THE CASE OF DCIT , - - ITA 1469/MDS/09, 162/MDS/15 ETC. 15 CENTRAL CIRCLE-1, HYDERABAD VS. RAASI CEMENT LIMIT ED, WHEREIN IT WAS HELD THAT : IN FACT, IT IS MERELY A MATTER OF PRESENTATION PRESCRIBED BY SCHEDULE VI OF THE COMPANIES ACT TO THE EFFECT THAT THE DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT IS TO BE SHOWN AFTER DEDUCTION OF UNCOMMITTED RESERVES, IF ANY. THIS DOES NOT MEAN THAT THE DEBIT BALANCE IS WRITTEN OFF OR ADJUSTED AGAINST THE RESERVES. THE DEBIT BALANCE REMAINS AS IT IS, IT HAS ONLY TO BE SHOWN IN THE BALANCE SHEET NET OF GENERAL RESERVE. THIS BEING THE CASE, THE DEBIT BALANCE OF RCII AND TPML (SUBSIDIARIES WHICH HAD BEEN MERGED WITH THE ASSESSEE COMPANY AND HENCE AS PER CLAUSE (III) OF THE EXPLANATION TO SECTION 115 JA, THE SAME WILL HAVE TO BE REDUCED FROM THE PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT. 10.3 ACCORDING TO THE CIT(A), THIS TRIBUNAL WAS OF THE VIEW THAT THE MANNER OF PRESENTATION OF THE STATEMENT O F AFFAIRS IN THE BALANCE SHEET DOES NOT OBLITERATE THE FACT T HAT LOSSES HAD BEEN INCURRED IN THE PRECEDING YEARS. SUCH LOS SES, IF THEY HAD BEEN INCURRED AND COMPUTED, WOULD BE AVAIL ABLE FOR CARRYING FORWARD TO THE SUBSEQUENT ASSESSMENT Y EAR AND WOULD BE AVAILABLE FOR SET OFF IN SPITE OF BEIN G SHOWN IN THE BALANCE SHEET AS A REDUCTION FROM THE GENERAL O R UNCOMMITTED RESERVES. MANNER OF PRESENTATION CANNO T CHANGE THE FACT OF LOSS HAVING BEEN INCURRED. THE - - ITA 1469/MDS/09, 162/MDS/15 ETC. 16 CIT(APPEALS) OBSERVED THAT THE LOSSES QUANTIFIED IN THE PRECEDING YEAR WOULD BE AVAILABLE FOR SET OFF AGAIN ST THE BOOK PROFITS OF THE PERIOD UNDER CONSIDERATION IN T ERMS OF EXPLANATION (III) TO SEC.115JB OF THE ACT AND MERE ACCOUNTING ENTRIES CANNOT ERASE THE FACT THAT LOSSE S HAD BEEN INCURRED IN THE PRECEDING YEARS AND WERE PERMI TTED TO BE CARRIED FORWARD. ACCORDING TO THE CIT(A), THE AO S ACTION IN DENYING SUCH SET OFF FOR THE PERIOD UNDER CONSID ERATION WAS NOT CORRECT IN VIEW OF THE DECISION OF THIS TRI BUNAL, HYDERABAD BENCH CITED SUPRA AND ALLOWED THE APPEAL OF THE ASSESSEE ON THIS GROUND. AGAINST THIS, THE REV ENUE IS IN APPEAL BEFORE US. 11. THE LD. D.R SUBMITTED THAT BOOK LOSS AVAILABLE WITH THE ASSESSEE TO SET OFF WITH THE PRESENT ASSESSMENT YEARS BOOK PROFIT AND THERE IS NO QUESTION OF CARRIED FOR WARD OF SUCH LOSS IN THE ASSESSMENT YEAR UNDER CONSIDERATIO N. 11.1 ON THE OTHER HAND, LD. A.R SUBMITTED THAT AS ON 31.03.2003, THERE WAS A LOSS AND THIS LOSS HAS BEEN IN - - ITA 1469/MDS/09, 162/MDS/15 ETC. 17 BROUGHT FORWARD AND SUCH BROUGHT FORWARD LOSSES HAS BEEN CORRECTLY SET OFF AND ACCORDINGLY HE RELIED ON THE FOLLOWING JUDGEMENTS:- I) IN THE CASE OF SUMI MATHERSON INNOVATIVE ENGG. I N 336 ITR 321(DEL.) II) IN THE CASE OF PEICO ELECTRONICS & ELECTRICAL L TD. IN 339 ITR 596(KOL.) III) IN THE CASE OF DCIT VS. BECK INDIA LTD IN 26 S OT 141 (BOM.) IV) IN THE CASE OF RANGNATHAN INDUSTRIES ORDER IN I TA NO.2434/CHEN/04 V) IN THE CASE OF RAASI CEMENTS ORDER IN INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') NO.442/CHEN/01 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. ACCORDING TO THE AO, THE ASSESSEE COMPAN Y HAS GENERATED RECONSTRUCTION RESERVE OF ` 142.57 CRORES AND OUT OF THIS RECONSTRUCTION RESERVE, THE LOSS IN P & L A/C TO BE ADJUSTED, THUS AS ON 31.03.2003, THERE WAS NO BROUGHT FORWARD LOSS TO SET OFF IN THE CURRENT ASSESSMENT YEAR. IN OUR OPINION , THIS METHODOLOGY FOLLOWED BY THE AO IS NOT PROPER WHILE COMPUTING THE BOOK PROFIT UNDER EXPLANATION (III) TO SEC.115JB OF THE ACT, BROUGHT FORWARD LOSS ON THE LAST DATE OF THE IMMEDI ATELY PRECEDING YEAR, WHICH IS TO BE BROUGHT FORWARD TO T HE - - ITA 1469/MDS/09, 162/MDS/15 ETC. 18 FINANCIAL YEAR IN QUESTION IS TO BE REDUCED; WHAT HAPPENS DURING THE COURSE OF ASSESSEE IS NOT RELEVANT. THE REFORE, LD. COMMISSIONER OF INCOME TAX(A) IS JUSTIFIED IN D ELETING THAT THE A.O TAKING SUCH SET OFF FOR THE PERIOD UND ER CONSIDERATION WAS NOT CORRECT. HENCE, THE SAME IS CONFIRMED AND THE GROUND TAKEN BY THE REVENUE STAND S DISMISSED. 13. NOW, WE TAKE UP THE CROSS APPEALS IN ITA NOS.162/MDS./15 (ASSESSEES APPEAL) & 256/MDS./15 (REVENUES APPEALS) 14. THE FIRST COMMON GROUND IN THESE APPEALS IS THA T THE CIT(APPEALS), LTU ERRED IN UPHOLDING THE DISALLOWAN CE OF 26,00,376/- MADE BY THE AO UNDER SEC.14A R.W.R. 8D( 2)(III) OF THE ACT. 15. THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE ASSESSEE HAS CLAIMED EXEMPTION OF DIVIDEND INCO ME OF 1,53,203 AS EXEMPT FROM TAX. THE AO ASKED THE ASSESSEE AS TO HOW MUCH EXPENSES HAVE BEEN DEBITED TO - - ITA 1469/MDS/09, 162/MDS/15 ETC. 19 PROFIT AND LOSS ACCOUNT ON ACCOUNT OF EARNING OF TH IS INCOME AND AS TO WHY THE PROVISIONS OF SEC.14A OF THE ACT R.W. RULE 8D SHOULD NOT BE INVOKED. THE ASSESSEE REPLIED THA T IT HAS NOT ACCOUNTED ANY EXPENDITURE AS THERE IS NO EXPEND ITURE INCURRED IN CONNECTION WITH EARNING SUCH EXEMPTED I NCOME. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATING TO THE EXEMPTED INCOME CONSIDERING THE VOLUMINOUS TRANSACTION INVOLVED AND SUBSTANTIAL AMOUNT OF EXPE NSES DEBITED TO PROFIT AND LOSS ACCOUNT UNDER VARIOUS HE AD. THEREFORE, THE AO MADE DISALLOWANCE OF 2,37,79,071/- U/S.14A BY INVOKING RULE 8D BY RELYING ON (I) CBDT INSTRUCTION IN F.NO.173/172/2008-ITA-I DATED 4.2.20 09, (II) DECISION OF THIS TRIBUNAL SPECIAL BENCH, MUMBAI IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT P. LTD. FOR AY 2001 -02 VIDE ITA NO.8057/MUM/03 DATED 20.10.2008 AND THE DECISION OF THE DELHI BENCH IN THE CASE OF M/S. CHE MINVEST LTD. V. ITO (121 ITD 318). AGGRIEVED, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD. LEARNED COMMISSIONER OF I NCOME TAX(A). - - ITA 1469/MDS/09, 162/MDS/15 ETC. 20 15.1 ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE DISALLOWANCE MADE BY THE AO BY INVOKING THE PROVISI ONS OF RULE 8D(2)(II) WILL NOT SURVIVE AND HE CONFIRMED TH E DISALLOWANCE MADE BY THE AO BY INVOKING THE PROVISI ONS OF RULE 8D(2)(III) OF THE I.T.RULES. ACCORDINGLY, HE DIRECTED THE AO TO REWORK THE DISALLOWANCE AND PARTLY ALLOWED TH E GROUND OF APPEAL. AGAINST THIS, BOTH, THE ASSESSEE AND THE REVENUE IS IN APPEAL, BEFORE US. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. FOR ASSESSMENT YEAR 2008-09 RU LE-8D IS NOT APPLICABLE AS IT WAS INSERTED WITH EFFECT FR OM 24.03.2008. ACCORDINGLY, IN OUR OPINION FOR THESE ASSESSMENT YEARS WE DIRECT THE A.O TO DISALLOW 2% O F THE EXEMPTED INCOME ON PLACING RELIANCE ON THE JURISDIC TION HIGH COURT IN THE CASE OF SIMPSON & CO. LTD. V. DCI T IN TAX CASE NO.2621 OF 2006 DATED 15.10.2002. THIS GRO UND IS ALLOWED IN ASSESSEES APPEAL AND IS DISMISSED IN REVENUES APPEAL. - - ITA 1469/MDS/09, 162/MDS/15 ETC. 21 17. THE NEXT GROUND IN REVENUES APPEAL IS THAT THE CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF EX CESS DEPRECIATION MADE BY THE AO BY APPLYING THE WDV MET HOD, BY RELYING UPON THE DECISION OF HIS PREDECESSOR FOR THE A.Y. 2004-05 TO 2007-08. 18. THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT M/S. SUPREME RENEWABLE ENERGY LTD. AND M/S. AURO ENERGY LTD. WERE AMALGAMATED WITH M/S. SHREE AMBIKA SUGAR LTD. W.E.F. 01.04.2003. WHILE CLAIMING DEPRE CIATION, THE ASSESSEE CLAIMED DEPRECIATION ON THE ASSETS OF THESE COMPANIES ON STRAIGHT LINE METHOD. THE AO FURTHER OBSERVED THAT FOR EARLIER YEARS THE DEPRECIATION HA S BEEN WORKED OUT ON WDV BASIS AND FOR A.Y. 2007-08 SIMILA R STANDS WAS TAKEN BY THE AO. HOWEVER, THE ASSESSEE STATED THAT THOUGH THE AO FOR EARLIER YEARS HAVE GR ANTED DEPRECIATION ON WDV BASIS, THAT HAS BEEN CONTESTED BY THE ASSESSEE IN FURTHER APPEALS. THE ASSESSEE FURTHER STATED THAT FOR AY 2004-05, THE CIT(A) HAS ALLOWED RELIEF TO THE ASSESSEE. THE AO DID NOT ACCEPT THE REPLY AND OBSE RVED - - ITA 1469/MDS/09, 162/MDS/15 ETC. 22 THAT THE DEPARTMENT IS CONSISTENTLY TAKING THIS STA ND WHICH HAS NOT BEEN FINALLY SETTLED DOWN AND THE APPEAL IS PENDING BEFORE THE TRIBUNAL, CHENNAI AND WITH DUE RESPECT T O THE DECISION OF THE CIT(A) ON A.Y 2004-05, THE A.O WORK ED OUT THE EXCESS DEPRECIATION CLAIMED AT 4,25,71,722/-. AGGRIEVED, THE ASSESSEE CARRIED THE APPEAL BEFORE T HE LD. LEARNED COMMISSIONER OF INCOME TAX(A). 19. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE IDENTICAL ISSUE WAS ALREADY DECIDED IN FAVOUR OF TH E ASSESSEE BY HIS PREDECESSOR IN ASSESSEES OWN CASE FOR THE AY 2004-05 IN ITA NO.659/06-07 DATED 28.11.2008 AND BASED ON THE SAME DECISION, THE ISSUE WAS DECIDED I N FAVOUR OF THE ASSESSEE FOR A.YS. 2005-06 TO 2007-08 ALSO. FURTHER, THE CIT(APPEALS) OBSERVED THAT IN THE ORDE R PASSED FOR AY 2007-08 VIDE ITA NO.49/09-10/LTU(A) D ATED 19.11.2010, IT WAS HELD AS UNDER: 4.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE LD. AR. I HAVE ALSO GON E THROUGH THE DECISIONS RELIED ON BY THE AR IN THIS REGARD. I FIND THAT IDENTICAL ISSUE IN THE EARLIER YEAR - - ITA 1469/MDS/09, 162/MDS/15 ETC. 23 FOR AY 2004-05 IN ITA 659/06-07 DATED 28.11.2008 WAS DECIDED AS UNDER: 8. THE ASSESSING OFFICER IN COMING TO HIS CONCLUSION HAS MISSED OUT THE FACT THAT THE CONCERNED ASSETS ARE POWER PLANT EQUIPMENT FOR WHICH DEPRECIATION ALLOWANCE IN TERMS OF SECTION 32(1)(I) IS PERMISSIBLE AT SUCH PERCENTAGE ON THE ACTUAL COST THEREOF TO THE ASSESSEE AS MAY BE PRESCRIBED IF SUCH ASSETS ARE OF AN UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER. SPECIFIC PROVISIONS APPLICABLE TO THE FACTS OF THE ASSESSEES CASE WOULD OVERRIDE THE GENERAL PROVISIONS DEALT BY EXPLANATION 2 TO SECTION 43(6) OF THE ACT. ON THE FACTS OF THE PRESENT CASE RESTRICTION OF THE DEPRECIATION CLAIM IN TERMS OF EXPLANATION 2 TO SECTION 43(6) WAS NOT CALLED FOR AND THE SAME IS HEREBY DELETED. APPEAL FILED BY THE ASSESSEE ON THIS GROUND MAY BE TREATED AS ALLOWED. ACCORDINGLY, FOLLOWING THE ABOVE DECISION, LD. LEAR NED COMMISSIONER OF INCOME TAX(A) ALLOWED THIS GROUND F OR A.Y. 2008-09. AGAINST THIS, THE REVENUE IS IN APPE AL BEFORE US. - - ITA 1469/MDS/09, 162/MDS/15 ETC. 24 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. AS DISCUSSED IN EARLIER PARA-5, THIS GR OUND IS DECIDED IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THIS GROUN D RAISED BY THE REVENUE IS DISMISSED. 21. ITA NOS.219/MDS./2010, 12/MDS./11 & 560/MDS./1 1 /MDS/2011(REVENUES APPEAL FOR ASSESSMENT YEAR 2005 - 06, 2006-07 & 2007-08) 21.1. THE FIRST COMMON GROUND IN THESE APPEALS IS WITH REGARD TO DELETION OF ADDITION DUE TO RESTRICTING D EPRECIATION OF ASSETS ACQUIRED ON MERGER. 22. AT THE OUTSET, THE LD. A.R POINTED OUT THAT TH IS ISSUE CAME FOR CONSIDERATION IN REVENUES APPEAL IN ITA NO.1469/09 FOR THE AY 2004-05. AS DISCUSSED IN EARLIER PARA-5, THIS GROUND IS DECIDED IN FAVOUR OF THE ASS ESSEE ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE IS D ISMISSED. 23. THE NEXT GROUND IN REVENUES APPEAL IN ITA NO.560/MDS./2011 IS WITH REGARD TO DISALLOWANCE U/S .14A READ WITH RULES 8D OF INCOME TAX ACT, 1961. - - ITA 1469/MDS/09, 162/MDS/15 ETC. 25 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. ADMITTEDLY, THIS ISSUE IS COVERED BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF SIMPSON & CO. LTD. V. DCIT IN TAX CASE NO.2621 OF 2006 DATED 15.10.2002. ACCORDINGLY, WE DIRECT THE AO TO DISALLOW 2% OF EXE MPTED INCOME TOWARDS NOTIONAL EXPENDITURE INCURRED FOR TH E PURPOSE OF EARNING THIS INCOME. AS DISCUSSED IN EARLIER PARA- 16, THIS GROUND IS DISMISSED. 25. IN THE RESULT, THE ALL THE APPEALS BY THE REVE NUE ARE DISMISSED AND ALL THE APPEALS BY THE ASSESSEE ARE A LLOWED. ORDER PRONOUNCED ON 19 TH DECEMBE, 2016 AT CHENNAI. SD/- SD/- ( %. ' ) ( ( ) * %! ) (G. PAVAN KUMAR) (CHANDRA POOJARI) ; <= /JUDICIAL MEMBER >' <=/ACCOUNTANT MEMBER (>; /CHENNAI, C< /DATED, THE 19 TH DECEMBER, 2016. K S SUNDARAM <>D EF G>F / COPY TO: 1 . / APPELLANT 4. H / CIT 2. / RESPONDENT 5. FIJ K / DR 3. H () / CIT(A) 6. JL M / GF