O/TAXAP/739/2017 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 739 of 2017 PR. COMMISSIONER OF INCOME TAX, VADODARA -3 Appellant(s) Versus GUJARAT NARMADA VALLEY FERTILIZERS CO LTD. Opponent(s) Appearance: MR KM PARIKH, ADVOCATE for Appellant(s) No. 1 MR MANISH J SHAH, ADVOCATE for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 25/09/2017 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Revenue is in appeal against judgment of Income Tax Appellate Tribunal dated 10.6.2016 raising following questions for our consideration : (1) Whether on facts and circumstances of case and in law, ITAT erred in quashing reopening of assessment on issues recorded in reasons for reopening of assessment? (2) Whether on facts and circumstances of case and in law, ITAT erred in not appreciating that Assessing Officer had validity reopened assessment in accordance with provision of section 147 of Act read with clause(c) of Explanation 2 below section 147 of Act? Page 1 of 5 HC-NIC Page 1 of 5 Created On Tue Oct 31 10:10:47 IST 2017 O/TAXAP/739/2017 ORDER issue pertains to validity of reopening of assessment in case of respondent assessee for assessment year 2003 2004. Assessing Officer had recorded following reasons for issuing said notice : During year, assessee has claimed depreciation of Rs.12,54,94,512/ Under section 32(iia) of IT Act, 1961, in case of any new machinery of plant (other than ships and air crafts) which has been acquired and installed after 31st day of March, 2002, by assessee engaged in business of manufacture or production of any article or thing, further sum equal to fifteen percent of actual cost of such machinery or plant shall be allowed as deduction under clause(ii). 2. During year assessee company claimed total addition depreciation of Rs.12,54,94,512/ on new machinery acquired and installed. detailed scrutiny of cost of machinery, date of acquisition, and date of put to use furnished in Annexure B of Form No.3AA disclosed that certain expenditure was incurred prior to 1.4.2002 and some are as old as of 9.8.99. Details of these expenses of earlier period are given in statement enclosed. So these expenses cannot be treated as expenses relating to expenses cost paid against those plant and machinery purchased after 1.4.2. So, additional expenditure allowed at 15% on total amount of Rs.61,01,69,488/ to be disallowed. assessee has claimed depreciation at 50% of 15% i.e 7.5% which comes to Rs.4,57,62,711/ requires to be disallowed as it is escapes income. 3. It was revealed from audited accounts and notes forming part of return of income that during year relevant of AY 2003 2004, assessee company had written off inventory of costing Rs.2,47,85,301/ treating them as non moving and absolute in nature. (Refer Page 2 of 5 HC-NIC Page 2 of 5 Created On Tue Oct 31 10:10:47 IST 2017 O/TAXAP/739/2017 ORDER 17.0.06 Note ). As per Income tax Act, loss of inventory by way of theft, fire, etc is allowed as expenses/revenue loss. But when assessee receives insurance claim against such loss will be offered as income of year in which it is received. Here assessee themselves treated certain inventory as absolute and cost of it has been debited in profit and loss account. This loss is due to mistake on part of assessee of plan out properly requirement of inventory and its timely use to production. 4. So, action of assessee to write off inventory treating it is absolute is not justified. Omission to disallow claim resulted into escaped income of Rs.2,47,85,301/ with consequent short levy of tax of Rs.1,25,01,551/ including interest leviable (at 37.25%) u/s 234B of Act. 5. As per item no.9(i) in Annexure Report (page 31) as mentioned in Annual for FY 2002 03, assessee had given to Gujarat State Investment Limited (GSIL) with stipulation of interest but interest accrued as per stipulation was not accounted for as income on account of dispute about rate. amount of this loan is not mentioned in this Anneuxre and this transaction does not appear in Notes on accounts. Hence it needed ascertainment of amount and verification of facts. Interest is time cost and accrues day to day. It accrues sui generis as settled in case of Vijay Lakshmi Sugar Mills Ltd v./s. CIT 191 IR 64 (SC). dispute was only in regard to rate. assessee was bound to declare income on basis of rate claimed by as it could claim bad debt, if any, on settlement of rate. Principle of disputed contractual liability does not extend to disputed income under mercantile system which is diluted only by theory of real income. assessee could not waive this interest ipse dixit as settled in case of State Bank of Travancore v/s. CIT 158 ITR 102, 154(SC), Western Page 3 of 5 HC-NIC Page 3 of 5 Created On Tue Oct 31 10:10:47 IST 2017 O/TAXAP/739/2017 ORDER India Oil Distributing co. v/s. CIT 206 ITR 359 (Bom) and Navin R. Kamani v/s. ITO 185 ITR 408 (Bom) 6. I view of above facts, I have reason to believe that income has escaped and hence proceedings for reopening of assessment by issue of notice u/s. 148 of Act have been initiated. Despite objections from assessee, Assessing Officer and CIT(Appeals), both held that reopening was valid and made certain additions. Thereupon, assessee approached Tribunal. Tribunal noted that notice for reopening was based on three separate grounds as recorded in reasons. In case of first two out of these three grounds, it was admitted position before Tribunal that issues were examined by Assessing Officer during original scrutiny assessment who had made no additions. Tribunal was therefore, of opinion that any reopening on basis of such grounds would amount to change of opinion and therefore, not permissible. Revenue's contention that Assessing Officer had not made specific mention of these issues in assessment order also did not find favour of Tribunal observing that assessee would have no control over manner in which Assessing Officer would treat such issues in order of assessment after full scrutiny. With respect to third ground, there was no dispute that such issue did not come up for consideration before Assessing Officer in original assessment. However, on this ground Tribunal entered into merits and held that same could not have formed basis for making any additions. Page 4 of 5 HC-NIC Page 4 of 5 Created On Tue Oct 31 10:10:47 IST 2017 O/TAXAP/739/2017 ORDER Without so elaborating, Tribunal examined question whether on third ground, Assessing Officer could have formed belief that income chargeable to tax had escaped assessment. Tribunal ultimately held it against Revenue. If we peruse order in this respect more minutely, issue pertains to offering certain interest income to tax. assessee had given loan to one GSIL but had not received interest on such loan for long time, perhaps on ground that there was no interest stipulation in loan document. In past, assessee would offer notional interest on accrual basis. However during period relevant to assessment year in question, issue came to be referred for arbitration. Board of Directors of assessee company therefore, passed resolution not to offer interest income to tax in view of such uncertainty in its receipt itself. Tribunal noted that much later arbitral award was available holding assessee entitled to interest at rate of 11.5%. Tribunal therefore, found that assessee was justified in not accounting for such interest in return when there was no stipulation for interest in agreement between parties. Tax Appeal is dismissed. (AKIL KURESHI, J.) (BIREN VAISHNAV, J.) raghu Page 5 of 5 HC-NIC Page 5 of 5 Created On Tue Oct 31 10:10:47 IST 2017 Pr. Commissioner of Income-tax, Vadodara -3 v. Gujarat Narmada Valley Fertilizers Co. Ltd