COMMISSIONER OF INCOME TAX FARIDABAD V. M/S NHPC LTD SEC-33 NHPC COMPLEX FARIDABAD

ITA/136/2015

AI Insights

The case revolves around an appeal by the Commissioner of Income-tax, Faridabad against M/s NHPC Ltd. concerning the assessment year 2006-07. The primary issues pertained to the treatment of 'advance against depreciation' and various additions made by the Assessing Officer under section 143(3) and section 115JB of the Income Tax Act. The Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) had previously ruled in favor of the respondent, leading to the present appeal. The High Court examined the substantial questions of law raised by the appellant, referencing relevant Supreme Court judgments and previous High Court decisions, ultimately finding no merit in the appeal.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 728900 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 28-02-2018
• Assessment Year: misc
• Other Referred Cases: Apollo Tyres Ltd. vs. Commissioner of Income Tax, Commissioner of Income Tax v. Woodward Governor India P. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: VED JAIN
• Assessee Lawyers: TAJENDER JOSHI
• Keywords: Advance Against Depreciation; Book profit; Hedging transaction; Income Tax; Leave encashment; Minimum Alternate Tax; Provisions for gratuity
• Section: 143(3); 28; 115JB; 2(24)

Judgement Text

"IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH INCOME TAX APPEAL No.136 of 2015(O&M) DATE OF DECISION: 28.02.2018 The Commissioner of Income-tax Faridabad …..Appellant versus M/s NHPC Ltd. .....Respondent CORAM:- HON'BLE MR.JUSTICE S.J.VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE AVNEESH JHINGAN Present: Mr. Tajender K. Joshi, Advocate for the appellant Mr. Ved Jain, Advocate for the respondent .. S.J. VAZIFDAR, CHIEF JUSTICE: This is an appeal against the order of the Income Tax Appellate Tribunal upholding the order of the Commissioner Income Tax (Appeals). The matter pertains to the Assessment Year 2006-07. 2. The appellant contends that the following substantial questions of law arise in this appeal:- “1. Whether on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in dismissing appeal of the Revenue observing that ‘in view of categorical finding of the Supreme Court we hold that the CIT(A)was correct in holding that advance against depreciation cannot be added under the computation of the normal income’, whereas the Hon’ble Supreme Court in its decision dated 05.01.2010 has held that the ‘advance against depreciation’ is ‘income received in advance’, thus making the said income subject to ‘Charge’ under Chapter-II, as business income under Chapter-IV-D read with sub clause (i) of sub-section 24 of section 2 of the Income Tax Act? Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 2 - 2. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in deleting the addition of Rs.57,27,25,000/- made by the Assessing Officer under section 143(3) (and not under section 115JB) on account of “Advance Against Depreciation” ignoring the provisions of section 2(24) read with section 28 of the Income Tax Act, 1961, which provides that “income” includes profits and gains and the profits and gains of any business or profession carried on by the assessee at any time during the previous year is taxable? 3. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in deleting disallowance of Rs.1,10,04,534/- made by the Assessing Officer in computing the book-profit u/s 115JB in respect of depreciation claimed on land after amortization of land by the assessee because there is no depreciation allowable on land under Companies Act and no rate of depreciation is provided in schedule XIV of Companies Act? 4. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in applying ratio of decision in case of M/s Apollo Tyres 255 ITR 273 (SC) when the computation of book profit was not as per Companies Act and wrongly claimed depreciation on land not allowable in Companies Act? 5. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in deleting disallowance of Rs.24,84,24,189/- made by the AO in computing book profit u/s 115JB on a/c of provisions made for gratuity, leave encashment, post retirement medical benefits, LTC, Baggage allowance and Matching Contribution on Leave Encashment even when the assessee has failed to Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 3 - establish these provisions to be of ascertained in nature? 6. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in deleting addition of Rs.22,99,80,552/- made by the Assessing Officer in computing the book- profit u/s 115JB as well as in normal income in respect of ‘provisions for loss in hedging transaction’ which were not an ascertained liability? 7. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in deleting addition of Rs.7,01,00,000/- which was made by the Assessing Officer under section 14A by applying Rule 8D? 8. Whether, on the facts and in circumstances of the case and in law, the Hon’ble ITAT was right in law in deleting the addition of Rs.5,07,00,000/- made by the Assessing Officer in respect of indirect expenses incurred on administrative and other heads relating to the income to which section 10 applies?” None of these are substantial questions of law and, if they are, they are answered by the judgment of the Supreme Court and of this Court. 3. Re: Questions 1 & 2: These questions are covered against the appellant in view of our order and judgment dated 14.02.2018 in the assessee’s case in ITA No.151 of 2015. 4. Re: Question No.5: It is agreed that this issue is covered against the appellant by an order and judgment dated 06.07.2010 in the assessee’s case in ITA No.385 of 2009. Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 4 - 5. Re: Questions 3 & 4: Question 3 was dealt with by the Tribunal on the basis of its decision dated 30.09.2014 for the Assessment Year 2004-05 (Appeal before the Tribunal for the year 2004-05 vide ITA No.2449/Del/2008). 6. The assessee debited an amount of Rs.6.12 crores to the profit and loss account on account of depreciation of land. This was under accounting policy 2.4 introduced during the year and as per notes to the accounts. This led to a reduction of profit by the said amount. The assessee contended that the claim was in accordance with accounting standard 6 and in compliance with the Companies Act. The Assessing Officer held that the assessee had not furnished any details from which it could be verified that the land amortized had a limited useful life for it. It must be noticed at this stage that a remand report was called for when the matter was carried in appeal. The Assessing Officer rejected the contention that the claim was in accordance with the provisions of the Companies Act and held that no rate for depreciation is prescribed in schedule 14 of the Companies Act. The Assessing Officer added an amount of Rs.6.12 lakhs for amortization of land. 7. The CIT(A) allowed the appeal and deleted this addition. The Tribunal upheld the order of the CIT(A). It noted that the land was not owned by the assessee company. It was taken for use from the State Government. The State Government did not transfer the title of the land to the assessee. The land was only taken for relief and rehabilitation of the evacuees. The people had evacuated the land on account of the submergence of the land on account of the construction put up by the assessee. The cost Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 5 - incurred by the assessee in this regard was amortized for the useful life of the project. The land was presumably acquired by the State Government but at the instance of the assessee in order to enable the assessee to implement its projects. 8. The assessee’s policy decision regarding the project, the use of the land for rehabilitating the evacuees and the amortization had been approved by the auditors of the company and by the Comptroller and Auditor General. The assessee’s accounts were audited by the statutory auditors and also by the Comptroller and Auditor General and were approved by the company at its AGM and filed with the Registrar of Companies. The Tribunal rejected the contention on behalf of the revenue that land is not a depreciable asset and depreciation charged in the profit and loss account is not in accordance with the provisions of the Companies Act read with the accounting standard 6. It is not the appellant’s case that the assessee’s accounts were not duly audited, certified and approved. 9. The Tribunal rightly placed reliance upon the judgment of the Supreme Court in Apollo Tyres Ltd. vs. Commissioner of Income Tax, (2002) 255 ITR 0273. In Apollo Tyres, one of the questions raised and the observations of the Supreme Court in regard thereto are as follows:- “2. …. ….. ….… .…..… …..…… ..….. .…..… …..…. ..….. .….. ….. (i) Can an AO while assessing a company for income-tax under s.115J of the IT Act question the correctness of the P&L a/c prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Sch.VI to the Companies Act? …. ….. ….… .…..… …..…… ..….. .…..… …..…. ..….. .….. ….. .…… Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 6 - 5. For deciding this issue, it is necessary for us to examine the object of introducing Section 115-J in the IT Act which can be easily deduced from the Budget speech of the then Hon'ble Finance Minister of India made in Parliament while introducing the said section which is as follows: “It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called ‘zero-tax’ highly profitable companies deserves attention. In 1983, a new Section 80- VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a ‘minimum corporate tax’ on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30% of its book profit. In other words, a domestic widely held company will pay tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately Rs 75 crores.” The above speech shows that the Income Tax Authorities were unable to bring certain companies within the net of income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that Section 115-J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30% of its book profits as shown in its own account. For the said purpose, Section 115-J makes the income reflected in the companies' books of accounts as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 7 - the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to rescrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on sub- section (1-A) of Section 115-J of the IT Act in support of the above contention is misplaced. Sub- section (1-A) of Section 115-J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income Tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115-J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes, one for the purpose of the Companies Act and another for the purpose of income tax, both maintained under the same Act. If the legislature intended the Assessing Officer to reassess the company's income, then it would have stated in Section 115-J that “income of the company as accepted by the Assessing Officer”. In the absence of the same and on the language of Section 115-J, it will have to be held that the view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the Assessing Officer while computing the income under Section 115-J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 8 - with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J.” The judgment of the Supreme Court is a complete answer in favour of the assessee and against the appellant in respect of question Nos.3 and 4. It is not the appellant’s case that the assessee’s books of account were not certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer could not, therefore, have gone behind the same and come to a different conclusion. 10. Accordingly, question Nos.3 and 4 are answered in favour of the assessee and against the appellant. 11. Re: Question 5: As we mentioned earlier, question 5 is answered in favour of the assessee and against the appellant in view of the judgment of this court dated 06.07.2010 in the assessee’s case, namely, ITA No.385 of 2009. 12. Re: Question 6: The facts are admitted. In February, 2004, the assessee availed a loan of 5347 million Japanese Yen (JPY)(equivalent to USD 50 million) from Barclays Bank and Standard Chartered Bank. The loans were sanctioned under the automatic route of RBI’s External Commercial Borrowing (ECB). The RBI guidelines require foreign currency exposure under the ECB to be hedged before availing the Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 9 - ECB facilities. The assessee, accordingly, entered into a hedging agreement with the said banks to protect itself against market fluctuations in spot exchange currency rates for payment of interest and repayment of principle in foreign currency. It was a general purpose loan and not for the acquisition of any assets. On account of a fluctuation adverse to it, the assessee was liable for a differential amount of interest to the extent of about Rs.23 crores. The assessee followed the mercantile system of accounting. In accordance with the guidelines of the ICAI, the assessee provided for a loss of Rs.23 crores. 13. The Assessing Officer added this amount in computation of the book-profit for the purpose of minimum alternate tax under section 115JB holding that the amount was merely provisional and at the time of actual repayment of loan the position may vary resulting in a profit. He held, therefore, that this was not an ascertained liability. Accordingly, the Assessing Officer added the amount of Rs.23 crores to the book-profit under section 115JB as well as to the normal income. 14. The Tribunal noticed that accounting standard 11 issued by ICAI deals with the issue of accounting for fluctuation in foreign exchange rates as impacting the current assets and liabilities. The Tribunal rightly placed reliance upon a judgment of the Supreme Court in Commissioner of Income Tax v. Woodward Governor India P. Ltd., [2009] 312 ITR 254 (SC). Although the ratio in paragraph 15 is sufficient to answer the questions under consideration, we intend referring to the process of reasoning leading to it as well. In that case, the Supreme Court raised the Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 10 - following question and made the following observations in regard thereto:- “3. In this batch of civil appeals, the following questions arise for determination: (i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under Section 37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? …. ….. ….… .…..… …..…… ..….. .…..… …..…. ..….. .….. ….. .…… 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word “expenditure” in Section 37(1) connotes “what is paid out” and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in Indian Molasses Co. [AIR 1959 SC 1049 : (1959) 37 ITR 66] Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. In Indian Molasses Co. case [AIR 1959 SC 1049 : (1959) 37 ITR 66] , the Supreme Court was considering the meaning of the expression “expenditure incurred” while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word “expenditure” is not defined in the 1961 Act. The word “expenditure” is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head “profits and gains of business”. In Sections 30 to 36, the expressions “expenses incurred” as well as “allowances and depreciation” have also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament has used the expression “any expenditure” in Section 37 to cover both. Therefore, the expression “expenditure” as used in Section 37 may, in the circumstances of a Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 11 - particular case, cover an amount which is really a “loss” even though the said amount has not gone out from the pocket of the assessee. 14. In M.P. Financial Corpn. v. CIT [(1987) 165 ITR 765 (MP)] the Madhya Pradesh High Court has held that the expression “expenditure” as used in Section 37 may, in the circumstances of a particular case, cover an amount which is a “loss” even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in Madras Industrial Investment Corpn. Ltd. v. CIT [(1997) 4 SCC 666 : (1997) 225 ITR 802]. According to Law and Practice of Income Tax by Kanga and Palkhivala, Section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by Sections 30 to 36. This section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting (see p. 617, Vol. I of the 8th Edn.). It is this principle which attracts the provisions of Section 145. That section recognises the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under Sections 30 to 43-C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word “paid” in Section 43(2), which is used in several sections i.e. Sections 30 to 43-C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under Sections 28/29. That is why in deciding the question as to whether the word “expenditure” in Section 37(1) includes the word “loss” one has to read Section 37(1) with Section 28, Section 29 and Section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under Section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 12 - account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading Section 37(1) with Section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increased profits before actual realisation. This is the theory underlying the rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year's account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realised actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where Section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the accounting standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under Section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under Section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the accounting standards. Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 13 - 15. For the reasons given hereinabove, we hold that, in the present case, the “loss” suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1961 Act.” (emphasis supplied) The judgment of the Supreme Court clearly applies to the present case. The Tribunal, accordingly, rightly deleted the addition. 15. Question 6 is, therefore, answered in favour of the assessee/respondent. 16. Re: Questions 7 & 8: On the basis of the assessee’s balance-sheet, the Assessing Officer noticed that there were dividend bearing investments and the assessee earned dividend during the year on such investments; that the assessee earned exempt income of about Rs.36 crores and that, therefore, the expenses on account of such income were liable to be disallowed as per the provisions of section 14A. The assessee was also asked to file a computation as per rule 8D. The Assessing Officer computed the disallowance as per rule 8D in the sum of Rs.5.07 crores. It was further observed that by applying rule 8D the quantum of disallowance came to Rs.24.90 crores as against which the assessee had itself made a disallowance of Rs.17.89 crores and that accordingly a further disallowance of Rs.7.01 crores (Rs.24.90-Rs.17.89 crores) was made under section 14A. The Assessing Officer noticed that the assessee while adding an amount of Rs.17.89 crores had only accounted for the direct expenditure and not for indirect expenditure, such as, under administrative and other heads. 17. The issue is covered by a judgment of a Division Bench of this Court dated 06.09.2016 in Commissioner of Income Tax, Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 14 - Jalandhar-I, Jalandhar vs. M/s Max India Limited, ITA No.186 of 2013. Before dealing with the judgment, it is necessary to note a few facts. Rs.521 crores was the assessee’s total business expenditure by way of interest on loans. The assessee’s business assets were about Rs.26,930 crores of which Rs.1014 crores were invested in its wholly owned subsidiaries. It is from the investment in its subsidiaries that the assessee earned Rs.36.06 crores by way of dividend. However, it is important to note that the assessee had, free funds of its own of a sum of Rs.17,275 crores available to it. Thus, as against the investment of Rs.1014 crores which yielded dividend of Rs.36.06 crores, the assessee had available to it Rs.17,275 crores. As Mr. Ved Jain, the learned counsel appearing on behalf of the assessee, rightly submitted, the presumption is that the assessee used its own funds while making the investment of Rs.1014 crores in the subsidiaries. There is nothing to rebut this presumption. The Tribunal, therefore, rightly held that there was no question of disallowance under section 14A. 18. Question Nos.7 and 8 are, therefore, answered in favour of the assessee 19. In the circumstances, the appeal is dismissed. (S.J. VAZIFDAR) CHIEF JUSTICE 28.02.2018 (AVNEESH JHINGAN) parkash JUDGE NOTE: Whether speaking/non-speaking: Speaking Whether reportable: NO Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document ITA-136-2015 - 15 - Parkash Chand 2018.02.28 14:59 I attest to the accuracy and integrity of this document "