Case Law Details
Dakshin Gujarat Vij. Co. Ltd. Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that an appellate authority can exercise the power u/s. 251(1)(a) to enhance the assessment only after giving a notice for enhancement. Accordingly, enhancement by CIT(A) without issuance of notice is untenable in law.
Facts- The assessee company is an undertaking of Government of Gujarat, came into existence on reorganization of erstwhile Gujarat Electricity Board (GEB). The assessee company is engaged in the activity of distribution of power.
AO noted that the assessee purchased certain fixed assets on 31st March 2006 for the amount aggregating to Rs. 229,49,35,998/- and claimed that the same has been “put to use” on 31st March 2006 only. AO held that the assessee failed to justify the assets purchased on 31st March 2006 were actually put to use on 31st March 2006 only. Thus, the AO disallowed the claim of depreciation on such assets for the year under consideration on reasoning that the assets were not put to use in the year under consideration.
Further, assessee also contested that CIT(A) erred in enhancing the assessed income by making disallowances of deferred revenue expenses of Rs. 41,16,442/-.
Conclusion- Held that the controversy before us relates to whether the assessee has put to use the machinery before the end of the relevant financial year i.e. 31-3-2006, the year under consideration. To adjudicate the issue on hand, the assessee has to provide the details as directed by the ld. CIT-A discussed above. As such, we do not find any infirmity in the direction of the ld. CIT-A. Hence this ground of appeal of the assessee is dismissed.
Held that in the case on hand, the disallowance made by CIT(A) was not part of the assessment order or appeal meaning thereby that CIT(A) have made disallowances or assessed new income not forming part of assessment order or appeal. Thus, CIT(A) before exercising the power under section 251(1)(a) to enhance the assessment was required to provide reasonable opportunity to show cause against such enhancement, but no such opportunity has been provided. Thus, the appellate authority cannot enhance the assessment without issuing show cause notice.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Assessee against the order of the learned Commissioner of Income-tax (Appeals)-I, Baroda [hereinafter referred to as “CIT(A)”] dated 30.11.2010, arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relevant to the Assessment Year 2006-07.
2. The assessee has raised following grounds of appeal:-
“1.0 The learned Commissioner of Income Tax (Appeals) erred in law and facts has set aside the issue relating to allowance of depreciation on Fixed Assets purchased and put to use for more than 180 days without considering the fact that the appellant had submitted all the details about the dates of commissioning of the assets in support of its claim of depreciation.
2.0 The learned Commissioner of Income Tax (Appeals) erred in law and facts has enhanced the additions made on account of Capital Grants & Subsidies and Consumers’ Contribution to Rs. 6.66 crores as against the additions of Rs. 6.31 crores made by the Assessing Officer thereby resulting into an enhancement of assessment by Rs.0.35 crores.
The learned Commissioner of Income Tax (Appeals) erred in law and on facts has also rejected the appellant’s alternative plea that the WDV of the assets may allowed to be increased on withdrawal of such subsidies/grants in subsequent years.
3.0 The learned Commissioner of Income Tax (Appeals) Officer erred in law and on facts has enhanced the assessment completed under section 143(3) of the IT Act by disallowing the deferred revenue expenditure amounting to Rs.41,16,442/- written off during the year without considering the facts in right spirit.
4.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the disallowance of unpaid service tax amounting to Rs.13.56,000/-without considering the fact the provisions of section 43B of the IT Act are not applicable to the same.
5.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the disallowance of deduction of deferred tax asset amounting to Rs.4,08,56,524/- while computing the book profits under section 1151B of the Income Tax Act, 1961 without understanding the facts in right spirit.
6.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 for the alleged concealment and/or furnishing of inaccurate particulars of income.
7.0 The learned Commissioner of Income Tax (Appeals) has erred in law and facts in confirming the charging of interest under section 234B, 234C and 234D of the Income Tax Act, 1961 on tax liability computed under section 1151B of the Income Tax Act, 1961.”
3. The first issue raised by the assessee is that the learned CIT(A) erred in setting aside the issue of disallowance of Depreciation on assets purchased and put to use for more than 180 days.
4. The facts in brief are that that the assessee company is an undertaking of Government of Gujarat, came into existence on reorganization of erstwhile Gujarat Electricity Board (GEB). The assessee company is engaged in the activity of distribution of power.
5. The AO from depreciation chart reported in the audit report found that the assessee purchased certain fixed assets on 31st March 2006 for the amount aggregating to Rs. 229,49,35,998/- and claimed that the same has been “put to use” on 31st March 2006 only. On question by the AO, the assessee claimed fixed assets were transferred from erstwhile “GEB” and effective date of transfer was of 1st April 2005. However, the AO found the explanation of the assessee misleading for the reason that the assets transferred form GEB were of Rs. 106.37 crores and the same were part of opening WDV. The AO accordingly held that the assessee failed to justify the assets purchased on 31st March 2006 were actually put to use on 31st March 2006 only. Thus, the AO disallowed the claim of depreciation on such assets for the year under consideration on reasoning that the assets were not put to use in the year under consideration.
6. The aggrieved assessee preferred an appeal before the learned CIT(A) and contended that during the year under consideration, more than 1000 assets were added on different dates. However, for the purpose of presentation, the assets which were commissioned and put to use for more than 180 were entered as on 30th September 2005 in the assets register. Similarly, the assets commissioned and put to use for less than 180 days were entered on 31st March 2006. Therefore, the disallowances made by the AO need to be deleted.
7. The learned CIT(A) after considering the contention of the assessee requested the assessee to provide all necessary details regarding the commissioning of the assets on different dates before the AO to compute the correct depreciation. As such the ld. CIT-A set aside the issue to the AO with clear direction.
8. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
9. The learned AR before us filed a paper book running from pages 1 to 33 but could not point out any fault in the direction given by the learned CIT-A. As such the learned AR submitted before us that the similar direction as given by the ld. CIT-A, should be provided to the AO.
10. On the other hand, the learned DR vehemently supported the order of the authorities below.
11. We have heard the rival contentions of both the parties and perused the materials available on record. The controversy before us relates to whether the assessee has put to use the machinery before the end of the relevant financial year i.e. 31-3-2006, the year under consideration. To adjudicate the issue on hand, the assessee has to provide the details as directed by the ld. CIT-A discussed above. As such, we do not find any infirmity in the direction of the ld. CIT-A. Hence this ground of appeal of the assessee is dismissed.
12. The next issue raised by the assessee vide ground no. 2 of its appeal is that the learned CIT(A) erred in confirming the action of the AO for recognizing income on government grant & subsidy @ 15% instead of @ 10 % as offered by it.
13. The necessary facts are that assessee, for infrastructural development in the field of electricity distribution for certain underdeveloped area and class of consumers, received certain financial assistance from Government of Gujarat in the form of subsidies/ grants towards cost of capital assets. In addition to subsidies and grants, the assessee as per the rules framed by the Gujarat Electricity Regulatory Commission, recovered certain amounts from new consumers towards development of infrastructure of electrical line and cable network systems to provide the electricity at the consumers doorstep while releasing the connection to such customers. The assessee capitalized all these receipts and at the end of the year recognized an income @ 10% of the closing value of such subsidies, grants, and recoveries from the customers. Accordingly, the assessee for the year under consideration offered income of Rs. 12,62,04,714/- only.
14. The AO found that the Government Grants and recoveries from consumer were made towards capital assets and with respect to majority of capital assets, the assessee is claiming depreciation at the rate of 15% per annum. Therefore, according to the AO, the income should have been recognized @ 15% instead of 10% of the amount of consumer contribution and government grant as discussed above. The provision of section 43(1) of the Act also provides that the cost of capital assets should be reduced by the amount of subsidies or grants. Hence, the AO worked the amount of income on closing value of grants & consumer contribution @ 15% and accordingly made addition of Rs. 6,31,02,357/- being an additional amount of 5% of the amount discussed above.
15. On appeal by the assessee, the learned CIT(A) confirmed the order of the AO and further enhanced the addition made the AO by observing as under:
“6.4 In response to the enhancement notice it is submitted that the company had received consumer contribution and capital grants amounting to Rs. 1285341794/-and that these contributions and grants were received from State and Central Government towards various schemes of electrification such as Jyoti Gram Yojana Electrification of wells and pumps in tribal areas Kutir Jyoti, SC Basties, electrification of hutments etc. and that these are towards cost of capital assets. It is further submitted that the appellant followed AS-12 relating to accounting for government grants and that part of the grant has been treated as deferred income spread over the useful life of the assets and 10% of the year end balances are transferred to P & L a/c. It is further emphasized that the grants are in the nature of financing arrangement and that non-tribal grants under Jyoti Gram Yojana sanctioned during F.Y. 2005-06 and 2006-07 were withdrawn and was converted to equity in F.Y. 2008-09. It is thus suggested that if the capital grant is to be reduced from cost of the assets then, in subsequent year on withdrawal of subsidies the WDV should be enhanced for depreciation purposes.
6.5 After considering the submissions and also on examination of Income-tax provisions in my humble opinion, the appellant seems to have relied mainly on the accounting treatment of certain receipts instead of the treatment of such receipts under the Income-tax Act. It is trite law as held by Hon’ble Apex Court in the case of Sutlej Cotton Mills Vs. CIT (116 ITR 01) SC that it is well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to be the assessee.
6.6 The appellant is in the business of transmission of electricity in specified areas of Gujarat and towards this end it incurs expenditure on fixed assets such as transformers, cables, meters, switches etc. and it has been admitted that no part of the grant / consumer contribution is utilized towards operational activities of the company. Therefore, in view of the clear provisions of the section 43, Explanation 10, grant / consumer contribution ought to have been reduced from the capital assets. By not doing so, the appellant has claimed extra depreciation of Rs. 19.28 crores (.15 X 128.534 crores) and since Rs. 12.62 crore of the grant is written back, the addition is sustained to the extent of Rs. 6.66 crores as against Rs. 6.31 crores proposed by the AO. Thus, the income is enhanced by Rs. 0.35 crores.
6.7 It is also noticed that appellant had written off and treated Rs.41,16,442/- as deferred revenue expenditure and in the computation of income such write off was not added back. There is no concept of deferment of revenue expenditure under the Income-tax Act and furthermore, it is not shown as to how the said expenditures / losses crystallized during the year and as to how these are allowable in the current year. When confronted with these facts, the Ld. AR had no explanation. In view thereof, the income is further enhanced by Rs. 41,16,442/-.”
16. The learned CIT(A) also rejected the alternate plea of the assessee that in case grant/subsidy withdrawn then the WDV of the capital should be increased by observing as under:
“6.8 As regard the alternate plea that the WDV be increased on withdrawal of subsidy in the later years, in my opinion such view is not tenable. All the subsidies have been received after incurring the expenditure and is credited to the books on 31.03.2006. Admittedly the capital subsidy is to be reduced from cost of assets u/s 43 and therefore, on reduction of subsidies from cost of fixed assets there is no amount left in the capital reserve which could be converted into equity or loan. The issue of conversion of grant into equity subsequently is a accounting jugglery and has no relevance for income-tax purposes. Under the Income-tax Act, the amount actually incurred towards fixed assets on receipt of the government grant or in anticipation of the grant would require adjustment out of the cost of fixed assets for depreciation purposes. The alternate plea is thus, rejected. Ground no.3 is dismissed.”
17. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.
18. The learned AR before us submitted that the ITAT in the own case of the assessee has set aside the issue to the file of the AO for fresh adjudication. Accordingly, the learned AR prayed before us for similar direction for the year in dispute.
19. On the other hand, the learned DR before us vehemently supported the order of the authorities below.
20. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the issue on the dispute regarding the recognition of income on account of government grants and customer contribution in the case of present assessee was also there in the AY 2010-11 which has been adjudicated by the ITAT in ITA No. 2858/Ahd/2015 vide order dated 22.07.2022 wherein the issue has been restored back to the A.O. to adjudicate afresh after verifying amount of grants to be apportioned relating to different assets and calculate the amount of depreciation allowances accordingly. The relevant finding of the coordinate bench reads asunder:
“15. We have heard the rival submissions made by the respective parties, and we have also perused the relevant materials available on record.
16. We find that on the identical issue as submitted by the Ld. A.R. in ITA No. 652/Ahd/2013 for A.Y. 2009-10 the Coordinate Bench has been pleased to set-aside the issue to the file of the Ld. AO for adjudication afresh for verifying the proportionate amount of grant relevant to different asset. The relevant observation of the Coordinate Bench is as follows:
“13. The Learned AO finalized the issue by making an addition of Rs.24,17,88,400/- which was, in turn, confirmed by the Learned CIT(A) and added to the total income of the assessee. While confirming the addition, the Learned CIT(A) observed as follows:
“6.3 I have considered the submissions. It has been accepted by the appellant that the grants were for capital purpose and for capital projects specified by the Government. In Schedule-3 of the printed balance sheet as on 31.3.2009, it is clearly mentioned that grants were towards cost of capital assets. Appellant’s contention that the grants were not actually for meeting cost of assets is therefore not at all tenable. After insertion of Explanation 10 below section 43(1) by the Finance (No.2) Act, 1998 w.e.f. 1.4.1999, decisions relied upon by the appellant in the case of P. 3. Chemicals etc. are no longer applicable and cost of assets met directly or indirectly by the Central Government or State Government in the form of subsidy or grant or reimbursement (by whatever name called) is not to be included in the “actual cost of asset” to the assessee. Accordingly, depreciation is to be allowed only after making necessary adjustment in “written down value”/”actual cost” of block of assets in accordance with Explanation 10 below section 43(1). In the case of Dakshin Gujarat Vij Co. Ltd. for A.Y.2006-07 referred to by the Assessing Officer, CIT(A) distinguished the treatment to be meted out to revenue grants and capital grants and held that revenue grants are to be taxed in entirety in the year of receipt and capital grant towards assets are to be reduced from “actual cost” of assets as per Explanation 10 below section 43(1). In the case of Dakshin Gujarat Vij Co. Ltd., after noting that grants were only towards cost of capital assets, CIT(A) had held that such grants ought to have been reduced from the cost of capital assets and by not doing so, extra depreciation @ 15% of grants had been claimed. Since 10% of the grants had already been offered as income by the assessee, in the decision in the case of Dakshin Gujarat Vij Co. Ltd., CIT(A) had directed addition to be made after reducing income already offered from 15% of the grants. The AO has made addition in the present case as per this appellate order. Hence following the same, the addition made by the AO is upheld and this ground of appeal is dismissed.”
However, at the vary onset of the proceeding, the Learned AR has taken us to the order passed by the Co-ordinate Bench in ITA No.704/Ahd/2012 for A.Y. 2008-09 in assessee’s own case where we find that the issue has been set aside to the file of the Learned AO for adjudication afresh after verifying proportionate amount of grant relating to different asset. The Learned AR prayed for similar relief. The argument advanced by the Learned AR has been failed to be contradicted by the Learned DR. We find following observation was made by the Hon’ble Co-ordinate Bench while granting relief to the assessee:
“15. The ground no.3 of the appeal of the assessee is directed against the order of the CIT(A) in confirming the action of the AO in transferring 15% of the capital grants as income although the disallowance made under this head has been restricted to Rs.18,93,11,850/- as against the disallowance of Rs.30,97,61,800/- made by the AO.
16. The brief facts of the case are that on verification of subsidies and grants, the AO observed that the assessee has shown deferred government grants, subsidies, contribution at Rs.7305.70 lakhs as on 1.4.2007 and the assessee had shown Rs.15941.67 lakhs at the end of the year i.e. as on 31.3.2008. On show cause by the AO to explain the treatment in accounts of the subsidy, grants the assessee stated that during the year capital grant received from Government of Gujarat and other. The assessee submitted that in order to improve various functions associated with the generation, transmission and distribution of electricity, and also because the PSIts connected with power section were making consistent losses, the Government decided to introduce reforms in the direction of State PSIts. Accordingly, under the provision of Gujarat Electricity Industrial (Reorgnisation & Regulation) Act, 2000, the erstwhile GEB was split into seven companies, for the purpose of financial restructuring plan, and the approval was accorded to provide some financial/capital support to GUVNL. The grant was given in terms of the power reforms for the overall development of the power sector. Such grant was not granted to actually meet the cost of assets. Further, the grant was given to the holding company, GUVNL and then it was allocated to the assessee company, one of the subsidiary companies. The assessee was not entitled to an amount beyond a certain limit, even if it is spent large amount on purchase of fixed assets. Further, the grant was not with reference to any particular fixed assets. It was further submitted that the resolution sanctioning the grant no where indicated that the grant was meant to offset the cost of the capital assets purchased by the company. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT Vs. P.J. Chemicals Ltd., 121 CTR 201, wherein the decision of the Gujarat High Court in the case of CIT Grace Paper Industries P. Ltd., 83 CTR 1, which was affirmed by the Hon’ble Supreme Court by observing that the amount of subsidies and grants received by the assessee cannot be reduced from the cost of assets. It was further submitted that the subsidy received under scheme cannot be reduced from the actual cost of the assets by applying the provisions of section 43(1) of the Income Tax Act. The AO did not accept the submission of the assessee and held that the submission of the assessee that the grant was not capital in nature, is factually incorrect, and from the resolution, it was clear that the grant received from the State Government was in the nature of capital grant and it should have been reduced from the capital assets. The decisions quoted by the assessee are not applicable after insertion of Explanation 10 of section 43(1) of the Act, as they pertained to earlier years prior to insertion of Explanation 10 of section 43(1) of the Act. After insertion of Explanation 10 of section 43(1) of the Act, the position of law was very clear. Since the assessee failed to reduce the capital grant against the cost of capital assets, and claimed excess depreciation, which was disallowed and worked out at 15% of the capital assets.
17. On appeal, the CIT(A) held that in assessee’s case, 10% of grant under three heads namely “Subsidy towards cost of capital assets”, “Grants towards cost of capital assets” and “Consumer contribution for capital assets” i.e. the grants appearing in Schedule -3 of the balance sheet as on 31.3.2008 were offered for tax. The amount of grant on which 10% was calculated was on the opening balance of grants of Rs.73,05,70,492/-, and the grants received during the year was Rs.103,56,34,226/-, aggregating to Rs.176,62,04,718/-. As these grants were towards cost of capital assets, 15% of the same should have been reduced from the depreciation claimed on account of making adjustment in the ‘actual cost’ of assts as per Explanation 10 below section 43(1). Since the assessee has already offered for tax, 10% of the opening balance of grants plus grants received during the year under these three heads of Schedule-3 grants, such amount offered for tax was to be reduced from the excess depreciation to be disallowed at the rate of 15% of Rs.176,62,04,718/- i.e. Rs.26,49,30,708/-. The net disallowance on this count worked out Rs.26,49,30,708/- minus Rs.17,20,37,655/-, the amount already offered for taxation i.e. Rs.9,28,93,053/-. Since no portion of grant of Rs.6427.94 lakhs being capital grant for capital support appearing in Schedule-2 of the balance sheet as on 31.3.2008 was offered as income nor it was reduced from the cost of assets, 15% of the same i.e. Rs.964.191 lakh needed to be disallowed as excess depreciation claimed in respect of the same. The total disallowance towards excess depreciation, therefore, worked out to Rs.9.289 crores plus Rs.9.641 crores i.e. Rs.18.93 crores. Thus, instead of net addition of Rs.30,97,61,800/- made by the AO, addition of Rs.18.93 crore was directed to be made on this count.
18. Before us, the AR of the assessee argued that uniform rate of 15% cannot be applied for making disallowance. He submitted that the grant should be apportioned according to the value of the asset given in the balance sheet. He argued that the rate of depreciation on land was zero percent, building was 5% and the plant & machinery was 15%, and hence, the disallowance at the uniform rate at 15% is not justified.
19. On the other hand, the DR argued and submitted that the order of the CIT(A) was correct, and he after appreciating the entire facts had reduced the disallowance from Rs.30.97 crores to Rs.18.93 crores.
20. We find that in the instant case, the CIT(A) held that excess depreciation claimed on account of capital grant comes to Rs.18.93 crores being 15% of Rs.176,62,04,718/-, i.e. Rs.26,49,30,708/- minus Rs.17,20,37,655/-, which amounts to Rs.9,28,93,053/-, and 15% of Rs.6427.94 lakhs amounting to Rs.964.191 lakh. The submissions of the assessee before us is that the uniform rate of 15% adopted by the CIT(A) is not justified. As per provisions of section 43(1) of the Act, the capital grant should be reduced from the cost/WDV of the relevant asset, and thereafter the depreciation is to be calculated. Thus, the capital grant receipt in respect of asset, on which depreciation is allowable at the rate different from 15% should be worked out as per the applicable rate. The DR could not point out any mistake in the above submission of the assessee, which we find is in accordance with law. We, therefore, set aside the orders of the lower authorities on this issue, and restore the matter back to the file of the AO for adjudication afresh after verifying the proportionate amount of grant relating to different asset, and applying the actual rate of depreciation which relate to these assets. Thus, this ground of appeal of the assessee is allowed for statistical purpose.
Hence, in the absence of any changed circumstances as it appears from the records, we find no other alternative but to remit the issue to the file of the Learned AO for readjudication of the same and to pass order upon verification of the proportionate amount of grant relating to different assets and upon applying the actual date of depreciation relates to those assets. Hence, this ground of appeal preferred by the assessee is allowed for statistical purposes.”
Relying upon the observation and the decision taken by the Coordinate Bench we find it fit and proper to remand the issue to the file of the Ld. AO for re-adjudication of the same and to pass orders upon verification of the proportionate amount of grant relating to different assets and to pass orders accordingly. This ground of appeal preferred by the assessee is allowed for statistical purposes.”
21. Therefore, following the view taken by the ITAT in own case of the assessee, we hereby restore the issue to file of the AO for fresh adjudication in accordance with the direction of the ITAT in the above-mentioned order and as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
22. The next issue raised by the assessee vide ground No. 3 of its appeal is that the learned CIT(A) erred in enhancing the assessed income by making disallowances of deferred revenue expenses of Rs. 41,16,442/-
23. During the appellate proceeding the learned CIT(A) disallowed deferred revenue expenditure of Rs. 41,16,442/- by observing as under:-
“6.7 It is also noticed that appellant had written off and treated Rs.41,16,442/- as deferred revenue expenditure and in the computation of income such write off was not added back. There is no concept of deferment of revenue expenditure under the Income-tax Act and furthermore, it is not shown as to how the said expenditures / losses crystallized during the year and as to how these are allowable in the current year. When confronted with these facts, the Ld. AR had no explanation. In view thereof, the income is further enhanced by Rs. 41,16,442/-.”
24. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
25. The learned AR before us contended that the learned CIT-A enhanced the income of the assessee without giving the opportunity and therefore the same is not sustainable.
26. On the other hand, the learned DR vehemently supported the order of the authorities below.
27. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the learned CIT(A) during the appellate proceeding made new disallowance being disallowances of deferred revenue expenses which was not part of the assessment order. The provision of clause (a) to subsection 1 of section 251 of the Act empowers the ld. commissioner appeal while disposing of appeal against the assessment order, he may confirm, reduce, enhance, or annul the assessment order. However, the provision of subsection 2 to section 251 of the Act provides that the ld. commissioner appeal shall not enhance an assessment unless appellant has been provided with the reasonable opportunity of being heard against such enhancement.
28. In the case on hand, the disallowance made by the learned CIT(A) was not part of the assessment order or appeal meaning thereby that the learned CIT(A) have made disallowances or assessed new income not forming part of assessment order or appeal. Thus, the learned CIT(A) before exercising the power under section 251(1)(a) to enhance the assessment was required to provide reasonable opportunity to show cause against such enhancement, but no such opportunity has been provided. The learned DR also did not bring any material on record suggesting that the assessee was awarded the opportunity of being heard before the enhancement of income by the learned CIT(A). As such, the appellate authority cannot enhance the assessment without issuing show cause notice. In holding so, we also draw support and guidance from the judgment of Hon’ble Gujarat High court in the case of Saheli Synthetics (P.) Ltd vs. CIT reported 302 ITR 126. The relevant observation of Hon’ble High court reads as under:
“Even in case where an appellate authority wants to exercise powers of enhancement under subsection (2) of section 251 such powers have to be exercised after giving a notice for enhancement providing for a reasonable opportunity of showing cause and not in absence of such a notice. This provision itself gives an indication that even if the appellate authority wants to process a new source of income which forms part of either return of income or the order of assessment, but was not in challenge in appeal before the appellate authority, the appellate authority has to give a reasonable opportunity of hearing before processing such a source of income and enhancing the assessment.”
29. In view of the above discussion and respectfully following the finding of the Hon’ble jurisdictional High Court in the above-mentioned case, we hereby set aside the finding of the learned CIT(A). Hence the ground of appeal of the assessee is hereby allowed.
30. The next issue raised by the assessee vide ground No. 4 of its appeal is that the learned CIT(A) erred in confirming the disallowances of unpaid service tax under section 43B of the Act.
31. The necessary facts are that the assessee during the assessment proceeding submitted that it inadvertently disallowed the unpaid amount of service tax for Rs. 13,56,000/- in the computation of income, however the provision of section 43B of the Act is not applicable on the same.
32. The AO found that any sum payable by the assessee by way of tax, duty, cess or fee under any law shall be allowable in the year in which such sum was actually paid. The service tax was not paid by the assessee. Therefore, the amount was rightly disallowed in the computation of income.
33. On appeal by the assessee, the learned CIT(A) confirmed the finding of the AO by observing as under:
“8.3 I have carefully considered the facts of the case, the submissions of the appellant and the assessment order. Under the service tax provisions the onus of collecting the service tax from the service recipient and payment to the Govt. Account rests with the service provider. In that sense, the service tax is akin to excise duty both in terms of it accounting treatment and the overall responsibility for its deposition in the Govt. Account. In the present case, the appellant had collected the service tax but had not deposited Rs.13,56,000/- in Govt. account before filing the return. But it had claimed the said amount in the P & L Account. Looking at the nature and the accounting treatment of the service tax, section 438 is clearly applicable and the action of AO in disallowing the claim is well founded. The decision in the case of Nobel & Hewit cited by the appellant is distinguishable as in that case there was no debit to the P & L Account of the unpaid duty whereas in the instant case the appellant had claimed the said amount. In the case of ACIT Vs. Real Image Media in my respectful submission, the provisions of Service tax were not properly presented before Hon’ble ITAT. At Para 16 of the said order, it is mentioned by Hon’ble ITAT that there is no liability to make payment to Central Govt. if the payment is not received from the recipient of service and thus in terms of Section 43B no sum of service tax was payable. In fact, under the service tax Act if no service tax is collected the service provider is liable to deposit the service tax treating the receipts as inclusive of the service tax and thus the sum is payable and covered u/s 43B. In view of above, Ground No. 5 is dismissed.”
34. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
35. The learned AR before us prayed to give the direction to the revenue to provide the benefit of deduction for the disallowance of service tax liability in the year in which it is paid.
36. On the other hand, the learned DR before us vehemently supported the order of the authorities below.
37. We have heard the rival contentions of both the parties and perused the materials available on record. The issue on hand has a direct bearing of the provision of sections 43B of the Income Tax Act. As per the provision of section 43B of the Act, any sum payable by assessee by way of tax, fee, or duty then such sum shall be allowed as deduction in the year in which same was actually paid. In the present case, the assessee had unpaid service tax liability which was suo-moto disallowed by the assessee in the computation of income. Subsequently, the assessee before the assessing officer as well as before the learned CIT(A) claimed that such unpaid liability of service tax should be allowed as deduction. However, the same was concurrently rejected by the lower authorities. The learned AR for the assessee at the time of hearing before us seek direction from us to be given to the AO that the deduction on account of service tax liability shall be allowed in the year in which such service tax liability shall be paid. In terms of unambiguous provision of second 43B of the Act that the certain sums payable by the assessee shall be allowed as deduction in the year in which actually paid, we hereby direct the AO to allow the claim of the assessee in the year in which service tax is actually paid. Needless to say, the assessee shall provide all the necessary detail regarding the payment of service tax. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
38. The next issue raised by assessee vide ground No. 5 of its appeal is that the learned CIT(A) erred in confirming the disallowance of deferred tax assets while computing book profit under section 115JB of the Act.
39. At the outset, we note the learned AR of the assessee at the time of hearing before us conceded that the issue is covered against the assessee vide amended provision of explanation 1 to section 115JB of the Act. The provision of explanation 1 to section 115JB of the Act was amended vide Finance Act 2008 with retrospective effect from 1st April 2001. As per clause (h) of explanation 1 to section 115JB of the Act, the book profit shall be the net profit shown in profit and loss account which is to be increased by the amount of deferred tax assets or provision thereof. Therefore, considering the amended provision of clause (h) of explanation 1 to section 115JB of the Act, we do find any infirmity in order of the learned CIT(A). Hence, the ground of appeal of the assessee is hereby dismissed.
40. The next issues raised by the assessee vide ground Nos. 6 to 7 of its appeal are either premature to adjudicate, consequential or general. Therefore, we hereby dismissed the same as infructuous.
41. In the result, the appeal of the assessee is hereby partly allowed for statistical purposes.
Order pronounced in the open Court on 16/11/2023 at Ahmedabad.
Author Bio
