No addition can be made u/s 41(1)(a) for the interest liability converted into the share capital as there is no cessation of liability

Tamil Nadu State Transport Corporation (Kum Div I) Limited Vs JCIT (ITAT Chennai) – With regard to deemed profits and gains u/s 41(1)(a), it was argued that the accumulated interest payable to Government which was converted as share capital during the year was treated as deemed profit u/s 41(1)(a). In fact, it was interest accrued from 1995-96 to 31.10.2000. The ld. CIT(A) has confirmed this addition on the ground that it is a clear case of cessation of liability. But it was fairly conceded by both sides that this issue stands covered in favour of the assessee by the decision of this Bench in the case of Metropolitan Corporation (Chennai) Ltd in I.T.A.No. 2012/Mds/2006, order dated 16.11.2007 for assessment year 2001- 02.

In that case, under identical facts, the Tribunal has deleted the addition made by the Assessing Officer. While doing so, the Tribunal has relied on the G.O.No.18, Transport(Tl)Department, dated 7.3.2001 of Government of Tamil Nadu. Since the G.O is common to all the State Transport Undertakings and covers Kumbakonam Division- I also vide Sl. No. 14 of the said G.O. We have gone through the Tribunal order. The Tribunal has held that the assessee-company has discharged its interest liability and instead of making payment in cash it has issued share capital to the Government as per the G.O. in question. Hence, the provisions of section 41(1)(a) of the Act are not attracted at all. Therefore, the conversion of the payment in the share capital has to be treated as proper discharge of interest payments. This decision is applicable to the facts of this case mutatis mutandis. In view of the above decision, we are of the considered opinion that this issue stands allowed in favour of the assessees in all these appeals.

Whether there is no requirement to obtain permission from committee on disputes for pursuing litigation between PSUs and the Government –– Whether the assessee is entitled to carry forward and set off of brought forward business loss and unabsorbed depreciation u/s 72A in the scheme of an amalgamation though the assessee is not an industrial undertaking. – Assessee’s appeal partly allowed.

IN THE INCOME TAX APPELLATE TRIBUNAL

CHENNAI BENCH ‘B’ : CHENNAI

[BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND

SHRI HARI OM MARATHA, JUDICIAL MEMBER]

ORDER

PER BENCH

The above captioned miscellaneous petitions have been filed by the assessees for recalling of the common order of the Tribunal dated 15.12.2009, vide which the appeals of the petitioners were dismissed for want of permission of the Committee on Disputes(COD). The assessees were given liberty to get the order recalled once it obtains the requisite COD permission.

2. It has been pleaded that in view of the decision of Hon’ble Supreme Court rendered recently in the case of Electronics Corporation of India Ltd vs Union of India, 2011-TIOL-18-SC-CX-CB, judgment dated 17.2.2011, in Civil Appeal Nos.1883 of 2011 and 1903 of 2008, SLP© No.2538 of 2009, it has been categorically held that for pursuing litigation between PSUs and the Government, there is no longer a need to obtain permission of COD. The reason for arriving at the above conclusion has been stated to be that although the object in getting COD permission is laudatory but the mechanism involved in the process leads to delays in litigation and as such, the mechanism has outlived its utility. A copy of the above mentioned judgement has been placed for our perusal. Although we are aware of this decision, yet we have treaded once again through it. It has been observed by their Lordships that in the changed scenario the existing directions to obtain COD permission has outlived so it is being recalled and hereinafter, there is no need for such permission of COD to pursue litigation between PSUs and Government. Since the judgement of Apex Court becomes the law of the land in view of Article 141 of the Constitution of India, it would be deemed that on the date of judgement passed on 15.12.2009 by this Bench there was no need for permission of the COD to pursue the dispute by the petitioner against the Income-tax Department of Government of India. Therefore, in that view of the matter, we recall the Tribunal order dated 15.12.2009 passed in these cases.

5. After considering the suggestions and objections the Central Government in exercise of the powers conferred by Sub-section (1) & (2) of the sec. 396 of the Companies Act, 1956 passed an order S.O. 1477(E) dated 30.12.2003, approving the amalgamation of the said three companies namely TNSTC Div-TI, Div-ITT and Div-TV into TNSTC Kumbakonam Div-T.

6. For assessment year 2000-01, all the above four Divisions are in appeal. As almost common issues are involved in these appeals. We narrate the facts as obtaining in the case of TNSTC(Kumbakonam Division TTT) Ltd. [Karaikudi]. For the assessment year 2001-02, assessment order was passed on 24.12.2008. The Assessing Officer has added the following amounts:

a) Deemed profits and gains u/s 41(1)(a)

b) Additions towards pension and provident fun

c) Addition towards insurance fund

d) Gratuity.

7. Against these additions, the assessee preferred appeal and the ld. CTT(A), Trichy, vide order dated 20. 10.2009, disposed of the appeal by confirming all the additions except the amount towards insurance fund which he directed to be allowed after verification on actual payment basis. Being aggrieved, the assessee is in appeal before us.

8. With regard to deemed profits and gains u/s 41(1)(a), it was argued that the accumulated interest payable to Government which was converted as share capital during the year was treated as deemed profit u/s 41(1)(a). In fact, it was interest accrued from 1995-96 to 31.10.2000. The ld. CIT(A) has confirmed this addition on the ground that it is a clear case of cessation of liability. But it was fairly conceded by both sides that this issue stands covered in favour of the assessee by the decision of this Bench in the case of Metropolitan Corporation (Chennai) Ltd in I.T.A.No. 2012/Mds/2006, order dated 16.11.2007 for assessment year 2001-02. In that case, under identical facts, the Tribunal has deleted the addition made by the Assessing Officer. While doing so, the Tribunal has relied on the G.O.No.18, Transport(Tl)Department, dated 7.3.2001 of Government of Tamil Nadu. Since the G.O is common to all the State Transport Undertakings and covers Kumbakonam Division —I also vide Sl. No. 14 of the said G.O.

9. We have gone through the Tribunal order. The Tribunal has held that the assessee-company has discharged its interest liability and instead of making payment in cash it has issued share capital to the Government as per the G.O. in question. Hence, the provisions of section 41(1)(a) of the Act are not attracted at all. Therefore, the conversion of the payment in the share capital has to be treated as proper discharge of interest payments. This decision is applicable to the facts of this case mutatis mutandis. In view of the above decision, we are of the considered opinion that this issue stands allowed in favour of the assessees in all these appeals.

12. Both the parties heard and it was found that when an accident occurs during a financial year, as per the provisions of the Motor Vehicles Act, No fault liability for each fatal and for each injury become payable by the owner of the vehicle. The owner of the vehicle in this case being the assessee, on whom such a duty is cast by the Motor Vehicles Act. In such cases, the Act says that even if there is no fault of the owner or in other words, whether the fault is on the part of the owner/victim and whether the vehicle is own by the public/private transport, such minimum amounts being 50,000/- in the case of death and 25,000/- in case of injury have to be paid. The assessee has booked these amounts based on the number of accidents occurred during the relevant financial year(s). The Corporation is exempted from insuring the vehicles against the third party liability with the Insurance Companies as per the G.O. But in case higher claim is made by the victim for payment as per the court order, the same is booked under the head ‘Accident Compensation’ against third party claims. In that case, no fault liability amount shall also be included in that based on the judicial pronouncements of the appropriate judicial authorities and as accepted by the assessee. This issue is also covered in favour of the assessee by the decision of the Tribunal rendered in the case of Cholan Roadways Corporation Ltd for assessment years 1994-95 and 1995-96 in I.T.A.No. 158 and 159/Mds/1999 dated 14.2.2005. Subsequently, the Assessing Officer has been allowing this claim in favour of the assessee. From different angles it was found that in fact this payment is not made to an employee by an employer and therefore, the provisions of section 40A(9) of the Act are not attracted. Hence, we find that this provision would not apply in such cases. It does not mean that the assessee is not entitled to such a claim. On the other hand, the issue stands covered by the aforementioned Tribunal order in favour of the assessee. Accordingly, we decide this issue in favour of the assessee(s) as per our above observation.

15. In all these appeals, almost common issues are involved. We choose to decide the issue in favour of the assessee(s) in view of our above observations. The amounts added under different heads definitely be different in these cases, but we do not feel necessary to mention the exact amounts. These are verily given in the assessment order(s) of each case. Consequently, we allow all these grounds taken in all the appeals in favour of the assessee.

I.T.A.No. 1722/Mds/2009 – A.Y 2003-04

21. For assessment year 2003-04, the assessee has filed return ofincome on 27.3.2006 declaring a total income of 26,85,29,558/-.This total income was comprised of four divisions viz. TNSTC, Div‑I(Ku mbakonam), Div-II(Trichy), Div- III (Karaikudi) and Div- ­IV (Pudukottai). It was observed that the above mentioned four divisions got merged by an amalgamation recognised by Ministry of Finance, Government of India, as stated in the earlier part of this order. The original return in the name of TNSTC(Kum.Div-I) Ltd., wasfiled on 20.11.2003 as effect for amalgamation was not given in the original return, the assessee has filed revised return of income on 27.3.2006 declaring net income of 26,85,29,558/- comprising of the four units.  However, the assessee-company has set off of un absorbed business loss and unabsorbed depreciation brought forward from earlier years against income declared 26,85,29,558/- thereby net income was shown at NIL. Besides this, the assessee had also claimed carry forward for set off against future year profits business loss and  unabsorbed depreciation amounting to ~40,72,49,036/- and 1,44,59,30,027/- respectively. Since the assessee has filed return of income belatedly on 27.3.2006, the return was lodged. Moreover, the assessee had made a claim of adjustment of earlier year business loss and un absorbed depreciation losses u/s 72A of the Act on account of amalgamation. The Assessing Officer observed that since the assessee is not an industrial company, no adjustment of earlier years losses can be adjusted as per section 72A. On account of these reasons, the Assessing Officer was of the view that there was escapement of income. He, therefore, issued notice u/s 148 on 28.12.2007 calling for assessee’s revised return in response to which the assessee, vide letter dated 23.1.2008 stated that the return of income filed on 27.3.2006 be treated as return filed in response to notice u/s 148. After considering the submissions of the assessee, the Assessing Officer has completed the assessment on protective basis since the substantive assessment was done in the case of M/s TNSTC (Kumbakonam Div.I) Ltd for assessment year 2003-04 by denying brought forward business losses/ unabsorbed depreciation.

I.T.A. No. 1724/Mds/2009 – A.Y 2004-05

33. The first issue regarding reopening of assessment was not seriously contested, hence, the same stands dismissed.

33. The next issue relates to prior period expenses. In view of our finding in assessment year 2003-04, the issue is restored to the file of the Assessing Officer for verification as directed in assessment year 2003-04.

35. The next issues relate to Gratuity amount of 4,65,16,458/- paid to an approved Gratuity Fund and 15,13,52,550/- to Insurance Fund. These issues stand covered in favour of the assessee in view of our order for assessment year 2001- 02.

36.  In the result, the appeal is partly allowed and partly allowed for statistical purposes.

I.T.A. No. 1725/Mds/2009 A.Y 2005-06

I.T.A. No. 1726/Mds/2009 – A.Y 2005-06

I.T.A. No. 1727/Mds/2009 – A.Y 2006-07

49. In the result, the appeal is allowed.