M/s Hindustan Shipyard Ltd., Visakhapatnam V. The DCIT, Circle-3(1), Visakhapatnam

ITA 676/VIZ/2004

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0113 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 4 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 1999-2000
• Appeal Filed On: 11-11-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V NAGA PRASAD CITTDR
• Keywords: Depreciation; Deemed to accrue or arise in india; Bad and doubtful debts; Set aside; Capital Gains
• Section: 234B; 145; 148

Judgement Text

PAGE 1 OF 25 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO.676 & 677/VIZAG/2004 ASSESSMENT YEAR: 1999-2000 & 2000-2001 M/S HINDUSTAN SHIPYARD LTD., VISAKHAPATNAM VS. DCIT, CIRCLE-3(1), VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO. AAACH 4275 P APPELLANT BY: SHRI GVN HARI, CA RESPONDENT BY: SHRI V NAGA PRASAD, CITT-DR ORDER PER SHRI B R BASKARAN, ACCOUNTANT MEMBER : THESE TWO APPEALS, FILED AT THE INSTANCE OF THE ASS ESSEE, ARE DIRECTED AGAINST THE ORDER PASSED BY THE LD CIT (A) -I, VISAKHAPATNAM AND THEY RELATE TO THE ASSESSMENT YEARS 1999-2000 AND 2 000-01. SINCE CERTAIN ISSUES AGITATED IN THESE TWO APPEALS ARE IDENTICAL IN NATURE AND FURTHER, THESE TWO APPEALS WERE HEARD TOGETHER; WE FIND IT C ONVENIENT TO DISPOSE OF BOTH THE APPEALS BY THIS CONSOLIDATED ORDER. 2. THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKING AND HAS OBTAINED THE PERMISSION FROM THE COMMITTEE ON DISPUTE (COD) TO F ILE THESE APPEALS AGAINST THE ORDER OF THE LD CIT (A). IN ADDITION TO THE ORIGINAL GROUNDS OF APPEAL FOR WHICH THE PERMISSION OF COD WERE OBTAINE D, THE ASSESSEE HAS ALSO FILED AN ADDITIONAL GROUND QUESTIONING THE LEV Y OF INTEREST U/S 234B OF THE ACT IN BOTH THE YEARS. IT WAS BROUGHT TO OUR N OTICE THAT THIS GROUND WAS NOT RAISED BEFORE THE LD CIT (A) AND FURTHER TH E PERMISSION OF THE COMMITTEE ON DISPUTE WAS NOT OBTAINED FOR RAISING T HIS ADDITIONAL GROUND. PAGE 2 OF 25 SINCE THE ASSESSEE HAS FAILED TO OBTAIN THE COD ON THE ADDITIONAL GROUND, WE DECLINE TO ADMIT THE ADDITIONAL GROUND AND PROCE ED TO DISPOSE OFF THE GROUNDS ORIGINALLY RAISED BEFORE US. 3. FOR THE ASSESSMENT YEAR 1999-2000, THE ASSES SEE HAS RAISED FOLLOWING TWO GROUNDS. 1. APPELLANT MOST RESPECTFULLY SUBMITS THAT THE HO NBLE COMMISSIONER OF INCOME TAX (APPEALS)-I, VISKHAPATNA M IS NOT JUSTIFIED IN CONFIRMING THE ACTION OF LEARNED A SSESSING OFFICER IN REDUCING THE PROVISIONS AMOUNTING TO RS.5,43,13,196 FROM THE NET LOSS AS PER PROFIT & LO SS ACCOUNT FOR COMPUTATION OF LIABILITY UNDER SECTION 115JAA O F THE INCOME TAX ACT. 2. APPELLANT RESPECTFULLY SUBMITS THAT THE HONBLE COMMISSIONER OF INCOME TAX (APPEALS)-I, VISAKHAPATNA M IS NOT JUSTIFIED IN CONFIRMING THE LEARNED ASSESSING O FFICER ACTION IN REDUCING THE LOANS AND INTEREST WAIVED AMOUNTING TO RS.312,68,00,000 FROM THE NET LOSS AS PER PROFIT & LOSS ACCOUNT 4. THE FACTS PERTAINING TO THE CASE ARE THAT THE ASSESSEE, A PUBLIC SECTOR UNDERTAKING, IS IN THE BUSINESS OF SHIP BUILDING/SH IP REPAIRS. IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 1999-2000 DECLARING A NET LOSS OF 10.02 CRORES. SUBSEQUENTLY, IT WAS NOTICED THAT THE GOVERNMENT OF INDIA, BY AN ORDER DATED 24.3.99, HAS WAIVED LOAN AN D INTEREST THEREON TO THE TUNE OF RS.591.13 CRORES DUE FROM THE ASSESSEE. THE ASSESSEE DID NOT INCORPORATE THE EFFECT OF WAIVER IN ITS BOOKS O F ACCOUNTS, THOUGH IT DISCLOSED THE DETAILS OF WAIVER IN ITS ANNUAL REPOR T PLACED BEFORE THE SHAREHOLDERS FOR THE FINANCIAL YEAR 1998-99. THE A SSESSING OFFICER NOTICED THAT THE ASSESSEE WOULD BE LIABLE TO PAY TAX AS PER THE PROVISIONS OF SECTION 115JA OF THE ACT, (MINIMUM ALTERNATIVE TAX) , IF THE WAIVER BENEFITS ARE INCORPORATED IN THE BOOKS OF ACCOUNTS. ACCORDI NGLY A NOTICE U/S 148 WAS ISSUED AND THE ASSESSMENT WAS REOPENED. PAGE 3 OF 25 5 WE SHALL PROCEED TO ADJUDICATE INITIALLY THE SECOND ISSUE, AS IT IS RELATED TO THE ASSESSMENT YEAR 1999-2000 ONLY. SIN CE THE COMPANY HAD INCURRED HEAVY LOSSES AND WAS FACING FINANCIAL PROB LEMS, IT PROPOSED A CAPITAL-RESTRUCTURING PLAN TO THE GOVT. OF INDIA. ACCORDINGLY BY A WAIVER ORDER DATED 24.3.1999 PASSED BY THE GOVERNMENT OF I NDIA VIDE ITS LETTER NO: SY11018134/90/HSL (VOL.III), FOLLOWING BENEFITS WE RE ACCORDED TO THE COMPANY: (AMOUNT IN CRORES) A) CONVERSION OF LOANS INTO EQUITY - RS.120.20 B) WRITE OFF OF GOVT.LOANS TO THE EXTENT OF - RS. 158.25 C) WRITE OFF OF INTEREST ON GOVT. LOANS - RS.312.68 AND GUARANTEE FEES -------------- RS.591.13 ======= HOWEVER, THE ASSESSEE DID NOT ACCOUNT FOR THESE BEN EFITS IN ITS ACCOUNTS FOR THE YEAR ENDING 31.3.1999, THOUGH THE DETAILS O F WAIVER BENEFITS WERE DISCLOSED IN THE ANNUAL REPORT OF THAT YEAR. THE AO AGREED WITH THE CONTENTION OF THE ASSESSEE THAT THE CONVERSION OF L OANS INTO EQUITY AND THE WRITE OFF OF GOVERNMENT LOANS ARE NOT LIABLE TO TAX. WITH REGARD TO THE THIRD ITEM, THE ASSESSEE, IN ITS ANNUAL REPORT, HAD STATED THAT IMPACT OF CAPITAL RESTRUCTURING WOULD BE INCORPORATED IN THE BOOKS ONLY AFTER RECEIPT OF APPROVAL OF MINIMUM ALTERNATIVE TAX EXEMPTION FR OM THE GOVERNMENT. HENCE THE ASSESSEE CONTENDED THAT THE WAIVER BENEFI TS SANCTIONED BY THE GOVT. HAS NOT REACHED FINALITY AND ACCORDINGLY IT D ID NOT INCORPORATE THE WAIVER BENEFIT IN ITS BOOKS OF ACCOUNTS. 5.1 HOWEVER, THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE. THE ASSESSEE ALSO CONTENDED THAT IT HAD PREPARED THE AC COUNTS IN ACCORDANCE WITH THE SCHEDULE VI OF THE COMPANIES ACT AND HENCE THE AO, FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT U/S 115JA, IS NOT ENTITLED TO GO BEYOND THE SAME. THE ASSESSEE IN THIS REGARD PLACED ITS RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F APOLLO TYRES VS CIT PAGE 4 OF 25 (255 ITR 703). HOWEVER, THE AO WAS OF THE VIEW THA T SINCE THE ASSESSEE HAS OMITTED TO ACCOUNT FOR ITEMS, WHICH ARE OTHERWI SE LIABLE TO TAX, THE ACCOUNTS PREPARED BY THE ASSESSEE COULD BE MODIFIED TO INCORPORATE SUCH OMISSION. ACCORDINGLY THE AO ADDED THE AMOUNT OF I NTEREST WAIVER OF RS.312.68 CRORES TO ARRIVE AT THE BOOK PROFIT FOR T HE PURPOSES OF SECTION 115JA OF THE ACT. THE LD CIT(A) CONFIRMED THE ORDE R OF THE ASSESSING OFFICER. HENCE THE ASSESSEE IS IN APPEAL BEFORE US . 6. THE LD AR ASSAILED THE ORDER OF THE LD CIT (A) O N SEVERAL GROUNDS, WHICH ARE SUMMARISED BELOW: A) THE AO DOES NOT HAVE JURISDICTION TO GO BEYOND THE PROFIT SHOWN IN THE PROFIT & LOSS A/C, WHICH HAS BEEN CERT IFIED TO BE PREPARED IN ACCORDANCE WITH PART II AND III OF CHAPTER VI OF THE COMPANIES ACT, EXCEPT TO THE EXTENT PROVIDED IN EXP LANATION TO SEC 115JA(2). THE RELIANCE WAS PLACED ON THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES L TD. VS. CIT (255 ITR 273, 174 CTR 521). B) EVEN IF THE AUDITOR HAS QUALIFIED HIS REPORT, THE A O HAS NO ONUS TO GO BEYOND THAT ACCOUNTS AND TO MAKE ADJUSTMENT. RELIANCE WAS PLACED ON THE DECISION OF ITAT MUMBAI IN THE CA SE OF GEAVES CHITRAM LTD., VS. DCIT (2006) 9 S0T 143. C) ACCORDING TO THE AO, THE INTEREST AMOUNT WAIVED AND THE INTEREST AMOUNT WRITTEN BACK BY THE ASSESSEE ARE LI ABLE TO BE TAXED U/S 41 (1) OF THE ACT. THE REMISSION OF SUCH LIABILITIES IS BROUGHT TO TAX BY A LEGAL FICTION CREATED U/S 41 (1 ) OF THE ACT, WHEREAS UNDER COMMERCIAL PRINCIPLES, REMISSION OF L IABILITY CANNOT BE CONSIDERED AS INCOME. RELIANCE WAS PLACED ON THE DECISION OF THE HYDERABAD ITAT IN THE CASE OF NCL IN DUSTRIES LTD VS. JCIT (2004) (88 ITD 150). PAGE 5 OF 25 D) EVEN IF THE AMOUNT SO WAIVED OFF OR WRITTEN BACK IS TREATED AS INCOME, THE REVENUE CANNOT BRING THE SAME WITHIN TH E PURVIEW OF SEC 115JA FOR THE REASON THAT SEC 115JA IS A SEL F CONTAINED CODE WITHOUT HAVING REGARD TO ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF THE IT ACT. RELIANCE WAS PLACED ON T HE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF AMICH AND INVESTMENT (P) LTD., VS. DCIT 2008 304 ITR 97. 7. ON THE CONTRARY, LD DR SUBMITTED THAT THE AS SESSEE IS BOUND TO ACCOUNT FOR THE WAIVER BENEFITS IN ITS BOOKS OF ACC OUNTS AS THE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT AND FURTHER IT HAS DISCLOSED THE DETAILS OF WAIVER IN THE ANNUAL REPORT. SINCE THE ASSESSEE HAS FAILED TO ACCOUNT FOR THE SAME, THE AUDITORS HAVE QUALIFIED T HEIR AUDIT REPORT IN WHICH CASE, THE ACCOUNTS CANNOT BE SAID TO BE CERTI FIED TO HAVE BEEN PREPARED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI. THE VERY FACT THAT THE AUDITORS HAVE Q UALIFIED THEIR AUDIT REPORT ONLY SHOWS THAT THE ASSESSEE DOES NOT HAVE C HOICE IN THIS REGARD. IN VIEW OF THE ABOVE, THE AO HAS THE RIGHT AND OBLIG ATION UNDER THE ACT, TO CORRECT THE MISTAKES/OMISSIONS COMMITTED BY THE ASSESSEE WHILE ARRIVING AT THE BOOK PROFIT U/S 115JA OF THE ACT. THE DECISION RENDERED BY THE HYDERABAD ITAT IN THE CASE OF NCL INDUSTRIES IS DISTINGUISHABLE ON FACTS, WHICH IS ELABORATED IN PARA 10.7 OF THE SAID ORDER. IN THAT CASE THOUGH THE TOTAL INTEREST WAIVED BY FINANCIAL INSTI TUTIONS AND BANKS WAS RS.18.67 CRORES, THE ASSESSEE HAD ACCOUNTED ONLY FO R RS.5.37 CRORES IN THE PROFIT & LOSS A/C. THE DEPARTMENT ALSO PURSUED THE MATTER WITH REGARD TO RS.5.37 CRORES ONLY. THIS MISTAKE OF THE DEPARTMENT, WHICH WAS POINTED OUT BY THE TRIBUNAL, WAS TAKEN INTO ACCOUNT WHILE TAKING THE DECISION AGAINST THE REVENUE. THE HONBLE BOMBAY HI GH COURT IN THE CASE OF CIT VS. VEEKAYLAL INVESTMENT CO (P) LTD., (2001)( 249 ITR 597) HAS HELD THAT THE CAPITAL GAIN ARISING OUT OF THE SALE OF PLANT THOUGH HAD NO PAGE 6 OF 25 COMMERCIAL PROFIT ELEMENT, HAS TO BE TAKEN INTO A/C FOR THE PURPOSE OF ARRIVING AT THE BOOK PROFIT U/S 115J OF THE ACT. T HE SAME YARDSTICK IS APPLICABLE TO THE INCOME, WHICH IS CHARGEABLE U/S 4 1(1) OF THE ACT. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SAI N PROCESSING WEAVING MILLS (P) LTD, HAS HELD THAT THE INFORMATION DISCLO SED IN THE NOTES FORMING PART OF ACCOUNTS SHOULD ALSO BE TREATED AS FORMING PART OF PROFIT AND LOSS ACCOUNT. ACCORDINGLY LD DR CONTENDED THAT, IN THE INSTANT CASE, THE ASSESSEE HAS DISCLOSED THE DETAILS OF WAIVER BENEFI TS AND HENCE THE SAME WOULD FORM PART OF THE PROFIT AND LOSS ACCOUNT. HEN CE THE AO HAS RIGHTLY CONSIDERED THE SAME FOR WORKING OUT THE BOOK PROFIT . 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. THE ASSESSEE HAS FILED A COPY OF ITS 47 TH ANNUAL REPORT PERTAINING TO THE FINANCIAL YEAR 1998-99 BEFORE US. AT POINT N O.11 UNDER THE HEAD NOTES ON ACCOUNTS THE FOLLOWING NOTE IS GIVEN: THE GOVERNMENT OF INDIA HAS APPROVED THE CAPITAL RESTRUCTING PROPOSAL OF THE COMPANY VIDE LETTER NO. SY- 11018/34/90-HSL (VOL.III) DATED 24-3-99 WHICH INCLUD ES WRITE-OFF OF G.O.I LOANS, INTEREST, GUARANTEE FEES T O THE TUNE OF RS.470.93 CRORES AND CONVERSION OF G.O.I LOA NS INTO EQUITY SHARE CAPITAL TO THE TUNE OF RS.120.20 CRORE S. THE MINISTRY ALSO INDICATED IN ITS ANNUAL REPORT 1998-9 9 VIDE CLAUSE NO.4.2.6 SUBMITTED TO PARLIAMENT THAT THE IMPACT OF CAPITAL RESTRUCTURING WOULD BE REFLECTED IN THE COM PANIES RECORDS ONLY AFTER RECEIPT OF APPROVAL OF M.A.T EXE MPTION FROM THE GOVERNMENT THE ADMINISTRATIVE MINISTRY RECOMMENDED EXEMPTION O F M.A.T. AND IT IS UNDER ACTIVE CONSIDERATION OF THE MINISTRY OF FINANCE. IN VIEW OF THE ABOVE, THE CAPITAL RESTRUCT URING EFFECT IS NOT CONSIDERED IN THE BOOKS OF ACCOUNTS. THE AUDITORS OF THE COMPANY M/S SUDHAKAR KUMAR & AS SOCIATES, VISAKHAPATNAM IN THEIR AUDIT REPORT DATED 25.8.1999 HAS QUALIFIED THEIR REPORT AT PARA 4(I), BY STATING THAT LOSSES AND LIA BILITIES ARE SUBJECT TO NON PAGE 7 OF 25 EFFECTING OF CAPITAL RESTRUCTURING AS PROVIDED BY T HE GOVT. OF INDIA. FURTHER PARAGRAPH 5 OF THE AUDITORS REPORT READS A S UNDER: 5. IN OUR OPINION AND TO THE BEST OF OUR INFORMATIO N AND ACCORDING TO THE EXPLANATION GIVEN TO US THE ACCOUNTS TOGETHE R WITH THE NOTES THEREON GIVE THE INFORMATION REQUIRED BY THE COMPAN IES ACT, 1956, IN THE MANNER SO REQUIRED AND SUBJECT TO PARA (4) ABOVE GI VE A TRUE AND FAIR VIEW A. IN THE CASE OF BALANCE SHEET OF THE COMPANYS STATE OF AFFAIRS AS AT 31.3.1999. B. IN THE CASE OF PROFIT AND LOSS ACCOUNT OF THE LOSS F OR THE YEAR ENDED ON THAT DATE. THE AUDIT REPORT IS PRINTED AT PAGES 39 TO 44 OF TH E ANNUAL REPORT. IN THIS BACKGROUND THE FIRST QUESTION THAT ARISES IN O UR MIND IS WHETHER AN ASSESSEE IS ENTITLED TO POSTPONE ACCOUNTING OF BENE FITS THAT HAS ALREADY ACCRUED TO IT AND CONSEQUENTLY THE CONSEQUENT TAX L IABILITY CAN BE POSTPONED ?. 8.1 THERE CANNOT BE ANY DISPUTE THAT THE RECOGNI TION OF AN ITEM OF INCOME DEPENDS UPON THE METHOD OF ACCOUNTING FOLLOW ED BY THE ASSESSEE. THE ASSESSEE HEREIN HAS ADOPTED MERCANTILE SYSTEM O F ACCOUNTING AND THE SAME IS ALSO MENTIONED IN ITS ACCOUNTING POLICY. AT PAGE 67 OF THE ANNUAL REPORT, THE COMPANY HAS DISCLOSED ITS INCOME RECOGN ITION POLICY, WHICH READS AS UNDER: 4. INCOME INCOME IS CONSIDERED IN THE ACCOUNTS. A. I) IN RESPECT OF SHIPS UNDER CONSIDERATION AND RETRO FIT WORKS AT LOWER OF ACCRETION IN THE VALUE OF WORK-IN - PROGRESS VIDE PARAGRAPH 2(V) OR THE AGGREGATE OF INSTALMENTS OF PRICE/GOVERNMENT ASSISTANCE THAT HAV E FALLEN DUE. II) IN RESPECT OF SHIPS DELIVERED AND RETROFIT WORKS COMPLETED DURING THE YEAR AT THE TOTAL PRICE INCLUD ING EXTRAS AND ESCALATION REALIZABLE FROM OWNERS DEDUCT ING THEREFROM INCOME ACCOUNTED FOR IN EARLIER YEARS IN ACCORDANCE WITH CLAUSE (I) ABOVE. PAGE 8 OF 25 III) FOR THE PURPOSE OF RECOGNITION OF PROFIT, WEIG HTAGE SHALL BE GIVEN TO THE FOLLOWING THREE FACTORS, WHIC H SHALL REACH A MINIMUM OF 20% INDIVIDUALLY. (A).THE PROPORTION THAT COSTS INCURRED TO DATE BEAR TO THE ESTIMATED TOTAL COSTS OF THE CONTRACT. (B) STAGE OF COMPLETION AND (C) REVENUE RECEIVED B. INCOME FROM OTHER ACTIVITIES IS ACCOUNTED FOR ON ACCRUAL BASIS. C. INCOME IS INCLUSIVE OF EXCISE DUTY, SAL ES TAX AND IS NET OF REBATES AND OTHER DEDUCTIONS UNDER THE RESPECTIVE CONTRACTS. D. CLAIMS IN RESPECT OF INSURANCE ARE ACCO UNTED FOR ON ACCEPTANCE BASIS TAKING INTO ACCOUNT THE ACCEPTANCE RECEIVED WITHIN 15 DAYS OF THE END OF THE FINANCIAL YEAR ON PERUSAL OF THE POLICY RELATING TO THE RECOGNITIO N OF INCOME, WE NOTICE THAT THE COMPANY IS RECOGNIZING INCOME THAT HAS FAL LEN DUE DURING THE YEAR IN ACCORDANCE WITH THE PRINCIPLES OF MERCANTIL E SYSTEM OF ACCOUNTING. IN THE INSTANT CASE, THERE IS NO DISPUTE WITH THE FA CT THAT THE WAIVER BENEFIT ACCORDED BY THE GOVT. OF INDIA, VIDE ITS LET TER DATED 24.3.1999, HAS ACCRUED IN THE HANDS OF THE COMPANY BY VIRTUE OF TH E LETTER DATED 24.3.1999 CITED SUPRA, I.E. DURING THE FINANCIAL YE AR RELEVANT TO THE ASSESSMENT YEAR 1999-2000. THE ASSESSEE COMPANY DI D NOT ACCOUNT FOR THE BENEFITS BECAUSE THE CONCERNED MINISTRY OF GOVE RNMENT OF INDIA, IN ITS REPORT SUBMITTED TO PARLIAMENT HAS SAID THAT THE IM PACT OF CAPITAL RESTRUCTURING WOULD BE REFLECTED IN THE COMPANYS R ECORDS ONLY AFTER RECEIPT OF APPROVAL OF M.A.T. EXEMPTION FROM THE GO VERNMENT. IN THIS CONNECTION, WE EXTRACT BELOW THE OBSERVATIONS OF LD CIT(A) IN THIS REGARD, WITH OUR APPROVAL : IN THIS CONTEXT RELIANCE IS PLACED ON THE DECISIO N OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. ACE BUILDERS PVT LTD 2 02 ITR 324, WHEREIN IT WAS HELD THAT INCOME IS HELD TO ACCRUE ONLY WHEN TH E ASSESSEE ACQUIRES A RIGHT TO RECEIVE THAT INCOME, OR IN OTHER WORDS, IN COME CAN BE SAID TO ACCRUE ON THE DATE WHEN THE DEBT BECOME DUE AND UNL ESS THE RIGHT TO PROFITS COMES INTO EXISTENCE, THERE IS NO ACCRUAL O F PROFITS. IN THE PRESENT CASE, GOVERNMENT OF INDIA HAVE ACCEPTED THE PROPOSA L FOR WAIVER OF PAGE 9 OF 25 INTEREST IN THE FINANCIAL YEAR RELEVANT TO THE ASSE SSMENT YEAR 1999-2000. THEREFORE, THE ASSESSEE HAS GOT THE RIGHT TO RECEIV E WAIVER OF INTEREST, IN THE LIGHT OF THE APPROVAL BY THE GOVERNMENT OF INDIA IN THE FINANCIAL YEAR 1998-99 ONLY. SINCE THE ASSESSEES RIGHT TO RECEIV E THE AMOUNT AROSE IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 1999-2000 ONLY, THE ASSESSING OFFICER IS RIGHT IN ASSESSING THE AMOUNT OF INTEREST WAIVED IN THE SAID ASSESSMENT YEAR. THE HONBLE SUPREME COURT IN THE CASE OF E.D.SASSOO N & CO. LTD AND OTHERS VS. CIT (1954) (26 ITR 27) HAS HELD THAT INC OME BECOMES CHARGEABLE TO TAX WHEN THE RIGHT TO RECEIVE IS ACQU IRED. UNDER SECTION 5(1)(B) OF THE ACT, THE TOTAL INCOME OF A RESIDENT ASSESSEE INCLUDES ALL INCOME, WHICH ACCRUES OR ARISES TO HIM IN INDIA DUR ING THE PREVIOUS YEAR. HENCE THE TAXABILITY OF AN ITEM OF INCOME WOULD DEP END UPON THE METHOD OF ACCOUNTING FOLLOWED BY AN ASSESSEE AND THE PROVI SIONS OF INCOME TAX ACT THAT WERE PREVAILING AT THE MATERIAL POINT OF T IME, UNLESS SPECIFIC EXEMPTION IS GIVEN TO THE ASSESSEE. IT WOULD NOT DEP END UPON THE WILL AND PLEASURE OF THE ASSESSEE OR ANY OTHER PERSON. HENC E, IN OUR OPINION, THE OBSERVATION MADE BY THE CONCERNED MINISTRY OF CANNO T TAKE AWAY THE RESPONSIBILITY OF THE ASSESSEE TO ACCOUNT FOR THE W AIVER BENEFITS NOR IT WOULD PUT A BAR ON THE ASSESSING OFFICER TO ASSESS THE SAME. 8.2 THE NEXT QUESTION THAT ARISES BEFORE US IS WHET HER THE AO IS ENTITLED TO GO BEYOND THE NET PROFIT/LOSS THAT WAS DISCLOSED IN THE ANNUAL ACCOUNTS PREPARED UNDER THE COMPANIES ACT IN THIS K IND OF SITUATION. THE ASSESSEE HAS PLACED ITS RELIANCE HEAVILY ON THE DEC ISION OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD., SUP RA. WE HAVE CAREFULLY PERUSED THE SAID DECISION. WE EXTRACT THE FOLLOWING OBSERVATIONS OF HONBLE SUPREME COURT IN THAT CASE. SUB-S (1A) OF S.115J DOES NOT EMPOWER THE AO TO EM BARK UPON A FRESH INQUIRY IN REGARD TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. THE SAID SUB-SECTI ON, AS A MATTER OF FACT, MANDATES THE COMPANY TO MAINTAIN IT S ACCOUNT IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT WHICH MANDATE, ACCORDING TO US, IS BO DILY PAGE 10 OF 25 LIFTED FROM THE COMPANIES ACT INTO THE IT ACT FOR T HE LIMITED PURPOSE OF MAKING THE SAID ACCOUNT SO MAINTAINED AS A BASIS FOR COMPUTING THE COMPANYS INCOME FOR LEVY OF INCOM E-TAX. BEYOND THAT, WE DO NOT THINK THAT THE SAID SUB-SECT ION EMPOWERS THE AUTHORITY UNDER THE IT ACT TO PROBE IN TO THE ACCOUNTS ACCEPTED BY THE AUTHORITIES UNDER THE COMP ANIES ACT. IF THE STATUTE MANDATES THAT INCOME PREPARED IN ACCORDANCE WITH THE COMPANIES ACT SHALL BE DEEMED I NCOME FOR THE PURPOSE OF S.115J OF THE ACT, THEN IT SHOUL D BE THAT INCOME WHICH IS ACCEPTABLE TO THE AUTHORITIES UNDER THE COMPANIES ACT. THERE CANNOT BE TWO INCOMES ONE FOR THE PURPOSE OF COMPANIES ACT AND ANOTHER FOR THE PURPOS E OF INCOME-TAX BOTH MAINTAINED UNDER THE SAME ACT. IF T HE LEGISLATURE INTENDED THE AO TO REASSESS THE COMPANY S INCOME, THEN IT WOULD HAVE STATED IN S.115J THAT I NCOME OF THE COMPANY AS ACCEPTED BY THE AO. IN THE ABSENCE O F THE SAME AND ON THE LANGUAGE OF S.115J, IT WILL HAVE TO HELD THAT VIEW TAKEN BY THE TRIBUNAL IS CORRECT AND THE HIGH COURT HAS ERRED IN REVERSING THE SAID VIEW OF THE TRIBUNAL. THEREFORE, WE ARE OF THE OPINION, THE AO WHILE COMPUTING THE INCOME UNDER S.115J HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIE S ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. THE AO THEREAFTER HAS THE LIMITED POWER OF MAKING INCREASES AND REDUC TIONS AS PROVIDED FOR IN THE EXPLANATION TO THE SAID SECTION . TO PUT IT DIFFERENTLY, THE AO DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFIT SHOWN IN THE P&L A/C EXCEPT T O THE EXTENT PROVIDED IN THE EXPLANATION TO S.115J A CAREFUL ANALYSIS OF THE DECISION OF THE HONBLE A PEX COURT WOULD SHOW THAT THE AO HAS ONLY THE POWER TO EXAMINE WHETHER T HE BOOKS OF ACCOUNTS ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIE S ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIE S ACT. THERE CANNOT BE ANY DISPUTE THAT THE AUTHORITY TO GIVE SUCH A CE RTIFICATE IS PRIMARILY THE STATUTORY AUDITORS OF THE COMPANY. HOWEVER, IN THE INSTANT CASE, THE STATUTORY AUDITORS HAVE GIVEN A QUALIFIED CERTIFICA TE, MORE PARTICULARLY THE NON-INCORPORATION OF WAIVER BENEFITS. THE RELEVANT PART OF THE AUDITORS PAGE 11 OF 25 REPORT IS EXTRACTED IN PARA 8 SUPRA. LD CIT(A) HA S ALSO ANALYSED THE LEGAL POSITION ON THIS ISSUE AND WE EXTRACT HEREUNDER THE OBSERVATIONS OF LD CIT(A) IN PARA 3.3.2 OF HIS ORDER WITH APPROVAL: 3.3.2. UNDER THE PROVISIONS OF SECTION 211(2) OF T HE COMPANIES ACT, IT HAS BEEN LAID DOWN THAT THE ACCOU NTS OF A COMPANY MUST GIVE TRUE AND FAIR VIEW OF THE PROFI T OF THE COMPANY. PROVISIONS OF PART II OF SCHEDULES VI TO THE COMPANIES ACT ALSO LAID DOWN THAT THE PROFIT AND LO SS ACCOUNT OF A COMPANY SHALL BE SO MADE OUT AS TO DIS CLOSE CLEARLY THE RESULTS OF THE WORKING OF THE COMPANY D URING THE PERIOD COVERED BY THE ACCOUNT. THE PROVISIONS O F PART II AND PART III OF SCHEDULE VI ARE THEREFORE, SUBSERVIENT TO THE BASIC REQUIREMENT TRUE AND FAIR VIEW OF THE PRO FITS OF THE COMPANY. THE JUDGEMENT IN THE CASE OF APPOLLO T YRES LTD LAID DOWN THAT THE ASSESSING OFFICER CANNOT DIS PUTE THE ACCOUNTS MAINTAINED IN ACCORDANCE WITH THE PROVISIO NS OF PART II AND PART III OF SCHEDULE VI OF THE COMPANIES A CT. THUS, THE POWER OF THE ASSESSING OFFICER TO DECIDE WHETHER OR NOT THE ACCOUNTS WERE PREPARED IN ACCORDANCE WIT H PART II AND PART III OF SCHEDULE VI TO COMPANIES ACT HAS NOT BEEN AFFECTED BY THE JUDGEMENT. THEREFORE, IN CASE THE ASSESSING OFFICER FOUND THE PROFIT AND LOSS ACCOUNT HAS NOT BEEN PREPARED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT AND A LSO THAT THE PROFIT AND LOSS ACCOUNT PREPARED BY THE AS SESSEE IS FRAUDULENT OR MISLEADING GIVING FIGURES WHICH ARE F OUND TO BE FALSE THE ASSESSING OFFICER IS ENTITLED TO VERIF Y AND SATISFY HIMSELF BY RECASTING THE PROFIT AND LOSS AC COUNT IF THE CIRCUMSTANCES SO REQUIRED. IN THE PRESENT CASE THE ASSESSING OFFICER CONSIDERING ALL EVENT LEADING TO CAPITAL RESTRUCTURING, HAD HELD THAT WRITE-OFF OF INTEREST HAS MATERIALIZED IN THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 1999-2000. WHILE DECIDING THE ISSUE THE ASSESSING OFFICER HAS CONSIDERED THE LETTER DATED 2 4-03- 1999 ISSUED BY THE GOVERNMENT OF INDIA CONVEYING THE APPROVAL FOR CAPITAL RESTRUCTURING. CLAUSE 2(A) PAR T II OF SCHEDULE VI TO THE COMPANIES ACT, REQUIRES DISCLOSU RE OF CREDITS OR RECEIPTS AND DEBITS OR EXPENDITURE IN RE SPECT OF NON-RECURRING TRANSACTIONS OR TRANSACTIONS OF AN EX CEPTIONAL NATURE. FURTHER CLAUSE 3(XII)(B) OF PART II OF SCHEDU LE VI TO THE COMPANIES ACT REQUIRES DISCLOSURE OF PROFIT OR LOSSES FROM SUCH TRANSACTIONS. THEREFORE, IN THE GIVEN PAGE 12 OF 25 CIRCUMSTANCES IN THE ASSESSEES CASE, APPLYING ACCO UNTING STANDARD 5(AS 5), INTEREST WAIVED BY GOVERNMENT OF INDIA VIDE APPROVAL DATED 24-03-1999 SHOULD HAVE BEEN SHO WN IN FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 1999-200 0 FOR THE PURPOSE OF COMPUTING INCOME U/S 115JA OF THE AC T. MOREOVER ACCORDING TO SUBSECTION (4) OF SECTION 115 JA ALL OTHER PROVISIONS OF THE INCOME TAX ACT ARE APPLICAB LE AND THEREFORE, THE PROVISIONS OF SECTION 145 OF INCOMETA X ACT CAN BE INVOKED FOR DETERMINING THE INCOME UNDER THE PROVISIONS OF SECTION 115JA. 8.3 THE ASSESSEE PLACED RELIANCE ON THE DECISIO N OF THE MUMBAI ITAT IN THE CASE OF GREAVES CHITRAM LTD, SUPRA TO CONTEND T HAT THE QUALIFICATION MADE IN THE REPORT OF THE AUDITORS DOES NOT CAST AN ONUS ON THE ASSESSING OFFICER TO GO BEYOND THE ACCOUNTS PREPARED BY THE A SSESSEE. WE HAVE CAREFULLY CONSIDERED THE SAID DECISION OF ITAT. IN THAT CASE THE ASSESSEE THEREIN DID NOT PROVIDE FOR GRATUITY LIABILITY AND FURTHER IT DID NOT GIVE ANY REASON FOR NOT PROVIDING THE LIABILITY. HENCE THE TRIBUNAL HELD THAT WHEN NO REASON HAS BEEN PUT FORWARD FOR NOT CHARGING P&L A/C WITH THE GRATUITY LIABILITY, THE AO HAD NO ONUS CAST UPON HIM TO GO B EYOND THE ACCOUNTS. IN THIS CASE THE ASSESSEE HAS DISCLOSED THE DETAILS OF CAPITAL RESTRUCTURING PROPOSAL AND HAS ALSO GIVEN THE REASON FOR NOT INCO RPORATING THE SAME IN THE BOOKS OF ACCOUNTS. WE HAVE ALREADY HELD THAT T HE REASON GIVEN BY THE ASSESSEE MILITATES AGAINST THE PRINCIPLES OF ME RCANTILE SYSTEM OF ACCOUNTS. HENCE THE FACTS OF THAT CASE, BEING DISTI NGUISHABLE, THE ASSESSEE COULD NOT PLACE RELIANCE ON IT. 8.4 THIS ISSUE CAN BE ADDRESSED IN ANOTHER ANGL E ALSO. IN THE INSTANT CASE, THE ASSESSEE HAS DISCLOSED THE DETAILS OF CAP ITAL RESTRUCTURING PROPOSAL IN THE NOTES ON ACCOUNTS. WHAT WOULD BE THE SIGNIFICANCE OF SUCH DISCLOSURE IN THE NOTES ON ACCOUNTS. THIS I SSUE WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SAIN PR OCESSING & WEAVING MILLS (P) LTD., SUPRA, RELIED UPON BY THE REVENUE. IN THAT CASE, THE PAGE 13 OF 25 ASSESSEE THEREIN DID NOT CHARGE THE DEPRECIATION IN THE P&L A/C AND INSTEAD DISCLOSED THE FACT ALONG WITH THE QUANTUM O F DEPRECIATION BY WAY OF NOTE TO THE ACCOUNTS. THE HONBLE DELHI HIGH COU RT CONSIDERED SECTIONS 211(6) AND CLAUSE(3) (IV) TO PART-II OF SCH.VI OF THE COMPANIES ACT IN ORDER TO ARRIVE AT ITS DECISION. SECTION 211(6) AN D CLAUSE 3(IV) OF PART-II OF SCHEDULE VI OF THE COMPANIES ACT READ AS UNDER: (6) FOR THE PURPOSE OF THIS SECTION, EXCEPT WHERE THE CONTEXT OTHERWISE REQUIRES ANY REFERENCE TO A BALANCE SHEET OR PROFIT AND LOSS ACCOUNT SHALL INCLUDE ANY NOTES THEREON OR DOCUMENTS ANNEXED THERETO GIVING INFORMATION REQUIRED BY THIS ACT AND ALLOWED BY THIS ACT TO BE GIVEN IN THE FORM OF SUCH NOTES OR DOCUMENTS. 3. THE PROFIT AND LOSS ACCOUNT SHALL SET OUT THE V ARIOUS ITEMS RELATING TO THE INCOME AND EXPENDITURE OF THE COMPA NY ARRANGED UNDER THE MOST CONVENIENT HEADS AND IN PAR TICULAR, SHALL DISCLOSE THE FOLLOWING INFORMATION IN RESPECT OF THE PERIOD COVERED BY THE ACCOUNT. (IV) THE AMOUNT PROVIDED FOR DEPRECIATION, RENE WALS OR DIMINUTION IN VALUE OF FIXED ASSETS. IF SUCH PROVISI ON IS NOT MADE BY MEANS OF A DEPRECIATION COMPUTED IN ACCORDA NCE WITH S.205(2) OF THE ACT SHALL BE DISCLOSED BY WAY OF A NOTE. AFTER CONSIDERING THESE TWO PROVISIONS THE HONBLE DELHI HIGH COURT HAS OBSERVED AS UNDER: 4.7 THUS DISCLOSURE, ACCORDING TO US, IN THE NOTES TO THE ACCOUNT IS OBLIGATORY BY VIRTUE OF THE PROVISION OF SUB-S (1A) OF S.115J OF THE ACT WHICH REQUIRES THAT EVERY ASSESSE E SHALL PREPARE P&L A/C IN ACCORDANCE WITH THE PROVISION OF PARTS II AND III OF SCH.VI OF THE COMPANIES ACT, 1956. 4.8 HAVING SAID THAT, THE ISSUE STILL REMAINS AS TO WHETHER NOTES TO ACCOUNTS FORM PART OF THE ACCOUNTS, AND WH ETHER THE FACT THAT THE CURRENT YEAR DEPRECIATION WHICH HAS N OT BEEN DEBITED TO THE P&L A/C WOULD IN ANY WAY DEPRIVE THE ASSESSEE OF ITS CLAIM FOR THE DEDUCTION FROM THE NET PROFIT IN ARRIVING AT THE FIGURE OF BOOK PROFIT FOR THE PURPOSES OF S.1 15J OF THE ACT. PAGE 14 OF 25 4.9 THE ANSWER TO THIS POSER IS FOUND IN SUB-S (6) OF S.211 OF THE COMPANIES ACT, WHICH PROVIDES THAT EXCEPT WHERE THE CONTEXT OTHERWISE REQUIRES ANY REFERENCE TO A BALANCE SHEET OR P&L A/C SHALL INCLUDE THE NOTES THEREON OR DOCUMENTS ANNEXED THERETO, GIVING INFORMATION REQUIRED TO BE GIVEN AND/OR ALLOWED TO BE GIVEN IN THE FORM OF NOTES OR DOCUMEN TS BY THE COMPANIES ACT. AS ALREADY NOTED IT IS OBLIGATORY U NDER CL.3(IV) OF PART II OF SCH.VI TO COMPANIES ACT TO GIVE INFORMAT ION WITH REGARD TO DEPRECIATION, WHICH HAS NOT BEEN PROVIDED FOR ALONG WITH THE QUANTUM OF ARREARS. ACCORDING TO US, ONCE THIS INFORMATION IS DISCLOSED IN THE NOTES TO THE ACCOUN T IT WOULD CLEARLY FALL WITHIN THE AMBIT OF THE EXPLANATION TO S.115J OF THE ACT WHICH DEFINES BOOK PROFIT TO MEAN NET PROFIT AS SHOWN IN THE P&L A/C FOR THE RELEVANT ASSESSMENT YEAR IN THE INSTANT CASE ALSO, SINCE THE DETAILS OF CAPIT AL RESTRUCTURING PROPOSAL APPROVED BY THE GOVERNMENT OF INDIA HAS BEEN DISCLOS ED IN THE NOTES OF ACCOUNTS, ANY REFERENCE MADE TO THE P&L A/C SHALL I NCLUDE SUCH NOTES ALSO. FROM THIS ANGLE ALSO, THE ASSESSING OFFICER HAS TO CONSIDER BOTH THE PROFIT AND LOSS ACCOUNT AND THE NOTES ON ACCOUNTS T O DETERMINE THE BOOK PROFIT FOR THE PURPOSE OF SECTION 115JA. 8.5 THE ASSESSEE HAS PLACED RELIANCE ON THE DEC ISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF AMICHAND INVESTMENT P LTD, SUPRA TO SUBMIT THAT THE SECTION 115JA IS A SELF CONTAINED CODE WIT HOUT HAVING REGARD TO ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF THE I NCOME TAX ACT. WE NOTICE THAT THE SAID DECISION HAS BEEN RENDERED ON SECTION 115J OF THE ACT. HOWEVER, WE ARE CONCERNED WITH SECTION 115JA, WHEREIN SUB SECTION (4) STATES AS UNDER: SAVE AS OTHERWISE PROVIDED IN THIS SECTION, ALL OT HER PROVISIONS OF THIS ACT SHALL APPLY TO EVERY ASSESSE E, BEING A COMPANY, MENTIONED IN THIS SECTION. IN VIEW OF THIS SAVING CLAUSE, IN OUR OPINION, THE S AID ARGUMENT OF THE ASSESSEE FAILS. PAGE 15 OF 25 8.6 WE ARE NOW LEFT WITH THE FINAL ARGUMENT OF THE ASSESSEE THAT THE REMISSION OF TRADING LIABILITY COULDNT BE TREATED AS INCOME UNDER COMMERCIAL PRINCIPLES. ACCORDING TO THE ASSESSEE, THE REMISSION OF TRADING LIABILITY IS SUBJECT TO TAX ONLY IN VIEW OF THE FIC TION CREATED U/S 41(1) OF THE ACT. SINCE THE BOOK PROFIT IS COMPUTED AS PER PART II AND PART III OF SCHEDULE VI OF THE COMPANIES ACT, WHICH ARE BASED O N COMMERCIAL PRINCIPLES, THE REMISSION OF LIABILITY CANNOT BE CO NSIDERED AS INCOME AND HENCE THE AO IS NOT ENTITLED TO MAKE ADJUSTMENTS TO THE BOOK PROFIT. RELIANCE WAS PLACED ON THE DECISION RENDERED BY THE HYDERABAD BENCH OF ITAT IN THE CASE OF NCL INDUSTRIES, SUPRA. IN THAT CASE, THE BENCH DID CONSIDER FOLLOWING CASE LAW: A. BRITISH MEXICAN PETROLEUM CO. LTD (16 TAX CASES 57 0) B. CIT VS. HUKUMCHAND MOHANLAL (82 ITR 624 (SC)) C. C. AG. IT VS. KERALA ESTATE MOORIAD CHALAPURAM (161 ITR 155 (SC)) D. CIT VS. BIPINCHANDRA MAGANLAL & CO. LTD (41 ITR 290 (SC)) FINALLY THE TRIBUNAL HELD THAT THE ONLY CONCLUSION THAT CAN BE DRAWN FROM THIS IS THAT NORMALLY SUCH EXTRA-ORDINARY ITEMS ARE NOT CONSIDER ED AS REVENUE. THE SPECIAL BENCH OF THE TRIBUNAL IN THE C ASE OF SUTLEJ COTTON MILL HAS CLEARLY LAID DOWN THE PROPOSITION THAT SECTION 45 OF THE INCOME-TAX ACT CAPITAL GAINS, AS DEEMED INCOME, CANNOT BE BROUGHT TO TAX FOR THE PURPOSES O F DETERMINING BOOK PROFITS UNDER SECTION 115J. THUS T HE PROPOSITION IS CLEARLY LAID DOWN AT PARA 19 OF THAT JUDGMENT WHICH IS AT PAGE 1141. ON SIMILAR ANALOGY WE ARE IN CLINED TO AGREE WITH THE ARGUMENT OF THE ASSESSEES COUNSEL T HAT SECTION 41(1) WHICH IS BROUGHT INTO THE STATUTE TO SUPERSEDE THE PRINCIPLE THAT UNDER GENERAL LAW REMISSION OF A TRADE LIABILITY IS INCOME CANNOT BE BROUGHT IN FOR THE PU RPOSES OF CALCULATING BOOK PROFIT UNDER SECTION 115J. THE PRO POSITION LAID DOWN BY THE HONBLE SUPREME COURT IN THAT CASE OF BIPIN CHANDRA MAGANLAL & CO. LTD., (SUPRA) IS BINDING ON US AND WE DO NOT HAVE ANY OTHER ALTERNATIVE BUT TO AGREE WITH THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE. NO PAGE 16 OF 25 CONTRARY JUDGMENTS HAVE BEEN BROUGHT TO OUR NOTICE. SHRI MEENA TRIED TO DISTINGUISH THESE JUDGMENTS. WE ARE UNABLE TO AGREE WITH HIM AND WE ARE BOUND BY THE JUDGMENTS AN D PROPOSITIONS. THUS THIS GROUND OF THE ASSESSEE HAS TO BE ALLOWED. 8.6.1 HOWEVER, LD DR PLACED HIS RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF VEEKAYLAL INVESTME NT CO. (P) LTD, SUPRA TO SUBMIT THAT THE INCOME LIABLE TO BE TAXED U/S 41 (1) HAS TO BE INCLUDED IN THE COMPUTATION OF BOOK PROFIT. IN THAT CASE, T HE COURT WAS CONSIDERING THE ISSUE WHETHER THE CAPITAL GAINS SHOULD BE INCLU DED IN COMPUTING THE BOOK PROFITS U/S 115J OF THE ACT. THE DECISION REN DERED IN THAT CASE IS EXTRACTED BELOW: 7. WE FIND MERIT IN THIS APPEAL. ACCORDING TO S.11 5J (1), IN THE CASE OF AN ASSESSEE BEING A COMPANY IF THE TOTA L INCOME IS LESS THAN 30 PER CENT OF ITS BOOK PROFITS THEN T HE TOTAL INCOME OF SUCH COMPANY SHALL BE DEEMED TO BE AN AMO UNT EQUAL TO 30 PER CENT OF SUCH BOOK-PROFIT AND SUCH I NCOME SHALL BE CHARGEABLE TO TAX. THAT, THE ASSESSEE HAS TO FIRST COMPUTE THE TOTAL INCOME IN ACCORDANCE WITH THE IT ACT AND IF THE TOTAL INCOME IS LESS THAN 30 PER CENT OF THE BO OK PROFIT THEN THE ASSESSEE HAS TO PREPARE A P&L A/C FOR THE PREVIOUS YEAR IN ACCORDANCE WITH PART II AND III OF SCH.VI TO T HE COMPANIES ACT. IN OTHER WORDS, A PLAIN READING OF S. 115J SHOWS THAT IF THE ASSESSEE IS A COMPANY AND ITS TOT AL INCOME UNDER THE IT ACT IS LESS THAN 30 PER CENT OF ITS BO OK PROFITS THEN, FICTIONALLY, IT WILL BE DEEMED THAT ITS TOTAL INCOME CHARGEABLE TO TAX WOULD BE AN AMOUNT EQUAL TO 30 PE R CENT OF SUCH BOOK PROFITS. HENCE, IN SUCH A CASE, THE TOTAL INCOME OF THE ASSESSEE IS FIRST REQUIRED TO BE COMPUTED UNDER THE IT ACT AND IF THE TOTAL INCOME SO COMPUTED IS LESS THAN 30 PER CENT OF THE BOOK PROFITS THEN THE P&L A/C SHALL HAVE TO BE PREPARED IN ACCORDANCE WITH PART II AND PART III OF SCH.VI OF THE COMPANIES ACT. THE IMPORTANT THING TO BE NOTED IS T HAT WHILE CALCULATING THE TOTAL INCOME UNDER THE IT ACT, THE ASSESSEE IS REQUIRED TO TAKE INTO ACCOUNT INCOME BY WAY OF CAPI TAL GAINS UNDER S.45 OF THE IT ACT. IN THE CIRCUMSTANCES, ONE FAILS TO UNDERSTAND AS TO HOW IN COMPUTING THE BOOKS PROFITS UNDER THE COMPANIES ACT, THE ASSESSEE-COMPANY CANNOT CONS IDER CAPITAL GAINS FOR THE PURPOSES OF COMPUTING BOOK PR OFITS UNDER S.115J OF THE ACT. FURTHER, UNDER CL.(2) OF P ART II OF PAGE 17 OF 25 SCH.VI TO THE COMPANIES ACT WHERE A COMPANY RECEIVES THE AMOUNT ON ACCOUNT OF SURRENDER OF LEASEHOLD RIGHTS, THE COMPANY IS BOUND TO DISCLOSE IN THE P&L A/C THE SAI D AMOUNT AS NON-RECURRING TRANSACTION OR A TRANSACTION OF AN EXCEPTIONAL NATURE IRRESPECTIVE OF ITS NATURE I.E. WHETHER CAPITAL OR REVENUE. THAT, IT WOULD BE INAPPROPRIATE TO DIRECTLY TRANSFER SUCH AMOUNT TO CAPITAL RESERVE (SEE COMPAN IES ACT BY A.RAMAIYA P.1669 (FOURTEENTH EDN.). SUCH RECEIPT S ARE ALSO COVERED BY CL.2(B) OF PART II OF SCH.VI OF THE COMPANIES ACT WHICH, INTER ALIA, STATES THAT P&L A/C SHALL DI SCLOSE EVERY MATERIAL FEATURE, INCLUDING CREDITS OR RECEIPTS AND DEBITS OR EXPENSES IN RESPECT OF NON-RECURRING TRANSACTIONS O R TRANSACTIONS OF AN EXCEPTIONAL NATURE. LASTLY, EVEN UNDER CL.3(XII) (B) PROFITS OR LOSSES IN RESPECT OF TRANS ACTIONS NOT USUALLY UNDERTAKEN BY THE COMPANY OR UNDERTAKEN IN CIRCUMSTANCES OF EXCEPTIONAL OR NON-RECURRING NATUR E SHOWS CLEARLY THAT CAPITAL GAINS SHOULD BE INCLUDED FOR T HE PURPOSES OF COMPUTING BOOK PROFITS. THAT, CAPITAL GAINS WOUL D CERTAINLY BE ONE OF THE VARIOUS ITEMS WHOSE INFORMATION IS RE QUIRED TO BE GIVEN TO THE SHARE HOLDERS UNDER THE SAID CL.3(X II) (B). SO ALSO, THE DISCLOSURE IS REQUIRED TO BE MADE IN RESP ECT OF INVESTMENT IN THE CAPITAL OF A PARTNERSHIP FIRM IF THE COMPANY IS A PARTNER ON THE DATE OF THE BALANCE SHEET (SEE P.1651 OF THE COMPANIES ACT BY A. RAMAIYA (FOURTEENTH EDN.). SIMILARLY, PROFITS OR LOSSES ON SUCH INVESTMENTS AR E ALSO REQUIRED TO BE DISCLOSED. (SEE CL.3(XII) (A) OF PAR T II OF SCH.VI OF THE COMPANIES ACT). 8.6.2 WE NOTICE THAT THE HYDERABAD ITAT IN THE CASE OF NCL INDUSTRIES, SUPRA, FOLLOWED THE ANALOGY OF THE DECIS ION OF THE SPECIAL BENCH OF ITAT IN THE CASE OF SUTLEJ COTTON MILLS LT D. V ACIT (1993)(111 CTR (CAL.)(TRIB.) 321) TO COME TO THE CONCLUSION TH AT THE INCOME TAXABLE U/S 41(1) CANNOT BE INCLUDED FOR THE PURPOSE OF COM PUTING BOOK PROFIT U/S 115J OF THE ACT. THE SPECIAL BENCH IN THE CASE OF SUTLEJ COTTON MILLS LTD, SUPRA, HAS HELD THAT THE CAPITAL GAINS CHARGEABLE U /S 45, AS DEEMED INCOME, CANNOT BE BROUGHT TO TAX FOR THE PURPOSES O F DETERMINING THE BOOK PROFITS U/S 115J. HOWEVER, THE HONBLE BOMB AY HIGH COURT IN THE CASE OF VEEKAYLAL INVESTMENT CO. (P) LTD., SUPRA, HA S HELD THAT THE CAPITAL GAINS IS INCLUDIBLE IN THE COMPUTATION OF THE BOOK PROFIT. ACCORDING TO THE PAGE 18 OF 25 LEGAL HIERARCHY, A LOWER COURT SHOULD BOW TO THE WI SDOM OF THE HIGHER COURT. HENCE THE DECISION RENDERED BY A HIGH COURT PREVAILS OVER THE DECISION OF THE TRIBUNAL. BEFORE US, THE ASSESSEE DID NOT PLACE ANY OTHER CONTRARY DECISION OF A HIGH COURT. IN THESE CIRCUMS TANCES, IN VIEW OF THE DECISION OF THE BOMBAY HIGH COURT REFERRED SUPRA, W E ARE UNABLE TO AGREE WITH THE ARGUMENT OF THE ASSESSEE THAT THE INCOME T AXABLE U/S 41(1) CANNOT BE INCLUDED IN THE COMPUTATION OF BOOK PROF IT U/S 115JA OF THE ACT. 8.7 IN VIEW OF THE FOREGOING DISCUSSIONS, THE ON LY CONCLUSION THAT EMERGES OUT OF THE FACTS AND CIRCUMSTANCES OF THE C ASE BEFORE US IS THAT THE ASSESSING OFFICER IS ENTITLED TO RECOMPUTE THE BOOK PROFIT BY INCLUDING THE EFFECT OF WAIVER BENEFITS THAT HAS ALREADY ACCR UED TO THE ASSESSEE. ACCORDINGLY THE INTEREST AMOUNT OF RS.312.68 LAKHS WAIVED BY THE GOVERNMENT OF INDIA IS INCLUDIBLE IN THE COMPUTATIO N OF BOOK PROFIT U/S 115JA OF THE ACT. 9 THE FACTS RELATING TO THE FIRST ISSUE ARE STA TED IN BRIEF. THE AO ALSO ADDED A SUM OF RS.5.50 CRORES DEBITED IN THE BOOKS UNDER THE HEAD PROVISIONS AND LOSSES, PRESUMABLY IN VIEW OF THE CLAUSE (C) OF THE EXPLANATION TO SECTION 15JA. THE BREAK UP DETAILS OF THE SAID AMOUNT ARE GIVEN BY LD CIT(A) AS UNDER: I) PROVISION FOR DOUBTFUL DEBTS RS. 3,95,36 3 II) PROVISION FOR REDUCTION IN SHIP RS.4,76,92,514 REPAIR BILLS III) PROVISION FOR OBSOLESCENCE OF MATERIALS RS . 62,26,319 IV) LOSSES ON ACCOUNT OF UNLINKED ADVANCED RS. 7,11,598 TOTAL RS.5,50,25,794 PAGE 19 OF 25 AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE LD CIT (A) WHO DELETED THE LAST ITEM IN THE LIST, VIZ., RS .7,11,598/- AND CONFIRMED THE OTHER THREE ADDITIONS. STILL AGGRIEVED, THE ASS ESSEE IS IN APPEAL BEFORE US. 10. SIMILARLY, IN THE ASSESSMENT YEAR 2000-2001, TH E AO ADDED A SUM OF RS.108.67 CRORES DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD PROVISIONS LOSSES. THE BREAK UP DETAILS OF THE SA ME ARE GIVEN BY THE LD CIT (A) AS UNDER: (I) PROVISION FOR DOUBTFUL DEBTS 14,53,983 (II) PROVISION FOR REDUCTION IN SHIP REPAID BILLS 7 ,59,19,638 (III) PROVISION FOR OBSOLENCE OF MATERIALS 2,52,77, 268 (IV) PROVISION FOR FUTURE LOSSES 77,00,06,831 (V) PROVISION FOR LIQUIDATED DAMAGES 17,09,83,840 (VI) PROVISION FOR GUARANTEE REPAIRS 1,10,00,000 (VII) PROVISION FOR LEAVE ENCASHMENT 3,21,36,579 TOTAL 108,67,78,139 IN THIS YEAR, THE LD CIT (A) CONFIRMED THE ENTIRE AD DITION. 11 WE NOTICE THAT AS PER CLAUSE (C) OF EXPLANAT ION TO SEC.115JA, THE AMOUNT SET ASIDE TO PROVISIONS MADE FOR MEETING FOR LIABILITIES OTHER THAN ASCERTAINED LIABILITIES HAS TO BE ADDED TO THE BOOK PROFIT. ACCORDING TO THE ASSESSING OFFICER, THESE PROVISIONS RELATE TO UNASC ERTAINED LIABILITIES. WE ALSO NOTICE THAT, AS OBSERVED BY THE LD CIT (A), TH E TERM PROVISIONS HAS NOT BEEN DEFINED UNDER THE INCOME TAX ACT. HOWEVER , PART-III OF SCH.VI OF THE COMPANIES ACT DEFINES THE TERM PROVISION A S UNDER: FOR THE PURPOSES OF PARTS I AND II OF THIS SCHEDUL E, UNLESS THE CONTEXT OTHERWISE REQUIRES,- (A) THE EXPRESSION PROVISION SHALL, SUBJECT TO SUB-CL AUSE (2) OF THIS CLAUSE, MEAN ANY AMOUNT WRITTEN OFF OR RETAINED BY WAY OF PROVIDING FOR DEPRECIATION, RENE WALS OR DIMINUTION IN VALUE OF ASSETS, OR RETAINED BY WA Y OF PROVIDING FOR ANY KNOWN LIABILITY OF WHICH THE AMOU NT CANNOT BE DETERMINED WITH SUBSTANTIAL ACCURACY. PAGE 20 OF 25 (2) WHERE (A) ANY AMOUNT WRITTEN OFF OR RETAINED BY WAY OF PROVIDING FOR DEPRECIATION, RENEWALS OR DIMINUTION IN VALUE OF ASSETS, NOT BEING AN AMOUNT WRITTEN OFF IN RELATION TO FIXED ASSETS BEFORE THE COMMENCEMENT OF THIS ACT; OR (B) ANY AMOUNT RETAINED BY WAY OF PROVIDING FOR ANY KNOWN LIABILITY; IS IN EXCESS OF THE AMOUNT WHICH IN THE OPINION OF THE DIRECTORS IS REASONABLY NECESSARY FOR THE PURPOSE, THE EXCESS SHALL BE TREATED FOR THE PURPOSES OF THIS SC HEDULE AS A RESERVE AND NOT AS A PROVISION. ON CAREFUL PERUSAL OF THIS DEFINITION SUGGESTS THAT THE FOLLOWING 3 TYPES OF ENTRIES ARE TREATED AS PROVISIONS: A) AMOUNT WRITTEN OFF OR RETAINED BY WAY OF PROVIDING FOR DEPRECIATION, RENEWALS OF ASSETS B) AMOUNT WRITTEN OFF OR RETAINED BY WAY OF PROVIDING FOR DIMINUTION IN VALUE OF ASSETS C) AMOUNT RETAINED BY WAY OF PROVIDING FOR ANY KNOWN L IABILITY OF WHICH THE AMOUNT CAN BE DETERMINED WITH SUBSTANTIAL ACCURACY. SO A PROVISION CAN BE MADE EITHER TO PROVIDE FOR DEPRECIATION, RENEWALS OR DIMINUTION IN VALUE OF ASSETS OR TO PROVIDE FOR A LIABILITY. UNDER SECTION 115JA WHAT IS REQUIRED IS TO BE ADDED IS THE AMOUNT PROVIDED FOR MEETING LIABILITIES OTHER THAN ASCERTAINED LIABILITIES . THEREFORE, THE PROVISION MADE TO PROVIDE FOR DEPRECIATION, RENEWALS OR DIMIN UTION VALUE OF ASSETS IS NOT REQUIRED TO BE ADDED TO THE BOOK PROFIT AS PER CLAUSE (C) OF EXPLANATION TO SECTION 115JA. WE FIND SUPPORT FOR THIS VIEW FROM THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. HCL COMNET SYSTEMS AND SERVICES LTD. (2008) 305 ITR 409), WHER EIN, IT WAS HAS HELD THAT CLAUSE (C) OF EXPLANATION TO SEC 115 JA IS TAR GETED ONLY WITH RESPECT TO THE AMOUNT PROVIDED FOR MEETING A LIABILITY OTHE R THAN ASCERTAINED LIABILITY. ACCORDINGLY THE HONBLE APEX COURT HEL D THAT THE PROVISION FOR BAD AND DOUBTFUL DEBTS, BEING A PROVISION MADE FOR THE DIMINUTION IN THE PAGE 21 OF 25 VALUE OF THE ASSETS IS NOT HIT BY CLAUSE (C) OF EXP LANATION TO SECTION 115JA. HONBLE AHMEDABAD BENCH OF ITAT IN THE CASE OF DEEP AK NITRITE LTD., VS DCIT (2008) 114 TTJ (AHD) 980 HAS HELD THAT ANY PRO VISION MADE FOR DIMINUTION IN VALUE OF ASSETS BY WAY OF OBSOLENCE L OSS IS NOT COVERED UNDER CLAUSE C OF EXPLANATION 2 OF SEC 115JA. 11.1 ACCORDING TO AS 29 (ACCOUNTING STANDARD 29 ) PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, DEALS WI TH PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS. ACCO RDING TO THE SAID ACCOUNTING STANDARD, A PROVISION IS MADE IF (A) AN ENTERPRISE HAS A PRESENT OBLIGATION-LEGAL OR CON STRUCTIVE AS A RESULT OF PAST EVENTS, (B) OUT OF FLOW OF RESOURCES EMBODYING ECONOMIC BENEFIT IS PROBABLE (C) A RELIABLE ESTIMATE OF THE OBLIGATION IS POSSIBLE. THUS FOUR IMPORTANT ASPECTS OF PROVISIONING ARE: A) PROVISIONING RELATES TO PRESENT OBLIGATION B) IT ARISES OUT OF OBLIGATING EVENT (PAST EVENTS) C) IT INVOLVES PROBABLE OUTFLOW OF RESOURCES EMBODYING ECONOMIC BENEFIT D) A RELIABLE ESTIMATION OF OBLIGATION IS POSSIBLE. (SOURCE: TAXMANNS ACCOUNTING STANDARDS AND CORPORA TE ACCOUNTING PRACTICES 8 TH EDITION VOL.I BY SHRI TP GHOSH PARA 19.1 AT PAGE 788) IF THERE IS NO PRESENT OBLIGATION AS ON THE DATE OF BALANCE SHEET, THERE IS NO NEED TO RECOGNIZE THE PROVISION. IN THAT CASE THE ENTERP RISE SHOULD ONLY DISCLOSE THE EXISTENCE OF CONTINGENCIES. FOR T HE PURPOSE OF PREPARATION OF FINANCIAL STATEMENT, AN ENTERPRISE S HOULD ONLY RECOGNIZE LIABILITIES THAT EXIST AT THE BALANCE SHEET DATE . SUCH LIABILITIES CAN BE CLASSIFIED INTO ASCERTAINED LIABILITIES AND UNAS CERTAINED LIABILITIES. CLAUSE PAGE 22 OF 25 (C) OF EXPLANATION TO SEC 115JA IS ATTRACTED ONLY I N THE CASE OF UNASCERTAINED LIABILITIES. 11.2 WITH THIS KNOWLEDGE ON PROVISIONING, WE SHALL ANALYSE THE NATURE OF PROVISIONS MADE BY THE ASSESSEE AND TRY T O CLASSIFY THEM INTO (A) PROVISION RELATING TO DEPRECIATION, RENEWALS OR DIM INUTION IN THE VALUE OF ASSETS. (B) PROVISION RELATING TO ASCERTAINED LIABILITIES AND (C) PROVISION RELATING TO UNASCERTAINED LIABILITIES 11.3 IN THE ASSESSMENT YEAR 1999-2000, THE PROVISI ONS MADE BY THE ASSESSEE RELATE TO (A) PROVISION FOR DOUBTFUL DEBTS , (B) PROVISION FOR REDUCTION IN SHIP REPAIR BILLS AND (C) PROVISION OF OBSOLESCENCE OF MATERIAL. ON THE FACE OF IT, WE CAN SAY THAT THESE THREE PROV ISIONS CAN ONLY BE CLASSIFIED AS THE PROVISION MADE FOR DIMINUTION IN THE VALUE OF ASSETS. HENCE ALL THESE THREE PROVISIONS FALL OUTSIDE THE P URVIEW OF CLAUSE (C) OF EXPLANATION TO SEC 115JA. ACCORDINGLY WE SET ASIDE THE ORDER OF LD CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THESE TH REE ITEMS FROM THE COMPUTATION OF BOOK PROFIT. 11.4 IN THE ASSESSMENT YEAR 2000-01 IS CONCERNED, THE PROVISIONS MADE BY THE ASSESSEE RELATING TO (A) PROVISION OF DOUBTF UL DEBTS, (B) PROVISION FOR REDUCTION IN SHIP REPAIR BILLS AND (C) PROVISI ON FOR OBSOLESCENCE OF MATERIAL, AS STATED IN PARA 11.3 SUPRA, FALL OUTSID E THE PURVIEW OF CLAUSE (C) OF EXPLANATION TO SEC 115JA. 11.4.1 THE PROVISION FOR FUTURE LOSSES DOES NOT REL ATE TO ANY LIABILITY. ACCORDING TO PARAS 55-56 OF AS-29, NO PROVISION IS REQUIRED TO BE MADE FOR FUTURE OPERATING LOSS, AS IT DOES NOT MEET THE DEFINITION OF LIABILITY. PAGE 23 OF 25 ONCE IT IS NOT CONSIDERED AS A LIABILITY, THE QUEST ION OF ADDING THE SAME FOR COMPUTING BOOK PROFIT U/S 115JA DOES NOT ARISE. 11.4.2. THE ASSESSEE HAS EXPLAINED THE NATURE OF T HE PROVISION FOR LIQUIDITY DAMAGES AS UNDER BEFORE LD CIT (A). 2.2.3 REGARDING THE PROVISIONS FOR LIQUIDATED DAMAGES IT WAS SUBMITTED THAT IN THE SHIP BUILDING INDUSTRY IT IS A COMMON FEATURE THAT TIME BOUND CONTRACTS USUALLY RA NGING OVER A NUMBER OF YEARS, ARE EXECUTED FOR THE PURPOS E OF CONSTRUCTION OF SHIPS, WITH STRINGENT DAMAGES IN CA SE OF DELAY IN HANDING OVER DELIVERY. THE ASSESSEE HAS MADE A P ROVISION FOR THE LIQUIDATED DAMAGES THAT HAS TO BE PAID FOR THE DELAY ALREADY TAKEN PLACE FOR THE SHIPS UNDER CONSTRUCTION AS VESSELS UNDER REPAIR, ON A REALISTIC BASIS. THE EXPLANATION SHOWS THAT AS ON THE DATE OF BALANC E SHEET THE DELAY IN HANDING OVER THE SHIP HAS ALREADY OCCURRED AND ACCO RDINGLY THE LIABILITY TOWARDS LIQUIDATED DAMAGES HAS BEEN QUANTIFIED AND PROVIDED FOR. IN VIEW OF THE ABOVE, IN OUR OPINION, THE PROVISION FO R LIQUIDATED DAMAGES CANNOT BE CLASSIFIED AS AN UNASCERTAINED LIABILITY . ACCORDINGLY, IT WILL FALL OUTSIDE THE PURVIEW OF SEC 115JA. 11.4.3 THE ASSESSEE HAS EXPLAINED THE NATURE OF P ROVISION FOR GUARANTEE REPAIRS AS UNDER BEFORE LD CIT (A). 2.2.4 REGARDING THE PROVISION FOR GUARANTEE REPAIR S IT WAS SUBMITTED THAT WHILE ENTERING INTO CONTRACTS FOR SH IP BUILDING AS WELL AS THE SHIP REPAIRS, THE CUSTOMERS INSIST T HAT IN CASE ANY REPAIRS OF A SPECIFIC NATURE, AS MUTUALLY AGREE D UPON, ARISE WITHIN A SPECIFIED PERIOD, THAT THEY SHOULD B E ATTENDED TO FREE OF COST BY THE ASSESSEE. ACCORDINGLY THE AS SESSEE HAS MADE A REALISTIC ESTIMATE OF THE AMOUNT OF GUARANTE E REPAIRS IT WOULD HAVE TO EXECUTE ON ACCOUNT OF THE CONTRACT S EXECUTED DURING THE PREVIOUS YEAR RELEVANT TO THE A SSESSMENT YEAR AND HAS PROVIDED FOR THE SAME. ON A CAREFUL READING OF THE EXPLANATION OF THE ASSE SSEE, WE NOTICE THAT THE GUARANTEE REPAIRS IS AKIN TO PRODUCT WARRANT Y. IN PARA 19.1.2 OF PAGE 24 OF 25 THE TAXMANS ACCOUNTING STANDARDS AND CORPORATE ACC OUNTING PRACTICES, THE ACCOUNTING TREATMENT WITH REGARD TO THE PRODUCT WARRANTY IS STATED AS UNDER: 19.1.2 PRODUCT WARRANTY A WARRANTY IS AN OBLIGATION INCURRED IN CONNECTION WITH THE SALE OF GOODS OR SE RVICES THAT MAY REQUIRE FURTHER PERFORMANCE BY THE SELLER AFTER THE SALE HAS TAKEN PLACE. BECAUSE OF THE UNCERTAINTY SURROUNDING CLAIMS THAT MAY BE MADE UNDER WARRANTIES, WARRANTY OBLIGATIONS FALL WITHIN THE DEFINITION OF A CONTING ENCY AND IS COVERED BY AS-29 SO ACCORDING TO THE ACCOUNTING STANDARD, A PRODUCT WARRANTY FALL WITHIN THE DEFINITIONS OF A CONTINGENCY, WHICH MEANS THAT THOUGH IT IS A LIABILITY AS ON THE DATE OF BALANCE SHEET, IN VIEW OF THE UNC ERTAINTY SURROUNDING THE CLAIMS, IT WOULD FALL UNDER THE CATEGORY OF UN ASCERTAINED LIABILITY. HENCE IT IS LIABLE TO BE ADDED TO THE BOOK PROFIT A S PER CLAUSE (C) OF EXPLANATION TO SEC 115JA. 11.4.4 THE PROVISION FOR LEAVE ENCASHMENT IS MA DE TOWARDS THE LIABILITY THAT WOULD ARISE WHEN THE EMPLOYEE RETIRES IN FUTUR E. THE ASSESSEE HAS STATED THAT IT IS RELATABLE TO THE SERVICES RENDERE D BY THE EMPLOYEES. LD AR SUBMITTED THAT THE ASSESSEE HAS QUANTIFIED THE A MOUNT OF LEAVE ENCASHMENT ON THE BASIS OF DETAILS OF NUMBER OF DAY S OF LEAVE AT THE CREDIT TO EACH EMPLOYEE AS ON THE DATE OF BALANCE S HEET AND ACCORDINGLY PROVIDED FOR THE SAME. IN VIEW OF THE ABOVE, IN OU R OPINION, IT WOULD FALL IN THE CATEGORY OF ASCERTAINED LIABILITY. ACCORDIN GLY IT WOULD FALL OUTSIDE THE PURVIEW OF SEC 115JA. 11.4.5 IN VIEW OF THE FOREGOING DISCUSSIONS, EXCEP T THE PROVISION MADE FOR GUARANTEE REPAIRS AMOUNTING TO RS.1.10 CRORES, ALL OTHER PROVISIONS WOULD FALL OUTSIDE THE PURVIEW OF SEC.115JA AND WE ORDER ACCORDINGLY. PAGE 25 OF 25 12. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE A RE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 14.09.2009 SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, 14 TH SEPTEMBER 2009. COPY TO 1 M/S HINDUSTAN SHIPYARD LTD., PORT AREA, VISAKHAPA TNAM 530 035 2 THE DCIT, CIRCLE - 3(1) VISAKHAPATNAM 3 THE CIT, VISAKHAPATNAM 4 THE CIT(A), VISAKHAPATNAM 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM FIT FOR PUBLICATION (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER