TMI Blog2022 (9) TMI 1139X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome earned during the relevant assessment year and therefore, directing the Assessing Officer to restrict the disallowance u/s. 14A of the Act, only to the extent of the exempt income earned during the year. Adjustment on account of subsidy(ies) received to the tune to the books profit of the Assessee computed u/s 11JB - HELD THAT:- We find that in the instant case the Assessee treated the Subsidies/Incentives referred to above as capital in nature and directly incorporated to its reserves, without incorporating in its profit and loss account and inter-alia claimed that such subsidies received were credited to the capital reserves in accordance with the applicable accounting principles/standards as the accounts of the Assessee are correct being duly audited. We observe that both the authorities below without going into the treatment adopted by the Assessee, and without determining/testing the purpose of scheme of the subsidies/incentives and the status of the said subsidies whether the same are capital or revenue in nature as mandated in the case of Sahney Steel and Press works [ 1997 (9) TMI 3 - SUPREME COURT] decided the tax liability of the Assessee u/s 115JB of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier year. 3.2 The Assessee vide reply/letter dated 24.12.2018 submitted that during the relevant previous year, the Assessee company had received dividend income amounting to Rs.1,35,92,571/- from certain investments, which was claimed as exempt under section 10(34) of the Act and out of the total expenses incurred during the year, the Assessee by filing its return of income for the year under consideration, suo-moto disallowed , inter alia, a sum of Rs.45,98,740/- on account of the expenditure incurred towards earning of the above exempt income. Further, as the computation of the disallowance u/s. 14A been made in accordance with Rule 8D of the rules, no further disallowance in this regard is called for. 3.3 The Assessing officer after carefully perusing the submissions of the Assessee, did not find same to be acceptable on the ground that the Assessee is not maintaining separate books of accounts and separate banks account w.r.t. the exempt income and taxable income. Further, once funds are put in a common pool, it cannot be said which penny goes to earn the exempt income and which goes to earn the taxable income. Thus, it has not been established as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly those investments which yielded exempt income. 4.1 With regard to the finance charges, the ld. Commissioner was not agreeable with the contention of the ld. AR that as per definition of interest u/s. 2(28A) of the Act, interest means interest payable in any manner in respect of any money borrowed and includes any service fees or other charges in respect of the money borrowed. The ld. Commissioner finally opined that interest cost includes finance charges, therefore, the Assessing Officer has correctly considered an amount of Rs.9,45,54,006/- as interest expenses for computation of disallowance u/s. 14A of the Act. 4.2 With regard to the action of the Assessing Officer in making upward adjustment of Rs.4,83,36,424/- in the book profit u/s. 115JB of the Act, the ld. Commissioner observe and held as under: The Assessee itself has done upward adjustment of Rs.45,98,740/-, i.e., the suo - moto disallowance u/s. 14A of the Act. Now in appeal, the ld. AR is contesting against the adjustment made by the Assessing Officer. The upward adjustment u/s. 115JB of disallowance under Rule 8D(ii) and 8D(iii) is as per the express provision as per para (f) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money borrowed or debt incurred cannot be construed as interest expense. The Assessee in the Chart of issues/Synopsis , alternatively claimed that disallowance, if at all, cannot exceed exempt income earned during the relevant assessment year in view of the jurisdictional High Court judgment in the case of Joint Investments Pvt. Ltd. vs. CIT, 372 ITR 694 and in the case of CIT vs. Caraf Builders Constructions (P) Ltd. (supra). 6.1 On the contrary the ld. DR vehemently supported the impugned order. 6.2 We have given thoughtful consideration to the facts and circumstances of the case and observe that the Ld. Commissioner in the impugned order categorically held that the Assessee itself has done upward adjustment of Rs.45,98,740/-, i.e., the suo-moto disallowance u/s. 14A of the Act, however in appeal contested against the adjustment made by the Assessing Officer. The upward adjustment u/s. 115JB of disallowance under Rule 8D(ii) and 8D(iii) was as per the express provision as per para (f) to Explanation-1 of section 115JB of the Act, therefore, the Assessing Officer has done the adjustment. Before us, there is no rebuttal on these aspects by the Assessee. Even the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, subsidy of Rs.59,29,94,203/- which was received for acquisition of specific fixed assets has been treated as deferred income to be recognized in the profit and loss account over the period and in the proportion in which depreciation on related assets is charged (as disclosed in schedule-2 Reserves Surplus to the audited financial statements). It was further claimed by the Assessee that the subsidy received in the case of the Assessee clearly qualify under the category of grant in the nature of promoters contribution and therefore, in accordance with the applicable accounting standard (AS-12), the Assessee has rightly credited the amount of capital subsidy to capital reserve account instead of transferring into the profit and loss account, which was duly certified by the statutory auditors. Further, the disclosure of the aforesaid treatment was also made in the notes to accounts of the financial statements and further, the computation of book profit was also duly certified by the auditors in its report in Form 29B under sub-sec (4) of section 115JB of the Act read with Rule 40B of the Rules. The treatment adopted by the Assessee of crediting capital subsidy to capital r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing conclusion: That the taxability of income u/s. 115JA is a deeming provision and supersedes the normal manner of computation of income. As per section 115JB, every Assessee is required to prepare its profit and loss as per part II of Schedule VI to the Companies Act. In preparing the profit and loss account, all kind of profits are to be taken in the profit and loss account as it would reflect the position of actual profit loss of a company. Even as per the requirement of Parts II and III of Schedule-VI of the Companies Act, 1956, under which profit loss account has to be maintained as per the requirement of section 115JA(2), is that the company should disclose the result of the working of the company including credit or receipt and debit or expenditure in respect of non-recurring expenditure transactions or transaction of an exceptional nature. Therefore, the Assessee should have disclosed the receipts in question in the profit and loss account as per Companies Act, 1956. As per the accounting standard AS-5 issued by the Institute of Chartered Accountants of India, net profit and loss for the period contemplates that all the disclosure should be made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 12 apply; or]. Explanation 1 of section 115JB of the Act provides for specific additions/deductions which can be made to arrive at book profit chargeable to tax as MAT income. A plain reading of para (b) of the above Explanation 1 to section 115JB explains clearly that any reserve, other than a reserve specified u/s. 33AC (meant for shipping business), is to be taken into consideration for the purpose of computation of book profit and book profit is to be increased by the amount of such reserve. As the Assessee has incorporated the mega power project subsidy directly to the reserves therefore, the Assessing Officer has correctly added back capital subsidies to its book profit u/s. 115JB of the Act and correctly made upward adjustment of Rs.61,31,52,671/-. 9. The Assessee being aggrieved also challenged the said addition and claimed that the subsidies received were credited to the capital reserves in accordance with the applicable accounting principles/standards. The accounts of the Assessee are duly audited. The Assessee in support of its case, also relied upon the judgments of the Hon ble Apex Court in the cases of Apollo Tyres Ltd. vs. CIT and National Hydroelectric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited financial statements for the year under consideration, without incorporating in profit and loss account of the Assessee. 11.1 The Assessee before the Assessing Officer claimed that the Assessee had received incentives to encourage creation of employment trade, industrial infrastructure and plans regional development etc. in the State, which were in public interest. Since the incentives were given for the avowed objective of the development and industrialization of the State, therefore the incentives received were in the nature of promoter s contributions. Accordingly, as per the treatment given in AS-12, such incentives received by the Assessee were treated as part of capital reserve/promoter s contribution. 11.2 The Assessing Officer not being satisfied with the claim of the Assessee observed that Section 115 is a deeming provision and supersedes the normal manner of computation of income and as per Section 115JB, every Assessee is required to prepare its P L A/c as Part-II of Schedule VI to the Companies Act. In preparing the P L a/c all kinds of profit are to be taken in the P L account as it would reflect the position of actual profit and loss of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that even if the accounts are correct and complete to the satisfaction of the officer and the income has been computed in accordance with the method regularly employed by the Assessee, what is to be determined by the officer is a question of fact i.e. whether or not income chargeable under the Act can properly be deduced from the books of account and he must decide the question with reference to the relevant material and in accordance with the correct principles. We observe that both the authorities below without going into the treatment adopted by the Assessee, and without determining/testing the purpose of scheme of the subsidies/incentives and the status of the said subsidies whether the same are capital or revenue in nature as mandated in the case of Sahney Steel and Press works Versus CIT {228 ITR 253},decided the tax liability of the Assessee u/s 115JB of the Act. In our considered view, the authorities below should have first determined as to whether Subsidies/Incentives received by the Assessee are revenue or capital in nature and after determination of the same, should have decided the tax liability u/s 115JB of the Act, but not otherwise. Hence considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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