G.VK.Industries Limited, Secunderabad V. CIT II, Hyderabad

ITA 796/HYD/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2917 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKARA RAO
• Assessee Lawyers: V SHIVA KUMAR
• Keywords: Capital asset; Depreciation; Earning of tax free income; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 115JB; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER. ITA NO.796/HYD/10 & 22 3/HYD/2012 (ASSESSMENT Y EAR -2006-07) M/S. G.V.K. INDUSTRIES LTD., SECUNDERABAD ( PAN - AAACG 7499 J ) V/S. ASST. COMMISSIONER OF INCOME-TAX CIRCLE 1(4), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V.SHIVA KUMAR RESPONDE NT BY : SHRI D.SUDHAKARA RAO, DR DATE OF HEARING 24.05.2013 DATE OF PRONOUNCEMENT 3 1 .05.2013 O R D E R PER BENCH: THESE TWO APPEALS ARE BY THE ASSESSEE FOR ASSESSM ENT YEAR 2006-07. WHILE APPEAL, ITA NO.796/HYD/2010, IS AGA INST THE ORDER OF THE COMMISSIONER OF INCOME-TAX II HYDERABAD UNDER S.26 3 OF THE ACT, DATED 30.03.2010, THE OTHER APPEAL, ITA NO.223/HYD/2012, IS AGAINST THE CONSEQUENTIAL ORDERS PASSED SUBSEQUENT TO THE SETTI NG ASIDE OF THE ASSESSMENT BY THE COMMISSIONER UNDER S.263 OF THE ACT. SINCE THESE TWO APPEALS ARE RELATED, THEY ARE HEARD TOGETHER AND DE CIDED BY THIS COMMON ORDER. 2. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEAR NED DEPARTMENTAL REPRESENTATIVE AND ALSO PERUSED THE WR ITTEN SUBMISSIONS PLACED ON RECORD WITH ITS ANNEXURES. ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 2 ITA NO.796/HYD/2010 3. IN THIS APPEAL, ASSESSEE IS CHALLENGING THE JU RISDICTION OF THE COMMISSIONER IN INVOKING THE PROVISIONS OF S.263 AN D ALSO VARIOUS ITEMS CONSIDERED BY THE COMMISSIONER OF INCOME-TAX UNDER THE PROVISIONS OF S.263, WHILE DETERMINING THE INCOME UNDER S.115JB O F THE ACT. 4. BRIEFLY STATED, THE ASSESSMENT IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2006-07 WAS COMPLETED BY THE DY. CO MMISSIONER OF INCOME-TAX CIRCLE 2(2) UNDER S.143(3) OF THE ACT ON 31.03.2008. THE LEARNED COMMISSIONER OF INCOME-TAX CALLED FOR THE R ECORDS AND FOUND THAT THE SAID ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE, AND ACCORDINGLY SHOW-CAUSE NOTICE DATED 21.01.2010 WAS ISSUED TO THE ASSESSEE. THE LEARNED COMMISSIONER OF INCOME-TAX IN ITIATED THE PROCEEDINGS ON THE FOLLOWING GROUNDS- (A) AS PER PRINTED ACCOUNTED THE PROFIT FOR THE YEAR WA S RS.36,41,92,830 AND PROFIT AFTER EXTRAORDINARY ITEM S IS RS.10,69,63,873. FOR THE PURPOSE OF COMPUTATION OF INCOME U/S.115JB OF THE ACT, THE BOOK PROFIT OF THE YEAR O F RS.10,69,63,873 AS ADMITTED BY THE COMPANY WAS ACCEPTED. SINCE THE PROFIT FOR THE YEAR WAS RS.36,41,92,830/-, THE SAME SHOULD HAVE BE EN CONSIDERED FOR THE PURPOSES OF TAX U/S.15JB OF THE ACT INSTEAD OF BELOW THE LINE FIGURE OF RS.10,69,63,873/-. (B) SECONDLY, NET PROFIT AFTER TAXES FOR THE YEAR IS RS .115,43,28,808/- WHICH SHOULD HAVE BEEN CONSIDERED AS THE STARTING P OINT FOR THE COMPUTATION OF INCOME U/S. 115JB OF THE ACT. AN AMO UNT OF RS.105.21 CRORES WAS CREDITED TOWARDS DEFERRED TAX LIABILITY AS THE BELOW THE LINE ENTRY. AS PER NOTE ON THE ACCOUNTS ITEM -4 IT HAS BEEN STATED AS UNDER: THE COMPANY HAS RECOGNIZED DEFERRED TAX LIABILITY AS PER AS-22 ONLY FOR THE PERIOD AFTER THE EXPIRY OF THE P RESENT POWER PURCHASE AGREEMENT WITH AP TRANSCO IN 2015 SI NCE UP TO THAT DATE, AP TRANSCO HAS TO REIMBURSE INCOME TA X PAYABLE BY THE COMPANY. HENCE DEFERRED TAX LIABILITY CREAT ED EARLIER UP TO THAT PERIOD IS WRITTEN BACK TO PROFIT AND LOS S ACCOUNT DURING THE YEAR. IT APPEARS THAT THE ASSESSING OFFICER HAS NOT EXAMI NED THE IMPLICATION OF THIS CREDIT ENTRY AND THE CONNECTED NOTE. NEITHER THE ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 3 ASSESSEE FURNISHED THE YEARS IN WHICH THE SAID DEFE RRED TAX LIABILITY WAS DEBITED NOR THE AO EXAMINED THE ISSUED. (C) THIRDLY, IT IS NOTICED THAT THE ASSESSEE COM PANY MADE AN ADDITION OF RS.10,40,74,470 ON THE PLANT & MACHINERY (FIXED ASS ET) TOWARDS TRANSFER OF STORES AND SPARES PURCHASED DURING THE YEAR 1997-98 TO 2004-05. ACCORDINGLY THE SAID AMOUNT GOT DEPRECIATI ON. A PERUSAL OF INFORMATION ON RECORD SHOWS THAT THE ASSESSING O FFICER HAS NOT CALLED FOR DETAILS OF CAPITALISATION OF SPARES AND PURCHASES IN THE YEARS 1997-98 TO 2004-05. NORMALLY, THE STORES AND SPARES WOULD BE CHARGED TO THE REVENUE IN THE YEAR OF PURCHASE I TSELF. HENCE CAPITALISATION OF SPARES AND STORES AFTER LAPSE OF 4 YEARS APPEARS TO BE NOT CORRECT. (D) FOURTHLY, IT IS SEEN THAT AS PER CLAUSE (VI) IN AUD ITORS REPORT TO THE SHARE HOLDERS (PRINTED ACCOUNTS PAGE 6), THE STAT UTORY AUDITORS HAVE COMMENTED THAT THE COMPANY HAS CHANGED THE MET HOD OF ACCOUNTING IN RESPECT OF DEFERRED REVENUE EXPENDITU RE PERTAINING MAJOR MAINTENANCE WHICH RESULTED IN DECREASE OF PRO FIT OF THE YEAR BY RS.16,41,08,260/-. THERE IS NO EVIDENCE AS TO W HETHER THE ASSESSING OFFICER HAS EXAMINED THIS PROFIT. THEREAFTER, AFTER CONSIDERING THE ASSESSEES EXPLAN ATION, HE DISCUSSED THE ISSUES IN DETAIL FROM PAGES 3 TO 6 AND ULTIMATELY H ELD THAT THE ASSESSMENT ORDER PASSED WAS ERRONEOUS AND PREJUDICIAL TO THE I NTERESTS OF REVENUE AND ACCORDINGLY SET ASIDE THE ASSESSMENT WITH A DIRECT ION TO THE ASSESSING OFFICER TO REDO THE ASSESSMENT . 5. LEARNED COUNSEL EXPLAINED EACH OF THE ITEMS IN DETAIL WITH REFERENCE TO THE ANNEXURES OF THE ACCOUNTS AND CASE -LAW AND HIS SUBMISSIONS ON FACTS. THESE ARE EXTRACTED HEREUNDER FOR THE SAKE OF RECORD- GROUND NO:2(A), 2(B) AND 2C): (PERTAINS TO BOOK PR OFIT TAKEN AT RS.36,41,92,830/-) 2.1 PROFIT AS PER P&L ACCOUNT WAS RS.36,41,92,830/- . A COPY OF THE P&L ACCOUNT IS SUBMITTED HEREWITH. (PAGE 1 OF PAPER BOOK). AFTER DEBITING EXTRAORDINARY ITEMS THE PROFIT WAS RS.10,6 9,63,873.. FOR PURPOSE OF COMPUTATION OF INCOME U/S.115JB, THE A.O ACCEPTED THE SAID FIGURE. C.I.T WAS OF THE VIEW THAT THE PROFIT FOR THE YEAR OUGHT TO HAVE BEEN ADOPTED AT RS.36,41,92,830/- INSTEAD O F BELOW THE LINE FIGURE OF RS.L0,69,63,873/-. 2.2 THE RELEVANT FIGURES ARE GIVEN HEREUNDER:(PLEAS E SEE PAGE 32 OF PAPER BOOK) ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 4 PROFIT AS PER P&L ACCOUNT 36,41,92,830 LESS: EXTRAORDINARY ITEMS DEPRECIATION ON CAPITAL S TORES 4,39,600 DEFERRED REVENUE EXPENDITURE 17,36,74,331 FOREIGN EXCHANGE GAIN OF EARLIER YEARS 4,13,30,847 ADVERTISEMENT 4,55,000 SERVICE TAX OF EARLIER YEARS 1,33,508 25,9 5,54,686 LESS: MINIMUM TAKE OFF OF NAPHTA 34,59,126 25,60,95,560 25,60,95,560 BALANCE 10,80,97,270 LESS : PROVISION FOR FRINGE BENEFIT TAX 11,33,397 BOOK PROFIT AS PER ASSESSEE 10,69,63 ,873 2.3 THE ASSESSEE OBJECTED TO THE PROPOSAL OF THE C. I.T. IT WAS SUBMITTED THAT EXTRAORDINARY ITEMS DEBITED TO P&L A CCOUNT CANNOT BE ADDED BACK WHILE COMPUTING BOOK-PROFIT. 2.4 THE DETAILS OF THE ABOVE MENTIONED EXTRAORDINAR Y ITEMS ARE AS UNDER: 2.4.1 DEPRECIATION ON CAPITAL ASSETS: RS.4,39,61,OO O.:- AT THE TIME OF IMPORT OF EQUIPMENT FOR ITS PLANT, THE ASSESSEE IMP ORTED, FROM THE SUPPLIER, INSURANCE SPARES ALONG WITH THE EQUIPMENT FOR SETTING UP THE PLANT, AT A COST OF RS.10,40/74,470/-. THESE SP ARE PARTS CAN BE USED ONLY IN THE EQUIPMENT SUPPLIED BY THE EQUIPMEN T SUPPLIER AND ARE REQUIRED TO BE KEPT AS STANDBY PARTS. IN THIS CONNECTION THE ASSESSEE INVITES KIND ATTENTION TO CLAUSE 8.2 OF AC COUNTING STANDARD 10 I.E., ACCOUNTING FOR FIXED ASSETS WHICH IS AS UN DER- 8.20:STANDBY EQUIPMENT AND SERVLCMG EQUIPMENT ARE NORMALLY CAPITALISED, MACHINERY SPARES ARE USUALLY CHARGED T O THE P&L ACCOUNT AS AND WHEN CONSUME D. HOWEVER IF SUCH SPARES CAN BE USED ONLY IN CONNECTION WITH --AN ITEM OF FIXED ASS ET AND THEIR USE IS EXPECTED TO BE IRREGULA R, IT MAY BE APPROPRIATE TO ALLOCATE THE TOTAL COST ON A SYSTEMATIC BASIS OVER A PERIODNOT E XCEEDING THE USEF UL LIFE OF THE PRINCIPAL ITEM. 2.4.1.1 AS COULD BE SEEN FROM THE ABOVE, SPARES WHI CH CAN BE USED IN PARTICULAR MACHINERY AND IF THEIR USE IS IRREGULAR, COST OF SUCH SPARES CAN BE WRITTEN OFF OVER THE PERIOD OF THE USEFUL LIFE OF THE MACHINERY. THE ASSESSEE ALSO SUBMITS THAT THE INTERPRETATION C OMMITTEE OF ACCOUNTING STANDARDS BOARD (ICASB ) ALSO SUGGESTED AS UNDER IN CONNECTION WITH ACCOUNTING FOR SPARES IN THE ABOVE SITUATION. (EXTRACTED FROM FIRST LESSONS ON ACCOUNTING STANDAR DS BY M.P VIJAY KUMAR) A): WHETHER TO CAPITALISE AN ITEM OF MACHINERY SPA RES OR NOT, WILL DEPEND ON FACTS AND CIRCUMSTANCES OF THE CASE. B): HOWEVER, TWO TYPES OF MACHINERY SPARES EXPLAINE D BELOW SHOULD BE CAPITALISED, THEY BEING OF THE NATU RE OF CAPITAL NATURE OR INSURANCE SPARES. THESE SHOULD BE CAPITALISED SEPARATELY AT THE TIME OF PURCHASE, IRR ESPECTIVE ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 5 OF WHETHER THE ITEMS ARE BOUGHT ALONG WITH THE FIXE D ASSET OR SUBSEQUENTLY. 1. MACHINERY SPARES WHICH ARE SPECIFIC TO A PARTICU LAR ITEM OF FIXED ASSET, THEY CAN BE USED ONLY IN CONNECTION WITH A PARTICULAR FIXED ASSET, AND 2. THEIR USE IS EXPECTED TO BE IRREGULAR. 2.4.1.2 IT IS THEREFORE SUBMITTED THAT AS PER CLAU SE 8.2 OF THE ACCOUNTING STANDARD 10 I.E. ACCOUNTING FOR FIXED AS SETS, THE INSURANCE SPARES IN THE YEAR OF PURCHASE ARE TO BE CAPITALIZE D ALONGWITH THE COST OF THE MACHINERY. HOWEVER, BY OVERNIGHT, THE ASSES SEE HAS NOT CAPITALIZED THE SAID INSURANCE SPARES IN THE YEAR P URCHASE BUT WERE SHOWN IN STORES AND SPARES. SUBSEQUENTLY WHEN THIS MISTAKE CAME TO LIGHT, THE ASSESSEE HAS CAPITALISED THE COST OF INS URANCE SPARES DURING THE ASSESSMENT YEAR 2006-07 AND ACCOUNTED FOR DEPRE CIATION THEREON WHICH IS IN ORDER AND IN LINE WITH THE ACCOUNTING S TANDARD EXPLAINED ABOVE. 2.4.1.3 THE ASSESSEE RELIES ON THE DECISION IN THE CASE OF CIT VS INSITCO LTD 320 ITR322 DEL WHEREIN IT IS HELD THAT EMERGENC Y/INSURANCE SPARES CAN BE CAPITALISED AND DEPRECIATION THEREON IS ALLO WABLE. IT IS ALSO SUBMITTED THAT SLP FILED AGAINST THE SAID DECISION WAS DISMISSED BY THE SUPREME COURT. THE ASSESSEE PLEADS THAT THERE IS NO JUSTIFICATION IN STATING THAT 'CAPITALISATION OF SPARES AFTER LAPSE OF 4 YEARS IS NOT CORRECT'. 2.4.2 DEFERRED REVENUE EXPENDITURE : RS.17,36,4,331 : DETAILS OF DEFERRED REVENUE EXPENDITURE ARE AS UNDER : (PLEASE SEE PAGE 34 OF PAPER BOO_ SL. NO. PARTICULARS COST OF MAJOR MAINTENANCE (RS.) CHARGED TO P &L A/C. IN EARLIER YEARS (RS.) BALANCE AMOUNT CHARGED TO P & L ACCOUNT UNDER EXTRA ORDINARY ITEM (RS.) 1. GAS TURBINE 1 12,91,31,288 8,04,63,292 4,86,73,996 2. GAS TURBINE 2 15,21,61,089 2,71,60,755 12,50,00,335 TOTAL CHARGED TO P&KL ACCOUNT AS EXTRA ORDINARY IOTEM 17,36,74,331 2.4.2.1 UP TO THE ACCOUNTING YER THAT ENDED 31.-3- 2005, THE ASSESSEE HAD TREATED MAJOR MAINTENANCE EXPENDITURE INCURRED N COMBUSTION TURBINES AS DEFERRED REVENUE EXPENDITURE LAND CHARGED THE SAME TO P&L ACCOUNT OF EACH YEAR DEPENDING ON T HE TIME FOR WHICH THE TURBINES WERE PUT TO USE IN THE SAID YEAR TAKING THE LIFE OF TURBINES AS 24,000 WORKING HOURS. DURING THE YEAR T HE SAID METHOD OF ACCOUNTING WAS DISCONTINUED AND EXPENDITURE INCURRE D ON MAJOR MAINTENANCE FOR THE YEAR AND ALSO BALANCE DEFERRED REVENUE ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 6 EXPENDITURE AS AT MARCH 31-3- 2005 HAS BEEN CHARGED OFF P&L ACCOUNT. THE ASSESSEE PLEADS THAT THERE IS NO JUSTI FICATION FOR IGNORING THIS DEDUCTION. 2.4.3 FOREIGN EXCHANGE GAIN OF EARLIER YEARS: RS.4, 13,30,847: THE ASSESSEE EARNED RS.4,13,30,847/- ON ACCOUNT OF FORE IGN EXCHANGE FLUCTUATION DUE TO CANCELLATION OF FORWARD CONTRACT S ENTERED INTO WITH LOBI FOR HONOURING LC PAYMENTS FOR IMPORT OF MACHINERY F OR FURTHER EXPANSION PROJECT. (PLEASE SEE DETAILS IN ANNEXURE 'A' ) THE ASSESSEE SUBMITS THAT AS PER THE PROVISIONS OF SECTION 43A F OREIGN EXCHANGE FLUCTUATION IN RESPECT OF IMPORTS OF MACHINERY SHOU LD BE REDUCED FROM THE COST OF MACHINERY. THE ASSESSEE SUBMITS THAT TH E SAID FOREIGN EXCHANGE FLUCTUATION OF RS. 4,13,30,847 WAS BY MIST AKE CONSIDERED AS INCOME THOUGH THE SAME IS TO BE ADJUSTED AGAINST CO ST OF THE SAID ASSETS. THEREFORE THE ASSESSEE HAS REVERSED THE SAI D AMOUNT OF RS. 4,13,30,847 DURING THE ASSESSMENT YEAR 2006-07 AND CHARGED TO P&L ACCOUNT AS EXTRAORDINARY ITEM. THERE IS NO JUSTIFIC ATION IN STATING THAT THIS AMOUNT SHOULD NOT BE DEDUCTED. 2.4.4 ADVERTISEMENT: RS.4,55,OOO: DURING THE EARLIE R YEARS, THE ASSESSEE WRONGLY CAPITALIZED AN AMOUNT OF RS.4,55,0 00 INSTEAD OF CHARGING IT TO P&L ACCOUNT . THE EXPENDITURE RELATE D TO THE EXPANSION (PHASE II) THE ASSESSEE THEREFORE REDUCED THE SAME FROM CAPITALIZATION AND CHARGED TO P&L ACCOUNT. THE RE IS NO JUSTIFICATION IN STATING THAT THIS AMOUNT SHOULD NO T BE DEDUCTED. 2.4.5 SERVICE TAX OF EARLIER YEARS : RS.1,33,508: T HE ASSESSEE RECEIVED INVOICE FROM IDBI FOR RS.1,33,508 TOWARDS SERVICE TAX ON LENDER AGENT FEE FOR FINANCIAL YEAR 2004-05 SINCE T HEY DID NOT CHARGE SERVICE TAX DURING EARLIER YEAR. HENCE THE S AME IS CHARGED TO P&L ACCOUNT AS EXTRAORDINARY ITEM. THERE IS NO J USTIFICATION IN STATING THAT THIS AMOUNT 2.4.6 MINIMUM TAKE OFF OF NAPHTA: RS.34,59,126: THE ASSESSEE HAS NAPHTA FACILITY WITH BHARAT PETROLEUM CORPORATION L TD AND HAS TO PAY SOME AMOUNT FOR NON-UTILISATION OF 2003-04 AND 2004-05 WHICH HAD TO BE REVERSED DURING THE CURRENT YEAR ON ACCOUNT OF CHANGES IN MINIMUM TAKE OFF QUANTITY. THIS AMOUNT H AS ACTUALLY BEEN REDUCED FROM THE EXPENDITURE ON EXTRAORDINARY ITEMS.{25,95,54,686 -34.59.126 = 25,60,95,560). 2.5 THE ASSESSEE RELIED ON THE UNDER MENTIONED DECI SIONS. COPIES ARE SUBMITTED (PAGES 16 TO 20, PAGES 21 TO 24 AND P AGES 25 TO 31 OF PAPER-BOOK) 1. CIT VS KHAITAN CHEMICALS AND FERTILISERS LTD 307 IT R 150 DEL WHEREIN IT WAS HELD THAT PRIOR PERIOD/EXTRAORDINARY ITEMS DEBITED TO P&L ACCOUNT CANNOT BE ADDED BACK WHILE COMPUTING BOOK PROFITS. 2. GULF OIL CORPORATION LTD VS ACIT LL11TO 124 HYD WHE REIN A SIMILAR VIEW WAS TAKEN BY THE INCOME TAX APPELLATE TRIBUNAL, HYDERABAD BENCH. ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 7 3. APOLLO TYRES LTD VS CIT 255 ITR 273 SC. THE HON'BLE SUPREME COURT HELD THAT THE ASSESSING OFFICER HAS L IMITED POWER OF MAKING INCREASES AND REDUCTIONS AS PROVIDE D FOR IN THE EXPLANATION TO SEC.115J. THEREFORE THE ASSESSEE SUBMITS THAT SINCE PRIOR PERIOD/EXTRAORDINARY ITEMS ARE NOT SUCH ITEMS WHICH ARE SPECIFIED IN CLAUSES (A) TO (I) OF EXPLANATION 1 TO SEC.115JB, SUCH AMOUNTS ARE TO BE ALLOWED AS EXPENDITURE BUT CANNOT BE ADDED TO THE NET PROFIT W HILE COMPUTING BOOK PROFITS UNDER SEC. 115JB. 2.6 HOWEVER, THE C.I.T HELD THAT THE EXTRAORDINARY ITEMS ARE NOT ITEMS TO BE DEBITED TO P&L ACCOUNT. HE STATED THAT SERVICE TAX LIABILITY OF EARLIER YEARS IS LIABILITY FOR THOSE Y EARS AND IS NOT TO BE DEBITED TO P&L ACCOUNT OF THIS YEAR. SIMILARLY HE H ELD THAT FOREIGN EXCHANGE GAIN OF EARLIER YEARS IF ACCRUED DURING TH E YEAR WILL BE TAXABLE IN THIS YEAR AND CANNOT BE REDUCED FROM THE P&L ACCOUNT. HE ALSO OBSERVED THAT BOOK PROFIT SHOWN BY THE ASSESSE E AS PER ACCOUNTS IS RS.36,41,92,830/- AND SUBSEQUENT ADJUST MENTS WOULD NOT BE CONSIDERED AS FORMING PART OF THE BOOK PROFI T. HE ACCORDINGLY HELD THAT BOOK PROFIT FOR THE YEAR U/S.115JB IS RS. 36,41,92,830/- 2.7 THE ASSESSEE SUBMITS THAT IN THE LIGHT OF THE F ACTS SUBMITTED ABOVE AND THE JUDICIAL DECISIONS, THE ACTION OF THE ASSESSING OFFICER IN TAKING BOOK PROFIT AT RS.10,69,63,873/- IS NEITH ER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF REVENUE AND THE IMPU GNED ORDER IS LIABLE TO BE QUASHED TO THIS EXTENT. G ROUND NO:3(A) AND 3(B): (PERTAINS TO COMPUTATION OF BOOK PROFIT BY TAKING INTO ACCOUNT INCOME TAX REIMBURSEMENT THOUGH DISPUTED AND TO VERIFY COMPUTATION OF BOOK PROFIT UJS.115JB) 3.1 THE C.I.T OPINED THAT FOR THE YEAR, NET PROFIT AFTER TAXES WAS RS.115,43,28,808/- AND THAT THIS AMOUNT SHOULD HAVE BEEN CONSIDERED AS THE STARTING POINT FOR THE COMPUTATIO N OF INCOME U/S.115JB. HE FOUND FROM NOTE 4 TO NOTES ON ACCOUNT S THAT DURING THE YEAR, THE ASSESSEE HAS WRITTEN BACK TO P&L ACCO UNT, AN AMOUNT OF RS.105,21,23,708/- ON ACCOUNT OF DEFERRED TAX LI ABLILIETY CREATED EARLIER. THE SAID NOTE IS REPRODUCED HEREUNDER- NOTE 4 IN NOTES TO ACCOUNTS: THE COMPANY RECOGNIZED DEFERRED TAX LIABILITY AS PER AS-22 ONLY FOR THE PE RIOD AFTER THE EXPIRY OF THE PRESENT POWER PURCHASE AGREEMENT WITH APTRANSCO IN 2015 SINCE UP TO THAT TIMEAPTRANSCO HA S TO REIMBURSE INCOME TAX PAYABLE BY THE ASSESSEE COMPAN Y. HENCE DEFERRED TAX LIABILITY CREATED EARLIER UPTO T HAT PERIOD IS WRITTEN BACK TO P&L ACCOUNT DURING THE YEAR. 3.2 THE C.I.T OPINED THAT THE ASSESSING OFFICER HAS NOT EXAMINED THE IMPLICATION OF THIS CREDIT ENTRY AND THE CONNECTED NOTE. 3.3 THE ASSESSEE FURNISHED ITS REPLY ON THIS ISSUE STATING THAT THE DEFERRED TAX LIABILITY OF RS.105,21,23,708/- CREDIT ED THIS YEAR IS ONLY A REVERSAL OF DEFERRED TAX LIABILITY DEBITED TO P&L ACCOUNT IN EARLIER ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 8 YEARS AND THEREFORE THE BOOK PROFITS CANNOT BE COMP UTED TAKING THE NET PROFIT OF RS.1L5,43,28,808/- AS THE STARTING PO INT FOR COMPUTING INCOME U/S.1L5JB SINCE DEFERRED TAX LIABILITY OF RS .105,21,23,708/- WAS NOT CLAIMED AS DEDUCTION WHILE COMPUTING BOOK P ROFIT IN ASSESSMENT YEARS IN WHICH SUCH PROVISION WAS DEBITE D. THE ASSESSEE ALSO SUBMITTED THAT EVEN IF THE STARTING POINT FOR COMPUTATION FOR COMPUTATION WERE TO BE TAKEN AT RS.1L5,43,28,808/- EXCESS DEFERRED TAX LIABILITY OF RS.105,21,23,708/- CREDITED TO P&L ACCOUNT IS TO BE REDUCED FROM THE SAID PROFIT OF RS.115,43,28,808/- IN VIEW OF CLAUSE (I) OF EXPLANATION (1) TO SEC.115JB. THE ASSESSEE P OINTED OUT THAT THE DEFERRED TAX LIABILITY CREDITED TO P&L ACCOUNT THIS YEAR WAS STATING THAT THE STARTING POINT FOR COMPUTING BOOK PROFITS IS TO BE TAKEN AT RS.1L5,43,28,808/-. THE ANNUAL REPORTS FOR THE FINANCIAL YEARS 2002-03 AND 2005-06 ARE SUBMITTED (ANNEXURES BAND C) FROM WHICH IT CAN BE SEEN THAT THE COMPUTATION OF BOOK P ROFIT IS IN ORDER(PLEASE SEE P&L ACCOUNTS ON PAGES 15 AND 9 RES PECTIVELY). COMPUTATIONS OF TOTAL INCOME AND BOOK PROFIT FOR TH E ASST. YEARS 2002-03 TO 2006-07 ARE ALSO SUBMITTED (ANNEXURE D). 3.4 THE CIT DID NOT ACCEPT THE REPLY OF THE ASSESSE E. HE STATED THE ASSESSEE HAS NOT OFFERED TO TAX INCOME TAX AMOUNT R ECEIVABLE BY THE ASSESSEE FROM APTRANSCO WHICH WAS LEGALLY ENFORCEAB LE DEMAND FOR WHICH THE ASSESSEE HAS RAISED BILLS FOR REIMBUR SEMENT. THE CIT ALSO STATED THAT AS THE ASSESSEE IS FOLLOWING MERCA NTILE SYSTEM OF ACCOUNTING, IT REIMBURSEMENT ACCRUED TO IT AND IT I S INCOME OF THE ASSESSEE. APTRANSCO AS PER POWER PURCHASE AGREEMENT WHICH IS IN FORCE TILL 2015. THOUGH THE ASSESSEE HAS NOT ADMITT ED THE INCOME, THE A.O HAS BEEN BRINGING TO TAX SUCH ACCRUED INCOME BY WAY OF TAX REIMBURSEMENT. IN THE LIGHT OF THESE OBSERVATIONS, THE C.I.T DIRECTED THE A.O TO VERIFY THE COMPUTATION OF BOOK PROFIT FO R EARLIER ASSESSMENT YEARS AND TAKE APPROPRIATE ACTION TO RECOMPUTE THE BOOK PROFIT FOR THIS YEAR. 3.5 THE DIRECTION OF THE CI.T IN THIS REGARD IS NOT CORRECT. THE ASSESSEE HAS BEEN CLAIMING YEAR AFTER YEAR THAT IT HAS NOT R ECEIVED THE INCOME TAX RECEIVABLE AS PER PPA WITH APSEB. THE ASSESSEE HAS FURNISHED EVIDENCE OF THE FACT THAT APTRANSCO HAS BEEN DISPUT ING ITS LIABILITY. THE DEFERRED TAX LIABILITY CREDITED TO P&L ACCOUNT THIS YEAR WAS WITHDRAWN FROM PROVISIONS MADE IN EARLIER YEARS AND DURING THE YEARS IN WHICH PROVISIONS WERE MADE BY DEBITING TO P&L AC COUNT, SUCH PROVISIONS WERE NOT DEDUCTED WHILE COMPUTING BOOK P ROFITS. IN THESE CIRCUMSTANCES, THE P&L ACCOUNT DRAWN UP BY THE ASSE SSEE DID NOT SUFFER FROM ANY ERROR AND CONSEQUENTLY THERE IS NO ERROR IN THE ASST. ORDER ON THIS COUNT AND ALSO NO PREJUDICE IS CAUSED TO THE INTEREST OF REVENUE AND THEREFORE THE CI.T IS NOT CORRECT IN IS SUING DIRECTIONS TO THE A.O IN THIS REGARD. THE ASSESSEE PRAYS THAT THE ORDER OF THE CI.T IN THIS REGARD MAY BE QUASHED. ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 9 GROUND NO:4(A), 4(B) AND 4(C): (PERTAIN TO DIRECTIO N OF (C.I.T TO INCREASE BOOK PROFIT BY RS.16,41,08,260) 4.1 IN THE SHOW CAUSE THE CI.T STATED THAT AS PER A UDITORS' REPORT IN THE PRINTED ACCOUNTS, (ITEM 11 ON PAGE 18 OF PUBLIS HED ACCOUNTS) THE ASSESSEE CHANGED THE METHOD OF ACCOUNTING IN RESPEC T OF DEFERRED REVENUE EXPENDITURE PERTAINING TO MAJOR MAINTENANCE WHICH RESULTED IN DECREASE OF PROFITS OF THE YEAR BY RS.16,41,08,2 60/- AND THAT THERE IS NO EVIDENCE WHETHER THE A.O EXAMINED THIS POINT . 4.2 THE ASSESSEE REPLIED STATING THAT MAJOR MAINTEN ANCE EXPENDITURE WAS TO BE INCURRED AT REGULAR INTERVALS FOR KEEPING THE MACHINERY IN WORKING CONDITION AS PER RECOMMENDATION OF EQUIPMEN T SUPPLIER. THE EXPENDITURE SO INCURRED IS IN THE NATURE OF REVENUE EXPENDITURE. THE MANAGEMENT OF THE COMPANY HAS TAKEN A DECISION THAT IN THE BOOKS OF ACCOUNT THE SAID EXPENDITURE BE AMORTISED OVER A PE RIOD OF THREE YEARS AND CHARGED THE SAME TO P&L ACCOUNT OF EACH Y EAR DEPENDING UPON THE NUMBER OF HOURS FOR WHICH THE TURBINES WER E PUT TO USE IN THE SAID YEAR TAKING THE LIFE OF TURBINES AS 24000 WORKING HOURS. FOR THE PURPOSE OF COMPUTING INCOME UNDER NORMAL PROVIS IONS OF THE I.T ACT, THE ASSESSEE HAS TAKEN THE ENTIRE MAJOR MAINTE NANCE EXPENDITURE AS DEDUCTION IN THE YEAR IN WHICH IT WAS INCURRED. HOWEVER, DURING THE ASST. YEAR 2006-07, ACCOUNTING EXPERTS SUGGESTED TH AT THE METHOD OF ACCOUNTING OF MAJOR MAINTENANCE IN THE BOOKS OF ACC OUNT I.E., AMORTISING OVER A PERIOD OF THREE YEARS MAY NOT BE CORRECT SINCE MAJOR MAINTENANCE IS REVENUE EXPENDITURE AND NOT CAPITAL EXPENDITURE. THEREFORE AS SUGGESTED BY THEM, OLD METHOD OF ACCOU NTING WAS DISCONTINUED AND EXPENDITURE INCURRED ON MAJOR MAIN TENANCE DURING THE ASST. YEAR 2006-07 AND THE BALANCE IN DEFERRED REVENUE EXPENDITURE AS AT 31-3-2005 WAS CHARGED TO P&L ACCO UNT IN ASST. YEAR 2006-07. THE ASSESSEE ALSO TOOK SUPPORT FROM THE DE CISION OF THE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MFG. CO . LTD 82 ITR 363 SC IN WHICH IT WAS HELD AS UNDER: WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR D EDUCTION OR NOT WILL DEPEND UPON THE PROVISIONS OF LAW RELAT ING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGH T TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF E NTRIES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN T HE MATTER'. 4.3 THE ASSESSEE SUBMITTED THAT IN THE LIGHT OF TH E AFORESAID DECISION, THE MAJOR MAINTENANCE EXPENDITURE WHICH I S IN THE NATURE OF REVENUE EXPENDITURE IS ALLOWABLE AS DEDUCTION IN CO MPUTING INCOME IRRESPECTIVE OF THE TREATMENT IN BOOKS OF ACCOUNT. THE ASSESSEE ALSO SUBMITTED THAT BY AMORTISING MAJOR MAINTENANCE EXPE NDITURE IN THE EARLIER YEARS, PROFITS HAD GONE UP TO THAT EXTENT A ND TAXES WERE PAID ON SUCH INCREASED BOOK PROFITS. THEREFORE BY ALLOWI NG MAJOR MAINTENANCE EXPENDITURE DURING ASST. YEAR 2006-07, THERE WAS NO LOSS TO REVENUE WHICH OTHERWISE WOULD HAVE BEEN ALL OWED IN THE YEAR IN WHICH IT WAS INCURRED. 4.4 THE ASSESSEE ALSO SUBMITTED THAT AS FAR AS BOOK PROFIT IS CONCERNED, MAJOR MAINTENANCE WHICH IS DEBITED TO TH E P&L ACCOUNT CANNOT BE ADDED BACK BECAUSE THE SAID EXPENDITURE I S NOT ONE OF THE ITEMS SPECIFIED IN CLAUSES (A) TO (I) OF EXPLANATIO N 1 TOSEC.115JB. THE ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 10 ASSESSEE RELIED ON THE DECISION OF THE SUPREME COUR T IN THE CASE OF APOLLO TYRES VS. CIT 255 ITR 273 SC. THE ASSESSEE S UBMITTED THAT IN VIEW OF THE EXPLANATION FURNISHED, IT MAY BE SEEN T HAT THE ASSESSMENT ORDER IS NOT ERRONEOUS AND IS NOT PREJUDICIAL TO TH E INTEREST OF REVENUE. THE ASSESSEE REQUESTED THE C.I.T TO CANCEL THE NOTI CE ISSUED UNDER SEC.263. DETAILS OF THE MAJOR MAINTENANCE EXPENDITU RE ARE SUBMITTED AT PAGE 33 OF PAPER-BOOK. 4.5 THE CLT, HOWEVER, PASSED THE IMPUGNED ORDER DIR ECTING THE A.O TO INCREASE THE BOOK PROFIT BY RS.16,41,08,260/-. THE REASONING ON WHICH THE CLT DIRECTED THIS ADDITION IS CONTAINED I N PARAS 3.1 TO 3.3 OF THE ORDER OF THE CLT. IT MAY BE SEEN FROM THE SAID REASONING THAT THE CLT HAS NOT APPRECIATED THE FACTS OF THE CASE AND H E ATTRIBUTED THE AMOUNT OF RS.16,41,08,260 TO THE CAPITALIZATION OF INSURANCE SPARES AND CONSEQUENT CLAIM OF DEPRECIATION. IT IS ALSO SU BMITTED THAT A PART OF THE IMPUGNED AMOUNT TO THE EXTENT OF RS.7,04,25, 224/- ALREADY STANDS INCLUDED IN THE DIRECTION TO DISALLOW THE EX TRAORDINARY ITEMS OF WHICH DEFERRED REVENUE EXPENDITURE FORMS A PART. IN THE LIGHT OF THESE SUBMISSIONS, THE ASSESSEE SUBMITS THAT THE C. LT ERRED IN HOLDING THAT THE ASSESSMENT ORDER MADE BY THE ASSES SING OFFICER U/S.143(3) ON 31-03-2008 IS ERRONEOUS IN REGARD TO THE VARIOUS ITEMS ENUMERATED IN HIS ORDER. THE ASSESSEE PRAYS THAT TH E ORDER U/S.263 PASSED BY THE C.I.T MAY BE DIRECTED TO BE QUASHED. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER , SUPPORTED THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME-TA X. 7. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE R IVAL CONTENTIONS. BEFORE ADVERTING TO THE VARIOUS ITEMS CONSIDERED BY THE COMMISSIONER, IT IS NECESSARY TO EXTRACT THE RELEVA NT PROVISIONS OF THE ACT, PARTICULARLY EXPLANATION-1, WHICH DETERMINES THE BO OK PROFIT FOR THE PURPOSE OF S.115JB. THE EXPLANATION 1 IS AS UNDER- EXPLANATION [ 1 ].FOR THE PURPOSES OF THIS SECTION, 'BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION ( 2), AS INCREASED BY ( A ) THE AMOUNT OF INCOME-TAX PAID OR PAYABLE, AND TH E PROVISION THEREFOR; OR ( B ) THE AMOUNTS CARRIED TO ANY RESERVES, BY WHATEVER NAME CALLED , OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33AC; OR ( C ) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS MA DE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILI TIES; OR ( D ) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF SUB SIDIARY COMPANIES; OR ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 11 ( E ) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PROPO SED ; OR ( F ) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE T O ANY INCOME TO WHICH SECTION 10 (OTHER THAN THE PROVISIONS CONT AINED IN CLAUSE ( 38 ) THEREOF) OR SECTION 11 OR SECTION 12 APPLY; OR ( G ) THE AMOUNT OF DEPRECIATION, ( H ) THE AMOUNT OF DEFERRED TAX AND THE PROVISION THER EFOR, ( I ) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET, IF ANY AMOUNT REFERRED TO IN CLAUSES ( A ) TO ( I ) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY, ( I ) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVISIO N (EXCLUDING A RESERVE CREATED BEFORE THE 1ST DAY OF APRIL, 1997 O THERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT), IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT: PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO A N ASSESSEE IN ANY PREVIOUS YEAR, THE AMOUNT WITHDRAWN FROM RESERV ES CREATED OR PROVISIONS MADE IN A PREVIOUS YEAR RELEVANT TO T HE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1997 SHALL NOT BE REDUCED FROM THE BOOK PROFIT UNLE SS THE BOOK PROFIT OF SUCH YEAR HAS BEEN INCREASED BY THOSE RES ERVES OR PROVISIONS (OUT OF WHICH THE SAID AMOUNT WAS WITHDR AWN) UNDER THIS EXPLANATION OR EXPLANATION BELOW THE SECOND PROVISO TO SECTION 115JA , AS THE CASE MAY BE; OR ( II ) THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVISIO NS OF SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE ( 38 ) THEREOF) OR SECTION 11 OR SECTION 12 APPLY, IF ANY SUCH AMOU NT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT; OR ( IIA ) THE AMOUNT OF DEPRECIATION DEBITED TO THE PROFIT AND LOSS ACCOUNT (EXCLUDING THE DEPRECIATION ON ACCOUNT OF R EVALUATION OF ASSETS); OR ( IIB ) THE AMOUNT WITHDRAWN FROM REVALUATION RESERVE AND CREDITED TO THE PROFIT AND LOSS ACCOUNT, TO THE EXTENT IT DOES NOT EXCEED THE AMOUNT OF DEPRECIATION ON ACCOUNT OF REVALUATION OF ASSETS REFERRED TO IN CLAUSE ( IIA ); OR ( III ) THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION, WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT. EXPLANATION .FOR THE PURPOSES OF THIS CLAUSE, ( A ) THE LOSS SHALL NOT INCLUDE DEPRECIATION; ( B ) THE PROVISIONS OF THIS CLAUSE SHALL NOT APPLY IF THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION IS NIL; OR] ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 12 ( IV ) TO ( VI ) .. ( VII ) THE AMOUNT OF PROFITS OF SICK INDUSTRIAL COMPANY FOR THE ASSESSMENT YEAR COMMENCING ON AND FROM THE ASSESSME NT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE SAID COM PANY HAS BECOME A SICK INDUSTRIAL COMPANY UNDER SUB-SECTION (1) OF SECTION 17 OF THE SICK INDUSTRIAL COMPANIES (SPECIA L PROVISIONS) ACT, 1985 (1 OF 1986) AND ENDING WITH THE ASSESSMEN T YEAR DURING WHICH THE ENTIRE NET WORTH OF SUCH COMPANY B ECOMES EQUAL TO OR EXCEEDS THE ACCUMULATED LOSSES. EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE, 'NET WORTH' SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE ( GA ) OF SUB-SECTION (1) OF SECTION 3 OF THE SICK INDUSTRIAL COMPANIES (SPEC IAL PROVISIONS) ACT, 1985 (1 OF 1986); OR ( VIII ) THE AMOUNT OF DEFERRED TAX, IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT. EXPLANATION 2. . 8. AS CAN BE SEEN FROM THE ABOVE PROVISION OF THE ACT, THE COMPUTATION OF BOOK PROFIT STARTS FROM THE NET PRO FIT AS SHOWN IN THE PROFIT & LOSS ACCOUNT AS INCREASED BY ITEMS PRESCRIBED IN (A) TO (I) AND REDUCED BY ITEMS (I) TO (VIII). SO, NECESSARILY ANY OF THE AMOUNTS WHICH ARE TO BE ADDED OR REDUCED CAN ONLY BE CONSIDERED IN THE LIGH T OF THE ABOVE ITEMS SPECIFIED, AS ABOVE IN THE ACT. THE AMOUNTS CONSIDE RED BY THE COMMISSIONER OF INCOME-TAX IN OUR VIEW DO NOT COM E WITHIN THE PURVIEW OF THE ADJUSTMENTS REQUIRED UNDER S.115JB. 9. THE FIRST ITEM CONSIDERED IS WITH REFERENCE TO DEFERRED REVENUE EXPENDITURE/EXTRA-ORDINARY ITEM CONSIDERED IN THE P ROFIT & LOSS ADJUSTMENT ACCOUNT. THERE IS NO DISPUTE WITH REFERE NCE TO THE FACT THAT THESE ARE ASCERTAINED LIABILITIES. THERE IS ALSO NO DISPUTE WITH REFERENCE TO THE FACT THAT THESE AMOUNTS ARE ACCEPTED IN THE REG ULAR COMPUTATION. UNLESS THESE ARE THE AMOUNTS WHICH ARE TO BE INCREA SED AS SPECIFIED IN EXPLANATION (1), THE SAME CANNOT BE CONSIDERED FOR DISALLOWANCE AS DECIDED BY THE COMMISSIONER. MAY BE, THE SERVICE T AX LIABILITY IS OF EARLIER YEAR, BUT IT HAS CRYSTALISED IN THE YEAR UNDER APPE AL AND HAS BEEN ALLOWED IN THE REGULAR COMPUTATION. LIKEWISE, FOREIGN EX CHANGE GAIN OF EARLIER YEAR, DEPRECIATION ON CAPITAL STORES, ETC. CONSIDER ED TO THE EXTENT OF ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 13 RS.25,60,95,560 ARE ALL ITEMS OF EXPENDITURE AND NO T PROVISIONS OR AMOUNTS CARRIED TO RESERVE NOR CAN BE CONSIDERED AS AMOUNTS OF EXPENDITURE RELATING TO ANY EXEMPT INCOME. SINCE TH ESE AMOUNTS ARE NOT ITEMS SPECIFIED IN THE EXPLANATION, THE CHARGING OF THE AMOUNT IN THE PROFIT & LOSS APPROPRIATION ACCOUNT CANNOT BE CONSIDERED F OR DISALLOWANCE, WHILE CONSIDERING THE BOOK PROFITS. WE DO NOT FIND ANY M ISTAKE IN THE COMPUTATION, AS OFFERED BY THE ASSESSEE, AT THE TIM E OF ASSESSMENT. 10. WITH REFERENCE TO THE SECOND ITEM OF DEFERRED TAX LIABILITY, IT IS THE CONTENTION OF THE COMMISSIONER OF INCOME-TAX TH AT THE ASSESSEE HAS NOT OFFERED TO TAX THE INCOME TAX RECEIVABLE FROM T HE AP TRANSCO WHICH WAS LEGALLY ENFORCEABLE, AND OBSERVES THAT EVEN THE ASSESSEE HAS RAISED THE BILLS FOR REIMBURSEMENT FOR ITS LIABILITY OF IN COME TAX AND ACCOUNTED FOR IN ITS BOOKS OF ACCOUNT. HOWEVER, THOUGH THE ASS ESSEE HAS NOT ADMITTED THIS INCOME FOR TAX, THE ASSESSING OFFICER HAS BEEN BRINGING TO TAX SUCH ACCRUED INCOME BY WAY OF INCOME-TAX REIMBURSEMENT. WITH REFERENCE TO THIS AMOUNT ALSO, WE ARE UNABLE TO UNDERSTAND HOW A N AMOUNT, WHICH IS NOT ACCOUNTED FOR IN THE BOOKS AS INCOME, CAN BE BR OUGHT TO TAX UNDER THE PROVISIONS OF S.115JB. IT MAY BE AN ITEM, WHICH CA N BE CONSIDERED AS INCOME FOR THE PURPOSE OF NORMAL COMPUTATION, BUT UNLESS THESE AMOUNTS ARE TAKEN AS INCOME IN THE BOOKS OF ACCOUNT AND SHO WN IN THE RELEVANT PROFIT & LOSS ACCOUNT, ADJUSTMENTS SO SPECIFIED WH ILE ARRIVING AT THE BOOK PROFITS UNDER S.115JB CANNOT BE CONSIDERED AND ADJU STED IN RECOMPUTING THE BOOK PROFIT OF THE YEAR. AS SUBMITTED BY THE AS SESSEE, THESE AMOUNTS ARE BEING ADJUSTED EVERY YEAR ACCORDING TO THE AMO UNTS ACCEPTED BY THE TRANSCO AND ARE BEING OFFERED AS INCOME IN THE RESP ECTIVE YEAR. THE ACCRUAL OR TAXABILITY OF THESE ITEMS IN THE NORMAL COMPUTATION CAN BE CONSIDERED ACCORDING TO THE INTERPRETATION OF THE P ROVISIONS, BUT UNDER THE PROVISIONS OF S.115JB ONE HAS TO STRICTLY GO BY THE SAID SECTION, AS PRESCRIBED IN EXPLANATION 1, AS THIS PROVISION IS S PECIFIC ALTERNATE PROVISION TO REGULAR TAX AND THIS HAS TO BE FOLLOWED STRICTLY IN ACCORDANCE WITH THE PROVISIONS OF LAW. NOTHING HAS BEEN BROUGHT ON REC ORD BY THE ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 14 COMMISSIONER THAT THIS AMOUNT HAS TO BE INCREASED A S PART OF BOOK PROFIT AS PER EXPLANATION 1 PROVIDED UNDER THE ACT. THERE FORE, THIS DIRECTION OF THE COMMISSIONER FOR CONSIDERING ACCRUAL OF INCOME IN REGULAR COMPUTATION, TO BE ADDED UNDER S.115JB CANNOT BE UP HELD. 11. THE THIRD ITEM CONSIDERED BY THE COMMISSIONER OF INCOME-TAX IS EVEN PECULIAR IN THE SENSE THAT ITEM 11 IN THE N OTE STATES AS UNDER- 3.1 COMPUTATION OF BOOK PROFIT CAPITALIZATUIION O F SPARES AND STORES: ITEM NO.11 IN NOTES TO ACCOUNTS STATES THAT UPTO T HE ACCOUTING YEAR 31 ST MARCH 2005 THE COMPANY HAD TREATED MAJOR MAINTENANC E EXPENDITURE INCURRED ON COMBUSTION TURBINES AS DEFERRED REVENUE EXPENDITURE AND CHARGED THE SAME TO THE PROFIT & LOSS ACCOUNT OF EA CH YEAR DEPENDING ON THE TIME FOR WHICH THE TURBINES WERE PUT TO USE IN THE SAID YEAR TAKING THE LIFE OF TURBINES AS 24000 WORKING HOURS. DURING THE YEAR THE SAID METHOD OF ACCOUNTING WAS DISCONTINUED AND EXPENDITURE INCU RRED ON MAJOR MAINTENANCE FOR THE YEAR AND THE BALANCE IN DEFERRE D EXPENDITURE AS ON 31 ST MARCH 2005 IS CHARGED OFF TO THE PROFIT & LOSS ACC OUNT. ON ACCOUNT OF THE SAID CHANGE THE PROFIT FOR THE YEAR IS LOWER BY RS.16,41,08,260/-. 12. A DETAILED CHART GIVEN IN THIS REGARD ON THE BASIS OF WHICH THE ABOVE NOTE WAS MADE IS AS UNDER- ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 15 DETAILS FOR RS.16,41,08,260/- REFERRED TO IN NOTE 11 OF ANNUAL ACCOUNTS FOR THE FINANCIAL YEAR 2005-2006. MAJOR MAINTENANCE EXPENDITURE HOURS TO BE OPERAT- ED AMOUNT OPERATED HOURS DURING THE YEAR OF ACCOUNTING AMOUNTS TO BE DEBITED AS PER THE OLD METHOD BALANCE OPERATING HOURS LEFT OVER BALANCE ALSO WRITTEN OFF IN ASST. YEAR 2006-07 DUE TO CHANGE IN METHOD OF ACCOUNTING REMARKS RS. RS. RS. GAS TUR - BINE1 (BALANCE AS ON 01- 04-2005) GAS TUR- BINE-3 (BALANCE AS ON 01- 04-2005 DEBITED AS EXTRA- ORDINARY ITEMS 9,046 19,716 48,673,996 125,000,335 _________ 173,674,331 9,046 8,608 48,673,996 54,575,111 ________ 103,249,107 11,108 70,425,224 ________ 70,425,224 THIS AMOUNT HAS BEEN DEBITED TO P& L IN THE BELOW LINE UNDER EXTRA- ORDINARY ITEM GAS TUR- BINE-2 (INCURRED DURING THE YEAR 24,000 124,702,877 5,970 31,019,841 18,030 93,683,036 THIS AMOUNT HAS BEEN DEBITED TO P&L IN THE ABOVE LINE TOTAL 52,762 298,377,208 23,624 134,268,948 29,138 164,108,260 13. THERE IS NO DISPUTE WITH REFERENCE TO THE AMO UNT OF RS.29,83,77,208 DEBITED TO THE PROFIT & LOSS ACCOU NT, WHICH WAS ALSO ALLOWED IN THE COMPUTATION. THE AMOUNT TO BE DEBIT ED AS PER THE OLD METHOD WAS ONLY RS.13,42,69,948. IT IS ONLY A NOTE TO THE ACCOUNT BY THE ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 16 CHARTERED ACCOUNTANT QUALIFYING THE PROFIT & LOSS A CCOUNT, WHICH IN NO WAY GIVES RISE TO ANY ADJUSTMENT WITH REFERENCE TO THE AMOUNT IN QUESTION UNDER S.115JB. WHETHER THE ASSESSEE IS FOLLOWING ACCOUNTING STANDARD 10 OR NOT, THE FACT THAT IT HAS DEBITED THE ENTIRE AMOUNT OF RS.29,83,77,208 TO THE PROFIT & LOSS ACCOUNT WAS NO T DISPUTED. THERE IS ALSO NO DISPUTE THAT THIS IS NOT A PROVISION FOR DI MINUTION IN THE VALUE OF THE ASSET AS CONSIDERED BY THE COMMISSIONER, AS IT IS ONLY DIFFERENCE BETWEEN THE ACTUAL AMOUNT DEBITED TO THE PROFIT & L OSS ACCOUNT, ON WHICH THERE IS NO DISPUTE AND THE AMOUNT THAT COULD HAVE BEEN ACTUALLY DEBITED HAD THERE BEEN NO CHANGE IN ACCOUNTING PROCEDURE. T HE NOTIONAL DIFFERENCE AS REPORTED BY THE AUDITORS WITH REFERENCE TO THE P ROFIT & LOSS ACCOUNT OF THE ASSESSEE CANNOT LEAD TO AN ADJUSTMENT UNDER S.1 15JB, UNLESS THE SAME FALL WITHIN THE ADJUSTMENTS AS PROVIDED IN THE EXPLANATION. THE FACT THAT THE ENTIRE AMOUNT OF RS.29,83,77,208 WAS ALSO CONSIDERED IN COMPUTING THE INCOME UNDER S.115JB ALSO INDICATES T HAT THE DISALLOWANCE OF RS.16,41,08,260 IS A DOUBLE DISALLOWANCE, AS TH E SAME WAS PART OF THE AMOUNT, WHICH IS ALREADY DEBITED IN PROFIT & LOSS A CCOUNT AND CONSIDERED IN THE BOOK PROFIT. SINCE THE AMOUNT OF RS.16,48,01 ,260 IS PICKED UP FROM THE ITEM 11 IN THE NOTES TO ACCOUNT, AND SINCE MAJO R MAINTENANCE EXPENDITURE THOUGH CLAIMED AS DEFERRED REVENUE EXP ENDITURE IN THE BOOKS, WAS BEING ALLOWED ON ACTUAL BASIS IN THE CO MPUTATION OF INCOME, IN OUR VIEW, THE DIRECTION OF THE COMMISSIONER TO DIS ALLOW THIS, AMOUNTS TO DOUBLE DISALLOWANCE, AND FURTHER, FALLS OUTSIDE THE PURVIEW OF PROVISIONS OF S.115JB. 14. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION T HAT THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME-TAX CANNOT BE S UPPORTED BOTH ON FACTS OR ON LAW, AND THEREFORE, WE HAVE NO HESITATI ON IN SETTING ASIDE THE ORDER UNDER S.263, AND RESTORING THE ORDER UNDER S. 143(3) PASSED BY THE ASSESSING OFFICER. ASSESSEES GROUNDS IN THIS APPE AL ARE ACCORDINGLY TREATED AS ALLOWED. ITA NO.796/HYD/2004 & 2 23/HYD/2012 M/S. G.V.K. INDUSTRIES LTD., HYDERABAD 17 15. IN THE RESULT, ASSESSEES APPEAL ITA NO.697/H YD/2010 IS ALLOWED. ITA NO.223/HYD/2012 16. SINCE THIS IS AN APPEAL AGAINST THE CONSEQUEN TIAL ORDERS PASSED IN PURSUANCE OF THE ORDER UNDER S.263 OF THE ACT PA SSED BY THE COMMISSIONER OF INCOME-TAX, THIS APPEAL BECOMES AC ADEMIC AS WE HAVE SET ASIDE HEREINABOVE THE SAID ORDER OF THE COMMISS IONER PASSED UNDER S.263 OF THE ACT. CONSEQUENTLY, ASSESSEES GROUNDS ARE CONSIDERED AS ALLOWED FOR STATISTICAL PURPOSES. 17. IN THE RESULT, ASSESSEES APPEAL, ITA NO.223/ HYD/2012 IS ALSO TREATED AS ALLOWED. 18. TO SUM UP, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE COURT ON 31.05.2013 SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER DT/- 31 ST MAY, 2013 COPY FORWARDED TO: 1. M/S. GVK INDUSTRIES LTD., PAIGAH HOUSE, 156 - 159, S.P. ROAD, SECUNDERABAD. 2 . 3. 4. 5. ASST. COMMISSIONER OF INCOME - TAX CIRCLE 1(4), HYDERABAD COMMISSIONER OF INCOME-TAX(APPEALS) II, HYDERABAD COMMISSIONER OF INCOME-TAX(A)-III, HYDERABAD. COMMISSIONER OF INCOME-TAX II, HYDERABAD 6. COMMISSIONER OF INCOME - TAX I, HYDERABAD 7. DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. BVS