High Court of KeralaDivision Bench2019-01-03Appeals dismissed; Tribunal’s order upheld; cos...

Commissioner of Income Tax-I, Cochin v Fertilizers and Chemicals Travancore Ltd.

Case / Petition Number:ITA Nos. 102/2012 and 118/2012

Case Details & Bench

Court: High Court of Kerala
Hon'ble Judges: K. Vinod Chandran
Ashok Menon
Judgment Date: 2019-01-03
Court Decision / Holding: Appeals dismissed; Tribunal’s order upheld; no tax payable under Section 115JB for 2005-06; the revised return stands due to GOI waiver; 2006-07 book profit would not be taxed in light of the earlier waiver; costs allocated to the Revenue.
Final Disposition: Appeals dismissed; Tribunal’s order upheld; costs to the parties.

Parties to the Case

Appellants / Petitioners

Commissioner of Income Tax-I, Cochin

Respondents

Fertilizers and Chemicals Travancore Ltd.

Legal Representation & Advocates

Counsels for Petitioners

• Sri. P.K.R. Menon, Senior Counsel, GOI (Taxes)
• Sri. Jose Joseph, SC for Income Tax

Counsels for Respondents

• Sri P. Gopinath (Sr.)
• Smt. Preetha S. Nair
• Sri K. John Mathai
• Sri M. Gopikrishnan Nambiar
• Sri P. Benny Thomas

Case Synopsis & Summary

This Kerala High Court decision arises from two Income Tax Appeals (ITAs 102/2012 and 118/2012) challenging assessments for the years 2005-06 and 2006-07. Fertilizers and Chemicals Travancore Ltd. (FACT) had a government loan with accrued interest. The Government of India initially deferred interest up to 31.03.2003, and for 2004-05 a provision for interest was made. Before assessments were finalized, GOI permitted waiver of interest up to 31.03.2005, including interest for the relevant years, leading FACT to file revised returns for 2005-06 deleting the interest provision and adding it back to profits; the revised book profit became negative, resulting in no tax payable under Section 115JB. The Commissioner of Income Tax-I, Kochi, invoked Section 263 challenging the revised return, contending the adjustments would allow an escape from tax for the subsequent year (2006-07). The AO completed an assessment for 2006-07 under Section 115JB as if the revised 2005-06 order did not exist. The Tribunal’s decision favored the assessee, and the High Court framed two questions of law. The Revenue relied on mercantile accounting and precedents such as Keshav Mills and Shiv Prakash Janak Raj to argue that interest liability accrues regardless of later waivers. The Court ultimately held in the assessee’s favour, concluding no accrual of interest due to the waiver and upholding the Tribunal’s order, dismissing the Revenue’s appeals with costs.

Provisions of Law Cited

Section 263 of the Income Tax Act, 1961Section 115JBSection 143(3)

Legal Doctrines & Maxims

Mercantile system of accounting

Submissions & Arguments

Contentions of Appellants / Petitioners

Revenue argued that under mercantile accounting, interest liability accrued in the year and could not be negated merely by GOI's subsequent waiver; the Section 263 order was justified to ensure that adjusting the 2005-06 liability would not undermine tax collection for the subsequent year (2006-07). Reliance was placed on precedents such as Keshav Mills Ltd. and Shiv Prakash Janak Raj & Co. Pvt. Ltd. to contend that merely waiving liability later could not erase accruals.

Contentions of Respondents

FACT contended that GOI's waiver of interest up to 31.03.2005, including interest for the years in question, justified revising the return for 2005-06; the revised return was filed within the prescribed time, and abolition of the interest liability meant no book profit for 2006-07 would arise; the Section 263 intervention was improper as the revised assessment was already processed and the Tribunal’s order should stand.

Cited Precedents (2)

Case Name	Citation	Treatment	Explanation
Keshav Mills Ltd. v. C.I.T.	[1953] 33 ITR 230	Mentioned Only	Cited by Revenue to argue mercantile accounting governs interest accrual; court did not adopt this position and instead relied on the waiver and revised return to negate accrual.
C.I.T. v. Shiv Prakash Janak Raj & Co. Pvt. Ltd.	[1996] 222 ITR 583	Mentioned Only	Cited as supportive of the mercantile principle by Revenue; the court’s decision did not follow the precedents but rested on the waiver and timely revisions.

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Extracted Judgment Text

Exact text extracted from official judgment records.

**IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **THURSDAY ,THE 03RD DAY OF JANUARY 2019 / 13TH POUSHA, 1940** **ITA.No. 102 of 2012** **AGAINST THE ORDER/JUDGMENT IN ITA 289/2010 of I.T.A.TRIBUNAL,COCHIN BENCH** **APPELLANT/S:** **THE COMMISSIONER OF INCOME TAX-I COCHIN.** **BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR INCOME TAX** ## **RESPONDENT/S:** **THE FERTILISERS AND CHEMICALS TRAVANCORE LTD. 111/793, ELOOR, UDYOGAMANDAL, KOCHI - 683 501.** **BY ADVS. SRI.P.GOPINATH (SR.) SMT.PREETHA S.NAIR SRI.K.JOHN MATHAI SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.BENNY THOMAS** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03.01.2019, ALONG WITH ITA.118/2012, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** _I.T.A.Nos.102 & 118 of 2012_ 2 # **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **THURSDAY ,THE 03RD DAY OF JANUARY 2019 / 13TH POUSHA, 1940 ITA.No. 118 of 2012** **AGAINST THE ORDER/JUDGMENT IN ITA 106/2010 of I.T.A.TRIBUNAL,COCHIN BENCH** ## **APPELLANT/S:** **THE COMMISSIONER OF INCOME TAX-I COCHIN.** **BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH SC FOR INCOME TAX** ## **RESPONDENT/S:** **THE FERTILIZERS & CHEMICALS TRAVANCORE LTD. 111/793 ELOOR, UDYOGAMANDAL, KOCHI 683501** **BY ADVS. SRI.P.GOPINATH (SR.) SMT.PREETHA S.NAIR SRI.K.JOHN MATHAI SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.BENNY THOMAS** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03.01.2019, ALONG WITH ITA.102/2012, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** _I.T.A.Nos.102 & 118 of 2012_ 3 ## **JUDGMENT** ## **[ ITA 102/2012, ITA.118/2012 ]** ## Vinod Chandran, J. The Revenue is in appeal before us for the assessment years 2005-06 and 2006-07. Before framing the question of law, we have to look at the facts as available in the two years, which are inter-connected. The assessee had availed of a loan from Government of India (for short “GOI”), the outstanding in which was Rs.574.46 crores as on 31.03.2004 and Rs.619.40 crores as on 31.03.2005. The assessee had applied for a waiver of interest on loan, as also partial/total conversion of the unsecured loans into equity, which was under consideration by GOI. 2. By order dated 31.03.2003 the GOI approved deferment of interest outstanding as on 31.03.2003. Hence, no provision for interest was made in the accounts for the year ending 31.03.2004. For the following year, ie., ending 31.03.2005, the assessee provided a provision for interest on Rs.50,97,23,074/for the financial year 2004-05. Later, before the _I.T.A.Nos.102 & 118 of 2012_ 4 assessments for the two years were completed, the GOI had permitted waiver of interest upto 31.03.2005 (including the interest payable in the two assessment years, which is the subject matter of this appeal). The assessee hence filed a revised return in the first year 2005-06, deleting the provision made and adding it to the profit. The original return filed by the assessee showed a loss of Rs.100,43,93,711/- and a negative book profit of Rs.32,50,56,501/-. On the GOI permitting waiver of the interest for the said year, the assessee added back the same to the profits and reduced it from the losses. The book profit as per the revised computation was negative at Rs.81,97,27,138/-. Hence, there was no tax payable even under Section 115JB for the said year. The Commissioner by Annexure B order produced in I.T.A.No.102/2012 interfered with the assessment order under Section 263 of the Income Tax Act, 1961 (for short “the Act”). The interference was on the specific ground that if the assessee is allowed to make the adjustment in the assessment year 2005-06, then the assessee would effectively absolve _I.T.A.Nos.102 & 118 of 2012_ 5 itself from the liability to tax on Rs.40 crores in the subsequent year being 2006-07. 3. I.T.A.No.102/2012 is from the order under Section 263. The order under Section 263 was not given effect to and the matter was pending before the Tribunal. Even before the order under Section 263, when the revised order passed under Section 143(3) of the Act for the year 2005-06 was subsisting, the Assessing Officer proceeded to assess the book profits under Section 115JB in the second year, ie., 2006-07 as if the revised assessment order had not been passed. Tax was demanded on the book profit, under Section 115JB coming to Rs.40,24,85,349/-. In fact the order under section 263 was passed for the assessment year 2005-06, later to the assessment order for the next assessment year 2006-07. 4. The questions of law arising in the appeals for the respective years are re-framed as under:- _1. Whether the assessee was entitled to revise the return for the year 2005-06 on the basis of the subsequent waiver of interest granted by GOI when the interest had accrued in the financial year and had to be treated as a liability for_ _I.T.A.Nos.102 & 118 of 2012_ 6 _the said year, the assessee having followed the mercantile system of accounting ?_ _2. Ought not the Tribunal have set aside the order passed under Section 263 on the ground of it being not legally sustainable ?_ 5. The learned Counsel for the Revenue would rely on the decision of the Hon'ble Supreme Court in _**Keshav**_ _**Mills Ltd. v. C.I.T., [1953] 33 ITR 230**_ and _**C.I.T. v. Shiv Prakash Janak Raj & Co.Pvt.Ltd., [1996] 222 ITR**_ _**583**_ to contend that the assessee followed the mercantile system of accounting and hence cannot escape from the interest liability which accrued in the year, merely on the basis of the subsequent waiver of such liability. It is also contended that the Commissioner had interfered with the assessment order for the earlier year under Section 263, which would enable the book profit to be assessed under Section 115JB for the second year. 6. The learned Counsel for the assessee emphatically pointed out that the order under Section 263 of the Act was dated 19.02.2010 while the assessment order for the subsequent year was prior and dated 30.12.2008. It is the contention of the assessee _I.T.A.Nos.102 & 118 of 2012_ 7 that the order under Section 263 was passed only to validate the earlier order for the assessment year 2006-07. 7. We find that the assessment for the year 200607 was completed, after the assessment for the earlier year, 2005-06, had been completed accepting the revised return filed by the assessee. The revised return was filed by the assessee within the time provided for the same and there is no contention taken regarding the limitation having worked out against the assessee. In such circumstances on that basis alone the subsequent assessment passed in the year 2006-07 has to be found to be without any authority. 8. Further, it is to be noticed that the issue arise only if there exists a book profit for the year 2006-07; which would not be there if the revised assessment for the assessment year 2005-06 is permitted to stand. Only if the adjustments for the earlier year were not permitted, the book profit would turn positive by virtue of the credit made to the profit and loss account; of the provision for interest for the two years. We find that there is no question of accrual of _I.T.A.Nos.102 & 118 of 2012_ 8 interest, especially since the assessee had filed revised return within the time provided for the same; after the interest was waived by the GOI. We, hence, answer the question of law in favour of the assessee and against the Revenue. We uphold the order of the Tribunal and reject the appeals, leaving the parties to suffer their respective costs. ## **Sd/-** **K.VINOD CHANDRAN** **JUDGE** **Sd/-** **ASHOK MENON** _dkr_ **JUDGE** _I.T.A.Nos.102 & 118 of 2012_ 9 ## **APPENDIX OF ITA 102/2012** **APPELLANT'S/S ANNEXURES:** **ANNEXURE A** **ANNEXURE B** **COPY OF ASST.ORDER U/S.143(3), DATED 30/10/2007 FOR THE ASSESSMENT YEAR 2005-06. COPY OF THE ORDER U/S.263 DATED 19/02/2010 OF THE COMMISSIONER OF INCOME TAX, KOCHI.** **ANNEXURE C COPY OF THE ORDER DATED 31/01/2012 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH ITA NO.289/COCH/2010.** ## **APPENDIX OF ITA 118/2012** **APPELLANT'S/S ANNEXURES:** **ANNEXURE A COPY OF ASST.ORDER U/S.143(3) DATED 30/12/2008 FOR THE ASSESSMENT YEAR 2006-07. ANNEXURE B COPY OF THE ORDER NO.ITA-80/R-1/E/CITII/08-09 DATED 30/11/2009 OF THE CIT (APPEALS)-II, KOCHI.** **ANNEXURE C COPY OF THE ORDER DATED 31/01/2012 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH ITA NO.106/COCH/2010.**