Commissioner Of Income Tax, Kota v. M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR I.D.B. Income Tax Appeal No. 866 / 2008 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent Connected With II. D.B. Income Tax Appeal No. 203 / 2008 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent III. D.B. Income Tax Appeal No. 919 / 2008 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent IV. D.B. Income Tax Appeal No. 377 / 2011 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent V. D.B. Income Tax Appeal No. 378 / 2011 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent VI. D.B. Income Tax Appeal No. 11 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent VII. D.B. Income Tax Appeal No. 13 / 2012 Commissioner of Income Tax, Kota. ----AppellantVersus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent VIII. D.B. Income Tax Appeal No. 15 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent IX. D.B. Income Tax Appeal No. 16 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent X. D.B. Income Tax Appeal No. 65 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XI. D.B. Income Tax Appeal No. 66 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XII. D.B. Income Tax Appeal No. 140 / 2012 Commissioner of Income Tax, Kota. ----AppellantVersus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XIII. D.B. Income Tax Appeal No. 141 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XIV. D.B. Income Tax Appeal No. 142 / 2012 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----RespondentXV. D.B. Income Tax Appeal No. 47 / 2015 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XVI. D.B. Income Tax Appeal No. 76 / 2015 Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XVII. D.B. Income Tax Appeal No. 34 / 2016 Principal Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo Jain For Respondent(s) : Mr. Sanjay Jhanwar, Mr. Prakul Khurana & Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment Per Hon’ble Jhaveri, J. 15/05/2017 ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent XVII. D.B. Income Tax Appeal No. 34 / 2016 Principal Commissioner of Income Tax, Kota. ----Appellant Versus M/S Chambal Fertilizers & Chemicals Ltd., Gadepan, Kota. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo Jain For Respondent(s) : Mr. Sanjay Jhanwar, Mr. Prakul Khurana & Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment Per Hon’ble Jhaveri, J. 15/05/2017 1.In all these appeals common questions of law and facts are involved, hence these appeals are decided by this commonjudgment. 1.1By way of these appeals, the appellant department haschallenged the judgment and order passed by the Tribunalwhereby the Tribunal has dismissed the appeals of the revenueconfirming the order of CIT (A) whereby the CIT(A) has partlyallowed the appeals preferred by the assessee. 2.While admitting the appeals on different dates, thefollowing substantial questions of law, appeal-wise, were framedfor consideration of the Court: I.DB ITA No.866/2008 admitted on 04.03.2009 “(i) Whether under the facts andcircumstances of the case and in law theTribunal was justified in allowingRs.15,64,979/- as business expenditure u/s. 37 incurred on foreign tour of wife of theDirector of the Company? (ii) Whether under the facts and in thecircumstances of the case and in law theTribunal was justified in allowing 100%deduction u/s.80IA specifically when theassessee company itself and claimeddeduction @ 30% u/s. 80IA? (iii) Whether under the facts and in thecircumstances of the case and in law theTribunal was justified in holding that theassesseecompanyisentitledforconsequential relief in computing income taxpayable u/s. 115JA specifically when theassessee company did not distribute thepower and the plant was set up formanufacturing of fertilizer and the powerplant was a part of fertilizer unit of thecompany?" 2.I.1.aThe first issue regarding expenditure which areincurred by the Director while going with his wife is covered by thedecision of Calcutta High Court in the case of KesoramIndustries & Cotton Mills Ltd. Vs. CIT- 191 CIT 518 (Cal)and of Kerala High Court in the case of CIT Vs. Apollo TyresLtd.- 237 ITR 706 (Ker.) which is sought to be relied by theTribunal and also followed by the jurisdictional High Court in thecase of M/s Chambal Fertilizers & Chemicals Ltd. Vs. DCIT (Asstt.),Spl. Range, Kota- Tax Appeal No.296/JP/1999 decided on 24.02.2005. 2.I.2.bIn that view of the matter, the issue No.(i) isrequired to be answered in favour of the assessee and against therevenue. 2.I.2In so far as issue no.(ii) in allowing 100% deductionu/s.80IA specifically when the assessee company itself claimeddeduction @ 30% u/s. 80IA, is concerned counsel for theappellant has taken us to the order of CIT (A) and contended thatthe view taken by the Tribunal is required to be reversed.However, the issue is now covered by the decision of Madras HighCourt in the case of Tamilnadu Petro Products Ltd. Vs.Assistant Commissioner of Income-tax- (2011) =388 ITR643 (Madras), wherein it has been held as under: 24.02.2005. 2.I.2.bIn that view of the matter, the issue No.(i) isrequired to be answered in favour of the assessee and against therevenue. 2.I.2In so far as issue no.(ii) in allowing 100% deductionu/s.80IA specifically when the assessee company itself claimeddeduction @ 30% u/s. 80IA, is concerned counsel for theappellant has taken us to the order of CIT (A) and contended thatthe view taken by the Tribunal is required to be reversed.However, the issue is now covered by the decision of Madras HighCourt in the case of Tamilnadu Petro Products Ltd. Vs.Assistant Commissioner of Income-tax- (2011) =388 ITR643 (Madras), wherein it has been held as under: “7.In our considered opinion, the saidcontention can have no application to thecase on hand. In as much as we dealt with-the issue in the light of Section80IAand inparticular Sub-clause (iv) of the said sectionwhich provides for the benefit even inrespect of electricity generation plantestablished by the Assessee and the incomederived from such enterprise of theAssessee, it will have to be held that theAssessee fully complied with the-requirements prescribed under Section 80IA in order to avail the benefits providedtherein. Therefore, the contention based onthe interpretation of the expression 'derivedfrom' can have no application to the case-where the provisions of Section 80IAgetattracted.” 2.I.2.aIn that view of the matter, the issue No.(ii) is required to be answered in favour of the assessee and against the 2.I.3.Regarding issue No.(iii), whether the assesseecompany is entitled for consequential relief in computing incometax payable u/s. 115JA specifically when the assessee companydid not distribute the power and the plant was set up formanufacturing of fertilizer and the power plant was a part offertilizer unit of the company, is concerned, this issue is squrelycovered by the decision of Supreme Court in the case ofCommissioner of Income-tax Vs. DCM Shriram ConsolidatedLtd.- (2014) 368 ITR 720, wherein it has been held as under: "The High Court in the impugned order hasrelied upon the decision of the six-judgeBench of this Court in Tata Iron and SteelCo. Ltd. v. State of Bihar : [1963] 48 ITR(SC) 125. The proposition of lawpropounded in TISCO [1963] 48 ITR (SC)125 has rightly been applied by the HighCourt in the facts and circumstances of thecase. The view taken by the High Court,therefore, is in conformity with the law laiddown in TISCO [1963] 48 ITR (SC) 125. Nointerference is called for. Civil appeals are,accordingly, dismissed with no order as tocosts." 2.I.3.a In that view of the matter, the issue is answered in favour of the assessee and against the revenue. 2.I.3.bAccordingly, the appeal stands dismissed. II.DB ITA No.203/2008 admitted on 23.10.2008 “Whether on the facts and in thecircumstances of the case and in law, theTribunal was justified in upholding the orderof the CIT(A) in cancelling the rectificationorder under Section 154 and deleting theinterest levied u/s.234C?” 3.II.1With regard to this issue the Tribunal in para 6 of its order has observed as under: 2.I.3.a In that view of the matter, the issue is answered in favour of the assessee and against the revenue. 2.I.3.bAccordingly, the appeal stands dismissed. II.DB ITA No.203/2008 admitted on 23.10.2008 “Whether on the facts and in thecircumstances of the case and in law, theTribunal was justified in upholding the orderof the CIT(A) in cancelling the rectificationorder under Section 154 and deleting theinterest levied u/s.234C?” 3.II.1With regard to this issue the Tribunal in para 6 of its order has observed as under: “6.After considering the argumentsadvanced by the parties, we find the firstappellate order is comprehensive andreasoned one though unnecessaryrepetitions could have been avoided in thefirst appellate order. The ld. CIT (A) hasheld the order under section 154 dated30.3.2004 as invalid on several reasons towhich we fully agree with. First reason isthat charging of interest under section234C on 30.3.2004 under section 154 waschange of opinion as the AO on earlieroccasion on 12.11.99 had withdrawn thesame passing an order on the applicationof the assessee moved under section 154.Thereafter even in the assessment undersection 143(3) the interest under section234C was not charged. Thus it was onlychange of opinion of the AO and it is alsoobvious that the issue was debatable oneand thus beyond the provisions undersection 154 of the Act. Secondly, theprovisions of MAT by the Finance Act 1996were introduced by inserting a new section115JA for the first time and the Act waspassed on 28[th] September, 1996. Accordingto this new section 115JA tax was to bepaid on the book profit. The book profit isdetermined only as and when profit & lossaccount is prepared. During theassessment year 1997-98 the taxableincome of the assessee was at Nil. Theassessee company was liable to pat tax onthe basis of book profit as per proviso ofsection 115JA which was known only afterthe profit & loss account was prepared and,therefore there was no liability to payadvance tax. Further, the new section115JA was introduced on 28.9.96 andtherefore the levy of interest fordelay/short deposit of first and secondinstalments due on 15[th] June and 15[th]September were not at all applicable.Hence interest under section 234C shouldnot have been charged. Exception providedin section 294 has been referred insupport. Which reads as under:- “If on the first day of April, in anyassessment year provision has not yetbeen made by a Central Act for thecharging of income-tax for that assessmentyear, this Act shall nevertheless have effectuntil such provision is so made as if theprovision in force in the precedingassessment year or the provision proposedin the Bill then before Parliament,whichever is more favourable to theassessee, were actually in force”. “If on the first day of April, in anyassessment year provision has not yetbeen made by a Central Act for thecharging of income-tax for that assessmentyear, this Act shall nevertheless have effectuntil such provision is so made as if theprovision in force in the precedingassessment year or the provision proposedin the Bill then before Parliament,whichever is more favourable to theassessee, were actually in force”. The ld. A/R has cired the decision ofChandigarh Bench of the Tribunal in thecase of Joint Commissioner of Income-Taxvs. Arihant Industries reported in 961TD464 (Chd) wherein it has been held thatsection 115JA had been brought on statuteby the Finance (No.2) Act 1996 with effectfrom 1.4.1997 and applicable to theprevious year relevant to the assessmentyear 1997-98. The Finance (No.2 Act, 1996got the assent of president of India on28.9.96 and before this date this sectionwas not on statute. Admittedly, the firstinstalment of advance tax became due on15.6.1996 and the second on 15.9.1996.In the case of assessee these dates areprior to the date when the finance No.2)Act, 1996 got the assent of President ofIndia. In that view of the matter, theassessee was not liable to pay advance taxfor these two dates, held the Tribunal. Anyway since the issue of charging of interestunder section 234C of the Act under thefacts and circumstances of the presentcase was debatable one and hence the AOwas not justified in charging the same bypassing an order under section 154 of theAct. The Hon’ble Supreme Court in thecase of CIT vs. Hero Cycles Pvt. Ltd, 220ITR 463 (SC) was pleased to hold that thecondition precedent for initiating theproceedings under section 154 the mistakeshould be glaring and obvious and it shouldnot be debatable and, therefore, even ifthere are two views on the issue theproceedings under section 154 cannot beinitiated. Under these circumstances, theld. CIT(A) has rightly treates therectification order under section 154 dated30.3.2004 as invalid one and has rightlybeen cancelled. The first appellate order is thus upheld.” 3.II.1.aIn that view of the matter, we are in completeagreement with the view taken by the CIT(A) and the Tribunal andtherefore, the issue is required to be answered in favour of theassessee and against the department. 3.II.1.bTherefore, the appeal stands dismissed. III.DB ITA No.919/2008 admitted on 04.03.2009 (i)whether under the facts and in thecircumstances of the case and in law, theTribunal was justified in allowing 100%deduction u/s. 80IA specifically when theassessee company itself had claimeddeduction 30% u/s. 80IA? (ii)Whether under the facts and in thecircumstances of the case and in law thetribunal was justified in holding that theassessee company is entitled forconsequential relief in computing incometax payable u/s. 115JA specifically when theassessee company did not distribute thepower and the plaint was set up formanufacturing of fertilizer and the powerplant was a part of fertilizer unit of thecompany? (iii)Whether under the facts the AssessingOfficer was justified in rejecting theapplication of assessee u/s. 154?” 4.III.1In so far as issue No.(i) is concerned, it is covered by the decision on issue No.(ii) of appeal No.866/2008 whichreads as under: “I.3In so far as issue no.(ii) inallowing100%deductionu/s.80IAspecifically when the assessee companyitself claimed deduction @ 30% u/s. 80IA, isconcerned counsel for the appellant hastaken us to the order of CIT (A) and contended that the view taken by theTribunal is required to be reversed. However,the issue is now covered by the decision ofMadras High Court in the case of TamilnaduPetro Products Ltd. Vs. AssistantCommissioner of Income-tax- (2011)=388 ITR 643 (Madras), wherein it hasbeen held as under: (iii)Whether under the facts the AssessingOfficer was justified in rejecting theapplication of assessee u/s. 154?” 4.III.1In so far as issue No.(i) is concerned, it is covered by the decision on issue No.(ii) of appeal No.866/2008 whichreads as under: “I.3In so far as issue no.(ii) inallowing100%deductionu/s.80IAspecifically when the assessee companyitself claimed deduction @ 30% u/s. 80IA, isconcerned counsel for the appellant hastaken us to the order of CIT (A) and contended that the view taken by theTribunal is required to be reversed. However,the issue is now covered by the decision ofMadras High Court in the case of TamilnaduPetro Products Ltd. Vs. AssistantCommissioner of Income-tax- (2011)=388 ITR 643 (Madras), wherein it hasbeen held as under: “7.In our considered opinion, the saidcontention can have no application to thecase on hand. In as much as we dealt with-the issue in the light of Section80IAand inparticular Sub-clause (iv) of the said sectionwhich provides for the benefit even inrespect of electricity generation plantestablished by the Assessee and the incomederived from such enterprise of theAssessee, it will have to be held that theAssessee fully complied with the-requirements prescribed under Section 80IA in order to avail the benefits providedtherein. Therefore, the contention based onthe interpretation of the expression 'derivedfrom' can have no application to the case-where the provisions of Section 80IAgetattracted.” I.4In that view of the matter, theissue No.(ii) is required to be answered infavour of the assessee and against therevenue.” 4.III.1.aIn that view of the matter, the issue is required tobe answered in favour of the assessee and against the revenue. 4.III.2.In so far as issue No.(ii) is concerned, it iscovered by the decision on issue No.(iii) of appeal No.866/2008which reads as under: “I.5Regarding issue No.(iii), whetherthe assessee company is entitled forconsequential relief in computing incometax payable u/s. 115JA specifically when theassessee company did not distribute thepower and the plant was set up formanufacturing of fertilizer and the powerplant was a part of fertilizer unit of the company, is concerned, this issue is squrelycovered by the decision of Supreme Courtin the case of Commissioner of Income-tax Vs. DCM Shriram Consolidated Ltd.-(2014) 368 ITR 720, wherein it has beenheld as under: "The High Court in the impugned order hasrelied upon the decision of the six-judgeBench of this Court in Tata Iron and SteelCo. Ltd. v. State of Bihar : [1963] 48 ITR(SC) 125. The proposition of lawpropounded in TISCO [1963] 48 ITR (SC)125 has rightly been applied by the HighCourt in the facts and circumstances of thecase. The view taken by the High Court,therefore, is in conformity with the law laiddown in TISCO [1963] 48 ITR (SC) 125. Nointerference is called for. Civil appeals are,accordingly, dismissed with no order as tocosts." I.6In that view of the matter, theissue is answered in favour of the assesseeand against the revenue.” 4.III.2.aIn that view of the matter, the issue is required to be answered in favour of the assessee and against the revenue. 4.III.3In so far as issue No.(iii) is concerned, in view ofabove decisions of issues No.(i) & (ii) above, this issue hasbecome academic in nature. 4.III.3.aTherefore, issue No.(iii) does not survive being of academic nature. 4.III.3.bAccordingly, the appeal stands disposed of. IV.DB ITA No.377/2011 admitted on 16.11.2016 (i) Whether under the facts and circumstances ofthe case and in law the Tribunal was justified inholding that the revised return u/s 139(5) was avalid return? (ii) Whether under the facts and in thecircumstances of the case and in law the Tribunalwas justified in holding the revised return as validwhen there was no apparent omission or wrongstatement in the original return? be answered in favour of the assessee and against the revenue. 4.III.3In so far as issue No.(iii) is concerned, in view ofabove decisions of issues No.(i) & (ii) above, this issue hasbecome academic in nature. 4.III.3.aTherefore, issue No.(iii) does not survive being of academic nature. 4.III.3.bAccordingly, the appeal stands disposed of. IV.DB ITA No.377/2011 admitted on 16.11.2016 (i) Whether under the facts and circumstances ofthe case and in law the Tribunal was justified inholding that the revised return u/s 139(5) was avalid return? (ii) Whether under the facts and in thecircumstances of the case and in law the Tribunalwas justified in holding the revised return as validwhen there was no apparent omission or wrongstatement in the original return? (iii) Whether under the facts and in thecircumstances of the case and in las the Tribunalwas justified in deleting the addition of Rs. 37.38crore made on account of downward impact ofRetention Price Subsidy? (iv) Whether under the facts and in thecircumstances of the case and in law the Tribunalwas justified in allowing the Retention PriceSubsidy specifically when it was an unascertainedliability and represented "reverse" which is notallowable? (v) Whether under the facts and in thecircumstances of the case and in law the Tribunalwas justified in deleting the addition of Rs.11,62,550 lakhs made in respect of fees paid to aconsultant for drafting the shareholdersagreement?circumstances of the case and in law the Tribunalwas justified in deleting the addition of Rs.11,62,550 lakhs made in respect of fees paid to aconsultant for drafting the shareholdersagreement? (vi) Whether under the facts and in thecircumstances of the case and in law the Tribunalwas justified in allowing the fees paid toconsultant as revenue expenditure instead ofcapital expenditure?circumstances of the case and in law the Tribunalwas justified in allowing the fees paid toconsultant as revenue expenditure instead ofcapital expenditure? 5.IV.1 In so far as issues no.(i) and (ii) are concerned, the Supreme court in the case of Goetze (India) Ltd. Vs.Commissioner of Income Tax- (2006) 284 ITR 323, has held as under: 4. The decision in question is that thepower of the Tribunal under section 254 ofthe Income Tax Act, 1961, is to entertainfor the first time a point of law provided thefact on the basis of which the issue of lawcan be raised before the Tribunal. Thedecision does not in any way relate to thepower of the assessing officer to entertain aclaim for deduction otherwise than by filinga revised return. In the circumstances ofthe case, we dismiss the civil appeal.However, we make it clear that the issue inthis case is limited to the power of theassessing authority and does not impinge on the power of the Income Tax AppellateTribunal under section 254 of the IncomeTax Act, 1961. There shall be no order as tocosts. 5.IV.1.aIn that view of the matter, the issues No.(i) and (ii) are required to be answered in favour of the assessee andagainst the department. 5.IV.2.So far as issues No.(iii) and (iv) are concerned,the Tribunal while considering the case has observed as under: on the power of the Income Tax AppellateTribunal under section 254 of the IncomeTax Act, 1961. There shall be no order as tocosts. 5.IV.1.aIn that view of the matter, the issues No.(i) and (ii) are required to be answered in favour of the assessee andagainst the department. 5.IV.2.So far as issues No.(iii) and (iv) are concerned,the Tribunal while considering the case has observed as under: “6.8 We have heard both the parties. The AO hasadded the deduction on account of Retention PriceLiability under Clause (c) and (b) of explanation(1) to Section 115JB of the Act. Clause (c) ofexplanation (1) to Section 115 JB refers to theamount or amounts set aside for provision madefor meeting liabilities other than ascertainliabilities. Clause (b) to explanation (1) of Section115JB refers to the amount carried to any reserve.It is not disputed that the assessee was creatingadhoc Retention Price Liability on the basis ofmanufacture of fertilizers. Such adhoc credit isbased on the notification available. Since theamount was being credited for Retention PriceSubsidy on the basis of earlier notification and theassessee became aware of retention for theRetention Price Subsidy as per notification dated15-04-02, therefore, the excess so credited wasdebited in the P&L account. The assessee isrequired to follow the accounting standards in caseof any event which occurs after balance sheetbefore the finalization of the accounts. Theassessee is required to make adjustment. The ld.CIT (A) has held that such adjustment is correctbut it should have been made in the subsequentassessment year before notification i.e. after thedate of the end of the accounting year. Thus it isclear that such liability was an ascertained liability.In the case of Bharat Earthmovers Ltd., 245 ITR428, the Hon’ble Supreme Court has held thatliability of leave encashment is admissiblededuction because the liability is ascertained,though it may not be quantified on scientificmethod. If the quantum of Retention Price Subsidyis made available to the assessee before finalization of the accounts then the assessee canmake adjustment for such price subsidy againstRetention Price Subsidy already credited in thebooks of account. The liability is therefore,ascertained liability. Similarly Hon’ble Apex Courtin the case of Appollo Tyres Ltd. vs. CIT, 255 ITR273 held that the AO has to accept theauthenticity of the accounts with reference to theprovisions of the Companies Act which obligatesthe company to maintain its accounts in a mannerprovided by the Companies Act and the same is toscrutinized and certified by the statutory auditorsand will have to be approved by the company andits General meeting. The AO has only power tomake adjustment as provided in explanantion. Theamount set aside for making the ascertainedliability cannot be added to the book profit. Hence,sub clause (c) to explanation (1) of Section 115 JBis not applicable. The amount so debited is not areserve to be covered under sub-clause (d) toexplanation 1 of Section 115JB of the Act. We donot agree with the contention ld. AR the RetentionPrice Subsidy credited be not treated as part of thebook profit. If the assessee is crediting theRetention Price Subsidy in the books of accountsand such subsidy is included in the accountsapproved in General Body Meeting, the samecannot be excluded from the book profit. One hasto consider the method of accounting beingfollowed by the assessee consistently. Accordinglywe hold that the debit in respect of Retention PriceSubsidy on account of notification dated 15.04.2009 is allowable.” 5.IV.2.aThe Supreme Court in the case of Godhra Electricity Co. Ltd. Vs. Commissioner of Income-tax- (1997) 225 ITR 746 (SC) has observed as under: 15.04.2009 is allowable.” 5.IV.2.aThe Supreme Court in the case of Godhra Electricity Co. Ltd. Vs. Commissioner of Income-tax- (1997) 225 ITR 746 (SC) has observed as under: “6.Under the Act income charged to tax isthe income that is received or is deemed tobe received in India in the previous yearrelevant to the year for which assessmentis made or on the income that accrues orarises or is deemed to accrue or arise inIndia during such year. The computation ofsuch income is to be made in accordancewith the method of accounting regularlyemployed by the assessee. It may be either the cash system where entries aremade on the basis of actual receipts andactual outgoings or disbursements or itmay be the mercantile system whereentries are made on accrual basis, i.e.,accrual of the right to receive payment andthe accrual of the liability to disburse orpay. In Commr. of Income-tax, BombayCity-I v. Shoorji Vallabhdas and Co.[1962]46ITR144(SC) (supra), it has beenlaid down: Income-tax is a levy on income. No doubt,the Income Tax Act takes into account twopoints of time at which the liability to tax isattracted, viz., the accrual of the income orits receipt; but the substance of the matteris the income. If income does not result atall, there cannot be a tax, even though inbook-keeping, an entry is made about ahypothetical income, which does notmaterialise.[ 14. This principle is applicable whether theaccounts are maintained on cash system orunder the mercantile system. If theaccounts are maintained under themercantile system what has to be seen iswhether income can be said to have reallyaccrued to the assessee-Company. In H.M.KashiParekh and Co. Ltd. v. Commr. ofIncome-tax [1960]39ITR706(Bom) , theBombay High Court had said (Para 10 ofAIR): Even so, (the failure to produce accountlosses) we shall proceed on the footingthat the assessee-Company havingfollowed the mercantile system of account,there must have been entries made in itsbooks in the accounting year in respect ofthe amount of commission. In ourjudgment, we would not be justified inattaching any particular importance in thiscase to the fact that the company followedmercantile system of accounting. Theywould not have any particular bearing inapplying the principle of real income in thefacts of this case. 15. The said view was approved by thisCourt in Commr. of Income-tax v. Birla Gwalior (P) Ltd. [1973]89ITR266(SC)(supra) where the assessee maintained itsaccounts on the mercantile system. In thatcase this Court, after referring to thedecision in Morvi Industries Ltd. v. Commr.of Income-tax [1971]82ITR835(SC) ,which was also a case where the accountswere maintained on mercantile system,hassaid: Hence it is clear that this Court in MorviIndustries case did emphasise the fact thatthe real question for decision was whetherthe income had really accrued or not. It isnot a hypothetical accrual of income thathas got to be taken into consideration butthe real accrual of the income. [P. 273] (ofITR):(atP.2491ofAIR)16. In Poona Electric Supply Co. Ltd. v.Commr. of Income-tax, Bombay City-I[1965]57ITR521(SC) (supra) this Courthassaid: Income-tax is a tax on the real income,i.e., the profits arrived at on commercialprinciples subject to the provisions of theIncome-taxAct.17. In that case the Court has approvedthe following principle laid down by theBombay High Court in H.M. Kashiparekh &Co. Ltd. v. Commr. of Income-tax AIR1961Bom 84 (supra) (Para 15 of AIR): Hence it is clear that this Court in MorviIndustries case did emphasise the fact thatthe real question for decision was whetherthe income had really accrued or not. It isnot a hypothetical accrual of income thathas got to be taken into consideration butthe real accrual of the income. [P. 273] (ofITR):(atP.2491ofAIR)16. In Poona Electric Supply Co. Ltd. v.Commr. of Income-tax, Bombay City-I[1965]57ITR521(SC) (supra) this Courthassaid: Income-tax is a tax on the real income,i.e., the profits arrived at on commercialprinciples subject to the provisions of theIncome-taxAct.17. In that case the Court has approvedthe following principle laid down by theBombay High Court in H.M. Kashiparekh &Co. Ltd. v. Commr. of Income-tax AIR1961Bom 84 (supra) (Para 15 of AIR): The principle of real income is not to be sosubordinated as to amount virtually to anegation of it when a surrender orconcession or rebate in respect ofmanaging agency commission is made,agreed to or given on grounds ofcommercial expediency, simply because ittakes place some time after the close of anaccounting year. In examining anytransaction and situation of this nature theCourt would have more regard to thereality and specialty of the situation ratherthan the purely theoretical or doctrinaireaspect of it. It will lay greater emphasis onthe business aspect of the matter viewedas a whole when that can be done withoutdisregardingstatutorylanguage.18. In State Bank of Travancore v. Commr.ofIncome-tax,Kerala [1986]158ITR102(SC)(supra),afterconsidering the various decisions of thisCourt, Sabyasachi Mukharji, J. (as thelearned Chief Justice then was) has said:An acceptable formula of correlating thenotion of real income in conjunction withthe method of accounting for the purposeof the computation of income for thepurpose of taxation is difficult to evolve.Besides, any strait-jacket formula is boundto create problems in its application toevery situation, it must depend upon thefacts and circumstances of each case.When and how does an income accrue andwhat are the consequences that followfrom accrual of income as well-settled. Theaccrual must be real taking into accountthe actuality of the situation. Whether anaccrual has taken place or not must, inappropriate cases, be judged on theprinciples of real income theory. Afteraccrual, non-charging of tax on the samebecause of certain conduct based on theipse dixit of a particular assessee cannotbe accepted. In determining the questionwhether it is hypothetical income orwhether real income has materialised ornot, various factors will have to be takeninto account. It would be difficult andimproper to extend the concept of realincome to all cases depending upon theipse dixit of the assessee which would thenbecome a value judgment only. What hasreally accrued to the assessee has to befound out and what has accrued must beconsidered from the point of view of realincome taking the probability orimprobability of realisation in a realisticmanner and dovetailing of these factorstogether but once the accrual takes place,on the conduct of the parties subsequentto the year of closing an income which hasaccrued cannot be made 'no income'. |p.1541 (of ITR): (at p. 788 of AIR) 7. If the matter is examined in the light ofthe aforementioned principles laid down bythis Court, it must be held that eventhough the assessee-Company wasfollowing the mercantile system ofaccounting and had made entries in thebooks regarding enhanced charges for the 7. If the matter is examined in the light ofthe aforementioned principles laid down bythis Court, it must be held that eventhough the assessee-Company wasfollowing the mercantile system ofaccounting and had made entries in thebooks regarding enhanced charges for the supply made to the consumers, no realincome had accrued to the assessee-Company in respect of those enhancedcharges in view of the fact that soon afterthe assessee-Company decided to enhancethe rates in 1963 representative suits (CivilSuits Nos. 152 of 1963 and 50 of 1964)were filed by the consumers which weredecreed by the trial Court and whichdecree was affirmed by the appellate Courtand the learned single Judge of the HighCourt and it is only on December 3, 1968that the Letters Patent Appeals filed by theassessee-Company were allowed by theDivision Bench of the High Court and thesaid suits were dismissed. But appealswere filed against the said judgment by theconsumers in this Court and the same weredismissed by the judgment of this Courtdated February 26, 1969. Shortlythereafter, on March 19, 1969, the UnderSecretary to the Government of Gujaratwrote a letter advising the assessee-Company to maintain the status quo forthe rates to the consumers for at least sixmonths and the Chief Electrical Inspectorwas directed to go through the accounts ofthe assessee-Company from year to yearand to report to the Government about theactual position about the reasonablereturns earned by the assessee-Company.On May 16, 1969 another representativesuit (Suit No. 118 of 1969) was filed by theconsumers wherein interim-injunction wasgranted by the Court and which was finallydecreed in favour of the consumers onJune 23, 1974. It would thus appear thatafter the decision was taken by theassessee-Company to enhance the chargesit was not able to realise the enhancedcharges on account of pendency of theearlier representative suits of theconsumers followed by the letter of theUnder Secretary to the Government ofGujarat and the subsequent suit of theconsumers and during the pendency of thesubsequent suit the management of theundertaking of the assessee-Company wastaken over by the Government of Gujaratunder the Defence of India Rules, 1971and the undertaking was subsequentlytransferred to the Gujarat State Electricity Board. It is no doubt true that the letteraddressed by the Under Secretary to theGovernment of Gujarat to the assessee-Company had no legally binding effect butone has to look at things from practicalpoint of view. [See : R.B. Jodha MalKuthiala v. Commr. of Income-tax, Punjab[1971]82ITR570(SC) ] The assessee-Company, being a licensee, could notignore the direction of the StateGovernment which was couched in theform of an advice, whereby the assessee-Company was asked to maintain the statusquo for at least six months and not to takesteps to recover the dues towardsenhanced charges from the consumersduring this period. Before the expiry of theperiod of six months the subsequent suithad been filed by the consumers andduring the pendency of the said suit theundertaking of the assessee-Company wastaken over by the Government of Gujaratunder the Defence of India Rules, 1971and subsequently it was transferred to theGujarat State Electricity Board and, as aresult, the assessee-Company was not in aposition to take steps to recover theenhanced charges. 9. The question whether there was realaccrual of income to the assessee-Company in respect of the enhancedcharges for supply of electricity has to beconsidered by taking the probability orimprobability of realisation in a realisticmanner. If the matter is considered in thislight, it is not possible to hold that therewas real accrual of income to the assessee-Company in respect of the enhancedcharges for supply of electricity which wereadded by the Income-tax Officer whilepassing the assessment orders in respectoftheassessmentyearsunderconsideration. The Appellate AssistantCommissioner was right in deleting thesaid addition made by the Income-taxOfficer and the Tribunal had rightly heldthat the claim at the increased rates asmade by the assessee-company on the basis of which necessary entries weremade represented only hypotheticalincome and the impugned amounts asbrought to tax by the Income-tax Officerdid not represent the income which hadreally accrued to the assessee-Companyduring the relevant previous years. TheHigh Court, in our opinion, was in error inupsetting the said view of the Tribunal. 5.IV.2.bTherefore, issues No.(iii) and (iv) are required to be answered in favour of the assessee and against the department. 5.IV.3In so far as issues No.(v) & (vi) are concerned, the Tribunal has in para 8.4 & 8.5 observed as under: “8.4 The ld. CIT (A) after considering thesubmissions upheld the addition byobserving as under: “ I have considered the argument of theappellant and submission of the AO andperused the assessment order as well asthe relevant records. It is an undisputedfact that the appellant company hasincurred expenditure of Rs.11.62 lakhs inconnection with drafting of stocksubscription and shareholders agreementfor acquiring stock/equity shares ofNovasoftInformationTechnologyCorporation, USA. The expenditure isdirectly relatable to the acquisition ofshare/equity of another company but not inrelation to the share capital of the appellantcompany. Hence, it cannot be directlyconsidered as capital expenditure. If theshares so acquired have been treated asnon-trade investment, then it would haveadded to the cost of shares (being asset).However, on perusal of balance sheet, it isseen that these shares have been treatedas trade investment and accordingly theexpenditure so incurred may be consideredas allowable revenue expenditure. However,by virtue of provision of Section 145A thedirt expenses or fees (by whatever namecalled) incurred in acquiring the traded items will have to be added for the purposeof valuation of closing stock for determiningthe income chargeable under the headsProfit and Gains of the business.Accordingly, for determining income fromprofits & gains of the business, same isdirected to be added in view of thediscussion made above”. 8.5 We have heard both the parties. The ld.CIT (A) has confirmed the addition onaccount of provisions of Section 145 of theAct. The explanation to the Section 145 (A)mentioned that any tax, duty, cess or feeunder any law is to be included under anylaw is to be included for the purpose ofSection 145A. The assessee has not paidfees under any law. The assessee has paidfees for the consultancy received. Such feescannot be included in the value of theClosing stock as per Section 145A. Wetherefore, feel that the ld. CIT(A) was notjustified in confirming the addition of Rs.11.62 lacs. Now we will take up appeal ofthe revenue.” 5.IV.3.aIt will not be out of place to mention that thecontentions which have been raised by the department withregard to the following observations made by the CIT(A) wasnever challenged before the Tribunal by the department. 5.IV.3.aIt will not be out of place to mention that thecontentions which have been raised by the department withregard to the following observations made by the CIT(A) wasnever challenged before the Tribunal by the department. “15.4 I have considered the argument ofthe appellant and submission of the AO andperused the assessment order as well asthe relevant records. It is an undisputedfact that the appellant company hasincurred expenditure of Rs. 11.62 lakhs inconnection with drafting of stocksubscription and share holders agreementfor acquiring stock/equity shares ofNovasoftInformationTechnologyCorporation , USA. The Expenditure isdirectly relatable to the acquisition ofshares/equity of another company but notin relation to the share capital of theappellant company. Hence, it can not bedirectly considered as capital expenditure.If the shares so acquired have been treated as non-trade investment, then it wouldhave added to the cost of shares (beingasset). However, on perusal of balancesheet, it is seen that these shares havebeen treated as trade investment andaccordingly the expenditure so incurredmay be considered as allowable revenueexpenditure. However, by virtue ofprovisions of Section 145A the directexpenses or fees (by whatever name called)incurred in acquiring the traded items willhave to be added for the purpose ofvaluation of closing stock for determiningthe income chargeable under the headsprofit and gains of the business.Accordingly, for determining income fromprofits and gains of the business, same isdirected to be added in view of thediscussion made above.” 5.IV.3.bIn that view of the matter, the issues No.(v) & (vi) are required to be answered in favour of the assessee and againstthe department. 5.IV.4Accordingly, the appeal stands dismissed. V.In DB ITA No