Indowind Energy Ltd., CHENNAI V. ACIT, CHENNAI

ITA 936/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8280 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-07-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 27-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUPRIYO PAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Depreciation; Additional depreciation; Bad and doubtful debts; Revenue expenditure
• Section: 143(3); 115JB; 37(1); 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . , ' # . $ , & ' BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICI AL MEMBER ./ I.T.A.NOS.936 & 937/MDS/2015 ( / ASSESSMENT YEARS: 2006-07 & 2008-09) M/S. INDOWIND ENERGY LTD. KOTHARI BUILDINGS, IV FLOOR, 114, NUNGAMBAKKAM HIGH ROAD, CHENNAI -600 034. VS THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(3), CHENNAI-34. PAN: AAACI1806M ( /APPELLANT) ( /RESPONDENT) & ./ I.T.A.NOS.1823 & 1824/MDS/2015 ( / ASSESSMENT YEARS: 2006-07 & 2008-09) THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(3), CHENNAI - 34. VS M/S. INDOWIND ENERGY LTD. KOTHARI BUILDINGS, IV FLOOR, 114, NUNGAMBAKKAM HIGH ROAD, CHENNAI - 600 034. PAN: AAACI1806M ( /APPELLANT) ( /RESPONDENT) ASSESSEE BY : MR. S.SRIDHAR, ADVOCATE REVENUE BY : MR. SUPRIYO PAL, JCIT /DATE OF HEARING : 3 RD AUGUST, , 2016 /DATE OF PRONOUNCEMENT : 25 TH OCTOBER, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- ITA NOS. 936 & 937/MDS/2015 ARE FILED BY THE ASSESS EE AGGRIEVED BY THE SEPARATE ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-6, CHENNAI BO TH DATED 12.02.2015 FOR THE ASSESSMENT YEARS 2006-07 & 2008- 09 IN ITA NOS.143 & 26/CIT(A)-6/2008-09 & 2010-11 2 ITA NOS.936, 937, 1823 & 1824/MDS/2015 RESPECTIVELY PASSED UNDER SECTION 143(3) R.W.S. 250 (6) OF THE ACT. 2. ITA NOS.1823 & 1824/MDS/2015 ARE FILED BY THE REVENUE AGGRIEVED BY THE ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-6, CHENNAI DA TED 12.02.2015 & 23.01.2015 IN ITA NO.143/CIT(A)-6/20 08-09 PASSED UNDER SECTION 143(3) R.W.S. 250(6) OF THE AC T AND IN ITA NO. 234/CIT(A)-6/ 2014-15 PASSED UNDER SECTION 143(3) R.W.S. 147 & 250(6) OF THE ACT. ITA NO.936/MDS/2015 (A.Y. 2006-07): (ASSESSEES APPEAL): 3. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL, HOWEVER, THE CRUXES OF THE ISSUES ARE AS FOLLOWS:- (I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN PARTLY SUSTAINING THE ORDER OF THE LEARNED ASSESSING OFFICER IN REGARD TO DISALLOWANCE OF BAD DEBTS TO THE EXTENT OF 4/5 TH OF THE TOTAL CLAIM OF RS.1,02,00,000/- UNDER SECTION 35D OF THE ACT. (II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD DISALLOWED RS.42,95,568/- BEING COMPENSATION PAYMENT MADE FOR DELAYED COMMISSIONING OF WINDMILLS. 3 ITA NOS.936, 937, 1823 & 1824/MDS/2015 ITA NO.1823/MDS/2015 (A.Y. 2006-07): (REVENUES APPEAL): 4. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS AP PEAL, HOWEVER, THE CRUXES OF THE ISSUES ARE AS FOLLOWS:- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN ALLOWING THE CLAIM OF BAD DEBT IN RESP ECT OF ADVANCES MADE TO M/S. SOPRANO HOLDINGS PVT. LTD. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN ALLOWING 1/5 TH OF THE EXPENSES BEING ADVANCE MADE FOR THE PROJECT TO M/S. CICON WHICH IS NOT RECOVERABLE. III) THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) HAS ERRED IN PARTLY ALLOWING THE DEDUCTION FOR RS.22,04,432/- BEING COMPENSATION PAID TO M/S. INDONET GLOBAL LTD., OF RS.65.00 LAKHS. ITA NO.937/MDS/2015 (A.Y. 2008-09): ): (ASSESSEES APPEAL): 5. THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 HAS RAISED SEVERAL GROUNDS, HOWEVER, THE ISSUES ARE CON CISED FOR ADJUDICATION AS UNDER:- (I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ORDER OF THE LEARNED ASSESSING OFFICER IN REGARD TO DISALLOWANCE OF BAD DEBTS WRITTEN OFF AMOUNTING TO RS.1,50,00,000/- (SIC) RS.1,47,00,000/- BEIN G LAND ADVANCE GIVEN TO M/S.WIPRO FINANCE LTD., WHICH HAS BECOME IRRECOVERABLE. (II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ADDITION OF 4 ITA NOS.936, 937, 1823 & 1824/MDS/2015 RS.4,78,44,777/- BEING RUPEE FLUCTUATION LOSS ON FOREIGN CURRENCY CONVERTIBLE BONDS MADE BY THE THE LEARNED ASSESSING OFFICER. ITA NO.1824/MDS/2015 (A.Y. 2008-09): (REVENUES APPEAL): 6. THE ONLY ISSUE RAISED BY THE REVENUE FOR THE ASSESSMENT YEAR 2008-09 IS THAT THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) HAS ERRED IN ALLOWING THE A DDITIONAL DEPRECIATION CLAIMED BY THE ASSESSEE OF RS.3,02,62 ,222/-. 7. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF POWER GENERATION , TRADING ON WINDMILLS AND HIRE PURCHASE FILED ITS RE TURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 ON 27.11.200 6. SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY AN D ORDERS WERE PASSED BY THE LEARNED ASSESSING OFFICER UNDER SECTION 143(3) OF THE ACT ON 30.12.2008, WHEREIN THE LEARNE D ASSESSING OFFICER HAD MADE SEVERAL ADDITIONS, AGGRI EVED BY WHICH THE ASSESSEE CAME ON APPEAL BEFORE THE LEARNE D COMMISSIONER OF INCOME TAX (APPEALS) WHO PASSED THE APPELLATE ORDER ON 12.02.2015 AGAINST WHICH BOTH TH E PARTIES ARE NOW IN APPEAL BEFORE US. AS REGARDS ASSESSMENT YEAR 5 ITA NOS.936, 937, 1823 & 1824/MDS/2015 2008-09, THE ASSESSEE IS IN APPEAL BEFORE US AGAINS T THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) UNDER SECTION 143(3) R.W.S. 250(6) OF THE ACT DATED 12.02.2015 AND THE REVENUE IS IN APPEAL AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) DA TED 23.01.2015 PASSED UNDER SECTION 143(3) R.W.S. 147 O F THE ACT. ITA NO.936/MDS/2015 (A.Y.2006-07): GROUND NO.1 : DISALLOWANCE OF BAD DEBTS TO THE EXTENT OF 4/5 TH OF THE TOTAL CLAIM OF RS.1,02,00,000/- UNDER SECT ION 35D OF THE ACT:- 8.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LEARNED ASSESSING OFFICER THAT THE ASSESSEE HAD CLAIMED BAD DEBTS AGGREGATING TO RS.1,00,00,000 /- AGAINST THE IRRECOVERABLE ADVANCES MADE TO M/S. C ICON ENVIRONMENT TECHNOLOGIES P.LTD.. IT WAS EXPLAINED B Y THE ASSESSEE THAT IT HAD ADVANCED AN AMOUNT OF RS.1.00 CRORE TO M/S. CICON ENVIRONMENTAL TECHNOLOGIES LTD., IN ORDE R TO IDENTIFY LOCATIONS, CONDUCT SERVICE AND FOR GETTING PERMISSIONS FROM THE APPLICABLE GOVERNMENT AGENCIES WITH RESPEC T TO THE 6 ITA NOS.936, 937, 1823 & 1824/MDS/2015 ASSESSEES PROJECT FOR DEVELOPMENT OF ALTERNATE POW ER. TO SECURE THE ADVANCE, M/S. CICON ENVIRONMENTAL TECHNO LOGIES LTD., HAD GIVEN BANK GUARANTEE. THE DEADLINE DEMAR CATED FOR THE SERVICES TO BE RENDERED BY M/S. CICON ENVIR ONMENTAL TECHNOLOGIES LTD., HAD EXPIRED ON 30.04.2004. HOWEV ER, NO CONSTRUCTIVE SERVICES WERE RENDERED. HENCE, THE ASS ESSEE REQUESTED FOR REFUND WHICH WAS DENIED BY M/S. CICON ENVIRONMENTAL TECHNOLOGIES LTD. THE BANK ALSO REFUS ED TO HONOR THE BANK GUARANTEE. THE SUIT FILED FOR RECOVE RY OF THE ADVANCES WAS PENDING BEFORE THE HONBLE HIGH COURT OF BOMBAY. IN THESE CIRCUMSTANCES, THE ASSESSEE DECIDE D TO WRITE OFF THE AMOUNT ADVANCED TO M/S. CICON ENVIRON MENTAL TECHNOLOGIES LTD., AS BAD DEBT BECAUSE IT WAS RELA TED TO THE MAIN BUSINESS OF THE ASSESSEE. 8.2 THE LEARNED ASSESSING OFFICER WAS OF THE VIEW T HAT THE ADVANCE MADE BY THE ASSESSEE WAS TOWARDS SETTING UP OF A NEW PROJECT AND THEREFORE THE EXPENDITURE INCURRED WAS IN THE NATURE OF PRELIMINARY EXPENSES AND CANNOT BE AMORTI ZED AS PER PROVISIONS OF SECTION 35D OF THE ACT SINCE ONLY SUCH 7 ITA NOS.936, 937, 1823 & 1824/MDS/2015 EXPENSES CAN BE CLAIMED ON THE SUCCESSFUL COMMISSIO N OF THE PROJECT. THE LEARNED ASSESSING OFFICER WAS FUR THER OF THE VIEW THAT THE FOLLOWING PRE-CONDITIONS ENVISAGED IN THE ACT SHOULD BE FULFILLED FOR CLAIMING EXPENDITURE UNDER SECTION 37 OF THE ACT :- I) THERE SHOULD BE AN EXPENDITURE OF REVENUE NATURE INCURRED DURING THE PREVIOUS YEAR; II) IT SHOULD BE INCURRED IN CONNECTION WITH THE BUSINESS OR PROFESSIONS CARRIED ON BY THE ASSESSEE ; & III) IT SHOULD HAVE BEEN EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS / PROFESSION. 8.3 FOR THE AFORE STATED REASONS, THE LEARNED ASSES SING OFFICER DISALLOWED THE CLAIM OF BAD DEBTS ON THE A DVANCE MADE TO M/S. CICON ENVIRONMENT TECHNOLOGIES LTD., O F RS.1.00 CRORE. 8 ITA NOS.936, 937, 1823 & 1824/MDS/2015 8.4. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ALLOWED RS.20,40,000/- BEING 1/5 TH OF RS.1,02,00,000/- BAD DEBTS CLAIMED BY THE ASSESSEE UNDER SECTION 37D OF THE ACT BY OBSERVING AS UNDER:- 4.1.8. PERUSAL OF THE FACTS OF THE CASE SHOWS THAT THE ABOVE ADVANCE IS A BUSINESS ADVANCE, ADVANCED FOR THE PURPOSE OF BUSINESS AND DURING THE COURSE O F REGULAR BUSINESS, BUT IN RELATION TO A NEW PROJECT, WHICH FINALLY DID NOT MATERIALISE. FURTHER, THE ABO VE ADVANCE TO CLCON WAS FOR THE PURPOSE OF CONDUCTING DETAILED MARKET SURVEYS, PREPARATION OF PROJECT REPORTS, COMMERCIAL AND FINANCIAL VIABILITY REPORTS, ETC. ALL THESE EXPENSES ARE PRELIMINARY EXPENSES IN NATURE FALLING UNDER THE AMBIT OF SECTI ON 35D OF THE ACT, WHERE 5 TH OF THE EXPENSES ARE TO BE AMORTIZED OVER A PERIOD OF 5 YEARS STARTING FROM TH E COMMISSIONING OF THE PROJECT. WHEREAS, IN THE PRESENT CASE, THE SAID (PROPOSED) PROJECT DID NOT MATERIALIZE. HENCE, THE QUESTION OF CLAIMING THE EXPENSES FROM THE COMMISSIONING OF THE PROJECT IS NOT POSSIBLE. IN SUCH A CASE, THE . PRELIMINARY EXPENSES CAN BE WRITTEN OFF @ 20% (1 J 5 TH ) PER YEAR STARTING FROM THE YEAR IN WHICH THE PROJECT IS ABANDONED OR STOPPED. SINCE THE ASSESSEES NEW PROJECT OF SOLID MUNICIPAL WASTE ENERGY PROJECT HA S BEEN ABANDONED AND THE ASSESSEE ALSO FAILED IN THE 'ARBITRATION AWARD', THE ABOVE AMOUNT OF RS.L,02,00,000/- IS ELIGIBLE FOR WRITE OFF @ 20% (OR 1/5 TH J PER YEAR STARTING FROM THE PRESENT A.Y. 2006- 07. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO ALLOW RS.20,40,000/- (BEING I/5 TH OF RS.L,02,00,000/- AS AN ALLOWABLE DEDUCTION U/S.35D IN THE PRESENT A.Y. 2006-07 AND THE BALANCE AMOUNT IN THE NEXT (FOLLOWING) FOUR SUCCESSIVE ASSESSMENT YEARS. 8.5. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATI VE SUBMITTED THAT THOUGH THE ASSESSEE HAD MADE ADVANCE S TO M/S. CICON ENVIRONMENT TECHNOLOGIES LTD., FOR THE P URPOSE OF 9 ITA NOS.936, 937, 1823 & 1824/MDS/2015 CONDUCTING SURVEYS, PREPARATION OF PROJECT REPORTS, COMMERCIAL AND FINANCIAL VIABILITY REPORT ETC., WHI CH WAS RELATED TO THE CURRENT BUSINESS OF THE ASSESSEE AND THEREFORE, THE LOSS ARISING OUT OF THE SAME IS A BUSINESS LOSS AND THEREFORE IT MAY BE ALLOWED AS DEDUCTION. 8.6. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND, VEHEMENTLY ARGUED IN SUPPORT OF THE ORDER OF THE LEARNED ASSESSING OFFICER. 8.7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE, I T IS APPARENT THAT THE LOSS ARISING DUE TO THE NON RECOVERABILITY OF THE ADVANCES MADE TO M/S. CICON ENVIRONMENT TECHNOLOGIE S LTD., PERTAINS TO THE EXPANSION PROGRAM OF THE CURR ENT BUSINESS OF THE ASSESSEE. SECTION 35D(1) OF THE ACT CLEARLY STIPULATES THAT WHERE THE ASSESSEE AFTER COMMENCEME NT OF ITS BUSINESS IN CONNECTION WITH THE EXTENSION OF IT S UNDERTAKING OR IN CONNECTION WITH ITS SETTING UP OF A NEW UNIT INCUR ANY EXPENDITURE AFTER 31 ST DAY OF MARCH, 1998 TOWARDS 10 ITA NOS.936, 937, 1823 & 1824/MDS/2015 PREPARATION OF FEASIBILITY REPORT, PREPARATION OF PROJECT REPORT AND FOR CONDUCTING MARKET SURVEY, THEN THE ASSESSEE WILL BE ENTITLED TO DEDUCTION FOR AN AMOUNT EQUAL TO 1/5 TH OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOU S YEARS. BUT IN THE CASE OF THE ASSESSEE THE LOSS IS DUE TO NON RECOVERABILITY OF ADVANCES MADE AND NOT FOR ANY EXP ENDITURE INCURRED BY THE ASSESSEE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE DESERVES DEDUCTIO N FOR THE ENTIRE LOSS OF RS.1,02,00,000/- INSTEAD OF AMOR TIZATION UNDER SECTION 35D OF THE ACT. HENCE, WE HEREBY DIRE CT THE LEARNED ASSESSING OFFICER TO TREAT THE AMOUNT OF RS.1,02,00,000/- AS BUSINESS LOSS AND GRANT DEDUCTI ON PROVIDED THE DEBT IS WRITTEN OFF IN THE BOOKS OF AC COUNTS OF THE ASSESSEE. THUS, THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE AS INDICATED HEREINABOVE. GROUND NO.2: DISALLOWANCE OF RS.42,95,568/- BEING COMPENSATION PAYMENT MADE FOR DELAYED COMMISSIONING OF WINDMILLS. 9.1. IT WAS OBSERVED BY THE LEARNED ASSESSING OFFIC ER THAT THE ASSESSEE HAS PAID AN AMOUNT OF RS.65,00,000/- T O M/S. 11 ITA NOS.936, 937, 1823 & 1824/MDS/2015 INDONET GLOBAL LTD. (IGL) BEING COMPENSATION FOR DE LAYED COMMISSIONING OF WINDMILL. THE SAME WAS DEBITED UND ER THE HEAD MANUFACTURING EXPENSE AND CLAIMED AS DEDUCTI ON. ON FURTHER QUERY, THE ASSESSEE FAILED TO SUBSTANTIATE THE NATURE OF PAYMENT WITH ANY COGENT EVIDENCE. THEREFORE, THE LEARNED ASSESSING OFFICER DISALLOWED THE ENTIRE CLAIM OF DE DUCTION OF RS.65.00 LAKHS. 9.2. BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IT WAS EXPLAINED BY THE ASSESSEE THAT THE ASSESSEE COMPANY HAD RECEIVED AN ADVANCE OF RS.3.00 CRORES F ROM M/S. INDONET GLOBAL LTD., FOR THE PROPOSED SUPPLY A ND COMMISSIONING OF WINDMILL. HOWEVER, AS THERE WAS SUBSTANTIAL DELAY, THE COMPANY PAID COMPENSATION OF RS.65.00 LAKHS TO M/S. INDONET GLOBAL LTD., FOR THE DELAY IN SUPPLY AND COMMISSIONING OF WINDMILL. ALTERNATIVELY , THE ASSESSEE COMPANY HAD ALSO CLAIMED RS.65.00 LAKHS TO BE TREATED AS INTEREST PAYMENT SINCE THE ASSESSEE COMP ANY HAD RECEIVED SUBSTANTIAL AMOUNT FROM M/S. INDONET GLOBA L LTD, OTHERWISE THE ASSESSEE COMPANY WOULD HAVE AVAILED FINANCIAL FACILITIES FROM BANKS ETC., AND ENDED UP PAYING 12 ITA NOS.936, 937, 1823 & 1824/MDS/2015 SUBSTANTIAL INTERESTS. THE LD.CIT(A), FOLLOWING THE DECISION FOR THE ASSESSMENT YEAR 2004-05 BY THE FIRST APPELLATE AUTHORITY IN ITA NO.629/2006-07 HELD THAT THE PAYMENTS CANNOT BE CONSIDERED AS COMPENSATION FOR DELAY IN COMMISSIONI NG THE WINDMILL BUT CAN BE CONSIDERED AS INTEREST PAYMENT FOR THE ADVANCE RECEIVED FROM M/S. INDONET GLOBAL LTD. THE LD.CIT(A) FURTHER HELD THAT THE INTEREST @ 12% PER ANNUM ON THE ADVANCES RECEIVED FROM M/S. INDONET GLOBAL LTD. , IS REASONABLE AND WORKED OUT THE SAME AT RS.22,04,432/ - AND ALLOWED IT AS DEDUCTION, WHILE AS THE BALANCE PAYME NT OF RS.42,95,567/- WAS DISALLOWED. THE GIST OF THE ORDE R OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS REPRODUCED HEREIN BELOW FOR REFERENCE:- 4.2.2 I HAVE CONSIDERED THE ASSESSEE'S SUBMISSIONS CAREFULLY. THE PRESENT ISSUE OF DISALLOWANCE THE COMPENSATION FOR DELAY IN COMMISSIONING OF WIND MILLS IS A RECURRING ISSUE. A SIMILAR ISSUE ALSO CROPPED UP IN THE APPEALS OF THE ASSESSEE'S A.Y.2004-0S. IN THAT YEAR (A.Y.2004-0S) THE ASSESSEE CLAIMED PAYMENT OF RS.50 LAKHS AS COMPENSATION FOR DELAY IN COMMISSIONING OF WIND MILLS. ON APPEALS, THE COMMISSIONER OF INCOME TAX (APPEALS)-III, CHENNAI, VIDE HIS ORDER IN ITA NO.629/2006-07/A-III DATED 28.07.2008, HAS HELD THAT THE PAYMENTS CANNOT BE CONSIDERED AS COMPENSATION OF DELAY IN COMMISSIONING THE WINDMILLS, BUT CAN BE CONSIDERED AS INTEREST PAYMENTS FOR THE AMOUNTS RECEIVED FROM M/S. LNDONET GLOBAL LTD. HENCE THE COMMISSIONER OF INCOME TAX (APPEALS) DIRECTED THE ASSESSING OFFICER 13 ITA NOS.936, 937, 1823 & 1824/MDS/2015 TO WORKOUT INTEREST @ 12% PER ANNUM ON THE AMOUNTS RECEIVED FROM M/S. INDONET GLOBAL LTD AND CONSIDER THE SAME AS INTEREST PAYMENT AND DISALLOW THE BALANCE OF PAYMENTS. 4.2.3 IN THE CURRENT A.Y.2006-07 ALSO THE FACTS ARE EXACTLY IDENTICAL. SINCE THE FACTS ARE IDENTICAL, F OR THE DETAILED DISCUSSIONS AND REASONS CONTAINED IN ORDER OF A.Y.2004- 05 (IN ITA NO.629/2006-07 / A-III DATED 28.07.2008), I AM OF THE CONSIDERED OPINION THAT PAYMENTS IN THE PRESENT A.Y.2006-07 ALSO CANNOT BE CONSIDERED AS COMPENSATION OF DELAY IN COMMISSIONIN G THE WINDMILLS, BUT CAN BE CONSIDERED AS INTEREST PAYMENTS FOR THE AMOUNTS RECEIVED FROM M/S. INDONET GLOBAL LTD. AS COULD BE SEEN FROM THE DETAILS FILED BY THE ASSESSEE I ANNUAL STATEMENTS OF THE ASSESSEE, THE OPENING AND CLOSING BALANCES DUE TO M/S. INDONET GLOBAL LTD AS ON 01.04.2005 AND 31.03.2006 ARE AS UNDER: AMOUNTS DUE TO M/S_ INDONET GLOBAL LTD (IN THE BOOKS OF THE ASSESSEE): OPENING BALANCE AS ON 01.04.2005 : RS.I,39,99,862.7 9 (CR) CLOSING BALANCE AS ON 31.03.2006 : RS.3,51,28, 585.00 (CR) 4.2.4 ALSO THERE WERE SEVERAL RECEIPTS OF AMOUNTS AND REPAYMENTS DURING THE FINANCIAL YEAR 2005- 06. THEREFORE THE ASSESSING OFFICER IS DIRECTED TO CONSIDER AND CALCULATE INTEREST ON THE AVERAGE MONTHLY BASIS FOR EACH OF THE MONTH (I.E. AVERAGE OF OPENING BALANCE AT THE BEGINNING OF THE MONTH AND THE CLOSING BALANCE AT THE END OF THE MONTH) @ 1% PER MONTH, AND ALLOW TO THAT EXTENT, AS UNDER: 14 ITA NOS.936, 937, 1823 & 1824/MDS/2015 4.2.5 THUS, OUT OF RS.65,00,000/- CLAIMED BY THE ASSESSEE AS COMPENSATION FOR DELAY IN COMMISSIONING THE WINDMILLS, AN AMOUNT OF RS.22,04,432J - IS CONSIDER ED AS PAYMENT TOWARDS THE INTEREST ON THE AMOUNTS (ADVANCES) RECEIVED AND OUTSTANDING AND ALLOWED AS DEDUCTION. THE DISALLOWANCE OF BALANCE OF PAYMENTS OF ` 42,95,568/- (I.E. ` 65,00,000 ` 22,04,432) STANDS CONFIRMED. 9.3. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATI VE REITERATED HIS SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES STATING THAT THE ENTIRE PAYMENT OF RS.6 5.00 LAKHS WAS MADE AS COMPENSATION TOWARDS DELAYED COMMISSION ING OF WINDMILL WHICH ALSO INCLUDED THE BENEFIT ENJOYED BY THE ASSESSEE TOWARDS INTEREST FREE ADVANCES RECEIVED FR OM M/S. INDONET GLOBAL LTD. THEREFORE IT WAS ARGUED THAT T HE ENTIRE EXPENSES INCURRED BY THE ASSESSEE FOR RS.65.00 LAKH S SHOULD BE ALLOWED AS DEDUCTION. MONTH OPENING BALANCE CLOSING BALANCE AVERAGE BALANCE I NTEREST AMOUNT APR-05 13,999,862.79 14,199,862 . 79 14,099,862 . 79 140,998 . 63 . - 14,199,862.79 13,222,255.79 13,711,059.29 MAY - 05 137 , 11 0 . 59 JUN-05 13,222 , 255.79 (919,952.21) 6,151 , 151 . 79 61,511 . 52 JUL-05 (919,952.21) (1,507,761 . 21) (1,213,856.71 ) (12,138 . 57) AUG-05 (1,507,76121) (1,600,782 . 21 ) (1,554,27 1 . 71) (15 , 54 2. 72 ) SEP - 05 (1,600,782.21) 11,896,652.79 5 , 147,935.29 51 , 479.35 OCT-05 11,896 , 652.79 38,972,695.79 25 , 434,674 . 29 254,346.74 NOV-05 38,972 , 695.79 37,314,842 . 79 38,143,769.29 381 , 437.69 DEE - O5 37 , 314,842 . 79 27 , 031,40 1.00 32,173,121 . 90 321 , 731 . 22 JAN-06 2 7,031 , 401.00 27 , 940,937.00 27 , 486,169.00 274 , 861.69 FEB-06 27,940,937 . 00 29 , 328 , 801 . 00 28 , 634,869 . 00 286 , 348 . 69 MAR - 06 29,328,801 . 00 35,128,585.00 32,228,693 . 00 322,286.93 TOTAL INTEREST PAYABLE TO INDONET GLOBAL LIMITED 2,204,431 . 77 15 ITA NOS.936, 937, 1823 & 1824/MDS/2015 9.4. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND VEHEMENTLY ARGUED IN SUPPORT OF THE ORDERS OF THE REVENUE. 9.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE, W E FIND MERIT IN THE CONTENTION OF THE LEARNED AUTHORIZED REPRESE NTATIVE. THE AMOUNT OF RS.65.00 LAKHS PAID BY THE ASSESSEE T O ITS CLIENT WAS DUE TO THE DELAY IN COMMISSIONING OF THE PROJECT AND IN ORDER TO COMPENSATE FOR THE LOSS OF PROFIT. FURTHER, THE ASSESSEE HAD ALSO RECEIVED AN AMOUNT OF RS.3.00 CRO RES AS INTEREST FREE ADVANCES FOR THE EXECUTION OF THE PRO JECT WHICH IS ALSO REQUIRED TO BE COMPENSATED. CONSIDERING ALL THESE FACTS AND AS A RESULT OF MUTUAL AGREEMENT BETWEEN T HE ASSESSEE AND ITS CLIENT, THE ASSESSEE HAD PAID RS.6 5.00 LAKHS AS COMPENSATION. SUCH COMPENSATION NO DOUBT F ALLS IN THE REVENUE FIELD AND THEREFORE IT HAS TO BE ALLOWA BLE AS DEDUCTION AS PER SECTION 37 OF THE ACT. HENCE, WE H EREBY DIRECT THE LEARNED ASSESSING OFFICER TO DELETE THE ADDITION MADE ON ACCOUNT OF THE DISALLOWANCE OF RS.65.00 LAK HS IN THE 16 ITA NOS.936, 937, 1823 & 1824/MDS/2015 HANDS OF THE ASSESSEE. THUS THIS ISSUE IS ALLOWED I N FAVOUR OF THE ASSESSEE. ITA NO.1823/MDS/2015 (A.Y. 2006-07): (REVENUES APPEAL): GROUND NO.1: CLAIM OF BAD DEBT IN RESPECT OF ADVANCES MADE TO M/S. SOPRANO HOLDINGS PVT. LTD. 10.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, I T WAS OBSERVED BY THE LEARNED ASSESSING OFFICER THAT THE ASSESSEE HAD CLAIMED BAD DEBTS AGAINST THE IRRECOVERABLE POR TION OF THE OUTSTANDING LOAN STANDING IN THE NAME OF M/S. SAPRANO HOLDINGS PVT. LTD. OF RS.2,00,00,000/-. IT IS ALSO NOT IN DISPUTE THAT NEITHER THE LOAN WAS EXTENDED FOR THE PURPOSE OF BUSINESS NOR AS SECURITY DEPOSIT. THEREFORE, THE LE ARNED ASSESSING OFFICER DISALLOWED THE CLAIM OF BAD DEBTS BECAUSE OF THE FOLLOWING REASONS:- I) THE DEBT IS NOT INCIDENTAL TO THE BUSINESS OF TH E ASSESSEE. II) THE DEBT WAS NOT RELATED TO ANY REVENUE TRANSAC TION. III) THE BUSINESS OF THE ASSESSEE IS NOT MONEY LEND ING. 17 ITA NOS.936, 937, 1823 & 1824/MDS/2015 10.2 ON APPEAL BEFORE THE LEARNED COMMISSIONER OF I NCOME TAX (APPEALS), THE FOLLOWING FACTS WERE REVEALED:- 4.1.3 THE FIRST ITEM WRITTEN OFF IS THE BAD DEBT O F RS.2,00,00,000/- FROM M/S. SOPRANO HOLDINGS P.LTD., THE ASSESSEE ENTERED INTO AN OPERATION AND MAINTENANCE AGREEMENT WITH M/S. MILTON PLASTICS LTD. ON 24.04.1998 FOR OPERATING AND MAINTAINING 6 WINDMILLS FOR A PERIOD OF 9 YEARS 10 MONTHS. IN THI S PROCESS, IN ORDER TO SECURE A MINIMUM GUARANTEE, THE ASSESSEE HAD TO ADVANCE AN AMOUNT OF RS.5,65,00,000/- TO M/S. SOPRANO HOLDINGS P. LTD. AS THE ASSESSEE WAS NOT ABLE TO RECOVER THE SAID ADVANCE, THE COMPANY HAD STARTED WRITING OFF THE AMOUNT AS 'BAD DEBT' IN ITS BOOKS IN A PHASED MANNER, I.E. BY WRITING OFF RS.92,62,217/- DURING THE F.Y.2003-04; RS.2,00,00,OOO/- DURING THE F.Y.2004-05 AND RS.2,00,00,00I- IN THE CURRENT F.Y.2005-06. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT OF A.Y.2005-06 (F.Y.2004-05) U/S.143(3) APPARENTLY ALLOWED THE ASSESSEE'S CLAIM OF BAD DEBT. HOWEVER, IN THE ASSESSMENTS OF A.YS.2004-05 (F.Y.2003-04) AND 2006-07 (F.Y.2005- 06) THE ASSESSING OFFICER DISALLOWED THE ASSESSEE'S CLAIM OF BAD DEBTS. 4.1.4 AGAINST THE ASSESSMENT ORDER OF THE A.Y.2004- 05 THE ASSESSEE FILED AN APPEAL. THE COMMISSIONER OF I NCOME TAX (APPEALS) HELD THAT THE ADVANCE WAS MADE DURING THE COURSE OF REGULAR BUSINESS AND HENCE ALLOWABLE AS B AD DEBT U/S.28 OF THE ACT. EVEN THE ITAT, VIDE ITS ORDER IN ITA NO.2085 & 2086/MDS/2008 DATED 10.07.2009, HAD CONFIRMED THE ORDER OF CIT(A). 10.3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) THEREAFTER FOLLOWING THE DECISION OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2004-05 HELD AS FOLLOWS:- 4.1.5 THE FACTS OF THE PRESENT ASSESSMENT YEAR ARE EXACTLY IDENTICAL TO THOSE OF A.Y. 2004-05. IN FACT, IT IS THE SAME ADVANCE WHICH IS WRITTEN OFF IN PHASED MANNER IN THESE YEARS. HENCE, THE ABOVE DECISION OF THE CIT(A) AND ITAT IS 18 ITA NOS.936, 937, 1823 & 1824/MDS/2015 EQUALLY APPLICABLE FOR THE PRESENT ASSESSMENT YEAR 2006-07 UNDER CONSIDERATION. THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE ITAT IN THE ASSESSEE'S OWN CASE OF A.Y. 2004- 05, I HOLD THAT THE ASSESSEE'S CLAIM OF BAD DEBT WRITTEN OFF, ON ACCOUNT OF ADVANCE MADE TO M/S. SOPRANO HOLDINGS P. LTD., IS ALLOWABLE U/S.28 OF THE ACT. THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE SAME. 10.4 SINCE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ONLY FOLLOWED THE DECISION OF THE TRI BUNAL ON THE IDENTICAL ISSUE OF THE EARLIER ASSESSMENT YEAR 2004-05, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH HIS O RDER. THEREFORE, THIS GROUND RAISED BY THE REVENUE DOES N OT SUCCEED. GROUND NO.(II) & (III): BAD DEBTS ALLOWED TO THE EXTENT OF 1/5 TH OF THE TOTAL CLAIM I.E. RS.22,04,432/-: 11. SINCE IN THE ASSESSEES APPEAL HEREIN ABOVE, WE HAVE ALLOWED THE ENTIRE DEDUCTION OF RS.65.00 LAKHS CLAI MED BY THE ASSESSEE, PROVIDED IT IS WRITTEN OFF IN THE BOOKS O F ACCOUNTS OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR, THIS GROUND RAISED BY THE REVENUE IS ALSO DISPOSED OFF ACCORDIN GLY. 19 ITA NOS.936, 937, 1823 & 1824/MDS/2015 ITA NO.937/MDS/2015 (A.Y.2008-09) (ASSESSEES APPEAL): GROUND NO.1: DISALLOWANCE OF BAD DEBTS WRITTEN OFF AMOUNTING TO RS.1,50,00,000/- (SIC) RS.1,47,00,00 0/- BEING LAND ADVANCE GIVEN TO M/S.WIPRO FINANCE LTD.: 12.1 THE ASSESSEE COMPANY HAD ENTERED INTO AN AGRE EMENT FOR PURCHASE OF LAND IN TAMIL NADU THROUGH M/S.WIPR O FINANCE LTD., FOR WHICH THE COMPANY HAD ADVANCED RS.1,50,00,000/- TO THE PROPOSED SELLERS OF THE LAN D. HOWEVER, THE AGREED LAND WAS NOT TRANSFERRED TO THE COMPANY. THE ASSESSEE FILED A SUIT BEFORE THE COUR T IN TAMIL NADU FOR RECOVERY OF THE ADVANCE PAID. SUBSEQUENTLY , IN THE BOARDS MEETING HELD ON 31.01.2008 IT WAS DECIDED T O WRITE OFF THE AMOUNT IN THE BOOKS OF ACCOUNTS AND ACCORDI NGLY THE COMPANY CLAIMED THE AMOUNT OF RS.1,47,00,000/- AS BUSINESS LOSS. HOWEVER, THE LEARNED ASSESSING OFFIC ER DISALLOWED THE CLAIM OF LOSS BECAUSE HE WAS OF THE VIEW THAT THE CLAIM OF LOSS HAS NOT CRYSTALLIZED DURING THE R ELEVANT ASSESSMENT YEAR AND THEREFORE DO NOT QUALIFY AS EXP ENSES UNDER SECTION 37(1) OF THE ACT. 20 ITA NOS.936, 937, 1823 & 1824/MDS/2015 12.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESS ING OFFICER BY STATING THAT ANY AMOUNT GIVEN AS ADVANCE FOR PURCHASE OF ASSETS SUCH AS LAND WHICH IS NOT A REGU LAR BUSINESS ASSET REQUIRED FOR THE BUSINESS OF THE ASS ESSEE AND WHEN SUCH ADVANCE BECOMES BAD, THE SAME CANNOT BE CLAIMED AS DEDUCTION UNDER SECTION 28, 37 OR 36 OF THE ACT. 12.3 BEFORE US, THE LEARNED AUTHORIZED REPRESENTATI VE REITERATED ITS SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES BY STATING THAT THE ASSESSEE HAS INCUR RED LOSS OF RS.1,47,00,000/- DURING ITS COURSE OF BUSINESS AND THEREFORE, IT SHOULD BE ALLOWED AS DEDUCTION. 12.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEM ENTLY ARGUED IN SUPPORT OF THE ORDER OF THE REVENUE AUTHO RITIES. 12.5 AFTER HEARING BOTH SIDES, WE ARE OF THE CONSI DERED VIEW THAT THE ASSESSEE HAS INCURRED LOSS DURING THE COUR SE OF ITS REGULAR BUSINESS AND THEREFORE IT IS ENTITLED TO CL AIM THE SAME 21 ITA NOS.936, 937, 1823 & 1824/MDS/2015 AS BUSINESS LOSS. THEREFORE, WE HEREBY DIRECT THE L EARNED ASSESSING OFFICER TO DELETE THE ADDITION MADE FOR RS.1,47,00,000/- IN THE HANDS OF THE ASSESSEE. GROUND NO.2: ADDITION OF RS.4,78,44,777/- BEING RUPEE FLUCTUATION LOSS ON FOREIGN CURRENCY CONVERTIBLE BO NDS: 13.1 IT WAS OBSERVED BY THE LEARNED ASSESSING OFFIC ER THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.4,78,44,77 7/- TOWARDS RUPEE FLUCTUATION LOSS ON THE FOREIGN EXCHA NGE BONDS OF 30 MILLION US $ ISSUED DURING THE MONTH OF DECEM BER, 2007. THE UNUTILIZED AMOUNT OUT OF 30 MILLION US $ RECEIVED BY THE ASSESSEE IN INDIAN RUPEES WAS PLACED IN FIXE D DEPOSITS WHICH EARNED INTEREST OF RS.1,18,63,903/- AND THE SAME WAS OFFERED TO TAX. IT WAS THEREFORE EXPLAINED BY THE ASSESSEE THAT THE LOSS OF RS.4,78,44,777/- ARISING OUT OF FOREIGN EXCHANGE FLUCTUATION ON THE OUTSTANDING LIA BILITY OF 30 MILLION US $ OUGHT TO BE ALLOWED AS DEDUCTION. HOWE VER, THE LEARNED ASSESSING OFFICER WAS OF THE VIEW THAT TH E AFORESAID LOSS IS A NOTIONAL LOSS AND CONTINGENT IN NATURE AN D THEREFORE CANNOT BE CLAIMED AS DEDUCTION. ACCORDINGLY, THE CL AIM OF THE ASSESSEE WAS DISALLOWED. 22 ITA NOS.936, 937, 1823 & 1824/MDS/2015 13.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THE ASSESSEE WOULD BE ONLY ENTI TLED FOR DEDUCTION ON ACCOUNT OF RUPEE FLUCTUATION LOSSES ON THE FCCBS IN THE YEAR OF ACTUAL REDEMPTION/ CONVERSION BY OBSERVING AS UNDER:- 4.3.1. THE ASSESSEE BEFORE THE UNDERSIGNED CLAIMED THAT THE FCCBS ARE IN THE NATURE OF LOANS AVAILED AND HENCE ANY LOSS ON ACCOUNT OF RUPEE FLUCTUATION WILL BE BUSINESS LOSSES AND NEEDS TO BE ALLOWED. 4.3.2 I HAVE CONSIDERED THE ASSESSEES SUBMISSIONS CAREFULLY. THE ASSESSEE RECEIVED A FOREIGN CURRENCY LOAN IN THE FORM OF FCCBS. THESE BONDS HAVE AN OPTION TO CONVERT THE AMOUNT INTO EQUITY ON A LATER DATE OR T O REDEEM. THEREFORE TILL SUCH OPTION IS EXERCISED BY THE INVESTOR THE FCCBS CAN NEITHER BE TREATED AS SHARE CAPITAL NOR A LOAN. FURTHER, AS PER THE PROVISIONS OF THE ACT, THE CURRENCY FLUCTUATION LOSSES CANNOT BE ALLO WED AS DEDUCTION UNLESS THE TRANSACTION IS SETTLED. SINCE THE FCCBS WERE NOT SETTLED AS ON 31.03.2008 THE FLUCTUA TION LOSSES CANNOT BE ALLOWED. THEREFORE THE ACTION OF T HE AO IN DISALLOWING THE RUPEE FLUCTUATION LOSSES ON FCCB S IS JUSTIFIED AND CONFIRMED. 4.3.3 HOWEVER, THIS RUPEE FLUCTUATION LOSS ON THE FCCBS CAN BE ALLOWED AS ON ALLOWABLE DEDUCTION (NET EFFEC T OF ALL THE YEARS PUT TOGETHER FROM THE DATE OF ISSUING THE FCCBS TO THE DATE OF REDEMPTION ETC.) IN THE YEAR I N WHICH THE FCCBS ARE FINALLY REDEEMED OR CONVERTED. SIMILARLY, IF THERE IS A PART REDEMPTION OR CONVERS ION IN ANY YEAR, THE ALLOWANCE CAN BE ON PROPORTIONATE BAS IS. THEREFORE, IT IS HELD THAT THE ASSESSEE IS ENTITLED FOR THE DEDUCTION ON ACCOUNT OF THE RUPEE FLUCTUATION LOSSE S ON FCCBS IN THE YEAR OF ACTUAL REDEMPTION/CONVERSION. 23 ITA NOS.936, 937, 1823 & 1824/MDS/2015 13.3 BEFORE US, THE LEARNED AUTHORIZED REPRESENTA TIVE REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES WHILE AS THE LEARNED DEPARTMENTAL REPRE SENTATIVE STRONGLY SUPPORTED THE ORDER OF THE LEARNED COMMISS IONER OF INCOME TAX (APPEALS). 13.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREF ULLY PERUSED THE MATERIALS ON RECORD. IT IS AN ADMITTED FACT THAT AS ON 31.03.2008 THE ASSESSEE HAS SUFFERED LOSS OF RS.4,78,44,777/- DUE TO FLUCTUATION IN FOREIGN EXCH ANGE ON THE OUTSTANDING LIABILITY OF FCCBS. ACCOUNTING STAN DARD 11 CLEARLY STIPULATES THAT THE MONETARY ITEMS SUCH DEB TORS, CREDITORS AND LOANS SHOULD BE CONVERTED AT THE CLOS ING RATE AND REPORTED AS SUCH IN THE BALANCE SHEET BY CHARG ING THE SAME TO THE PROFIT & LOSS ACCOUNT. ACCOUNTING STAND ARDS ARE NOTHING BUT TOOLS TO DETERMINE THE ACTUAL PROFIT OR LOSS INCURRED BY THE ASSESSEE DURING THE RELEVANT YEAR. FURTHER, THE HONBLE APEX COURT IN THE CASE OF CIT VS. WOODW ARD GOVERNOR INDIA PVT. LTD., REPORTED IN 179 TAXMAN 32 6 HAS CLEARLY HELD THAT AN ENTERPRISE HAS TO REPORT OUTST ANDING 24 ITA NOS.936, 937, 1823 & 1824/MDS/2015 LIABILITY RELATING TO IMPORT OF RAW MATERIAL USING CLOSING RATE OF FOREIGN EXCHANGE AND ANY DIFFERENCES, LOSS OR GAIN ARISING ON CONVERSION OF SUCH LIABILITY AT CLOSING RATE SHOULD BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT FOR THE REP ORTING PERIOD. THEREFORE, WE ARE OF THE CONSIDERED VIEW TH AT THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION TOWARDS TH E LOSS INCURRED BY IT FOR RS.4,78,44,777/- PROVIDED THE PROVISIONS OF SECTION 43A OF THE ACT RELATING TO CHANGE IN RATE O F EXCHANGE OF CURRENCY IS NOT APPLICABLE IN THE CASE OF THE AS SESSEE. HENCE, WE HEREBY DIRECT THE LEARNED ASSESSING OFFIC ER TO EXAMINE THE APPLICABILITY OF SECTION 43A OF THE ACT IN THE CASE OF THE ASSESSEE AND IF THE SAME IS NOT APPLICABLE ALLOW THE CLAIM OF DEDUCTION OF RS.4,78,44,777/- OR SUCH PRO PORTIONATE AMOUNT ON WHICH SECTION 43A OF THE ACT IS NOT APPLI CABLE. IT IS ORDERED ACCORDINGLY. ITA NO.1824/MDS/2015 (A.Y. 2008-09): (REVENUES APPEAL): GROUND: ADDITIONAL DEPRECIATION OF RS.3,02,62,222/- : 14.1 BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-09 ON 30.08.2009 DECLARING LOSS OF RS.5,99,72,261 UNDER REGULAR 25 ITA NOS.936, 937, 1823 & 1824/MDS/2015 PROVISIONS AND PROFIT OF RS. 5,99,72,261/- UNDER SE CTION 115JB OF THE ACT. SUBSEQUENTLY ASSESSMENT WAS COMPL ETED U/S.143(3) OF THE ACT ON 30.12.200 WHEREIN THE LEAR NED ASSESSING OFFICER ASSESSED THE INCOME OF THE ASSESS EE AT RS.1,77,55,300/- . THEREAFTER, AGAIN THE ASSESSMENT WAS REOPENED UNDER SECTION 147/148 OF THE ACT ON 26.12. 2012 AND FINALLY ASSESSMENT ORDER WAS PASSED, WHEREIN TH E LEARNED ASSESSING OFFICER RETAINED THE EARLIER INCO ME ASSESSED OF RS.1,77,55,300/- BUT ENHANCED THE BOOK PROFIT TO RS.9,02,34,483/- FOR THE PURPOSE OF COMPUTATION OF TAX UNDER SECTION 115JB OF THE ACT BY DISALLOWING THE E XCESS CLAIM OF DEPRECIATION RS.3,02,62,222/-. THE LEARNED ASSESSING OFFICER HAD OBSERVED THAT THE ASSESSEE HA D CLAIMED HIGHER RATE OF DEPRECIATION THAN THE PRESCR IBED RATE OF DEPRECIATION UNDER THE COMPANIES ACT, THE DIFFERENC E OF WHICH WAS RS.3,02,62,222/-. HE WAS OF THE VIEW THAT SUCH HIGHER CLAIM OF DEPRECIATION MORE THAN WHAT IS PRES CRIBED BY THE COMPANIES ACT IS NOT ALLOWABLE WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. THEREFORE, THE LEARNED ASSESSING OFFICER DISALLOWED THE EXCESS CLAIM OF DE PRECIATION 26 ITA NOS.936, 937, 1823 & 1824/MDS/2015 OF RS.3,02,62,222/- WHILE COMPUTING THE BOOK PROFI T UNDER SECTION 115JB OF THE ACT. 14.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AFTER ELABORATELY DELIBERATING THE ISSUE ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER:- 4.2.2 I HAVE CONSIDERED THE ASSESSEE'S SUBMISSION S CAREFULLY. AS COULD BE SEEN FROM THE DETAILS FILED BY THE ASSESSEE, THE PRESENT DIFFERENCE IN THE DEPRECIATION, IS PERTAINING TO CERTAIN WINDMILLS PURCHASED FROM OTHERS, I.E. SECOND HAND WINDMILLS. NORMALLY, THE DEPRECIATION ON THE WINDMILLS IS RECOGNIZED AND PROVIDED BY CONSIDERING LIFESPAN OF THE WINDMILLS AT 20 YEARS. ACCORDINGLY THE COMPANY HAS BEEN PROVIDING DEPRECIATION ON WINDMILLS @ 5.28% IN ITS BOOKS OF ACCOUNTS. THIS PRACTICE HAS B EEN FOLLOWED FROM THE BEGINNING. HOWEVER, THE ASSESSEE' S WINDMILLS INCLUDE TWO TYPES, I.E. NEW WINDMILLS AND SECOND HAND WINDMILLS. THE COMPANY HAS BEEN TREATING ALL THE WINDMILLS (I.E. BOTH NEW WINDMILLS AS WELL AS THE SECOND HAND ONES) ALIKE AND PROVIDING DEPRECIATION @ 5.28% IN ITS BOOKS OF ACCOUNT ALL ALONG. SUDDENLY, DURING THE FINANCIAL YEAR 2007-08, THE COMPANY REALIZED THAT IN THE CASE OF SECOND HAN D WINDMILLS, THE LIFESPAN OF THE WINDMILLS IS LESS TH AN 20 YEARS (I.E. TO THE EXTENT OF THE NUMBER OF YEARS FO R WHICH THESE WINDMILLS WERE USED BY THE PREVIOUS OWNERS) AND HENCE THE DEPRECIATION HAS TO BE CLAIME D CONSIDERING THE BALANCE OF THE LIFESPAN OF THESE WINDMILLS IN THE HANDS OF THE ASSESSEE. BUT THE ASSESSEE HAS BEEN CLAIMING THE DEPRECIATION ON THES E SECOND HAND WINDMILLS ALSO @ 5.28% AS IF THESE WINDMILLS ARE ALSO GOING TO LAST FOR 20 YEARS. ACTU ALLY, THE DEPRECIATION OF THE SECOND HAND WINDMILLS (OR F OR THAT MATTER, ANY OTHER ASSET) SHOULD BE SPREAD OVER THE REMAINING LIFESPAN OF THE WINDMILLS IN THE HAND S OF THE ASSESSEE. FOR EXAMPLE, IF THE ASSESSEE PURCHASE S A SECOND HAND WINDMILL OF 15 YEARS OLD FOR RS.I0 LAKH S, 27 ITA NOS.936, 937, 1823 & 1824/MDS/2015 THE COST HAS TO BE WRITTEN OFF, BY WAY OF DEPRECIAT ION, OVER FIVE YEARS (BEING THE REMAINING LIFESPAN) @ 20% ON STRAIGHT LINE METHOD, AS AGAINST THE NORMAL METH OD OF 5% (OR 5.28%) OVER A PERIOD OF 20 YEARS IN THE CASE OF NEW WINDMILLS. HOWEVER, THE ASSESSEE ALL THESE YEARS HAS ONLY CLAIMED DEPRECIATION @ 5.28% I.E. ON PAR WITH THE NEW WINDMILLS. THE DIFFERENCE BETWEEN THE DEPRECIATION TO BE CONSIDERED ON THESE SECOND HAND WINDMILLS AND THE ACTUAL DEPRECIATION DEBITED IN THE BOOKS NEEDS TO BE ADJUSTED. THEREFOR E, SINCE THE ASSESSEE, IN ITS BOOKS, HAS BEEN CLAIMING THE DEPRECIATION @ 5.28% ON THESE SECOND HAND WINDMILLS ALL THESE YEARS, THE ASSESSEE DURING THE FINANCIAL YEAR 2007-08, CALCULATED THE DEPRECIATION @ 5.28% FOR THE PERIOD DURING WHICH THE WINDMILLS WER E OWNED BY THE PREVIOUS OWNER(S), AMOUNTING TO RS.3.02 CRORES AND CLAIMED IN THE DEPRECIATION SCHEDULE AND DEBITED TO P&L ACCOUNT, IN ADDITION TO THE NORMAL DEPRECIATION OF 5.28% FOR THE YEAR. THUS , THE CLAIM OF THE ASSESSEE IS BASED ON REALISTIC FAC TS AND HENCE THE CLAIM IS NEITHER EXCESSIVE NOR AN ABNORMAL PRACTICE, CONSIDERING THE NATURE OF THE ASSETS. 4.2.3 IT IS ALSO IMPORTANT TO MENTION HERE THAT THE ASSESSING OFFICER'S OBSERVATION, THAT THE ASSESSEE CLAIMED DEPRECIATION HIGHER THAN WHAT IS PROVIDED I N THE COMPANIES ACT, IS NOT CORRECT. THE COMPANIES AC T HAS ONLY SPECIFIED THE RATES OF DEPRECIATION FOR VARIOUS TYPES OF ASSET. THE COMPANIES ACT HAS NOT STIPULATED THAT THE ASSESSEES SHOULD NOT CLAIM HIGH ER DEPRECIATION THAN WHAT IS PROVIDED IN THE COMPANIES ACT. FURTHER, THE CIRCULAR NO.2/89, ISSUED BY THE FINANCE MINISTRY, CLEARLY STATES THAT THE COMPANY I S ENTITLED TO PROVIDE HIGHER DEPRECIATION IN THE BOOK S BASED ON THE RISKS LIKE TECHNOLOGICAL RISKS PERCEI VED BY THE MANAGEMENT AND TO REDUCE THE VALUE OF THE ASSETS TO THE GENUINE REALIZABLE VALUE I.E. ON MARK TO MARKET PRACTICES, THE MANAGEMENT ADOPTED THE POLICY TO CHARGE DEPRECIATION KEEPING THE RATES PRESCRIBED UNDER SCHEDULE XIV TO THE COMPANIES ACT AS MINIMUM RATE. THE RELEVANT PORTION OF THE CIRCULAR NO.2/89, NO.1/17/87-CL.V DATED 07.03.1989, ISSUED BY THE MINISTRY OF INDUSTRY, GOVERNMENT OF INDIA, IS AS UNDER: 28 ITA NOS.936, 937, 1823 & 1824/MDS/2015 IT MAY BE CLARIFIED THAT THE RATES AS CONTAINED IN SCHEDULE XIV SHOULD BE VIEWED AS THE MINIMUM RATES, AND, THEREFO RE, A COMPANY SHALL NOT BE PERMITTED TO CHARGE DEPRECIATION AT RA TES LOWER THAN THOSE SPECIFIED IN THE SCHEDULE IN RELATION TO ASSE TS PURCHASED AFTER THE DATE OF APPLICABILITY OF THE SCHEDULE. HOWEVER, IF ON THE BASIS OF A BONAFIDE TECHNOLOGICAL EVALUATION, HIGHE R RATES OF DEPRECIATION ARE JUSTIFIED, THEY MAY BE PROVIDED WI TH PROPER DISCLOSURE BY WAY OF A NOTE FORMING PART OF ANNUAL ACCOUNTS. 4.2.4 FURTHER, FOR THE PURPOSE OF SECTION 115JB OF THE ACT, THE ASSESSEE IS REQUIRED TO PREPARE THE P&L ACCOUNT AS PER THE PROVISIONS OF PARTS II AND III O F SCHEDULE VI TO THE COMPANIES ACT, 1956. THEREAFTER, THE BOOK PROFIT FOR THE PURPOSE OF SECTION 115JB IS TO BE DETERMINED BY ADOPTING THE NET PROFIT AS SHOWN I N THE SAID P&L ACCOUNT AND AS INCREASED BY THE ITEMS CONTAINED IN CLAUSES (A) TO (I) OF THE EXPLANATION- 1 OF SECTION 115JB; AND AS REDUCED BY ITEMS CONTAINED IN CLAUSES (I) TO (VIII) OF THE EXPLANATION-1 OF SECTI ON 115JB. THE ASSESSING OFFICER CANNOT MAKE ANY OTHER ADJUSTMENTS (I.E. INCREASING OR DECREASING) OTHER T HAN THOSE SPECIFIED IN THE CLAUSES OF EXPLANATION-1 OF SECTION 115JB OF THE ACT. THE PROVISIONS OF SECTION 115JB OF THE ACT ARE AS UNDER: SPECIAL PROVISION (OR PAYMENT O(TAX BY CERTAIN COMP ANIES . SEC.115JB. (I) NOTWITHSTANDING ANYTHING CONTAINED I N ANY OTHER PROVISION OF THIS ACT, WHERE IN THE CASE OF AN ASSESSEE, BEIN G A COMPANY, THE INCOME-TAX, PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESS MENT YEAR COMMENCING ON OR AFTER THE 1 ST DAY OF APRIL, 2011, IS LESS TH AN EIGHTEEN PER CENT OF ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE BY THE ASSESSEE ON SUC H TOTAL INCOME SHALL BE THE AMOUNT OF INCOME-TAX AT THE RATE OF EIGHTEEN PER CENT. (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSES OF THIS SECTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR TH E RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND I II OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956) : PROVIDED ... PROVIDED FURTHER .. EXPLANATION I.-FOR THE PURPOSES OF THIS SECTION, 'B OOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS INCREASED BY (A) THE AMOUNT OF INCOME-TAX PAID OR PAYABLE, AND T HE PROVISION THEREFOR; OR 29 ITA NOS.936, 937, 1823 & 1824/MDS/2015 (B) THE AMOUNTS CARRIED TO ANY RESERVES, BY WHATEVE R NAME CALLED, OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33AC; OR (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS M ADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES; OR (D) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF SU BSIDIARY COMPANIES; OR (E) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PROP OSED; OR (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO A NY INCOME TO WHICH SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED 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 TH EREFOR, (I) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DI MINUTION 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).. (II) 4.4.5 THUS, THE EXPLANATION-1 TO SECTION 115JB DEFINES THE WORDS 'BOOK PROFIT' WHICH MEAN 'NET PRO FIT' AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR. SUCH BOOK PROFIT HAS TO BE INCREASED BY CLAUSES (A) TO (I) OF THE EXPLANATION- 1 TO SAID SECTION IF THEY ARE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND FROM SUCH PROFIT. SIMILARLY, THE SUMS MENTIONED IN CLAUSES (I) TO (VIII) OF THE EXPLANATI ON-1 TO SECTION 115JB ARE TO BE REDUCED. THE FIGURE ARRI VED AT AFTER THE ABOVE EXERCISE IS THE BOOK PROFIT OF T HE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR, FOR THE PURPOSE OF SECTION 115JB. 4.4.6 THUS, THE EXPLANATION-1 TO SECTION 115JB HAS PROVIDED NINE CLAUSES, I.E., CLAUSES (A) TO (I) WHI CH IF DEBITED TO THE PROFIT AND LOSS ACCOUNT CAN BE ADDED BACK TO THE NET PROFIT FOR COMPUTING THE BOOK PROFI T. IN THE INSTANT CASE, WE ARE CONCERNED WITH THE CLAIM O F DEPRECIATION CLAIMED AT HIGHER RATES THAN WHAT IS PRESCRIBED IN THE COMPANIES ACT. THE CLAIM WOULD FA LL WITHIN THE AMBIT OF CLAUSES (A) TO (I), ONLY IF THE AMOUNTS ARE THE ONES SPECIFIED UNDER THESE CLAUSES. THE PRESENT CLAIM OF 'DEPRECIATION AT HIGHER RATES' , WHICH HAS ACTUALLY BEEN DEBITED IN THE P&L ACCOUNT, IS AN ACTUAL CHARGE ON THE ASSETS AND ALSO PERMITTED UNDER THE COMPANIES ACT READ WITH THE CIRCULAR ISSU ED BY THE FINANCE MINISTRY. THEREFORE, THE ASSESSEE'S CLAIM OF 'DEPRECIATION AT HIGH RATES' DEBITED IN TH E P&L ACCOUNT, WILL NOT FALL UNDER THE AMBIT OF CLAUSES (A) TO (I) OF THE EXPLANATION 1 TO SECTION 115JB. 30 ITA NOS.936, 937, 1823 & 1824/MDS/2015 4.4.7 THEREFORE, NONE OF THE CLAUSES (A) TO (I) OF THE EXPLANATION-1 TO SECTION 115JB ARE ATTRACTED TO THE FACTS OF THE INSTANT CASE. ONCE THE AMOUNTS DEBITED TO P&L ACCOUNT FALLS OUTSIDE THE AMBIT OF THE CLAUSES (A) TO (I) OF EXPLANATION 1 TO SECTION 115JB, THE AO WI LL NOT HAVE ANY JURISDICTION TO DISALLOW SUCH CLAIMS A ND ADD BACK TO THE PROFITS U/S.115JB OF THE ACT. THE A O IS NOT JUSTIFIED IN DISALLOWING AND ADDING BACK THE ASSESSEES CLAIM OF DEPRECIATION AT HIGHER RATES' OF RS.3,02,62,222/-, ACTUALLY WRITTEN OFF IN THE BOOKS AND DEBITED TO P&L ACCOUNT FOR THE PURPOSE OF COMPUTING BOOK PROFIT UNDER SECTION II5JB. THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE ASSESSEE'S CLAIM OF 'DEPRECIATION AT HIGHER RATES' OF RS.3,02,62,222/-, AS AN ALLOWABLE DEDUCTION, WHILE DETERMINING THE BOOK PROFITS U/S115JB OF THE ACT. THE ADDITION OF RS.3,02,62,222/-, MADE BY THE ASSESSING OFFICER U / S .115JB OF THE ACT, STANDS DELETED. 14.3 AFTER HEARING BOTH SIDES AND CAREFULLY PERUSIN G THE MATERIAL ON RECORD, WE FIND MERIT IN THE ORDER OF T HE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) BECAUSE OF THE FOLLOWING REASONS:- I) THE CIRCULAR NO.2/89 ISSUED BY THE FINANCE MINIS TRY CLEARLY STATES THAT ANY COMPANY IS ENTITLED TO PRO VIDE HIGHER DEPRECIATION IN THE BOOKS BASED ON RISK LIKE TECHNO LOGICAL RISKS PERCEIVED BY THE MANAGEMENT, GENUINE REALIZAB LE VALUE ACCORDING TO MARKET PRACTICE ETC. 31 ITA NOS.936, 937, 1823 & 1824/MDS/2015 II) IN THE CASE OF THE ASSESSEE, THE GENUINENESS OF THE ADDITIONAL CLAIM OF DEPRECIATION BY THE ASSESSEE IS NOT DISPUTED. III) THERE IS NO BAR UNDER THE COMPANIES ACT TO CH ARGE HIGHER DEPRECIATION OTHER THAN WHAT IS RECOMMENDED UNDER THE COMPANIES ACT. IV) THE ASSESSING OFFICER IS BARRED FROM MAKING ANY ADJUSTMENTS ON THE BOOK PROFIT FOR THE PURPOSE OF C OMPUTING TAX UNDER SECTION 115JB OF THE ACT OTHER THAN WHAT IS SPECIFIED IN THE ACT. 14.4 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) AFTER CONSIDERING ALL THESE FACTS HAS RIGHTLY HELD THE ISSUE IN FAVOUR OF THE ASSESSEE. THEREFORE, WE DO NOT FIND I T NECESSARY TO INTERFERE WITH THE ORDER OF THE LEARNE D COMMISSIONER OF INCOME TAX (APPEALS). 15. IN THE RESULT, THE APPEALS IN ITA NOS.936 & 937/MDS/2015 OF THE ASSESSEE ARE ALLOWED IN FAVOUR OF THE ASSESSEE AS INDICATED HEREIN ABOVE AND ITA 32 ITA NOS.936, 937, 1823 & 1824/MDS/2015 NO.1823/MDS/2015 OF THE REVENUE IS PARTLY ALLOWED F OR STATISTICAL PURPOSES AND THAT OF ITA NO.1824/MDS/20 15 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 25 TH OCTOBER, 2016 SD/- SD/- ( ' # . $ ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) ! # / JUDICIAL MEMBER # / ACCOUNTANT MEMBER ! /CHENNAI, ' /DATED 25 TH OCTOBER, 2016 SOMU )* +* /COPY TO: 1. APPELLANT 2. RESPONDENT 3. , () /CIT(A) 4. , /CIT 5. * 0 /DR 6. /GF