Income Tax Appellate Tribunal - ChennaiSouthern Petrochemical Industries ... vs Assessee on 19 December, 2006IN THE INCOME TAX APPELLATE TRIBUNAL
                     BENCH        "B"    CHENNAI
           (Before Shri U.B.S. Bedi, Judicial Member and
           Shri Abraham P. George, Accountant Member)
                                .....

                     I.T.A. No. 2292/Mds/2008
                    Assessment Year : 2004-05

M/s Southern Petrochemical                 The Joint Commissioner of
Industries Corporation Ltd.,               Income Tax,
88, Mount Road, Guindy,             v.     Company Circle V,
Chennai - 600 032.                         Chennai - 600 034.

PAN : AAACS4668K
      (Appellant)                              (Respondent)

                 Appellant by :     Shri R. Vijayaraghavan
               Respondent by :      Shri P.B. Sekaran


                               O R D E R


PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :In this appeal, assessee assails the assumption of jurisdiction

by CIT, underSection 263of the Income-tax Act, 1961 (hereinafter

called "the Act"), considering the assessment order dated 19.12.2006

for the impugned assessment year as erroneous and prejudicial to

the interest of the Revenue.2.   Grounds raised by the assessee can be grouped into two. First

group assails the order of the CIT in relation to computation of book2                   I.T.A. No. 2292/Mds/08profits for the purpose ofSection 115JBof the Act. Second group

assails the order of the CIT in relation to certain items not considered

by A.O., while computing the income of the assessee under normal

provisions.3.   Of the above, grounds relating to aspects concerning book

profit computation underSection 115JBof the Act can be

summarized as under:-(i)      Provision for bad and doubtful debts an advance of `
              16,03,61,290/- to one M/s Sical Ships (India) Ltd.(ii)     Provision for bad and doubtful ` 86,48,265.68 relating
              to various other parties.(iii)    Deposit of ` 2,00,00,000/- against Electricity tax
              demand of ` 10.51 Crores for captive power
              consumption, considered as contingent liability.(iv)     Electricity tax demand of ` 98,67,181/- as per Tamil
              Nadu Tax on Consumption or Sale of Electricity Act,
              again considered as contingent liability.4.   Ld. CIT in his show cause notice underSection 263of the Act

conveyed to the assessee that none of the above items were

considered by the Assessing Officer for the purpose of computation

of book profits underSection 115JBof the Act.           Reply of the

assessee vis-à-vis item No.(i) was that the said amount represented

an advance given to one M/s Sical Ships (India) Ltd., which was

engaged by the assessee-company to transport imported raw3                   I.T.A. No. 2292/Mds/08material from other countries for use in its manufacture of chemical

fertilizers and the said Sical Ships (India) Ltd. was under winding up.

According to assessee, a petition was already filed before Hon'ble

High Court Judicature at Madras in this regard and Hon'ble High

Court vide its order dated 4.9.2003 had directed that the said

company be wound up.         Therefore, as per the assessee, the

provision made was against an ascertained liability and would not

come within the purview of Explanation 1 toSection 115JB(2)of the

Act. Vis-à-vis the second item reply of the assessee was that it had

considered the amounts due from various parties doubtful of recovery

and hence, made a provision. According to assessee, this was also

an ascertained liability. Assessee also pointed out that whole of the

provision totalling to ` 16,90,09,556/- was added back in its Memo of

Income while computing total income under normal provisions of the

Act and the Assessing Officer had, therefore, considered each of the

items and came to a conclusion that these could not be considered

as unascertained liability which would call for application of

Explanation 1 to second proviso toSection 115JB(2)of the Act.5.   On the third item mentioned in the notice underSection 263,

reply of the assessee was that the Tamil Nadu Electricity Board had4                   I.T.A. No. 2292/Mds/08imposed a demand of ` 10.51 Crores on captive consumption of

power for the period January 1986 to March 1994 which was disputed

by the assessee before the Hon'ble Madras High Court in a writ

petition. According to assessee, an amount of ` 2,00,00,000/- was

deposited as per the directions of the Hon'ble High Court given while

admitting the writ petition. Therefore, it was argued that this was also

a crystallized liability.6.    On the fourth item, reply of the assessee was that an Act called

"Tamil Nadu Tax on Consumption orSale of Electricity Act, 2003"imposed on it an electricity tax of 5% of power cost and 10 paise per

unit on captive power. According to the assessee, such demand of `

98,67,181/- was also a crystallized liability. Assessee brought to the

attention of CIT the writ petition moved by it challenging the Act

wherein an interim injunction was granted against recovery of

demand.7.    As per the assessee, for each of the above items, it had

provided break-up details vide its letter dated 23.11.2006 addressed

to A.O. during the course of assessment proceedings. According to

assessee, the A.O. had taken a view that all the above provisions

were against ascertained liabilities and would not be susceptible for5                   I.T.A. No. 2292/Mds/08addition while computing book profit underSection 115JBof the Act.

Reliance was also placed on the decision of Hon'ble Apex Court in

the case ofMalabar Industrial Co. Ltd. v. CIT(2000) 243 ITR 83 (SC)

in support of its argument that the CIT could not take a different view

when lawful view was taken by the Assessing Officer.8.   CIT after considering the above submission was of the opinion

that none of the above merited any positive consideration. According

to him, the provisions mentioned at (i) and (ii) above were against

unascertained liabilities. According to CIT, in so far as the dues from

M/s Sical Ships (India) Ltd. was concerned, Hon'ble High Court had

ordered winding up of the said company on 4.9.2003 and assessee

despite having such order with it, which was passed during the

currency of the relevant financial year, had decided only to make a

provision. As per the CIT, assessee had effected an actual write off

only in the next assessment and this by itself clearly showed that the

sum of ` 16,03,61,290/- represented unascertained liability. In so far

as item No.(ii) was concerned, CIT noted that these were amounts

due from various Government Departments and could not be

considered as bad or doubtful. Vis-à-vis the third item, ld. CIT noted

that it was only a deposit made pursuant to High Court direction and

was only a contingent liability. Vis-à-vis item No.(iv), ld. CIT was6                    I.T.A. No. 2292/Mds/08again of the opinion that it represented only a contingent liability. He,

therefore, directed the A.O. to disallow all these amounts for the

purpose of computation of book profit underSection 115JBof the Act.9.    Now before us, learned A.R. strongly assailing the order of CIT,

submitted that Hon'ble Apex Court in the case ofCIT v. HCL Comnet

Systems And Services Ltd.(2008) 305 ITR 409 (SC) vide its order

dated 23rd September, 2008, had held that provision for bad and

doubtful debts could not be considered for addition while computing

book profit underSection 115JAof the Act. According to the learned

A.R., such provision was made to cover up probable diminution in the

value of assets and did not represent any provision for liability. As

per the learned A.R., Hon'ble Apex Court clearly held that provision

made towards irrecoverability of a debt could not be said to be a

provision for liability. According to him, when the CIT passed the

order underSection 263of the Act on 17.10.2008, the order of the

Hon'ble Apex Court was already available. It was argued that even,

otherwise, there were two views subsisting regarding treatment of

provisions for debts when the A.O. considered the issue. The A.O.

had taken a lawful view in not making any addition of these amounts

for the purpose of computation of book profit underSection 115JBof7                    I.T.A. No. 2292/Mds/08the Act.Reliance was placed on the decision of Hon'ble Apex Court

in the case ofMalabar Industrial Co. Ltd.(supra) in support of this

contention.According to him, the CIT was trying to substitute his

view with the lawful view taken by the A.O. Learned A.R. further

argued that though Explanation 1 to second proviso toSection

115JB(2)was amended byFinance (No.2) Act, 2009and clause (i)

added to it with retrospective effect from 1.4.2001, as per the decision

of Hon'ble Apex Court in the case ofCIT v. Max India Ltd.(2007) 295

ITR 282 (SC), retrospective amendment could not be a ground for

invoking powers underSection 263of the Act. According to learned

A.R., the CIT was obliged to consider only the law as it stood when

he was passing the order and the retrospectively amended provisions

could not cure the inappropriate jurisdiction exercised by the CIT. In

so far as dues on electricity tax was concerned, learned A.R. took us

through para 5 of the order of the Assessing Officer for arguing that

the liability arising to assessee on account of such taxes was properly

considered by the A.O. According to him, the Assessing Officer had

made a disallowance of the claim of ` 2,98,67,181/- under the normal

provisions of the Act despite assessee's argument that these were

crystallized liabilities. In other words, according to him, the Assessing

Officer had duly considered the issue regarding allowance of such8                  I.T.A. No. 2292/Mds/08amounts and after having considered such issue, came to a

conclusion that no addition was called for under Explanation 1 to

second proviso toSection 115JB(2)of the Act.          In any case,

according to him, the provision for bad debts of ` 16.04 Crores

relating to M/s Sical Ships was already deducted from its loans and

advances appearing in the balance sheet. For this contention, he

placed reliance on audited accounts statement of the assessee-

company for the relevant previous year and Schedule X thereto.

Similarly, according to him, the other amount of ` 86.48 lakhs was

also deducted from its sundry debtors balance and Schedule VII to

the audited accounts would substantiate this. Therefore, as per the

learned A.R., the whole of the provision for bad and doubtful debts

though it was called a provision, stood actually deducted from the

balances due to the debtors and therefore, it clearly implied that

these were ascertained liabilities only. In any case, according to him,

the CIT in each of the above item had given a direction to the

Assessing Officer to disallow the amounts underSection 115JBof the

Act and the CIT had no powers to give any directions underSection

263of the Act to do an assessment in a particular manner.9                   I.T.A. No. 2292/Mds/0810.   Per contra, the learned D.R. supporting the order of the CIT,

submitted that the question of consideration of a computation made

underSection 115JBof the Act, whether correctly done by the

Assessing Officer, would have arisen only if there was an application

of mind by the A.O. in this respect. According to learned D.R., the

A.O. had simply not made any computation of book profit in the

assessment order at all. Thus, there was non-application of mind by

the A.O. on all aspects relating to computation of book profits. When

the A.O. had not computed the book profits underSection 115JBof

the Act but only the total income under normal provisions of the Act,

according to learned D.R., it would be foolhardy to argue that there

was any application of mind by the A.O. on the former. According to

him, irrespective of the fact whether any of the items were allowable

or not, the A.O. ought have considered each of such items and made

a computation underSection 115JBof the Act, as to the book profits

and the A.O. having not done so, the CIT was justified in treating the

order of the A.O. to be erroneous in so far as it was prejudicial to the

interest of the Revenue.11.   We have perused the orders and heard the rival contentions. In

the first place, we note that the computation of income filed by the10                   I.T.A. No. 2292/Mds/08assessee along with its return for the impugned assessment year did

not consider, any computation of its book profit underSection 115JBof the Act. Assessee's computation as well as its return of income

mentioned items relevant to computations of total income, without

considering the book profit.     If we look at the assessment order

passed by the A.O. for the impugned assessment year, no doubt, he

has made a discussion in it regarding the allowability of electricity tax

of ` 298.67 lakhs charged to the profit and loss account and made an

addition thereof, under normal provisions, considering it to be not

allowable.   But, nevertheless, the argument of the assessee with

regard to electricity tax was that it was an ascertained liability

whereas the A.O. considered it to be a contingent liability.          Such

disallowance as well as all other disallowances made by the A.O.

were only for the purpose of computing the total income of the

assessee under the normal provisions of the Act. There is not even a

whisper in the assessment order regarding any computation of book

profits underSection 115JBof the Act.       A.O. has not discussed

anything regarding the provision for bad and doubtful debts, made by

the assessee, which it had by itself added back in its normal

computation. Obviously, Assessing Officer would not have found any

need of discussion on these items since assessee had made a suo-11                  I.T.A. No. 2292/Mds/08motu disallowance.No doubt, just because the order of Assessing

Officer was cryptic, we cannot consider it as erroneous. But, where

there is a total lack of enquiry, we cannot say that the order is not

erroneous and prejudicial to the interest of the Revenue.         All the

discussions in the assessment order were only regarding application

of normal provisions of the Act. May be, it is true that retrospective

amendment to the Act would not be a ground for invoking jurisdiction

underSection 263of the Act in every case as per the lawlaid down

byHon'ble Apex Court in the case ofMax India Ltd.(supra), but it is

also to be mentioned that the law solaid down bythe Apex Court

cannot be considered divorced from the circumstances in which

Hon'ble Apex Court gave such a ruling.In the case ofMax India Ltd.(supra) Hon'ble Apex Court was dealing with an issue regarding

amendments retrospectively made toSection 80HHCof the Act. It is

pertinent to note that in para 4 of the said order, Hon'ble Apex Court

had specifically mentioned that mechanics of the said section had

become so complicated over the years due to innumerable

amendments.     It is because of the complication arising out of

innumerable amendments that Hon'ble Apex Court held retrospective

amendment to the said Section, would not attract the provisions ofSection 263of the Act. It is not that in every case where there is a12                   I.T.A. No. 2292/Mds/08retrospective amendment, a CIT would be deprived of invoking

powers vested on him underSection 263of the Act. In the given

case before us, there was no such complicated successive

amendments toSection 115JBof the Act, akin to those made inSection 80HHCof the Act. In any case, ld. CIT had passed the order

underSection 263of the Act, not based on the retrospective

amendment to Explanation 1 to second proviso toSection 115JB(2)of the Act. He had based himself on a reason which is clear from

para 12 of his order which reads as under:-"12.   It is seen from the records that the Assessing Officer
        had only examined the issues for the purpose of computing the
        total income under the normal provisions of the Act other thanSec.115JBof the Act. The Assessing Officer had omitted to
        examine the case in the light ofSec.115JBand obviously had not
        taken any view in the matter. Therefore the ratio of the
        decision of the Supreme Court in the case ofMalabar Industrial
        Co. Ltd. Vs. CIT(2000) (109 Taxman 66) relied on by the
        assessee does not apply to the facts of the case."He deemed the order to be erroneous in so far as it was prejudicial to

the interest of the Revenue for a reason that the A.O. had omitted to

examine each of the items in the light ofSection 115JBof the Act.In

our opinion, decision of Hon'ble Apex Court in the case ofMalabar

Industrial Co. Ltd.(supra) would come to the aid of the Revenue

here.     The order of the A.O. was without application of mind on13                     I.T.A. No. 2292/Mds/08Section 115JBof the Act. Sub-section (1) ofSection 115JBstarts

with a non obstante clause and it runs as under:-"115JB. (1) Notwithstanding anything contained in any other
      provision of this Act, where in the case of an assessee, being a
      company, the income-tax, payable on the total income as
      computed under this Act in respect of any previous year relevant
      to the assessment year commencing on or after [the 1st day of
      April, [2010]], is less than [fifteen 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 such total
      income shall be the amount of income-tax at the rate of [fifteen
      percent]."A duty is thus cast on an Assessing Officer to work out book profit as

defined under subsequent sub-section, and apply 7.5% thereon, and

make a comparison thereof with total income under normal provisions

of the Act. The Assessing Officer had failed to discharge this duty

cast on him. In so far it relates to the electricity tax, undoubtedly, the

tax audit report of the assessee clearly mentioned the amount to be

contingent in nature. It is for this reason that the A.O. held it as not

allowable while computing the total income under the normal

provisions of the Act. Even at that point, the Assessing Officer never

made any effort to make a book profit computation as mandated

underSection 115JBof the Act. The simple reason for not doing so

was that such an aspect never came to his mind at all when he

passed the assessment order.         Non consideration of law and not14                 I.T.A. No. 2292/Mds/08making a computation prescribed under law would definitely render

the order of the A.O. erroneous and prejudicial to the interest of the

Revenue. In so far as the direction of the CIT to disallow all the

above items underSection 115JBof the Act, no doubt, such a

direction to do an assessment in a particular manner would be

beyond the powers of a CIT underSection 263. But, this by itself

could not be a reason to strike off the CIT's order as a whole since

the basic conclusion which he reached, that the assessment order

was erroneous in so far as it was prejudicial to the interest of the

Revenue is correct. The order of the CIT in this regard would stand

but we would modify it, so as to give the A.O. a free hand in making

the fresh assessment.      The order of the CIT would thus stand

modified to the effect that the Assessing Officer shall examine each

of the above issue relating to each of the above four items and

proceed in accordance with law.12.   Now coming to second group of grounds which assails the

order of the CIT whereby he considered certain additions/

disallowances made by the A.O. to be erroneous in so far as it was

prejudicial to the interest of the Revenue. We can summarize these

items into following two items:-15                   I.T.A. No. 2292/Mds/08(i)    Claim of depreciation made by the assessee `
             2,78,000/- in respect of a let out property at Tuticorin.(ii)   Claim of bad debts ` 84.09 lakhs which was already
             included in a sum of ` 1321.73 lakhs falling under the
             head 'miscellaneous expenses' debited in the profit
             and loss account.13.   The CIT in its notice underSection 263of the Act, conveyed to

the assessee that the property at Tuticorin was considered by the

A.O. under the head "House Property" and therefore, depreciation of

` 2.78 lakhs which was allowed was erroneous and prejudicial to the

interest of the Revenue. In so far as the claim of bad debts was

concerned, CIT was of the opinion that the said amount was part of

miscellaneous expenses and further deduction made as claimed by

the assessee and allowed by the A.O. resulted in double deduction.

Reply of the assessee in this regard was that depreciation of ` 6.40

lakhs on let out property, was already added back by the Assessing

Officer in the assessment and the said disallowance was underchallenge before the CIT(Appeals).            Therefore, according to

assessee, the CIT had no jurisdiction to revise the order of the A.O.

on an issue in appeal before the CIT(Appeals). Vis-à-vis the double

claim for bad debts, explanation of the assessee was that there was

no such double claim. According to assessee, it was following an

accounting practice whereby party-wise receivables were considered16                I.T.A. No. 2292/Mds/08and provisions made to the extent it had become doubtful by charging

the same to the profit and loss account. Nevertheless, as per the

assessee, when the amounts really become irrecoverable, there was

a reversal of the amounts earlier charged from the provision and

equivalent write-off thereafter effected.     Therefore, as per the

assessee, there was no double deduction.14.   Ld. CIT was however not impressed. According to him, just

because an issue was in appeal, did not preclude him from exercising

his jurisdiction underSection 263of the Act. According to him, the

income from let out property having been computed under the head

"Income from House Property", the claim of depreciation could not be

allowed. Vis-à-vis the double claim of bad debts, ld. CIT was of the

opinion that the assessee was not able to explain how the charge to

profit and loss account was reversed in the subsequent year, and

assessee never furnished copies of ledger accounts and details of

actual entries passed in support. According to CIT, the Assessing

Officer while completing the assessment had not examined these

aspects. He, therefore, directed the A.O. to disallow the claim of

depreciation on the house property and to examine the contention of

the assessee vis-à-vis its claim for bad debts.17                  I.T.A. No. 2292/Mds/0815.   Now before us, the learned A.R. assailing the order of CIT,

submitted that there was already disallowance of depreciation `

6,40,000/- on let out property made by the A.O. This was underchallenge before CIT(Appeals).         Therefore, according to him,

direction of CIT for making further disallowance was uncalled for and

beyond his powers. In any case, as per the learned A.R., the CIT fell

in error to give such direction underSection 263of the Act. Vis-à-vis

the claim of bad debts, the learned A.R. submitted that assessee was

following a consistent accounting practice whereby provisions were

being made every year and such provisions reversed to the extent

the amount had actually become bad, and a write-off effected.

Therefore, according to him, there was no double claim.16.   Per contra, learned D.R. supported the order of CIT on both

these aspects.17.   We have perused the orders and heard the rival contentions.

No doubt, vis-à-vis the issue of depreciation there was a disallowance

of ` 6,40,000/- made by the A.O. at para 10.3 of the assessment

order. Case of the assessee is that ` 2,78,000/- considered by the

CIT was included in the above amount of ` 6,40,000/-. We find that18                  I.T.A. No. 2292/Mds/08the A.O. had not examined the claim of depreciation of the assessee

vis-à-vis each of the let out property owned by it. There is nothing in

the assessment order which gives a break-up of the disallowance of `

6,40,000/- made by the A.O. Hence, there is a clear omission by the

A.O. in making a scrutiny of each of the claim of depreciation of the

assessee.    We cannot find any error in the order of the CIT in

considering such non-application of mind to be erroneous and

prejudicial to the interest of the Revenue. Nevertheless, we cannot

also accept the order of CIT that the A.O. shall disallow the claim of

the assessee. Hence, vis-à-vis the depreciation claim, we modify the

order of CIT and direct the A.O. to verify the claim of the assessee

and deal with it in accordance with law.18.   Coming to the claim of deduction of bad debts ` 84.09 lakhs,

though the assessee had argued that there was no double deduction,

as mentioned by the learned CIT, nothing was produced by the

assessee to prove that it consistently followed an accounting practice

whereby provision made in one year was reversed it to the extent

debts were considered bad, in a subsequent year and a write-off

effected for such bad debts. In any case, nothing is there in the

assessment order which would show that there was any application19                    I.T.A. No. 2292/Mds/08of mind by the Assessing Officer in this regard. Therefore, we cannot

find any lacunae in the order of CIT in directing the Assessing Officer

to examine the contention of the assessee and deal with it in

accordance with law. Obviously, there was an error by sheer non-

application of mind of the A.O. in this regard.19.   Before parting it, it would be inappropriate if we do not deal with

one of the arguments taken by the learned A.R. that this Tribunal did

not have any power underSection 254of the Act to modify an order

of CIT underSection 263of the Act.              We cannot accept this

contention since sub-section (1) ofSection 254of the Act, empowers

this Tribunal to pass such orders as it thinks fit.           As already

mentioned by us where the order of the A.O. was palpably erroneous

and prejudicial to the interest of the Revenue, just because the CIT

slightly overstepped his powers, would not be a sufficient reason to

quash his order in toto, but it is the duty of the Tribunal to properly

modify it so as to effectuate the purpose ofSection 263. Therefore,

we do not find any merit in this appeal of the assessee against the

order of the CIT underSection 263of the Act. Nevertheless, as

observed by us, the order of CIT shall stand modified to the extent

that the A.O. can consider each of the issue raised by the CIT in his20                I.T.A. No. 2292/Mds/08order, in accordance with law after giving the assessee an

opportunity to represent its case.20.    In the result, the appeal filed by the assessee stands

dismissed.The order was pronounced in the Court on 21st April, 2011.sd/-                                   sd/-
        (U.B.S. Bedi)                          (Abraham P. George)
       Judicial Member                         Accountant Member

Chennai,
Dated the 21st April, 2011.

Kri.

             Copy to:    (1)   Appellant
                         (2)   Respondent
                         (3)   CIT, Chennai-III, Chennai
                         (4)   D.R.
                         (5)   Guard file