Dcit, Circle-3(3), A... v. Reliance Industries ...

Asha Vijayaraghavan, J.M:— These three appeals filed by the Revenue are directed against the orders passed by the ld. CIT(A)-III for the Assessment Years 1997-1998 to 1999-2000.

ITA No. 1645.M/06 - A.Y 1997-1998

2. The first ground of appeal by the revenue is against deletion by the Ld. CIT(A) of the addition of Rs. 2613.46 lakhs being depreciation @ 25% claimed on Rs. 10453.83 lakhs declared under VDIS Scheme.

3. The Assessee claimed depreciation of Rs. 26,13,46,000/- being 25% of capitalized pre operative expenses of Rs. 104,53,83,000/- of Reliance Petrochemicals Ltd. (RPCL) which subsequently merged with the assessee. The facts relating to the issue are that during the construction period RPCL had earned interest and other income from various deposits made. In A.Y 1989-1990 to 1992-1993 this interest etc income was reduced from pre operative expenses and only the net amount of pre operative expenses (after reduction of interest etc income) was capitalized in the books of account in the assessment of RPCL, however the Assessing Officer held that interest etc income should be assessed as “Income From Other Sources”. The Hon'ble ITAT after considering the decision of the Apex court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (227 ITR 172) set aside the assessment orders with direction to the AO to frame the assessments de novo. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (227 ITR 172), the Hon'ble Supreme Court had held that interest on funds deployed before commencement of business cannot be set off against capital expenditure and has to be assessed as income from other sources. In the mean while RPCL amalgamated with Reliance Industries Ltd. with effect from 1.3.1992 While assessments of RPCL set aside by the Tribunal were pending the Voluntary disclosure of income scheme 1997 (VDIS) was introduced. Considering the law laid down in Tuticorin Alkali's case and availing the benefit of the VDIS, the appellant company offered to tax the interest etc income which had been netted off against the pre operative expenses of RPCL. In Annexure VII to the VDIS declaration filed the appellant company inter alia stated thus:

“The declarant without prejudice to its contentions and in order to buy peace and bring to an end to all litigations has offered for tax an amount of Rs. 104,53,83,202/- under VDIS 1997. No further accounting entry is required to be passed in this regard considering the guidance note issued by the institute of Chartered Accountants of India on the subject. The above amount will be added to the cost of various projects for the purpose of working out depreciation.

Since the aforesaid income offered to tax under VDIS 1997 does not result in creation of any asset column 4,5 & 6 of Table 5 of the form of voluntary disclosure of income is not filled.”

4. It was contended by the appellant that since interest etc income of Rs. 104.53 crore set off against pre operative expenses in the books of RPCL was offered to tax under VDIS, the pre operative expenses capitalized would automatically stand increased by the said amount of Rs. 104.53 crore. According depreciation on this amount was claimed and the same was allowed in the original assessment. However in the reassessment order the AO has disallowed this claim for depreciation on the ground that:

i. The amount declared had not been credited in the books of account and the appellant did not pass necessary entries for the same.

ii. Interest earned during construction period is income from other sources. Relief claimed on this income by way of depreciation cannot be allowed as per provisions of sec. 69 of VDIS 1997.

4.1 On appeal before the Ld. CIT(A) the assessee contended that depreciation is not claimed on the income declared under VDIS. Rather depreciation is claimed on that part of the pre operative expenses which had been reduced by the interest income in the books of RPCL. It is argued that since the interest income set off against pre operative expenses has been subjected to tax the entire (gross) pre operative expenses capitalized by the appellant is eligible for depreciation. As regards the contention of the AO that no entries are passed in the books for the income declared under VDIS, it is submitted that RPCL has merged with the appellant company and in accordance with the scheme of amalgamation as approved by the Court all assets and liabilities (as per books) of RPCL stood transferred to the appellant company. Hence it was not permissible to pass any entries in the books for that would violate the order of the Court and also the terms and conditions of the scheme of merger. As regards the AO's contention that the interest income in question is taxable under the head other sources it is urged that this view actually supports the stand of the appellant. For if the interest income is taxable then the capitalized pre operative expenses earlier reduced by the interest income would automatically stand increased by the interest amount. Consequently the actual cost WDV of the assets would stand enhanced resulting in corresponding increase in depreciation.

5. It is further contended that entries in the books of account are not determinative. Claims for deduction have to be decided as per the applicable provisions of law. Reliance for this proposition is placed on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT 82 ITR 363-SC. It is asserted that there is no dispute that the capitalised pre operative expenditure is eligible for depreciation and that the same had been reduced by the interest income. So when the said interest income was offered for tax the hitherto reduced amount of pre operative expenses would stand increased and depreciation on the same would be allowable as per law.

6. The Ld. CIT(A) allowed the claim of the assessee observing as under:

“I have carefully considered the matter and am unable to agree with the reasons given by the AO for not allowing depreciation. It appears that the AO labored under the misconception that the appellant was claiming depreciation on the interest income declared under VDIS. The facts of the case do not support such inference. There is no dispute that the preoperative expenses had been capitalised. From this capitalised value was reduced the amount of interest etc income earned during the construction period. As per the Supreme Court decision in Tuticorin's case the said interest was required to be assessed to tax as a revenue receipt under the head income from other sources. Therefore under the law the said income could not be set off against preoperative interest expenditure. Where such set off had been done the undoing of the set off would result in the quantum of preoperative expenses increasing to the extent of interest income charged to tax. In the instant case the interest income of Rs. 104.54 Crores set off against pre operative expenses in the books has been charged to tax. The undoing of the set off will automatically result in increasing the pre operative expenses to the extent of Rs. 104.54 Crores. The fact that the said interest income was charged to tax under the VDIS 1997 is to my mind immaterial. The consequential effect of charging the interest income to tax under VDIS will be no different than if the same had been charged to tax under sec. 56 of the act. In either case the effect would be to undo the set off of interest income against pre operative expenses resulting in corresponding increase in the pre operative expenses capitalized. I am therefore one with the appellant that depreciation on the increase in capitalized pre operative expenses has not been claimed on the income declared under VDIS> Depreciation attaches to the cost of assets and not to income. Therefore depreciation cannot in any case be claimed on income. I further agree with the appellant that entries or lack of them in the books of accounts cannot affect the determination of substantive issues as per the law. Therefore though the appellant had adequate reasons for not being able to give effect to the VDIS declaration in the books of account that cannot prejudice claims of the assessee which have no direct nexus with the subject of the declaration under VDIS. Besides in the instant case entries of both the pre operative expenses and interest income obtained in the accounts. The VDIS declaration merely had the effect of undoing the set off of interest income against the pre operative expenses. As mentioned above even if the interest income had been brought to tax u/s. 56 the effect would be the same. The fact that the appellant chose to avail the opportunity offered by the VDIS cannot alter its other rights under the law for these reasons I hold that upon charging of the said interest amount to tax the pre operative expenses would stand increased correspondingly. Consequently the actual cost of those assets to which the preoperative expenses had been allocated would also stand increased within the meaning of sec. 43(1). This is as per the decisions of the Bombay High Court in the cases of CIT v. BSES, 142 ITR 298 and Ahmedabad Electricity Co. Ltd. v. Commissioner Of Income-Tax. 190 ITR 413 (Bom) and decision of the Hon'ble Apex Court in the case of Saharanpur Electric Supply Co. Ltd. v. CIT 194 ITR 294 where it was held that actual cost has to be determined every year. Such determination cannot be prevented because actual cost has already been determined in one or more earlier years. The Court further held that u/s. 4391) read with sec. 43(6) the AO has to determine the actual cost for all assets new and old.

For these reasons I am inclined to hold that the disallowance of the claim of depreciation of Rs. 26,13,46,000 is not correct. The AO is directed to allow depreciation of Rs. 26,13,46,000 as allowed in the original assessment.”

7. The revenue is on appeal against the allowance of depreciation. The facts are as extracted by the Ld. CIT(A) is that Reliance Petrochemicals Ltd. (RPCL) the assessee during the pre-operative period had earned an income of Rs. 1045383202/- They have reduced the same from the pre-operative expenses which had been capitalized in arriving at the cost of assets on which depreciation was claimed. The Assessing Officer had assessed the income as income from other sources. On appeal the Tribunal had set aside the issue to the file of the assessing officer to decide the matter afresh after considering the decision of the Apex Court in the case of Tuticorin Alkali and Chemicals Limited reported in 227 ITR 172. Meanwhile RPCL amalgamated with the Assessee with effect from 1.3.1992 Before the assessing officer could reframe the assessment pursuant to the order of the ITAT, the assessee had offered VDIS, 1997. In their declaration under VDIS it has been specifically mentioned that as the aforesaid income does not result in creation of any assets requisite column No. 4,5 and 6 of Table 5 of the Form of Voluntary Disclosure income is not filled. The assessee thereafter contented that the income offered under VDIS has originally gone to reduce the cost of acquisition of assets on which depreciation has been claimed. Now that income has been separately taxed the cost of acquisition of assets should correspondingly be increased. The AO rejected this claim on the ground that the no further benefit obtained from the assessee in respect of income offered under VDIS and further no entries have been made in the books for increase in cost of acquisition of assets.

8. The Ld. CIT(A) had held claim of the assessee that once the income which is given to reduce the cost of acquisition has separately taxed then the correspondingly and as a consequence the cost of acquisition of the assets should also be increased. Mere entries or lack of them in the books of account cannot affect the determination of substantive issue as per law. Further, the CIT(A) also relied on various decisions wherein the WDV has to be determined based on the actual cost that may be worked out every year and the WDV should be arrived at after deducting therefrom the depreciation actually allowed. The CIT(A) directed the allowance or depreciation at 25% relating to the above income of Rs. 1045383201/-.

9. The contention of the revenue is that under VDIS the declarant shall not be entitled in respect of VDIS to reopen any issue or reassessment made in the Income tax Act or claim any set or relief on appeal, reference or other proceedings. Therefore, the assessee who had offered the income during the pre-operative period cannot claim benefit of depreciation on the same amount.

9.1 The Ld. DR submitted as follows:

“The declarant shall not be entitled in respect of the voluntarily disclosed income or any amount of tax paid thereon, to reopen any assessment or reassessment made under the I.T Act or the Wealth Tax Act or claim any set-off or relief in any appeal, reference or other proceeding in relation to any such assessment or reassessment.”

10. We heard both the parties. The facts of the matter is that the assessee had incurred certain expenses on setting up its plant and machinery. The preoperative expenses were added to the cost of acquisition and depreciation claimed. However, on the basis of accounting standard pre-operative income were reduced from the cost of the assets and the depreciation was claimed on the lower amount. Once the pre-operative income as per the directions of the ITAT are assessed separately as income, they cannot be reduced from the capitalized cost of acquisition of the assets. Therefore then as a consequence, the cost of acquisition of the plant and machinery would also be enhanced by that amount. Thus once the preoperative income which had gone to reduce the cost of acquisition of the assets is taxed separately, then correspondingly the cost of acquisition would get enhanced to their original level i.e prior to reduction of the same by the preoperative income.

11. It is on this enhanced cost of acquisition that the assessee is entitled to depreciation. Every year the WDV of the assets on which the depreciation is to be granted, have to be computed on the correct cost of acquisition as reduced by the actual depreciation allowed in computing the taxable income of the earlier years. (CIT v. Doom Dooma India Ltd. 310 ITR 392 (SC). This increase in cost of acquisition of plant and machinery does not depend on whether pre-operative income was assessed in the regular assessment proceeding or was assessed on the basis of declaration under the VDIS. The additional depreciation claimed is not a relief claimed on the preoperative income offered under VDIS, but on the correct cost of acquisition. It is not a relief claimed on the income offered under VDIS.

12. In the instant case, the assessee is not claiming any relief in respect of the income offered under VDIS. As pointed this income would have been taxed under the normal assessment giving effect to the order of the ITAT and correspondingly the cost of acquisition and the depreciation would have been enhanced. It is this income which would have become taxed in the regular assessment was declared under the VDIS. Therefore the assessee is not claiming any further relief by claiming depreciation on the correct cost of acquisition without reduction of pre-operative income. Therefore, we agree with the conclusion of the CIT(A) that the assessee is entitled to depreciation on the total cost of acquisition without reducing the pre-operative income of Rs. 1045383201/- which has been excluded and taxed separately. The revenue's appeal on this issue is dismissed.

13. The second issue is against the CIT(A) allowing expenditure of Rs. 2500.99 lakhs towards well head platform, u/s. 42(1)(b) of the Act. The Assessee claimed total expenditure of Rs. 13717.10 lakhs as deduction u/s. 42(1)(b), in respect of Oil and Gas division for extraction and production of oil and gas from panna, Mukta and Tapti fields. As per details of this expenditure furnished before the AO, the expenditure on production facilities at Panna Mukta field includes Rs. 25.00 crore incurred on well head platforms which was claimed deductible u/s. 42(1)(b) as expenditure incurred on drilling and exploration,. The AO has disallowed the claim on the ground that the expenditure on production facilities is not related to drilling and exploration activities and is therefore not eligible for deduction u/s. 42(1)(b) of the act.

14. The Ld, AR of the appellant explained that the appellant company is undertaking the activities of exploration extraction and production of oil and gas from the panna, Mukta and Tapti fields in a joint venture. The appellant incurs various expenses on drilling exploration extraction and production activities. The AR further explained that the expenditure in exploration and production (hereinafter referred to as E&P) is classified based on the nature of activities performed undertaken as under:

Acquisition Activities:

i. Cost of acquiring exploration development and production rights.

ii. Includes lease bonus brokers, fees, legal costs to acquire exploration eights.

Exploration Activities:

i. Cost of aerial, Geological. Geophysical, Geochemical, Palaentological, Topographical and Seismic surveys, studies, analysis and interpretation Investigations relating to subsurface geology.

ii. Cost of structural drilling exploratory Type, Stratigraphic, test drilling drilling of exploration and appraisal wells.

iii. Cost of carrying and retaining undeveloped properties, such as delay rental legal cost for title defence maintenance of land and lease records.

iv. Dry hole contributions and bottom hole contribution.

Developments activities

(A) Development Drilling.

(B) Cost of preparing well locations for drilling including surveying well locations for determining development drilling sites cleaning ground draining road building gas lines and power lines necessary to develop proved oil and gas reserves.

(C) Cos of drilling and equipping development wells. Development type stratigraphic tests wells and service wells.

D. Cost of well equipments such as casing tubing pumping equipment.

Production Facilities:

i. Cost of platforms well head assembly ii. Cost of installation of lease flow lines separators treaters heaters, manifolds measuring device and production storage tanks, natural gas cycling and processing plants and utility and waste disposal systems.

Production activities:

(A) Pre well Head cost:

(i) Cost of labour repairs and maintenances materials supplies fuel and power property taxes insurance severance taxes, royalty and other costs incurred for lifting the oil and gas to the surface.

(ii) Work over of wells.

B. Pre well Head Cost:

Cost of gathering treating field transportation field processing etc.

15. The AR contended that the expenditure incurred under the above heads for E& P are accounted under the heads capital expenditure or revenue expenditure depending upon the nature of activity performed. The AR has submitted a detailed technical note to justify as to how the expenses incurred in wellhead Platforms are actually for drilling or exploration activities. The said note is reproduced as under:

“Justification for claiming wellhead platforms under section 42:

Exploration activities include acquisition processing and interpretation of Geological & Geophysical data various analysis studies and investigations such as geo chem./biostrat analysis. PVT fluid analysis core analysis and drilling of wells for prospecting for hydrocarbons.

Production Facilities includes wellhead platforms processing platforms infield pipelines and export pipelines. Part of these facilities wellhead platforms (viz platform PC, PF and PG) houses equipments essential for drilling of wells.

These wellhead platforms are necessary to be installed before the drilling of wells and the utility of these platforms are as follows:

Facilitate drilling of drill multiple wells from a single location.

On completion of each well the wellhead platform only holds the assembly of valves for manual and automatic well closure and control of production rate has to be installed.

After a well has been drilled and performed the well has to be tested to determine well productivity and collect other production and reservoir data. During these well tests hydrocarbons along with drilling and completion fluids that are potentially hazardous to the environment are produced. These fluids have to be handled very carefully without causing any environmental damage. The facilities on the wellhead platform like test separator, manifolds and sumps are used to carry out well testing without violating any environmental regulations.

The wellhead platform provides the necessary support for the well conductors and therefore has to be installed before the wells are in place.

Cathodic protection is required for the well conductors so that they can be used as long as the well is capable of producing. The hardware required for cathodic protection is provided at the wellhead platform.

Thus the wellhead platform and the associated equipment as aforesaid are part and parcel of drilling operations in offshore areas.

The production sharing contract (PSC) signed with the Government of India specifically allows the prospectors to claim section 42 deduction in respect of the physical assets used in drilling or exploration activities or services. Since wellhead platform are very much an asset used in drilling it is rightly allowable for deduction under section 42.

In respect to the other facilities such processing platforms infield pipelines and export pipelines are related to Transportation and processing of Hydrocarbons and therefore classified as fixed asset and depreciation is claimed on the same.

It is submitted that since Wellhead platform are essential for conduct of exploration activities the expenditure incurred on the same should be considered as an allowable expense under sec. 42 of the act. It is urged that section 42(1)(b) of the act allows deduction on expenditure incurred in respect of drilling or exploration activities or in respect of physical assets used for that purpose. It is subjected that since a part of capital expenditure incurred and clubbed under the head production activity is directly attributable to drilling and exploration activity the same is clearly allowable as deduction while computing the total income under sec. 42 of the act as claimed.”

16. Before the CIT(A) the AR asserted that the details of exploration drilling and production expenditure were filed during the course of assessment. These details clearly show that expenditure on production facilities includes Rs. 25.00 crore incurred on platforms at Panna, Mukta site. This expense though classified under the expenses head production facilities is actually in the nature of expenses incurred on drilling or exploration activities and so has been rightly claimed as deduction under section 42(1)(b) of the act.

17. In the alternative the AR submitted that the assessee is eligible for depreciation on the capital expenditure relating to the drilling extraction and production facilities.

18. The Ld. CIT(A) accepted the contention of the assessee observing as under:

“I have carefully considered the matter the AO has disallowed the claim of the appellant merely by stating that the appellant could not substantiate its claim that the expenditure on production facilities is related to the drilling and exploration activities for which the deduction u/s. 42(1)(b) is allowable. No other infirmity in the claim was pointed out by the AO. On a consideration of the note explaining the necessity of wellhead platforms for exploration and drilling operations. I am of the view that installation of wellhead platforms is an integral part of the drilling and exploration process. It appears that the AO also may have no quarrel with this position because similar expenses on well head platforms have been allowed as deduction in the preceding as well in subsequent years u/s. 42(1)(b). Even during the year under consideration expenses of Rs. 5.20 crore incurred on the wellhead platforms at Tapti field has been allowed as deduction u/s. 42(1)(b) On the facts of the case therefore, I am inclined to agree with the appellant that installation of wellhead platform forms part of drilling and exploration activities and expenses incurred on the same will be eligible for deduction u/s. 42(1)(b) of the IT Act. This ground of appeal is therefore allowed.”

19. Aggrieved the revenue is on appeal before us. We heard both the parties. The issue pertains to allowance of expenses of Rs. 25 crores (out of the total expenses of Rs. 13717.70 lakhs) towards Well Head platform which was claimed u/s. 42(1)(b) as expenditure incurred on drilling and exploration. The assessing officer disallowed the claim on the ground that expenditure on production facility is not related to drilling and exploration activities and is therefore not eligible for deduction u/s. 42(1)(b) of the Act.

20. Before the CIT(A), the assessee had given details/particulars of activities and the necessity of well head platform for carrying out the drawing ad exploration etc., activities. Considering the detailed explanation by the assessee, the CIT(A) has directed the allowance of Rs. 25 crores as deduction under section 42(1)(b).

21. section 42(1)(b) provides for deduction, after beginning of commercial production expenses incurred in respect of drilling and exploration activities on the basis of agreement entered into between the Government of India and the assessee. The issue for consideration is whether the expenditure of Wellhead Platform will constitute expenditure in respect of drilling and exploration activities as well as in respect of physical assets used in that connection.

22. As pointed out by the ld. CIT(A), the Wellhead Platform is necessary for carrying out drilling and exploration activities. For the sake of convenience the part played by Well Head in drilling and exploration as explained by the Assessee is reproduced below:

Exploration activities include acquisition processing and interpretation of Geological & Geophysical data various analysis studies and investigations such as geo chemical/biostrata analysis. PVT fluid analysis core analysis and drilling of wells for prospecting for hydrocarbons.

Production Facilities includes wellhead platforms processing platforms infield pipelines and export pipelines. Part of these facilities wellhead platforms (viz platform PC, PF and PG) houses equipments essential for drilling of wells.

These wellhead platforms are necessary to be installed before the drilling of wells and the utility of these platforms are as follows: Facilitate drilling of drill multiple wells from a single location.

On completion of each well the wellhead platform only holds the assembly of valves for manual and automatic well closure and control of production rate has to be installed After a well has been drilled and performed the well has to be tested to determine well productivity and collect other production and reservoir data. During these well tests hydrocarbons along with drilling and completion fluids that are potentially hazardous to the environment are produced. These fluids have to be handled very carefully without causing any environmental damage. The facilities on the wellhead platform like test separator, manifolds and sumps are used to carry out well testing without violating any environmental regulations.

The wellhead platform provides the necessary support for the well conductors and therefore has to be installed before the wells are in place. Cathodic protection is required for the well conductors so that they can be used as long as the well is capable of producing. The hardware required for cathodic protection is provided at the wellhead platform.

Thus the wellhead platform and the associated equipment as aforesaid are part and parcel of drilling operations in offshore areas.

23. This technical explanation about the purpose and necessity of well heads submitted by the assessee has not been seriously contested by the department. Wellhead Platform has provided necessary support for drilling and exploration which is carried out. section 42(1)(b) specifically allowed the expenditure incurred after commercial production, expenditure incurred in respect of drilling or exploration activities or in respect of physical assets used in connection with drilling and exploration. Therefore expenditure in connection with drill heads will certainly fall within expenditure incurred in connection with drilling and exploration contemplated u/s. 42(1)(b). We are therefore of the view that the Ld. CIT(A) was correct in holding that expenditure of Rs. 25 crores incurred in connection with Wellhead Platform are allowable expenses under section 42(1)(b).It has been submitted by the assessee that similar expenditure has been allowed by the assessing officer himself in other fields. In the circumstances, we uphold the order of the ld. CIT(A) allowing the expenditure of Rs. 2500.99 lakhs incurred in connection with well head, and dismiss the departmental appeal on this issue.

24. The next ground of appeal by the revenue is against the Ld. CIT(A) deleting the addition made to book profit u/s. 115JA of Rs. 391,17,724/- being provision of doubtful debts. The AO increased the book profit u/s. 115JA of the IT Act by provision for doubtful debts of Rs. 3,91,17,724/-. It was noticed by the assessing officer that though this provision had been added back by the assessee while computing income under the normal provisions the said provision had not been added back to the book profit u/s. 115JA. The assessing officer took the view that in terms of clause (c) of explanation to sec. 115JA(2) the assessee company as required to add back the said provision for computing the book profit. It was explained by the assessee before the Assessing Officer that the provision had been made for debts which were considered by the management as doubtful of recovery after evaluating each debt. Since each debt had been evaluated for its soundness it was contended that the provision was for ascertained liability. The Assessing Officer did not accept the assessee's contention and added the provision for doubtful debts to the Book profits u/s. 115JA.

25. On appeal the CIT(A) allowed the claim of the assessee that the provision for doubtful debts represents provision for diminution in value of assets and hence cannot be added back in computing Book profits u/s. 115JA. Accordingly he deleted the addition of Rs. 1,17,355,317/- made by the Assessing Officer to the income u/s. 115JA on account of provision for doubtful debts

26. Aggrieved the revenue is on appeal. On this issue of exclusion of provision for bad and doubtful debts in computing Book profits, even though the decision of the Supreme Court in the case of CIT v. HCL Comnet services and Systems Ltd. reported in 305 ITR 409 is in favour of the assessee, we find that Section 115JA has been subsequently amended by Finance Act No. 2 of 2009 with retrospective effect from 01.04.1998 (A.Y: 1998-1999) including explanation (g) whereby any amount set aside towards provision for diminution of assets is to be added back in computing the Book profits u/s. 115JA. As held by the Apex Court in the case of CIT v. HCL Comnet services and Systems Ltd. reported in 305 ITR 409, any provisions made towards bad and doubtful is nothing but provisions made in diminution in value of assets and in respect of such provisions explanation (g) would apply and hence such provisions are to be added back in computing the Book profits u/s. 115JA.

27. In this view of the matter having regard to the amendment to Section 115JA by way of introduction of explanation (g), we uphold the claim of the revenue and set aside the order of the CIT(A) and confirm the order of the assessing officer that the provisions for bad and doubtful debts should not be deducted while computing book profit under Section 115JA. The appeal of the revenue on this issue is allowed. The appeal of the revenue in ITA No. 1645.M/2006 for Asst. Year 1997-1998 is partly allowed.

I.T.A No. 2394.M/2007: Asst. year: 1998-1999

28. The first ground of appeal by the revenue reads as under:

“On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the AO to allow the depreciation of Rs. 87,70,401/- on opening WDV of Rs. 3,50,81,605/- without appreciating that the depreciation was claimed on enhanced value of the asset and as per section 69 the depreciation cannot be allowed on income declared under VDIS.”.

29. The AO in not allowing depreciation of Rs. 87,70,401/- on opening WDV of Rs. 3,50,81,605/-. The facts of the case are that Reliance Petrochemicals Ltd. (RPCL), which later on merged with Reliance Industries Ltd., had earned interest and other income during the construction period. This income was set off against the pre-operative expenses and only the net amount was capitalized. Later on, it was held by the Supreme Court in the case of Tuticorin Alkali chemicals & Fertilizers Ltd., 227 ITR 172 that the interest on funds before the commencement of business cannot be set off against the capital expenditure and has to be assessed as income from other sources. In the meantime, the department came out with Voluntary Disclosure of Income Scheme (VDIS). The interest income earlier set off by the appellant against pre-operative expenses was offered to tax under VDIS. Accordingly, the appellant increased the capitalization of preoperative expenses to this extent. The appellant claimed depreciation taking into account the increased value of fixed assets on Asst. Year 1997-1998. However, the AO did not allow the depreciation on the enhanced value of assets on the ground that, as per section 69 of VDIS, income declared under VDIS cannot be considered for any other relief. However, the CIT(A) accepted the claim of the appellant vide his order dated 26.12.2005 For the year under consideration, the appellant claimed depreciation of Rs. 87,70,401/- taking into consideration the WDV of the assets worked out after giving effect to the order of CIT(A) for the preceding year. The AO refused to allow depreciation on the increased value of the assets on the same ground that the amount offered under VDIS is not entitled to any other relief under IT Act. It is observed that no fresh claim of depreciation is made in the year on account of any amount offered under VDIS during the year. Depreciation claimed by the appellant is just consequential to the effect given to the order of CIT(A) for the preceding year. The CIT(A) allowed the claim of depreciation by the Assessee.

30. The revenue is on appeal. We find that we have decided the issue in favour of the assessee that they are entitled to depreciation on the total cost of acquisition without reducing the pre-operative income of Rs. 1045383201/- which has been excluded and taxed separately. As this year, the assessee has claimed depreciation on the WDV of the additional amount of preoperative expenses added to the cost of acquisition, following our decision in the assessee's case for the A.Y 1997-1998 in ITA No. 1645.M/2006 (supra), we uphold the claim of depreciation on this amount and dismiss the appeal of the Revenue.

31. The next ground of appeal by the revenue is against the CIT(A) deleting the addition made to book profit u/s. 115JA of Rs. 12,85,77,140/- being provision of doubtful debts. The AO increased the book profit by provision for doubtful debts of Rs. 12,85,77,140/-, under Explanation (c) to 115JA the I.T Act, treating it as an unascertained liability.

32. On appeal the Ld. CIT(A) allowed the Assessee's claim holding that provision for doubtful debts is not a provision for unascertained liability and hence should not be added back while computing the Book profits u/s. 115JA.

33. Aggrieved the revenue is on appeal. On this issue of exclusion of provision for bad and doubtful debts in computing Book profits, even though the decision of the Supreme Court in the case of CIT v. HCL Comnet services and Systems Ltd. reported in 305 ITR 409 is in favour of the assessee, we find that subsequently Section 115JA has been amended by Finance Act No. 2 of 2009 with retrospective effect from 01.04.1998 (AY: 1998-1999) including explanation (g) whereby any amount set aside towards provision for diminution of assets is to be added back in computing the Book profits u/s. 115JA. As held by the Apex Court in the case of CIT v. HCL Comnet services and Systems Ltd. reported in 305 ITR 409, any provisions made towards bad and doubtful debts is nothing but provisions made in diminution in value of assets and hence explanation (g) to sec. 115JA would be applicable to Provisions for bad and doubtful debts. Hence the provision for bad and doubtful debts are to be added back in computing the Book profits u/s. 115JA in view of Explanation (g) to Sec. 115JA introduced by Finance Act (No. 2) of 2009 with retrospective effect from 01.04.1998

34. In this view of the matter having regard to the amendment to Section 115JA by way of introduction of explanation (g), we uphold the claim of the revenue and set aside the order of the Ld. CIT(A) and restore the order of the Assessing officer holding that the provisions for bad and doubtful debts should not be deducted in computing book profit under Section 115JA. The appeal of the revenue on this issue is allowed.

35. The appeal by the revenue in I.T.A No. 2394.M/2007 for Asst. year: 1998-1999 is partly allowed.

ITA No. 1646.M/2006. Asst. Year: 1999-2000

36. The first ground in the revenue's appeal is against the Ld. CIT(A) deleting the addition of Rs. 1,32,78,051/- made by the A.O in computing Book Profits u/s. 115JA of the Act. During the course of reassessment proceedings the Assessing Officer observed that while computing the book profit u/s. 115JA the assessee had been allowed deduction of Rs. 113.62 crores u/s. 80IA in respect of infrastructure profits of Single Buoy Mooring (SBM) unit. However, according to the Assessing Officer, the actual infrastructure profit of the said unit was only Rs. 109.20 crores, because depreciation of Rs. 4.42 crores in respect of the same, not been claimed by the assessee, had to be granted to it. It was explained by the assessee before the Assessing Officer that since the deduction admissible u/s. 80IA worked out to Rs. 113.62 crores, the same had to be taken as it is, in terms of clause (vi) of section 115JA, for computing book profit under that provision. Accordingly, it was contended that the amount of Rs. 113.62 claimed as deduction u/s. 80IA while computing book profits was correct.

37. The Assessing Officer was not convinced and he held that profit of the SBM unit had to be reduced by the depreciation in respect of the same. Accordingly, depreciation of Rs. 4.42 crores was reduced from the profits of the SBM unit which resulted in corresponding increase in the book profit. The net addition to taxable profits on this account to income u/s. 115JA came to Rs. 1,32,78,051/-

38. Before the Ld. CIT(A) the assessee submitted that the depreciation cannot be thrust upon the assessee. In support of this proposition reliance has been placed on decision of the Hon'ble Mumbai Tribunal in the case of Plastiblends India Ltd. v. ITO (95 TTJ 1062) (Mum). In this case, Hon'ble ITAT following the decision of the Supreme Court in the case of Mahindra Mills (2000) 243 ITR 56 (SC) and various Tribunal decisions on the subject held that depreciation, if not claimed by the assessee, cannot be thrust upon it for computing deduction u/s. 80IA. In so holding, the Hon'ble Tribunal distinguished the decision of the Bombay High Court in the case of Indian Rayon Corporation Ltd. v. CIT 9 (2003) 182 CTR (Bom) 247.

39. Reliance is further placed by the appellant on another recent decision of Mumbai Tribunal in the case of Shree Rajasthan Texchem Ltd., dated 22.7.2005 reported at (2005) 97 TTJ (Mum) 91. In this case, also it was held that depreciation if not claimed by the assessee, cannot be thrust upon him for purposes of computing deduction u/s. 80IA.

40. The assessee further submitted that on the facts of the instant case depreciation on the SBM unit cannot even be claimed by the assessee. It is pointed out that the appellant company had entered into an agreement for construction of captive jetty with Gujarat Maritime Board (GMB) vide agreement dated 1.12.1996 GMB gave the appellant company license to construct Single Buoy Mooring (SBM) facility along with service Jetty. The SBM facility was constructed by the assessee company for the purpose of handling, storage and transportation of materials manufactured by the appellant company and also for use by the public. Since the SBM unit was to be handed over to GMB, the appellant company claimed the entire cost of the infrastructure unit as deduction while computing its total income for the relevant year. However, in the books of account the cost of the SBM unit was capitalized and depreciation at the applicable rate was debited in the books year after year. It is submitted that since the entire cost of the SBM had been claimed as revenue expenditure, no depreciation in respect of the same was claimed in any year in computing the total income as per the normal provisions of the Act. Accordingly, depreciation on the said unit was also not claimed while computing the profit u/s. 80IA eligible for deduction from the book profit in terms of clause (vi) of Explanation to sec. 115JA. On these facts, it is contended that since depreciation in respect of such SBM unit cannot even be claimed by the assessee, there can be no question of thrusting the same upon the assessee. For these reasons it is contended that the appellant company correctly computed the deduction admissible u/s. 80IA at Rs. 113.62 crores and the action of the Assessing Officer in reducing the depreciation of Rs. 4.42 crores from the admissible deduction u/s. 80IA is not correct.

41. The CIT(A) allowed the Assessee's claim holding as under:

“On consideration of the matter, I am inclined to agree with the appellant. The Mumbai Tribunal decisions cited by the appellant do support its case that depreciation, if not claimed, cannot be thrust upon the assessee for purposes of computing the deduction u/s. 80IA. However that may be, in the instant case depreciation on the SBM unit could not even have been claimed while computing either the gross total income or the profits and gains derived from the industrial undertaking eligible for deduction u/s. 80IA. Accordingly, the quantum of deduction u/s. 80IA to be reduced from the book profits would correctly be Rs. 113.62 crores. In this view of the mater, the addition of Rs. 132,78,051/- made by the Assessing Officer to income u/s. 115JA is directed to be deleted.”

42. Aggrieved the revenue is on appeal. The issue is regarding the relief to be granted under Explanation (vI) to sec. 115JA in respect of profits attributable to infrastructure facility as defined under Explanation to sec. 80IA(4). In the original assessment the relief under sec. 80IA in respect of the SBM unit was computed at Rs. 113.62 crores and the same was deducted under Explanation (vi) to sec. 115JA while computing the Book profits under that section. In the reopening, the AO has stated that the relief under sec. 80IA should be reduced by the depreciation of Rs. 4.42 Crores attributable to that undertaking but not claimed by the Assessee. But as found by the CIT(A), the Assessee could not have claimed depreciation on the assets used in the SBM, since the SBM unit was to be handed over to Gujarath Maritime Board, the assessee had claimed the entire cost of the infrastructure unit as deduction while computing its total income for the relevant year. However, in the books of account the cost of the SBM unit was capitalized and depreciation at the applicable rate was debited in the books year after year. In the circumstances there is no question of deducting depreciation of Rs. 4.42 Crores, while computing the relief u/s. 80 IA(4) or from the deduction to be made under Explanation (vI) to sec. 115JA. We uphold the order of the CIT(A) on this issue and dismiss the departmental appeal on this issue.

43. The next ground of the revenue is against the order of the CIT(A) holding that provision for doubtful debts and advance of Rs. 23,00,01,065/- should not be added back while computing the Book profits u/s. 115JA. Similar issue has been considered by us, in the revenue's appeals for A.Y 1997-1998 and 1998-1999 supra.

44. On this issue of exclusion of provision for bad and doubtful debts in computing Book profits, even though the decision of the Supreme Court in the case of CIT v. HCL Comnet services and Systems Ltd. reported in 305 ITR 409 is in favour of the assessee, we find that subsequently Section 115JA has been amended by Finance Act No. 2 of 2009 with retrospective effect from 01.04.1998 (AY: 1998-1999) including explanation (g) whereby any amount set aside towards provision for diminution of assets is to be added back in computing the Book profits u/s. 115JA. As held by the Apex Court in the case of CIT v. HCL Comnet services and Systems Ltd. reported in 305 ITR 409, any provisions made towards bad and doubtful debts is nothing but provisions made in diminution in value of assets and hence explanation (g) to sec. 115JA would be applicable to Provisions for bad and doubtful debts. Hence the provision for bad and doubtful debts are to be added back in computing the Book profits u/s. 115JA in view of Explanation (g) to Sec. 115JA introduced by Finance Act (No. 2) of 2009 with retrospective effect from 01.04.1998

45. In this view of the matter having regard to the amendment to Section 115JA by way of introduction of explanation (g), we uphold the claim of the revenue and set aside the order of the CIT(A) and restore the order of the assessing officer holding that the provisions for bad and doubtful debts should not be deducted in computing book profit under Section 115JA. The appeal of the revenue on this issue is allowed. The Appeal of the revenue in ITA No. 1646.M/06 for A.Y 1999-1900 is partly allowed.

46. In the result the appeals by the revenue in ITA No. 1645.M/06 for A.Y 1997-1998, ITA No. 2394.M/07 for the A.Y 1998-1999 and ITA No. 1646.M/06 for the A.Y 1999-2000 are all partly allowed.