2020 (3) TMI 1488 - AT - Income Tax

Disallowance u/s.40(a)(ia) - assessee has not deducted deposited TDS on the interest paid - HELD THAT - CIT(A) relying upon Tribunal s order in the case of assessee s group concern namely M/s Urvi Build-tech Pvt. Ltd correctly directed Ld. AO to delete the disallowance subject to verification of the fact that the deductee had shown the amounts in their respective tax returns and had paid the due taxes. Therefore no infirmity could be found in the same. Adjustment of Debenture Redemption Reserve while computing book profits u/s. 115JB - AO denied the same in view of the fact that the same was not credited to Profit Loss Account - HELD THAT - Section 117C of the Companies Act mandate the assessee to provide for DRR for the purpose of redemption of debentures. Therefore it could not be said that DRR was mere appropriation or provision for unascertained liability since the assessee had definite liability to redeem the debentures. Since the debentures are with put and call option then naturally the creation of DRR would require some kind of estimation since it would not be known in advance that what quantum of debentures would be redeemed at different points of time. Therefore creation of DRR due to terms of debentures would involve some kind of estimation. Nevertheless the same would be towards discharge of ascertained liability only. We find that similar favorable view has been taken by the Tribunal in case of assessee s holding company DCIT V/s Ackruti City Ltd. 2017 (6) TMI 1391 - ITAT MUMBAI wherein the coordinate bench has followed the decision of Hon ble Bombay High Court in Raymond Ltd. 2012 (4) TMI 128 - BOMBAY HIGH COURT and the decision of this Tribunal rendered in JSW Energy Ltd. 2013 (7) TMI 192 - ITAT MUMBAI .

Summary

The core legal questions considered by the Tribunal in this appeal relate to two primary issues: (i) the validity of disallowance under section 40(a)(ia) of the Income Tax Act, 1961, concerning non-deduction and non-deposit of tax at source (TDS) on interest payments amounting to Rs.4,32,80,710/-; and (ii) the permissibility of adjustment of Rs.5,25,00,000/- credited to Debenture Redemption Reserve (DRR) while computing book profits under section 115JB of the Income Tax Act, 1961.

Regarding the first issue, the legal framework involves section 40(a)(ia) which mandates disallowance of expenses in the absence of timely deduction and deposit of TDS. The revenue authority (Assessing Officer, AO) disallowed the interest payment on the ground that TDS was not deducted and deposited before the due date of filing the return. The assessee initially disallowed the same but later claimed it in the revised return, relying on CBDT Instruction No.275/201/95-IT(B) dated 29/01/1997 and the Supreme Court decision in Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT, which clarified the applicability of disallowance under section 40(a)(ia). Further, the assessee invoked the benefit of the second proviso to section 40(a)(ia) as inserted by the Finance Act, 2012, effective from 01/04/2013, which exempts disallowance if the deductee has included the relevant income in their return and paid due taxes.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, subject to verification that the deductee had indeed declared the income and paid taxes. The Tribunal noted that CIT(A) followed a consistent precedent from the Tribunal's own order in the case of the assessee's group concern for the same assessment year, where the disallowance was deleted on similar facts. The revenue failed to distinguish the present case or cite any contrary authority. Consequently, the Tribunal upheld the deletion of disallowance under section 40(a)(ia), dismissing the ground raised by the revenue.

The second and third issues concern the adjustment of the Debenture Redemption Reserve (DRR) while computing book profits under section 115JB, which governs Minimum Alternate Tax (MAT). The AO disallowed the claim of Rs.5.25 crores credited to DRR on the basis that such amount was not routed through the Profit & Loss Account and represented an appropriation of profit rather than a deductible expense. The revenue argued that DRR is a capital account liability and not an allowable deduction for computing book profits.

The assessee contended that DRR is not merely a reserve or appropriation but a provision for an ascertained liability, mandated under section 117C of the Companies Act, which requires companies issuing debentures to create DRR for their redemption. The assessee relied on the circular issued by the Ministry of Law, Justice and Company Affairs and judicial precedents distinguishing reserves from provisions, including the Supreme Court decision in National Rayon Corporation Ltd. v. CIT.

The CIT(A) allowed the deduction of DRR while computing book profits, relying on the Tribunal's decision in the assessee's holding company's case, which had accepted the treatment of DRR as a provision for ascertained liability and allowed its deduction under section 115JB. The revenue challenged this order before the Tribunal.

In its analysis, the Tribunal observed that the debentures issued were unsecured, redeemable, and optionally convertible with put and call options exercisable after five years. The creation of DRR was mandated by law and represented a definite liability to redeem debentures, not a mere appropriation or a provision for unascertained liability. The Tribunal acknowledged that the quantum of DRR involves estimation due to the optionality in redemption but emphasized that it is directed towards discharging an ascertained liability.

The Tribunal further relied on consistent judicial precedents, including the Bombay High Court decision in Raymond Ltd. and the Tribunal's own ruling in JSW Energy Ltd., which recognized DRR as a deductible provision for computing book profits under section 115JB. The Tribunal found no reason to interfere with the CIT(A) order allowing the deduction of DRR.

In addressing competing arguments, the Tribunal gave due consideration to the revenue's contention that DRR was not routed through the Profit & Loss Account and was a capital appropriation. However, it found the legal mandate under section 117C of the Companies Act and the nature of debentures issued to be determinative, establishing that DRR is a provision for an ascertained liability and thus allowable for MAT computation.

The Tribunal concluded by dismissing all grounds raised by the revenue and affirming the CIT(A) order, thereby allowing the deletion of disallowance under section 40(a)(ia) and permitting the adjustment of DRR while computing book profits under section 115JB.

Significant holdings from the judgment include the Tribunal's affirmation that "the creation of DRR, due to terms of debentures, would involve some kind of estimation. Nevertheless, the same would be towards discharge of ascertained liability only," thereby distinguishing DRR from mere appropriation or unascertained provision. The Tribunal also upheld the principle that disallowance under section 40(a)(ia) is not automatic if the deductee has included the relevant income in their return and paid taxes, consistent with the proviso inserted by the Finance Act, 2012.

These determinations reinforce the legal position that statutory provisions mandating creation of DRR must be recognized for tax computation purposes and that compliance with TDS provisions, when rectified by the deductee's inclusion of income and payment of tax, can mitigate disallowance under section 40(a)(ia).