In our opinion the Scheme of the Act does not authorize the Assessing Officer to make a disallowance according to his wishes, rather it provide that he should first point out the defects in the accounts of the assessee. In the finding extracted (Supra) it nowhere reveals what was the total amount of expenditure claimed by the assessee, which specific vouchers was not in accordance with law. In a just sweeping statement, the ld. AO observed that on verification, some of the expenses were found to be unverifiable, but what were those expenses, he should make out in the assessment order, only then he can disallow them. This is more important when in a row in the last 4-5 years, similar disallowances were made by him but deleted by the ld. CIT (A) as well as ITAT.
Undoubtedly, the RBI Guidelines are Guidelines for the banks, issued for FEMA purposes. Clause 2.3 (supra) of these Guidelines refers to Regulation 10B (2) of the Foreign Exchange Management (Approval or Issue of Security By a Person Resident Outside India) Regulations, 2000. The very opening paragraph of these Guidelines (APB-III) shows that they are addressed to ‘Authorised Dealer (AD) Banks’.
In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under secs. 80-HH and 80-I as well as investment allowance under sec. 32AB. The controversy arose whether conversion of jumbo rolls into small sizes amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I of the Income-tax Act, 1961/ Hon’ble Supreme Court has held that this activity amounts to manufacture or production.
Coming to the issue regarding ICC International, we find that assessee has demonstrated, as noted earlier, that it had earned super profits during the year because of increase in supply on account of government scheme. We find that TPO has considered the assessee’s objection regarding exclusion of high margin comparables in para 8.7 of his order and the DRP in para 7.1. They have merely, inter alia, observed that comparables cannot be rejected simply because they are loss or high profit making comparables. However, they have not considered that if certain extraordinary factors materially affected the profit in a particular year then that aspects had to be taken into consideration and due adjustment was required to be made to the net profit margin for brining the comparable on the same platform at which the assessee was performing its functions.
Section 2(14) defines ‘capital asset’ as property of any kind held by an assessee. The term ‘property’ encompasses in its ambit bundle of rights. This includes every conceivable species of valuable rights and interests. The right to dispose off a thing in every legal way, to possess it and to use and to exclude everyone from interfering with it, comes within the ambit of property. The exclusive right of possessing, enjoying and disposing off a thing comes within the term of ‘property’. The assessee had perpetual right of possession of suite and was entitled to transfer the same by virtue of seventh covenant noted above. Therefore, long term advance booking by virtue of which assessee got right to possession was ‘capital asset’ within the definition of section 2(14) and, therefore, on transfer of the same long term capital gain accrued to the assessee and assessee was, accordingly, entitled for indexation of cost of acquisition.
The sum paid was also not in the nature of compensation because there was no obligation on M/s Gillette Company USA, under any contract to compensate the assessee. Under these facts we do not find infirmity in the decision of the first appellate authority in treating the amount of Rs. 108.49 crores out of an aggregate addition of Rs. 118.49 crores made by the AO as capital receipt and hence not chargeable to tax. In this regard we also find support from the decisions relied upon by the Ld. AR in the cases of Smartalk (P) Ltd. (supra) and General Electrodes & Equipment Ltd. (Supra) wherein under almost identical circumstances addition made has been deleted.
In the books of account, assessee had made provision for doubtful debts for this amount. The matter is sub-judice before court or arbitration. This shows that the amount was not ascertained. It remained contingent at the relevant time. Moreover, it had been gone against assessee due to amendment in Act. The amendment made by inserting clause (i) in Explanation 1 to section 115JB by the Finance Act, 2009 with retrospective effect 1.4.2001, the amount set aside and provision for diminution in the value of an asset is to be added to arrive at the book profit under section 115JB of the Act. This empowers the Assessing Officer to add to income any amount debited in profit & loss account for provision of bad and doubtful debts.
We further note that in this case the loan agreement was for fixed rate of interest. The LIBOR has been accepted in decision referred above as the most suitable bench mark for judging Arms’ length price in case for foreign currency loan. Hence, adjustment as made by the TPO is not warranted.
Now we come to argument of the assessee that there is no change in the operating model or the business activity of the assessee company, hence, rule of consistency should be followed and hence no adjustment is warranted. In this regard we are of the opinion the res judicata is not applicable to taxation cases. Moreover, as held by Apex Court in Distributors (Baroda) (P.) Ltd. (supra) that to perpetuate an error is no heroism. To rectify is the compulsion of the judicial conscience.
Once in a particular trust, some default came to the notice of a trustee managing its affairs and the same trustee is also managing the affairs of other trust then, if the trustee of the second trust voluntarily comes forward before the department and discloses material facts, which have been duly accepted by the department, then it cannot be said that assessee’s conduct was not bona fide or voluntary. It can be said to be a case of concealment only when income comes to the notice of assessee but he still withholds the same from disclosing to the department.
