TMI Blog2007 (2) TMI 632X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced by National Peroxide Ltd. and Citurgia Bio Chemicals Ltd., Mumbai. The assessee company has derived income during the year from commission, service charges on import entitlement, interest and dividend. The assessee has claimed a short-term capital loss on sale of 4,08,960 of secured premium notes (SPNs) issued by Bombay Dyeing and Manufacturing Co. Ltd. (BDMC) of ₹ 1,69,84,408. Along with the return of income, the assessee has given a note as under : Loss on sale of SPNs (purchased/sold during the year) at ₹ 1,60,84,400. After adjusting the short-term capital gain on sale of Mahindra shares of ₹ 58,90,157, the assessee has shown the net loss of investment at ₹ 1,01,94,251 to be carried forward in subsequent years. 2.1 In response to the query raised by the AO, assessee has explained that vide its letter of offer dt. 16th April, 1993, BDMC made a rights offer to its shareholders/debenture holders of 15 per cent secured non-convertible debentures (NCDs) and/or secured premium notes (SPNs). The instrument so offered consisted of secured premium notes of the face value of ₹ 200 each along with two warrants each of which would entitle the hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrant. He, accordingly, disallowed the short-term capital loss of ₹ 1,60,84,408 as claimed by the assessee on sale of SPNs and the same was taken as cost of warrant. 2.3 The assessee preferred an appeal before the CIT(A) with the submissions that the allotment of SPNs with detachable warrants was made by BDMC in terms of clear and transparent offer under the SEBI rules and Regulations and in due consultation with the Bombay Stock Exchange and as such there was no 'contrivance' or 'arrangement' in this regard as observed by the AO. The SPNs were allotted to the assessee and transfer took effect after such allotment. It is not a case where right to allotment could have been renounced in favour of third party. The warrants were acquired for no price and the payment made was only for acquisition of the SPN being the debt instrument whose terms of issue included a return of 15 per cent per annum. The purpose of issue was commercial and they were not issued by the BDMC only with an intention of attracting subscriptions to warrants attached thereto. He further contended that it was quite possible that warrants furnished become value less depending upon the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has further contended that in the case of Lazor Syntex Ltd. (supra), the assessee has subscribed for part 'B' convertible 'H' series of debentures numbering 1,65,500 by paying the subscription amount of ₹ 30 per debenture of Reliance Industries Ltd. and the total amount so paid up along with the application for debenture was ₹ 49,65,000. The face value of the debenture was ₹ 150 including the right of allotment of equity shares at ₹ 55. In these series 'H' was partly convertible debentures and later on offer indicated that every original subscriber to the original debenture of 'H' series would be entitled to one equity share at ₹ 55 on the part conversion which was to be so allotted within 18 months from the date of allotment of the debentures. The assessee while applying for 'H' series partly convertible debentures has undertaken a liability of ₹ 2,48,25,000. The assessee was interested in acquiring the equity shares at ₹ 55 even though it was to happen after 18 months because of market value of the shares offer of ₹ 200 and was expected to move up. The assessee accordingly retaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eetener with the debt instrument like NCDs or PCDs to improve the marketability of the main instrument. It is an incentive or inducing for ascribing to original NCDs, as such, an incentive or inducement has no acquisition value before s. 55(2)(aa)(iiia) brought under statute by the Finance Act, 1995 w.e.f. 1st April, 1996. 2.8 Adverting to the facts of the case in the light of ratio laid down by the various Benches of the Tribunal and the Delhi High Court, we find that in the instant case, the assessee has received an offer from BDMC for subscription of non-convertible debentures (NCDs) or secured premium notes (SPNs). The instrument so offered consisted of SPNs of the face value of ₹ 200 each along with two warrants each of which would entitle the holder, two equity shares on payment of ₹ 60 each on the due date of allotment, one equity share each. As per the terms and conditions of the letter of offer placed at page Nos. 61 to 76 of the compilation of the assessee, each NDC or SPN has two detachable warrants which will be issued only when the NCDs/SPNs are fully paid up. The holders of the warrants will have a right to apply for and be allotted a first equity shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 39.33 per SPN. The assessee accepted the offer and sold all partly paid SPNs without detachable warrants to the Credit Lyonnais Bank at the price of ₹ 10.67 per SPN resulting into a short-term capital loss of ₹ 1,60,84,408. At the time of sale of this partly paid SPNs the assessee even did not acquire a right to obtain two detachable warrants per SPN as the same can only be accrued when the SPNs are fully paid up. The sale of SPNs to the Lyonnais Bank was effected with an understanding that at the time of fully paid up of the SPNs, the detachable warrants would be issued to the assessee's name, meaning thereby, at the time of SPNs, the assessee did not have any right to acquire the detachable warrants. The right can only accrue after the SPNs are fully paid up. In these circumstances, we do not find any value of the detachable warrants which would be received by the assessee in future and on account of which, the equity shares would be allotted to the assessee on certain payments. 2.9 The identical issue came up for consideration before the Pune Bench of the Tribunal in the case of Asara Sales Investment (P) Ltd. vs. Dy. CIT (supra), in which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warrants have no inherent quality as they cannot be acquired at the time of allotment by paying an identifiable price or cost of it. If a person wants to acquire an NCD, he has to pay full price of ₹ 100 whether he wants the warrants or not. Further, the fact that warrants can be purchased in the open market subsequently is of no relevance. Accordingly, the cost of acquisition of warrant was 'nil' as it was a distinct from the NCD for which the assessee paid ₹ 100. Hence, the assessee paid a sum of ₹ 100 for one NCD and that was the cost of acquisition and while calculating capital gains, this cost had to be adopted. Therefore, the assessee rightly computed the short-term capital loss. The assessee's appeal was, thus, allowed. 2.11 The similar view was also taken by the Tribunal in the case of Lazor Syntex Ltd. vs. Dy. CIT (supra), against which, a reference made by the Revenue was also rejected. Again, in the case of Nalva Investment Ltd. (supra), the Tribunal has taken a similar view following the order of the Tribunal in the case of Lazor Syntex Ltd. (supra) and Karamchand Thaper Bros. of Calcutta Bench in ITA No. 2649/Cal/1996 (supra) and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the transfer was made entirely as per the arrangement between JISCO and the UTI, that the beneficiary of the transfer was not the UTI but JISCO, that thus the loss was deliberately cultivated for the benefit of JISCO and no such loss arose to the assessee on transfer of the NCDs and therefore, the question of allowing loss did not arise. On appeal, the Tribunal found that the five assessee companies were promoters of JISCO through whom JISCO made investment in various public limited companies. The assessee companies held about 34 per cent shareholding of JISCO. The rest was held by the financial institutions and the public. During the assessment year in question, JISCO came up with the rights issue worth about ₹ 500 crores. As per the terms of the issue, as approved by the SEBI, if 90 per cent of the issue was not subscribed then the issue had to fail and JISCO was to refund the entire money collected by it under the issue. It was thus a compulsion on the part of the assessee companies to subscribe to the rights issue. The Tribunal found that when the assessee companies made application for NCDs and paid the requisite sum of ₹ 111 per NCD, the offer of allotment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent and held that the transaction of selling NCDs of the face value of ₹ 500 to the UTI at ₹ 389 per debenture was not a colourable device and the ratio of McDowell's Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148(SC), had no application. On appeal to the High Court : Held, dismissing the appeal, that the Tribunal had analysed the factual position and come to the conclusion that the assessee companies claim was admissible as business loss. The conclusion of the Tribunal was essentially factual and had been arrived at after detailed analysis of the factual position with regard to the relevant documents. No question of law, much less a substantial question of law, arose out of its order. 2.12 These views of the Tribunal were followed repeatedly by the Tribunal in the case of Jagiya Traders Ltd. (supra) and Kanakadhara Traders (P) Ltd. (supra). A contrary view was taken only in the case of J.T. Holdings (P) Ltd. (supra) but, this view was never subscribed by the Tribunal in any other case. We, therefore, following the majority view of the Tribunal and also the judgment of the Delhi High Court decide this issue in favour of the assessee and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Tribunal has confirmed the disallowance made by the CIT(A) at ₹ 26,18,244. Copy of the order of the Tribunal for the asst. yrs. 1991-92 and 1992-93 is also placed on record and from a careful perusal of these orders of the Tribunal, we find that in every year, a disallowance on account of foreign travel expenses retained by the CIT(A), was confirmed by the Tribunal. In the asst. yr. 1993-94, a disallowance of ₹ 26,18,244 was confirmed by the Tribunal following its order for the asst. yrs. 1991-92 and 1992-93. In the instant case, the assessee did not improve his case as the disallowance was made on the similar pattern. In the impugned assessment year, the disallowance was made only to the extent of ₹ 15,96,331 and keeping in view of the disallowance made in earlier years, we find no infirmity in the order of the CIT(A). Accordingly, we confirm the same. 2.16 Ground No. 3 relates to the guest house expenses and during the course of hearing, the learned counsel for the assessee has candidly admitted that this ground is covered against the assessee by judgment of the apex Court in the case of Britannia Industries Ltd. vs. CIT (2005) 198 CTR (SC) 313: (2005) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30th March, 1994. On this date, there was a debit balance in the bank. The AO accordingly made the disallowance of interest on the abovesaid amount. Before the CIT(A), it was contended that the assessee company's funds were consisted of borrowed as well as own funds. It was also submitted that company has earned ₹ 109.06 lakhs as on 31st March 1994 and its reserve and surplus as on that date were ₹ 568.03 lakhs. Hence, it is not proper to presume that the payment of advance tax was made out of the borrowed capital. He has also placed a reliance upon certain judgments. Being not convinced with the arguments of the assessee, the CIT(A) confirmed the disallowance after having observed that since payments of income-tax and donations are personal liability of the assessee company, the interest paid on such amount, withdrawn from the bank is not allowable. Now, the assessee is before us and reiterated its submissions. 2.21 During the course of hearing, the learned Departmental Representative has placed a heavy reliance upon the judgment of the apex Court in the case of East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372: (1997) 224 ITR 627(SC) in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw urged by counsel appearing for the appellant but on the materials on record and on the amplitude of the question which had been referred to the High Court it is difficult to entertain and decide the contention raised by the counsel for the appellant. There is no error in the answer given by the High Court to the question posed before it. 2.22 In the instant case, nothing had been placed before us that assessee has made the payments out of its profits or surplus funds. Undisputedly, at the time of payment of income-tax and donation, there was a debit balance in his overdraft account, meaning thereby, the income-tax was paid out of the borrowed funds besides the donation. We, therefore, find no merit in this ground and accordingly we confirm the order of the CIT(A). 3. In the result ITA No. 3848/Mum/1998 is partly allowed for statistical purposes. 4. ITA Nos. 1072, 6002/Mum/2000 and 1204/Mum/2002 : The sole issue involved in Appeal Nos. 1072/Mum/2000 and 602/Mum/2000 and ground No. 2 in Appeal No. 1204/Mum/2002 is with regard to the disallowance of short-term capital loss on sale of SPNs issued by BDMCL to Credit Lyonnais Bank. The identical issue has already been examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The confirmations and reduction in increase were challenged by the assessee as well as the Revenue through their respective appeals. 10. Now, the issue before us is'whether the net profit as shown in the P L a/c for the relevant previous year prepared in accordance with the provisions of Parts (ii) and (iii) of Sch. VI of the Companies Act, 1956, can be increased by a provision made for advances, considered doubtful and the provision for debts considered doubtful in the light of cls. (b) and (c) of Explanation below sub-s. (2) of s. 115JA of the IT Act ? 11. The learned counsel for the assessee has emphatically argued that the provisions for doubtful advances and doubtful debts are not at all the liabilities, but it is a provision for diminution in the value of the assets and once it is not a liability, it is totally irrelevant whether it has ascertained or unascertained. The learned counsel for the assessee has invited out attention to the order of the Special Bench of the Tribunal in the case of Jt. CIT vs. Usha Martin Industries Ltd. (2006) 105 TTJ (Kol)(SB) 543: (2007) 288 ITR 63(Kol)(SB)(AT) with the submissions that the identical issue has been thoroughly examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fines the words book profit which mean net profit as shown in the P L a/c for the relevant previous year. Such book profit has to be increased by the item Nos. (a) to (f) of the Explanation if they are debited to the P L a/c and from such profit item Nos. (i) to (ix) of the Explanation are to be reduced. The figure arrived at after the above exercise would be the book profit of the assessee for the relevant previous year. 35. Hon'ble apex Court has examined the powers of the AO while computing the book profit for the purpose of s. 115J in the case of Apollo Tyres Ltd. (supra), wherein their Lordships observed as under : 'The AO, while computing the book profits of a company under s. 115J of the IT Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to s. 115J. The AO does not have the jurisdiction to go behind the net profits shown in the P L a/c except to the extent provided in the Explanation. The use of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;one for determining the total income as per provisions of the IT Act and other for determining the book profit as per s. 115JA. While computing the total income, he has to make the additions and allow deductions as per provisions of the IT Act. However, those additions or deduction as permissible under the various provisions of the IT Act would not be relevant while determining the book profit. While determining the book profit, additions/deductions are to be made as given in the Explanation. The assessee might have added the provision for bad and doubtful debt while determining its total income, because the deduction for the provision for bad and doubtful debt is not permissible while computing the total income for the purpose of IT Act. However, merely because the deduction of provision for bad and doubtful debt is not allowable in computing the total income of the assessee would be no ground for including the same in the book profit. 37. It was further contended by the learned Departmental Representative that for the purpose of computing the net profit for director's remuneration under s. 349 of the Companies Act, the assessee itself has included the provision for bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the original cost of that fixed asset and its written down value; (4) In making the computation aforesaid, the following sums shall be deducted : (a) All the usual working charges; (b) Director's remuneration; (c) Bonus or commission paid or payable to any member of the company's staff, or to any engineer, technician or person employed or engaged by the company, whether on a while time or on a part time basis; (d) Any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits; (e) Any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in its behalf; (f) Interest on debentures issued by the company; (g) Interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets; (h) Interest on unsecured loans and advances; (i) Expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature; (j) Outgoings (inclusive of contributions made under cl. (e) of sub-s. (1) of s. 293); (k) Depreciation to the extent specified in s. 350; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit for the purpose of s. 115JA. For the purpose of s. 115JA, the AO can increase the net profit determined as per P L a/c prepared as per Parts II and III of Sch. VI to the Companies Act only to the extent permissible under Explanation thereto. The Explanation has provided six items, i.e., item Nos. (1) to (f) which if debited to the P L a/c can be added back to the net profit for computing the book profit. The provision for bad and doubtful debt has been debited to the P L a/c. Therefore, it can be added back to the net profit if it falls within any of the items provided under the Explanation. As per Revenue, it falls within the category of item (c) and alternatively within item No. (b). We will first deal with item No. (c) which reads as under : 'The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities'. Thus, the assessee's case would fall within the ambit of item (c) if' (i) the amount is set aside to any provision; (ii) the provision is made for meeting liability; and (iii) the provision should be for other than ascertained liability, i.e., it should be for unascertained liability. All the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) diminution in the value of assets; and (iv) for any known liability of which the amount cannot be determined with substantial accuracy. 43.1 Now, the question is whether the provision for bad and doubtful debt is the provision for diminution in the value of asset or for known liability of which the amount cannot be determined with substantial accuracy. The provision for bad and doubtful debt is made when the assessee is of the opinion that its entire debt may not be realized and part of the debt may become irrecoverable. However, when the amount of such irrecoverable debt cannot be ascertained with substantial accuracy, the provision is made for bad and doubtful debt. Debts are of two types. One'debts payable by the assessee i.e., where the assessee has to pay amount to others. This would be liability in the hands of the assessee. Second'debt receivable by the assessee i.e., where the assessee has to receive the amount from others. This would be asset in the hands of the assessee. Admittedly, the 'debt' under consideration is 'debt receivable' by the assessee. The provision for bad and doubtful debt would always be made with reference to debt receiva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilarly, Tribunal, Kolkata Bench, in the case ICI India Ltd. (supra) also proceeded with the presumption that the provision made for bad and doubtful debt was a provision for liability and, therefore, relying upon the decision of Hon'ble Madras High Court in the case of Breadshell Ltd. (supra), confirmed the addition in this regard. The learned counsel for the assessee has relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs. Echjay Forgings (P) Ltd. (supra). However, we find that in the above case also the question whether the provision for bad and doubtful debt is diminution in the value of the asset or a provision for liability was neither argued nor considered. The Hon'ble High Court deleted the addition because they agreed with the assessee's contention that the provision was for ascertained liability. Therefore, the above case would also not be applicable while considering whether the provision for bad and doubtful debt is at all a provision for liability. 43.4 We find that the Tribunal, Pune Bench, in the case of Asstt. CIT vs. J.G. Vaccum Flasks (P) Ltd. has considered the issue whether the provision for doubtful debt can at all be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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