HIGH COURT OF KARNATAKA
CIT v/s. Tyco Electronics Corpn. India (P.) Ltd.
IT Appeal No. 383 of 2009
February 21, 2012.
N. Kumar, J. –
The revenue has preferred this appeal challenging the order passed by the Tribunal granting relief to the assessee.
2. On 14.12.2010 this appeal was admitted to consider the following substantial questions of law:
1. Whether the Tribunal was correct in holding that though the assessee has brought export proceeds into the country after expiry of time stipulated under section 10A(3) of the Act, in view of the subsequent ratification the assessee is entitled for deduction under section 10A of the Act, when the provisions of section 10A(3) does not provide for subsequent ratification?
2. Whether the Tribunal was correct in holding that, the assessee is entitled to claim expenses of a sum of Rs. 58,83,717/- as forfeited by the KIADB during April 2002 for the assessment year 2002-03 on the ground that, the assessee has booked loss in the financial year relevant to assessment year 2002-03?
3. Whether the Tribunal committed an error in holding that, the assessee is entitled to claim expenses of Rs. 58,83,717/- in the assessment year 2002-03 when the liability was crystallized during the financial year relevant to assessment year 2003-04?
4. Whether the Tribunal was correct in holding that, brought forward business loss and unabsorbed depreciation should not be adjusted before computing deduction under Section 10A of the Act?
3. The assessee company is in the business of manufacturing and trading in electrical and electronic interconnection devices. For the assessment year 2002-03, the assessee filed return of income on October 29, 2002 declaring a book profit of Rs. 4,30,34,505/-. The return was processed under Section 143(1) and refund of Rs. 18,17,829/- was granted on 31.03.2003. The case was selected for scrutiny under Section 143(2). On 13.10.2003, a notice under Section 143(2) was issued. The assessee was heard.
4. First Substantial Question of Law:
An amount of Rs. 23,65.207/-, out of export proceeds has not been brought into the country within the stipulated time under Section 10(A)(3) i.e. within six months. By a letter dated 29.09.2004, the assessee stated that they had made an application to the Reserve Bank of India seeking extension of time to receive the proceeds but no approval had been granted. Since the entire proceeds has been subsequently realized, they contended that they would be entitled to the full benefit of Section 10A. The Assessing Authority did not extend the benefit of Section 10A of the Act on the ground that the export proceeds was brought in after the stipulated time. The Appellate Commissioner upheld the said order. However, the Tribunal took note of the relevant letters in the paper compilation filed before them, at pages 1 to 17. They also noticed a letter issued by the Reserve Bank of India dated 19.11.2002, which showed that the assessee was directed to approach the authorised dealer HSBC. Thereafter by a letter dated 05.05.2006, the assessee requested for renewal. The authorised dealer informed the assessee as under:-
“Realisation of Export Proceeds
With reference to your letter dated 22nd October 2002 and 10th April 2006, we confirm that you have our approval for extension of time for realization of export proceeds for the bills mentioned in the annexure amounting to INR 2365209. This is in accordance with AP ‘DIR Series Circular No. 20 dated 28th January 2002.
We also confirm that the bills have been realized within such extended time.”
5. However, the Tribunal took note of the fact that the assessee had filed the details of realisation as found in page Nos. 21 to 23. These details would indicate that the assessee is certainly eligible for relief and the amount of Rs. 23,65,207/- cannot be reduced from the export turnover of the assessee. Therefore, it proceeded to grant relief to the assessee. Aggrieved by the said order, the revenue is in appeal.
6. The learned Counsel for the revenue assailing the impugned order contends that when admittedly the convertible foreign exchange was not brought within six months as contemplated under Section 10A(3) of the Act, the assessee is net entitled to the benefit of exemption. Further, he submitted that the assessee did not even make an application for extension of time within 6 months period. Even before such an exemption was granted, he has availed the benefit. Therefore, he submits that the Tribunal committed a serious error in interfering with the well-considered orders passed by the lower authorities.
7. Per contra, the learned Senior Counsel appearing for the assessee supported the impugned order.
8. Section 10A(3) reads as under:-
“(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported cut of India are received in or brought into India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.
Explanation 1 – For the purposes of this sub-section, the expression “competent authority” means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.”
9. A reading of the aforesaid provision makes it clear that the assessee to be entitled to the benefit of Section 10A, the sale proceeds would have to be brought into the country within a period of six months from the end of the previous year. However, the legislature has consciously in express words has vested the power to extend the time-limit for the said benefit, if the competent authority chooses to allow the said benefit. Therefore, the six months’ period prescribed is not mandatory.: A discretion is vested with the competent authority to extend the said benefit of the Section even in cases where the sale proceeds are received beyond the period of time prescribed under the said provision. The only condition is that the sale proceeds would have to be received. If the sale proceeds are not received within 6 months period, all that the assessee has to do is to make a request to the competent authority for extension of time. Of course, he has to make all efforts to receive the sale proceeds from the foreign buyer expeditiously. Granting of extension of time is the discretion of the competent authority. But once such a discretion is exercised and the time is extended, the assessee would be entitled to the benefit of the same.
9a. The statute does not prescribe any time-limit within which the application is to be made for such an extension of time and the period within which the competent authority has to pass an order. The object behind this provision appears to be that once the sale proceeds are received in India though late and the authority vested with the power to extend the time, exercises the discretion, the assessee should be entitled to the benefit. In that view of the matter, the Tribunal was justified in setting aside the order of the Appellate Commissioner as well as the Assessing Officer and in extending the said benefit. It is in consonance with the express words used in the statute. Therefore, we do not find any substance in the said contention. Therefore, the first substantial question of law is answered in favour of the assessee and against the revenue.
10. Second and Third Substantial Questions of Law:
The assessee company was allotted a plot of land on lease-cum-sale basis by the KIADB on 18.09.1996. The assessee company could not construct within the stipulated time and hence, the amount deposited towards allotment of site was forfeited on April, 18, 2002. The assessee claimed an expense of Rs. 58,83,717/- (including. the forfeiture of deposit of Rs. 29,40,000/- and penalty paid of Rs. 29,43,717/-). As the forfeiture was done in April 2002, the Income-tax Officer disallowed the aforesaid amount as expenses for the financial year 2001-02. Accordingly, a sum of Rs. 58,83,717/- shown as loss on KIADB project is added back to the total income of the assessee. Aggrieved by the same, the assessee preferred an appeal to the Appellate Commissioner, who confirmed the said order. In an appeal against the said order, the Tribunal held that the assessee booked the loss in the financial year 2001-02 as required under the Accounting Standards issued under Section 145(2) of the Act. As the said claim for loss is in accordance with the Accounting Standards, the Tribunal allowed the same. Aggrieved by the same, the revenue is in appeal.
11. The learned Counsel for the revenue assailing the impugned order contends that when admittedly forfeiture took place on 18.04.2002, the assessee can claim loss only for the accounting year 2002-03 and not for 2001-02. When the assessee was following the mercantile practice, the assessee was not justified in booking the loss for the financial year 2001-02. In support of his contention, he relied on two judgments of the Apex Court.
12. Per contra, the learned Senior Counsel appearing for the assessee relied on the accounting standards, which is extracted in the order of the Appellate Tribunal and supported the impugned order.
13. The Apex Court in the case of Morvi Industries Ltd. v. Commissioner of Income-tax reported in  82 ITR 835 (SC) has held at Para 11 as under:-
The dictionary meaning of the word “accrue” is “to come as an accession increment, or produce: to fall to one by way of advantage: to fall due”. The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only insofar as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income, although the non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. That the two accrual and receipt of income, have different connotations is also clear from the language of S.4 of the Act. Clause (a) of sub-s. (1) of s.4 of the Act deals with the receipt of income while the accrual of income is dealt with in cl. (b) of that sub-section.”
14. The Apex Court in the case of CIT v. A. Gajapathy Naidu  53 ITR 114 (SC) has held at para 11 as under:-
“Under this definition accepted by this Court, an income accrues or arises when the assessee acquires a right to receive the same. It is common place that there are two principal methods of accounting for the income, profits and gains of a business; one is the cash basis and the other, the mercantile basis. The latter system of accountancy “brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed.” The book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed. If an income accrues within a particular year, it is liable to be assessed in the succeeding year. When does the right to receive an amount under a contract accrue or arise to the assessee, i.e., come into existence? That depends upon the terms of a particular contract. No other relevant provision of the Act has been brought to our notice for there is none which provides an exception that though an assessee does not acquire a right to receive an income under a contract in a particular accounting year, by some fiction the amount received by him in a subsequent year in connection with the contract, though not arising out of a right accrued to him in the earlier year, could be related back to the earlier year and made taxable along with the income of that year. But that legal position is sought to be reached by a process of reasoning found favour with English Courts. It is said that on the basis of proper commercial accounting practice, if a transaction takes place in a particular year, all that has accrued in respect of it, irrespective of the year when it accrues, should belong to the year of transaction and for the purpose of reaching that result closed accounts could be reopened. Whether this principle is justified in the English law, it has no place under the Indian IT Act. When an ITO proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee? and (ii) if it is mercantile system of accountancy, subject to the deemed provisions, when has the right to receive that amount accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he shall include the said income in the assessment of the succeeding assessment year. No power is conferred on the ITO under the Act, to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose. Section 34 of the Act empowers the ITO to assess the income which escaped assessment or was under-assessed in the relevant assessment year. Subject to the provisions of the section and following the procedure prescribed thereunder, he can include the escaped income and reassess the assessee on the basis of which the earlier assessment was made. So, too under s. 35 of the Act the officers mentioned therein can rectify mistakes either of their own motion or when such mistakes are brought to their notice by a party to the proceedings. For that purpose the correct item may be taken into consideration in the matter of assessment. But strictly speaking even in those cases there is no reopening of the accounts of the assessee, but a reassessment is made or the mistake is corrected on the basis of the actual income accrued or received by the assessee. We do not see any relevancy of the question of reopening of accounts in considering the question when an assessee acquired a right to receive an amount.”
15. From the aforesaid judgments, it is clear that the moment the income accrues, the assessee gets a vested right to claim that amount even though it may not be immediately received by him. The accrual of an income is not to be equated with the receipt of the income. If it is a mercantile system of accountancy, subject to the deemed provisions, it has to be found out when the right to receive that amount accrues. If such a right accrued or arose to the assessee in a particular accounting year he can include the said income in the assessment of the succeeding assessment year.
16. In fact, the Accounting Standards prescribed by the Central Government reads as under:-
“Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs if the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purposes, the major considerations governing the selection and application of accounting policies are the following namely:-
i. Prudence – Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information;
ii. Substance over form – The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely the legal form;
iii. Materiality – Financial statements should disclose all material items the knowledge of which might influence the decisions of the user of the financial statements.”
17. In the instant case, the assessee was allotted a site by KIADS and he deposited Rs. 29,40,000/- towards the said allotment. As he could not construct the building within the stipulated time, on 31.07.2001, the assessee deposited a sum of Rs. 29,43,717/- as the charges for delay in not utilizing the said land for the purpose for which it was allotted. Subsequently, the assessee decided to surrender the land to the KIADB as the project could not be commenced. As per the terms of the contract between the assessee and the KIADB, if the assessee were to commit breach, the amount deposited by the assessee is liable to be forfeited. Therefore, the KIADB forfeited the amount of Rs. 58,83,717/- holding the same as non-refundable. According to the Income-tax Officer, the land having been forfeited on 18.04.2002, the said amount cannot be claimed as loss in the financial year 2001-02 for the assessment year 2002-03. From the aforesaid facts, it is clear that the surrender of the land was before March 2002. Once, the assessee surrendered the land in terms of the contract between the parties, the amount paid towards allotment of site land and the penalty is liable to be forfeited by the KIADB. Therefore, the right to forfeit accrues to the KIADB, the moment surrender took place. That accrued in the financial year 2001-02 for the assessment year 2002-03. Hence, the assessee is entitled to claim loss of the said amount to be forfeited by KIADB during the aforesaid period. Merely because the actual order of forfeiture was passed on 18th April 2002, that date has no relevance insofar as the date of accrual is to be considered. In that view of the matter, the Tribunal was justified in granting benefit to the assessee. Hence, we answer the 2nd and 3rd substantial questions of law In favour of the assessee and against the revenue.
18. Fourth Substantial Question of Law:
This Court had an occasion to consider this question in the case of CIT v. Yakogawa India Ltd., in ITA No. 78/2011 and other connected matters decided on 09-08-2011, wherein it was held as under:-
“As the income of 10-A unit has to he excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot-be set off against the income of 10-A unit under section 72. The loss incurred by the assessee under the head profits and gains of business of profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under section 10-A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current year depreciation under section 32(2) is to be set off. As deduction under section 10-A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and game of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of Section 10A to the assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the Revenue.”
19. In that view of the matter, the fourth substantial question of law is answered in favour of the assessee and against the revenue.
For the aforesaid reasons, the appeal is devoid of merits and hence it is dismissed.