M/s. Southern Petrochemical Industries Corpn Ltd., CHENNAI V. DCIT, CHENNAI

ITA 961/CHNY/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7943 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 02-01-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 27-05-2011
• Court: TRIBUNAL
• Department Lawyers: M SRINIVASA RAO
• Assessee Lawyers: R VIJAYARAGHAVAN
• Section: 43B; 263

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , ! ' ! # . $% , & '( BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER . / ITA NOS. 961 & 962/MDS/2011 / ASSESSMENT YEARS : 2005-06 & 2006-07 M/S. SOUTHERN PETROCHEMICAL INDUSTRIES CORPN. LTD., C/O M/S. SUBBARAYAR AIYAR PADMANABHAN & RAMAMANI ADVOCATES, NEW NO.75A (OLD NIO.105A0, DR. RADHAKIRSHNAN SALAI, MYLAPORE, CHENNAI -4. PAN AAACS4668K ( /APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-V(1), CHENNAI-34. RESPONDENT) / APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE / RESPONDENT BY : SHRI M. SRINIVASA RAO, CIT ! / DATE OF HEARING : 02.01.2017 '# ! / DATE OF PRONOUNCEMENT: 09.02.2017 ) / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINS T THE ORDER OF THE COMMISSIONER OF INCOME-TAX PASSED UNDE R SEC.263 - - ITA 961 & 962/MDS/11 2 OF THE I.T.ACT, DATED 24.3.2011. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE COMMISSIONER OF INCOME TAX ERRED IN ASSUMI NG JURISDICTION U/S.263 AND HOLDING THAT THE ASSESSMEN T ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE MERELY BECAUSE THE DECISION OF THE ASSESSIN G OFFICER IS NOT INCONSONANCE WITH THE VIEW OF THE CI T. 2. THE COMMISSIONER OF INCOME TAX ERRED IN DIRECTI NG THE ASSESSING OFFICER TO REWORK THE PROPORTIONATE I NTEREST DISALLOWANCE TAKING INTO ACCOUNT THE GROSS INTEREST PAID ON BORROWALS. 3. THE COMMISSIONER OF INCOME TAX ERRED IN DIRECTI NG THE ASSESSING OFFICER TO DISALLOW THE APPELLANTS C LAIM OF DEDUCTION TOWARDS ELECTRICITY AND POWER GENERATION TAX U/S.43B. 4. THE COMMISSIONER OF INCOME TAX ERRED IN DIRECTIN G THE ASSESSING OFFICER TO EXAMINE THE APPELLANTS CL AIM OF DEDUCTION U/S.35(2AB) AFRESH. 5. THE COMMISSIONER OF INCOME TAX ERRED IN DIRECTIN G THE ASSESSING OFFICER TO ASSESS THE RELIEF OBTAINED BY THE ASSESSEE UNDER CORPORATE DEBT RESTRUCTURING (CDR) MECHANISM UNDER THE APPROPRIATE PROVISIONS OF THE A CT. 3. THE FACTS OF THE CASE AS NARRATED FOR THE ASSESS MENT YEAR ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUS INESS OF MANUFACTURE AND SALE OF CHEMICAL FERTILIZERS, UREA, DAP AND CHEMICALS, EXECUTION OF TURNKEY PROJECTS AND ELECTR IFICATION - - ITA 961 & 962/MDS/11 3 CONTRACTS, MANUFACTURE OF BULK DRUGS AND FORMULATIO NS AND PRODUCTION OF TISSUE CULTURE PLANTS AND ENZYMES. I T FILED ITS RETURN OF INCOME FOR THE A.Y. 2005-06 ON 27.10.2005 DECLAR ING A NET LOSS OF 17,020.02 LAKHS. ASSESSMENT IN THIS CASE WAS COMP LETED ON 12.12.2008 ON A TOTAL INCOME OF NIL AFTER ADJUSTI NG BROUGHT FORWARD LOSSES TO THE EXTENT OF 139,87,79,554/-. 3.1 THE CIT NOTICED CERTAIN DISCREPANCIES IN THE AS SESSMENT ORDER WHICH IS AS FOLLOWS : (A). IN PARA 6 OF THE ASSESSMENT ORDER, PROPORTION ATE DISALLOWANCE OF INTEREST EXPENDITURE WAS MADE ON ACCOUNT OF DIVERSION OF INTEREST-BEARING FUNDS TO G ROUP COMPANIES WITHOUT CHARGING INTEREST. WHILE COMPUTI NG THIS DISALLOWANCE, THE AO HAD RECKONED NET INTEREST LIABILITY OF 18063.35 LAKHS (I.E. AFTER ADJUSTING INTEREST RECEIPT OF 164.51 LAKHS AGAINST GROSS INTEREST PAYMENT OF 18,227.86 LAKHS), INSTEAD OF ADOPTING GROSS INTERE ST LIABILITY OF 18,227.86 LAKHS, AS FURNISHED IN SCHEDULE 14 OF THE FINANCIAL STATEMENTS OF THE ASSESSEE COMP ANY. (B). AS PER ANNEXURE 15 TO FORM 3CD REPORT [COL.21( A)], ELECTRICITY TAX ( 1,93,03,614/-) AND POWER GENERATION TAX ( 69,97,512/-) WERE NOT PAID BY THE ASSESSEE COMPANY DURING THE RELEVANT PREVIOUS YEAR OR BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME U/S.139(1) OF THE I.T.ACT, WHICH WARRANTS DISALLOWANCE U/S.43B. HOWE VER, THE A.O. HAS NOT CONSIDERED THIS ASPECT AND HAD ALL OWED THE ABOVE CLAIMS OF THE ASSESSEE. (C). WEIGHTED DEDUCTION U/S.35(2AB) HAD BEEN ALLOWE D WITHOUT OBTAINING EVIDENCES RELATING TO : - - ITA 961 & 962/MDS/11 4 (I) THE EXPENDITURE INCURRED ON IN-HOUSE RESEARCH A ND DEVELOPMENT FACILITY. (II) THE AGREEMENT BETWEEN THE ASSESSEE COMPANY AN D THE DEPARTMENT OF SCIENTIFIC RESEARCH FOR COOPERATI ON IN SUCH RESEARCH AND DEVELOPMENT FACILITY AND FOR AUDI T OF ACCOUNTS MAINTAINED IN THAT FACILITY. (D). AS PER ITEM 11(A) / PAGE 54 OF THE NOTES ON ACCOUNTS ON THE FINANCIALS OF THE ASSESSEE, INTERES T RELIEF AVAILED FROM VARIOUS BANKS AND FINANCIAL INSTITUTIONS UNDER THE CORPORATE DEBT RESTRUCTURING SCHEME (CDRS) OR OTHERWISE INCLUDES 2845.49 LAKHS AVAILED FROM TWO LENDERS. THIS ISSUE WAS NOT EXAMI NED IN THE LIGHT OF THE HONBLE APEX COURTS DECISION I N THE CASE OF ACIT V. TVS SUNDARAM IYENGAR & SONS LTD. (222 ITR 444). 3.2 ACCORDING TO THE CIT, THE ASSESSEE IS GETTING R ELIEF MORE THAN THAT TO WHICH IT WAS ENTITLED. HENCE, THE ASS ESSMENT ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE INASMUCH AS, THE AFORESAID ERRORS RESULTED IN THE ASSESSEE G ETTING RELIEF RUNNING INTO CRORES. THEREFORE, A SHOW CAUSE NOTI CE DATED 04.03.2011 U/S.263 OF THE ACT WAS ISSUED TO THE ASS ESSEE. IN RESPONSE TO THE NOTICE, THE REPRESENTATIVES OF THE ASSESSEE FILED A DETAILED WRITTEN SUBMISSION AND EXPLAINED THE BUSIN ESS ORGANIZATION AND THE BACKGROUND OF THE ISSUES. 4. REGARDING DISALLOWANCE ON ACCOUNT OF DIVERSION O F INTEREST BEARING FUNDS TO GROUP CONCERNS, IT WAS NOTICED THA T THE AMOUNT - - ITA 961 & 962/MDS/11 5 DEBITED TO THE INTEREST PAID ACCOUNT WAS NET OF INT EREST RECEIVED. THE TOTAL INTEREST INCOME RECEIVED DURING THE YEAR WAS 164.51 LAKHS. THEREFORE, ACCORDING TO THE CIT, THE ORDER OF THE AO, WAS THEREFORE, ERRONEOUS TO THIS EXTENT THAT THE INTERE ST DISALLOWANCE WAS MADE WITH REFERENCE TO THE NET INTEREST DEBITED AND NOT THE GROSS INTEREST PAYMENT OF 18,227.86 LAKHS. IT WAS SUBMITTED BY THE LD. AR THAT THE FORMULA ADOPTED BY THE AO IN TH E ASSESSMENT ORDER IS A SCIENTIFIC ONE AND SHOULD NOT BE INTERFE RED WITH, SINCE, ONLY NET INTEREST LIABILITY WAS DEBITED TO THE PROF IT AND LOSS ACCOUNT. THE ASSESSEE COMPANY HAS ALSO RELIED ON T HE DECISION OF THE SUPREME COURT IN THE CASE OF S.A.BUILDERS V. CIT (288 ITR 1). FURTHER, IT WAS SUBMITTED THAT THE DE CISION TO DISALLOW THE INTEREST PAYMENT HAS BEEN TAKEN UP BEF ORE THE CIT(A) AND IF THE ENTIRE DISALLOWANCE IS DELETED BY THE CIT(A), THEN THIS ISSUE WOULD BE OF ACADEMIC INTEREST. 4.1 THE CIT OBSERVED THAT THE CONTENTION OF THE ASS ESSEE THAT THE FORMULA ADOPTED BY THE AO TO COMPUTE INTEREST D ISALLOWANCE IS A SCIENTIFIC ONE, SINCE, ONLY NET INTEREST LIABI LITY WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT CANNOT BE ACCEPTED, IN VIEW OF THE FACT THAT THE ASSESSEE BY ACCOUNTING JUGGLERY HAS MISREP RESENTED - - ITA 961 & 962/MDS/11 6 MATERIAL FACTS BY DEBITING NET INTEREST LIABILITY A ND NOT THE GROSS INTEREST LIABILITY. AS PER AS-1 (WHICH IS RECOGNI ZED BY THE CBDT UNDER SEC.145(2) VIDE NOTIFICATION NO.9949 DATED 25 .1.1996), THE FINANCIAL STATEMENTS OF THE ASSESSEE SHOULD DISCLOS E ALL MATERIAL ITEMS, THE KNOWLEDGE OF WHICH MIGHT INFLUENCE THE D ECISIONS OF THE USER OF THE FINANCIAL STATEMENTS. GOING BY THIS A CCOUNTING STANDARD, WHICH THE ASSESSEE OUGHT TO HAVE FOLLOWED , THE ASSESSEE SHOULD HAVE DECLARED GROSS INTEREST LIABIL ITY SEPARATELY AND OUGHT NOT TO HAVE DEBITED THE NET INTEREST LIAB ILITY IN ITS PROFIT AND LOSS ACCOUNT. FURTHER, THE CIT OBSERVED THAT T HE ACCOUNTING TREATMENT ADOPTED BY THE ASSESSEE CANNOT BE OVERRID E THE PROVISIONS OF THE ACT AND THE AO OUGHT TO HAVE ADO PTED THE GROSS INTEREST LIABILITY OF THE ASSESSEE FOR THE PURPOSE OF INTEREST DISALLOWANCE. 4.2 AS REGARDS THE INTEREST DISALLOWANCE, WHICH WAS SUBJECT MATTER OF APPEAL BEFORE THE CIT(A), THE CIT OBSERVE D THAT THE QUESTION OF ADOPTING GROSS INTEREST LIABILITY OR NE T INTEREST LIABILITY, FOR COMPUTING THE INTEREST DISALLOWANCE, WAS NOT AT ALL CONSIDERED BY THE CIT(A) FOR ADJUDICATION AND THE QUESTION OF MERGER DOES NOT ARISE IN THIS CASE. FURTHER, THE CIT OBSERVED THAT EXPLANATION - - ITA 961 & 962/MDS/11 7 (C) TO SEC.263(1) OF THE ACT PROVIDES THAT WHERE AN Y ORDER REFERRED TO IN SUB-SECTION (1) AND PASSED BY THE AO HAS BEEN MADE A SUBJECT-MATTER OF ANY APPEALS, THE POWERS OF THE CI T UNDER THE SUB-SECTION SHALL EXTEND TO SUCH MATTERS AS HAD NOT BEEN CONSIDERED AND DECIDED IN THE APPEAL. HE WORDS WHICH HAVE BEEN USED IN EXPLANATION (C) TO SUB-SECTION (1) OF SEC.263 ARE CONSIDERED AND DECIDED. ACCORDING TO THE CIT, TH E ISSUE OF GROSS OR NET INTEREST LIABILITY WAS NOT AT ALL CONS IDERED BY THE CIT(A) AND NO DECISION WAS RENDERED. ACCORDINGLY, THE CIT REJECTED THE ASSESSEES CONTENTION OF THE THEORY OF MERGER DOES NOT MERIT CONSIDERATION AND RELIED ON THE FOLLOWING DECISIONS TO SUPPORT HIS VIEW: 1. CIT V. SRI ARBUDA MILLS LTD. (231 ITR 50(SC) 2. CIT V. JAYKUMAR B. PATIL (236 ITR 469)(SC) 3. CIT V. PANNA KNITTING INDUSTRIES (253 ITR 656)(G UJ.) 4.3 WITH REGARD TO THE SUPREME COURTS DECISION IN THE CASE OF S.A.BUILDERS CITED SUPRA, THE CIT OBSERVED THAT IT IS ALSO DEVOID OF SUBSTANCE, SINCE, WHILE DECIDING TO DISALLOW A PORT ION OF INTEREST PAID, THE AO HAD CONSIDERED THE AFORESAID SUPREME C OURTS DECISION AND CONCLUDED THAT THE ADVANCES MADE TO TH E GROUP - - ITA 961 & 962/MDS/11 8 CONCERNS HAD NO DIRECT NEXUS WITH THE BUSINESS ACTI VITIES OF THE ASSESSEE COMPANY. BESIDES, THERE IS ALSO A QUESTI ON OF BASIC PRINCIPLE INVOLVED ON THIS ISSUE. THE INTEREST REC EIPTS HAVE COME THROUGH DEPOSITS AND INVESTMENTS MADE. ON THE OTHE R HAND, THE ADVANCES TO THE SISTER CONCERNS HAVE BEEN MADE OUT OF BORROWED FUNDS CARRYING INTEREST LIABILITY. THEREFORE, ACCO RDING TO THE CIT, THERE IS NO NEXUS BETWEEN THE INTEREST RECEIVED AND THE INTEREST PAID. DUE TO THIS, THE AO SHOULD HAVE DISALLOWED A PORTION OF THE INTEREST PAID OUT OF THE GROSS INTEREST LIABILITY I N PROPORTION TO THE INTEREST FREE LOANS EXTENDED TO THE GROUP CONCERNS, WHICH WORKS OUT OF TO 14,13,22,330/- AND DIRECTED THE AO TO REWORK THE DISALLOWANCE TAKING INTO ACCOUNT THE GROSS INTERES T PAID ON BORROWALS. 5. WITH REGARD TO ELECTRICITY TAX AND POWER GENE RATION TAX, THE ASSESSEE HAD CLAIMED ELECTRICITY TAX AND POWER GENERATION TAX AT 1,93,03,614/- AND 69,97,512/- RESPECTIVELY, IN THE PROFIT AND LOSS ACCOUNT. IT WAS SEEN THAT BOTH THE ABOVE SUMS WERE NOT PAID BY THE ASSESSEE COMPANY DURING THE RE LEVANT PREVIOUS YEAR OR BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME U/S.139(1) OF THE ACT. - - ITA 961 & 962/MDS/11 9 5.1 THE LD. AR, EXPLAINED BEFORE THE CIT THAT INITI ALLY THE ASSESSEE COMPANY, BEING IN THE LINE OF MANUFACTURE OF CHEMICALS AND FERTILIZERS, WAS COMPLETELY EXEMPTED FROM PAYME NT OF ELECTRICITY TAX, AS ANOTHER INCENTIVE, TO PROMOTE I NDUSTRIAL ACTIVITY IN THIS SECTOR. THE ELECTRICITY ACT WAS AMENDED IN THE YEAR 2003 BY THE TAMIL NADU STATE GOVERNMENT AND THE TAMIL NA DU GOVERNMENT IMPOSED TWO KINDS OF LEVY ON THE COMPANY . THE FIRST ONE IS A TAX ON ELECTRICITY CONSUMED, NAMELY, ELEC TRICITY TAX. BESIDES, THE COMPANY ALSO OWNED A CAPTIVE POWER PLA NT AND WAS PERMITTED TO UTILIZE THE ENTIRE POWER GENERATED FOR THE INDUSTRY. ON THIS, THE COMPANY WAS IMPOSED A POWER GENERATIO N TAX. THE LD. AR, SUBMITTED THAT THE ENTIRE BASIS AND CON STITUTIONAL VALIDITY OF THE TWO LEVIES WERE CHALLENGED BY THE A SSESSEE BEFORE THE MADRAS HIGH COURT AND THE MATTER IS STILL PENDI NG FOR ADJUDICATION IN WRIT APPEAL NO.384/2004. THE HIGH COURT HAS GRANTED AN INTERIM INJUNCTION ON THE RECOVERY OF TH E ABOVE SAID TWO LEVIES. THE LD. AR, INFORMED THAT THE STAY IS OPERATIVE EVEN AS ON DATE. IT WAS FURTHER SUBMITTED THAT THE LIAB ILITY IMPOSED UPON THE ASSESSEE IS NOT A CONTINGENT LIABILITY SIN CE THE SAME HAS BEEN IMPOSED BY AN ACT ENACTED BY THE TAMIL NADU LE GISLATIVE - - ITA 961 & 962/MDS/11 10 ASSEMBLY. THEREFORE, THE LD. AR CLAIMED THAT THE O RDER OF THE AO SHOULD NOT BE INTERFERED WITH. 5.2 THE CIT OBSERVED THAT IT IS NOT IN DISPUTE THAT THE LIABILITY TO PAY ELECTRICITY TAX AND POWER GENERATION TAX WA S OCCASIONED BY AN ACT BY THE TAMIL NADU LEGISLATIVE ASSEMBLY. THUS, THE LIABILITY BEING A STATUTORY ONE AND IS PAYABLE UNDE R THE LAW ENACTED BY THE STATE LEGISLATURE, THE SAME OUGHT TO HAVE BEEN PAID BEFORE THE DUE DATE FOR FILING RETURN OF INCOM E, IN ACCORDANCE WITH THE PROVISIONS OF SEC.43B OF THE ACT. HOWEVER , ACCORDING TO THE CIT, THE ASSESSEE HAS FAILED TO MAKE THE PAYMEN T IN RESPECT OF THE ABOVE TWO STATUTORY LEVIES AND HENCE, THE DE DUCTION CLAIMED ELECTRICITY TAX ( 1,93,03,614/-) AND POWER GENERATION TAX ( 69,97,512/- OUGHT TO HAVE BEEN DISALLOWED BY THE A O U/S.43B OF THE ACT. 5.3 FURTHER, THE CIT OBSERVED THAT THE ASSESSEES C ONTENTION THAT THE LIABILITY HAS NOT GOT CRYSTALLIZED DURING THE RELEVANT PREVIOUS YEAR IS ACCEPTED, THAT WOULD RESULT IN THE LIABILITY BEING CLASSIFIED AS A CONTINGENT LIABILITY, WHICH IS NO T AN ALLOWABLE DEDUCTION UNDER THE SCHEME OF THE ACT. THUS, ACCOR DING TO THE - - ITA 961 & 962/MDS/11 11 CIT, EITHER WAY, THE ASSESSEES CLAIM OF DEDUCTION ON ELECTRICITY TAX AND POWER GENERATION TAX OUGHT TO HAVE DISAL LOWED AND, THEREFORE, HE DIRECTED THE AO TO DISALLOW THE ASSES SEES CLAIM OF DEDUCTION TOWARDS ELECTRICITY TAX AND POWER GENE RATION TAX. 6. IN RESPECT OF DEDUCTION U/S.35(2AB) OF THE ACT, THE ASSESSEE CLAIMED A TOTAL DEDUCTION OF 4,11,16,605/- U/S.35(2AB). THE DEDUCTION IS AT THE RATE OF 150% OF THE EXPENDITURE INCURRED ON THE IN-HOUSE RESEARCH AND D EVELOPMENT FACILITY. THE CLAIM WAS ALLOWED BY THE AO. FROM T HE RECORDS, IT IS SEEN BY THE CIT THAT NO EVIDENCE WAS FURNISHED TO E STABLISH THAT THE ASSESSEE COMPANY HAD ENTERED INTO AN AGREEMENT WITH THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH FO R CO-OPERATION IN CARRYING OUT SUCH RESEARCH AND DEVELOPMENT ACTIV ITY AND FOR AUDIT OF THE ACCOUNTS MAINTAINED FOR THAT FACILITY. FURTHER, IT IS SEEN THAT NO EVIDENCE HAS ALSO BEEN FILED TO ESTABL ISH THAT THE EXPENDITURE WAS INCURRED ON IN-HOUSE RESEARCH AND D EVELOPMENT FACILITY. THE LD. AR, CONTENDED THAT THE CLAIM WAS MADE STRICTLY IN ACCORDANCE WITH THE PROVISIONS OF SEC.35(2AB) OF TH E ACT AND HE AGREED TO PRODUCE ALL THE RELEVANT DETAILS BEFORE T HE AO FOR VERIFICATION. - - ITA 961 & 962/MDS/11 12 6.1 ACCORDING TO THE CIT, THE AO HAD ALLOWED THE SA ID DEDUCTION WITHOUT EXAMINING THE AFORESAID ASPECT OF THE ISSUE, WHICH RENDERS THE ASSESSMENT ORDER ERRONEOUS AND PR EJUDICIAL TO THE INTEREST OF THE REVENUE. TO SUPPORT HIS VIEW, THE CIT RELIED ON THE DECISION OF THE GUJARAT HIGH COURT IN THE CA SE OF ADDL. CIT V. MUKUR CORPORATION (111 ITR 312), WHEREIN IT WAS HELD THAT IF THE AO HAD ALLOWED A CLAIM OF THE ASSESSEE WITHOUT PROB ING INTO THE SAME, THE CIT IS JUSTIFIED IN INVOKING THE PROVISIO NS OF SEC.263 OF THE ACT. ACCORDINGLY, THE CIT DIRECTED THE AO TO PASS A FRESH ORDER ON THIS ISSUE IN ACCORDANCE WITH LAW AFTER CO NSIDERING THE POINTS STATED ABOVE AND AN OPPORTUNITY OF BEING HEA RD TO THE ASSESSEE AND THE ASSESSEE SHALL BE FREE TO SUBMIT T HE DETAILS BEFORE THE AO, WHICH IT HAS PROMISED TO FURNISH DUR ING THE PROCEEDINGS. 7. REGARDING INTEREST RELIEF DERIVED UNDER THE CORP ORATE DEBT RESTRUCTURING(CDR) MECHANISM, THE ASSESSEE SHOWED NOTES ON ACCOUNTS THAT THE ASSESSEE COMPANY OWES SUBSTANTIAL LIABILITIES TOWARDS VARIOUS BANKS AND THAT A CDR MECHANISM WAS, THEREFORE ARRIVED AT BETWEEN THE BANKS AND THE ASSESSEE COMPA NY, UNDER THE CDR, THE RATE OF INTEREST PAYABLE ON THE BORROW ALS WAS - - ITA 961 & 962/MDS/11 13 REDUCED FROM 8% TO 4%. ON ACCOUNT OF THIS DOWNWARD REVISION OF INTEREST, THE TOTAL INTEREST LIABILITY CAME DOWN BY AN AMOUNT OF 2845.49 LAKHS OVER THE PERIOD OF BORROWALS. THE RE DUCTION FOR THE ASST. YEAR IN QUESTION WAS 1071.61 LAKHS. THE INTEREST LIABILITY HAS BEEN CLAIMED AND ALLOWED AS DEDUCTION ON A REGULAR BASIS IN THE ASSESSMENT FOR THE EARLIER ASST. YEARS . THEREFORE, AN AMOUNT OF 2845.49 LAKHS REPRESENTS THE LIABILITY REVERSED ON ACCOUNT OF CDR. 7.1 THE LD. AR POINTED OUT THE EFFECT OF THE CDR HA S NOT BEEN REFLECTED IN THE REVENUE ACCOUNT, SINCE, TWO OF THE PARTICIPATING BANKS HAVE NOT CONFIRMED THE REDUCTION IN THE RATE OF INTEREST. THE LD. AR, SUBMITTED THAT THE DISCLOSURE WAS MADE IN THE ACCOUNTS AS PER THE REQUIREMENT OF THE COMPANY LAW AND, THEREFORE, NO BENEFIT HAS ACTUALLY ACCRUED TO THE A SSESSEE COMPANY. 7.2 THE CIT OBSERVED THAT THE CDR EXERCISE CARRIED OUT BY THE FINANCIAL INSTITUTIONS AND BANKS (WHICH HAD ADV ANCED LOANS) AND THE ASSESSEE COMPANY WAS BASICALLY DONE WITH TH E INTENTION TO RESTRUCTURE ALL THE PARAMETERS OF THE LOANS ADVA NCED AND THE - - ITA 961 & 962/MDS/11 14 REPAYMENT SCHEDULE AND TERMS, TO ARRIVE AT NEW TERM S WHICH INCLUDES DOWNWARD REVISION OF INTEREST RATE, THE PU RPOSE BEING TO BAIL OUT THE ASSESSEE COMPANY FROM ITS FINANCIAL CR ISIS. THUS, THIS EXERCISE HAS BEEN CARRIED OUT BY THE FINANCIAL INST ITUTIONS AND THE ASSESSEE COMPANY BASED ON AN UNDERSTANDING BETWEEN THEM. THEREFORE, ACCORDING TO THE CIT, THE ASSESSEES SUB MISSION THAT IT HAS NOT RECEIVED THE APPROVAL FROM TWO OF THE CORPO RATE BANKS FOR THE REDUCTION IN THE RATE OF INTEREST IS FUNDAMENTA LLY FLAWED. FURTHER, THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY EVIDENCE TO SHOW THAT THESE TWO BANKS HAVE SUBSEQUENTLY OBJECTE D TO THE CDR EXERCISE. THUS, THE SUBMISSION OF THE ASSESSEE COMPANY THAT THE CDR EXERCISE HAS NOT REACHED FINALITY DOES NOT HOLD WATER. THE CIT OBSERVED THAT IT WAS ADMITTED BY TH E ASSESSEE COMPANY THAT THE CONFIRMATION FROM THE TWO BANKS WH ICH ARE YET TO BE RECEIVED, IS ONLY WITH REFERENCE TO THE ARITH METICAL ACCURACY OF THE AMOUNT WHICH WAS QUANTIFIED BY THE CDR AND N OT THE QUESTION OF REDUCTION. THUS, THE INTENTION OF THE CDR EXERCISE IS NOT AN ISSUE. THEREFORE, THE INTEREST RELATING TO EARLIER YEARS, WHICH WAS ALLOWED AS A DEDUCTION IN COMPUTING THE I NCOME FOR THOSE YEARS, BECOMES THE INCOME OF THE CURRENT YEAR . IF ANY - - ITA 961 & 962/MDS/11 15 COMPONENT OF THE PRINCIPAL / INTEREST AMOUNT PAYABL E HAS BEEN REDUCED OR IF COMPOUNDED RATE OF INTEREST HAS NOT B EEN CLAIMED AS DEDUCTION IN THE EARLIER YEARS, SUCH COMPONENT W OULD BE TAXABLE U/S.28(IV) OF THE ACT. ACCORDING TO THE C IT, THIS VIEW IS WELL SUPPORTED BY THE DECISION OF THE BOMBAY HIGH C OURT IN THE CASE OF SOLID CONTAINERS LTD. V. DCIT (308 ITR 417) AND DIRECTED THE AO TO ASSESS THE RELIEF UNDER THE APPROPRIATE P ROVISIONS OF THE ACT AND BASED ON THE DETAILS FURNISHED BY THE ASSES SEE. ACCORDINGLY, THE CIT SET ASIDE THE ORDER PASSED BY THE AO ON 12.12.2008 WITH INSTRUCTION TO PASS A FRESH ORDER A FTER CONSIDERING THE DIRECTIONS GIVEN BY HIM. AGAINST THESE DIRECTI ONS, THE ASSESSEE IS IN APPEAL BEFORE US. 8. REGARDING INTEREST DISALLOWANCE ON ACCOUNT OF D IVERSION OF INTEREST BEARING FUND TO GROUP CONCERN WITHOUT CHAR GING INTEREST, LD.A.R SUBMITTED THAT THIS ISSUE WAS CONSIDERED BY THE AO AND THERE IS NO NECESSITY OF THE DISALLOWANCE ON THIS C OUNT. FURTHER HE SUBMITTED THAT THERE ARE CLEVERAGE OF OPINION ON TH IS ISSUE AND HENCE THAT CANNOT BE ANY REVISION ON THIS ISSUE. FO R THIS PURPOSE LD.A.R HAS RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. IN [2000] 243 ITR 83 (SC). AS PER - - ITA 961 & 962/MDS/11 16 WHICH THE LD.CIT CAN INVOKE THE JURISDICTION U/S.26 3 OF THE ACT, IF THE AO IS ERRONEOUS AND IT IS ALSO PREJUDICIAL TO T HE INTERESTS OF THE REVENUE; BOTH THE CONDITIONS MUST CO-EXIST; IF DUE TO AN ERRONEOUS ORDER OF THE AO, THE REVENUE IS LOSING TA X LAWFULLY PAYABLE BY A PERSON, IT WILL CERTAINLY PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE PHRASE PREJUDICIAL TO THE INTERES TS OF THE REVENUE HAS TO BE READ IN CONJUNCTION WITH AN ERRO NEOUS ORDER PASSED BY THE ASSESSING OFFICER. EVERY LOSS OF REVE NUE AS A CONSEQUENCE OF AN ORDER OF THE ASSESSING OFFICER, C ANNOT BE TREATED AS PREJUDICIAL TO THE INTERESTS OF THE REVE NUE, WHEN AN ASSESSING OFFICER ADOPTED ONE OF THE COURSES PERMIS SIBLE IN LAW AND IT HAS RESULTED IN LOSS OF REVENUE, OR WHERE TW O VIEWS ARE POSSIBLE AND THE AO HAS TAKEN ONE VIEW WITH WHICH T HE COMMISSIONER DOES NOT AGREE, IT CANNOT BE TREATED A S AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE UNLESS THE VIEW TAKEN BY THE INCOME-TAX OFFICER IS UNSUSTA INABLE IN LAW. ACCORDINGLY, HE SUBMITTED THAT THE DISALLOWANCE OF INTEREST CANNOT BE DEALT BY THE LD. CIT IN HIS ORDER PASSED U/S.263 OF THE ACT. 9. ON THE OTHER HAND, LD.D.R SUBMITTED THAT INTERE ST RECEIVED - - ITA 961 & 962/MDS/11 17 CANNOT BE SET OFF WITH THE INTEREST PAID BY THE ASS ESSEE AND INTEREST PAID SEPARATELY TO BE SHOWN, WHICH USED FO R THE PURPOSE OF BUSINESS. INTEREST RECEIVED IS AN INCOME TO BE ASSESSED SEPARATELY. FURTHER, HE SUBMITTED THAT A PORTION OF FUND WAS ADVANCED TO THE SISTER CONCERN FREE OF INTEREST THA T INTEREST ON THAT ADVANCES TO ITS SISTER CONCERN TO BE COMPUTED AND TO BE ALLOWED WHICH IS WORKED OUT AT ` 513.44 CRORES. HE RELIED ON THE ORDER OF LD. CIT. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY THE INTEREST PAID BY THE ASS ESSEE ON BORROWINGS USED FOR THE PURPOSE OF THE BUSINESS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME OF ASSESSEE. THE INTEREST RECEIVED BY THE ASSESSEE CANNOT BE SET OFF AGAINST THE INTEREST PAID BY THE ASSESSEE. THE INTEREST PAID AND CLAIME D AS A DEDUCTION IN THE COMPUTATION OF PROFITS AND GAINS O F THE BUSINESS, CANNOT BE SET OFF AGAINST INTEREST RECEIVED UNDER T HE HEAD INCOME FROM OTHER SOURCES. SO THAT WHILE COMPUTIN G THE DISALLOWANCE OF INTEREST ON MONEY ADVANCED TO GROUP CONCERN, THE GROSS INTEREST TO BE CONSIDERED AND PROPORTIONA TE INTEREST - - ITA 961 & 962/MDS/11 18 DISALLOWANCE TO BE WORKED OUT, BEING SO, THE CIT J USTIFIED IN GIVING THE DIRECTION TO THE AO ACCORDINGLY. 11. BEFORE US, LD.A.R SUBMITTED THAT INTEREST DISA LLOWANCE BY THE LD. CIT WAS A SUBJECT MATTER OF THE APPEAL. IN THIS CONNECTION, IT IS TO BE NOTED THAT THE ENTIRE ASSES SMENT ORDER CANNOT BE SAID TO HAVE MERGED WITH APPELLATE ORDER. IN VIEW OF EXPLANATION-C TO SEC.263(1) OF THE ACT WHEREAS THE ASSESSEE HAD PREFERRED AN APPEAL ONLY ON CERTAIN POINTS; CIT CAN REVISE THE ASSESSMENT ORDER ON THE OTHER POINTS. THE RELIANCE WAS PLACED ON THE JUDGEMENTS OF JURISIDICTIONAL HIGH COURT IN THE CASE OF CIT VS. FARIDA PRIME TANNERY IN [2000] 244 ITR 465 (MAD) AN D IN THE CASE OF SESHASAYEE PAPER AND BOARDS LIMITED IN [199 9] 238 ITR 683 (MAD) AND IN THE CASE OF SOFT BEVERAGES P. LTD. IN [2001] 249 ITR 552 (MAD). HENCE, IN OUR OPINION, THE CONCEPT O F MERGER WITH THE APPELLATE ORDER CANNOT BE APPLIED; THEREFORE, L D. CIT IS WELL WITHIN HIS POWER IN EXERCISING REVISIONAL JURISDICT ION ON THIS ISSUE. THIS GROUND OF ASSESSEE IS REJECTED. 12. THE NEXT GROUND IS WITH REGARD TO DISALLOWANC E OF CLAIM OF DEDUCTION TOWARDS ELECTRICITY AND POWER GENERATION TAX U/S.43B OF THE ACT. - - ITA 961 & 962/MDS/11 19 13. LD.A.R SUBMITTED THAT POWER GENERATION TAX DOE S NOT FALL UNDER THE PROVISIONS OF THE SECTION 43B OF THE ACT. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ON THIS ISSUE, IN OUR OPINION, ELECTRIC AL TAX AND POWER GENERATION TAX IS STATUTORY LIABILITY WHICH REQUIRE S TO BE PAID BEFORE THE DUE DATE OF FILING OF RETURN OF INCOME AND AS S UCH PROVISIONS OF THE SECTION 43B IS APPLICABLE AND THE LD. CIT IS JU STIFIED IN INVOKING THE JURISDICTION U/S.263 OF THE ACT TO DIS ALLOW THE SAME. HENCE, THIS GROUND STANDS REJECTED. 15. THE NEXT GROUND IS WITH REGARD TO CLAIM OF DED UCTION U/S.35(2AB) OF THE ACT. LD.A.R SUBMITTED THAT THIS CLAIM WAS MADE IN ACCORDANCE WITH THE PROVISIONS OF THE SECTION 35 (2AB) OF THE ACT AND ACCORDING TO HIM, LD. ASSESSING OFFICER /CI T CANNOT WITHDRAW THE CLAIM ITSELF AT MOST, THEY CAN REFER T HE MATTER TO THE PRESCRIBED AUTHORITY UNDER THE PROVISIONS OF THE AC T SO AS TO VERIFY THE GENUINENESS OF CLAIM OF THE ASSESSEE. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE LD. CIT HAS NOT WITHDRAWN THE CLAIM OF ASSESSEE U/S.35(2AB) OF THE ACT. HE HAS ONLY REMITTED THE I SSUE BACK TO THE FILE OF AO TO EXAMINE THE ISSUE IN ACCORDANCE WITH LAW AFTER - - ITA 961 & 962/MDS/11 20 PROVIDING AN OPPORTUNITY TO THE ASSESSEE. SINCE TH E AO ALLOWED THE DEDUCTION WITHOUT EXAMINING THE ISSUE IN PROPER SENSE AND HE HAS NOT MADE ANY ENQUIRY ON THIS ISSUE, THE ORDER O F THE AO IS VERY CRYPTIC AND IS BAD IN LAW AS THE AO WHAT IS R EQUIRED TO BE LOOKED INTO WAS NOT GONE THROUGH BY HIM. HENCE, I T MAKES THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE I NTEREST OF THE REVENUE. BEING SO, THE CIT IS JUSTIFIED IN INVOKING THE PROVISIONS OF THE SECTION 263 OF THE ACT. 17. THE LAST ISSUE IS WITH REGARD TO RELIEF GRANTE D TO THE CORPORATE DEBT RESTRUCTURING MECHANISM UNDER THE AP PROPRIATE PROVISIONS OF THE ACT. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ON ACCOUNT OF UPWARD REVISION OF INTERES T, THE TOTAL LIABILITY CAME DOWN BY AN AMOUNT OF ` 4413.09 LAKHS OVER THE PERIOD OF BORROWALS. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THERE WAS A DEDUCTION OF INTEREST TO THE TUNE OF ` 1567.60 LAKHS. THE INTEREST LIABILITY CLAIMED AND ALLOWED IN THE ASSESSMENT YEARS DURING THE PERIOD OF BORROWINGS, T HEREFORE, THE INTEREST REVERSE IN THE ASSESSMENT YEAR UNDER CONSI DERATION TO BE CONSIDERED AS INCOME OF ASSESSEE. HOWEVER, THE AO NOT - - ITA 961 & 962/MDS/11 21 CONSIDERING THE ISSUE IN PROPER PERSPECTIVE, HENCE, THE CIT REMITTED THE ISSUE TO THE FILE OF LD. ASSESSING OFF ICER TO EXAMINE THE ISSUE AFRESH AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE TO PRODUCE THE NECESSARY DETAILS BEFORE THE AO. BEING SO WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(APPEALS) AND THE SAME IS CONFIRMED. THIS GROUND OF THE ASSESSEE IS ALSO REJE CTED. 19. IN THE RESULT, BOTH THE APPEALS OF THE ASSESS EE FOR ASSESSMENT YEARS 2005-06 & 2006-07 ARE DISMISSED. ORDER PRONOUNCED ON 09 TH FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 K S SUNDARAM )8 /CHENNAI, C9 /DATED, THE 09 TH FEBRUARY, 2017. 9D EFGF / COPY TO: 1 . / APPELLANT 3. H- / CIT(A) 5. FIJ K / DR 2. / RESPONDENT 4. H / CIT 6. J(L / GF