TMI Blog2009 (11) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... ng so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder." 3. Ground No. 2 of the assessee s appeal reads as under : "2.( a )On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in confirming the action of Assessing Officer of treating interest income amounting to Rs. 83,89,178 as "Income from other sources" as against "Business income" and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder. ( b )On the facts and in the circumstances of the case and in law, the authorities below ought to have netted off the interest paid against the interest income, and not doing so is wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder." 4. At the time of hearing before us, it was pointed out by the learned counsel that this issue is considered by the ITAT, in assessee s own case, for the assessment year 2000-01, in which the ITAT set aside the matter back to the file of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89,30,258 being purchase values of vessels sold during the year on the ground that they have been sold within 8 years from the end of previous year in which they have been acquired even though the period of holding required is 3 years for this assessment year and the reasons assigned for doing so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder. ( b )The lower authorities failed to appreciate that as per the amended clause ( c ) of sub-section (3) of section 33AC with effect from 1-4-2004, the period of retention was reduced from 8 years to 3 years and, hence, there was no violation of conditions laid down in that section. ( c )On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in confirming disallowance of Rs. 25,00,000 in respect of sale of vessel to DB Girdhari even though no deduction under section 33AC was ever claimed by the appellant in any of the earlier years." 9. At the time of hearing before us, it is submitted by the learned counsel that the assessee derives income from shipping business. During the accounting year relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 Yes From the above, it is evident that all the three ships sold during the year under consideration, were sold after the three years from the end of the previous year in which they were acquired but within the period of eight years. The provision of sub-section (2) and sub-section (3) of section 33AC, which is with regard to the utilization of reserve and the prohibition with regard to sale of ship acquired by utilizing the reserve, reads as under : "33AC. Reserves for shipping business. (1) ****** (2) The amount credited to the reserve account under sub-section (1) shall be utilized by the assessee before the expiry of a period of eight years next following the previous year in which the amount was credited ( a )for acquiring a new ship for the purposes of the business of the assessee; and ( b )until the acquisition of a new ship, for the purposes of the business of the assessee other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India. (3) Where any amount credited to the reserve account under sub-section (1) ( a )has been utilized for any purpose othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree with the view of the Assessing Officer. When the Legislature, in its wisdom, has decided to reduce the period of eight years to three years and made it effective from 1-4-2004, there is no warrant for holding that despite the above amendment the old provision of prohibition of eight years for the sale of ships would be applicable. It is a settled law that the law as applicable on the first day of the assessment year is to be applied for determining the income of the previous year. The Hon ble jurisdictional High Court in the case of Orkay Silk Mills (P.) Ltd. ( supra ) held as under : "That it is well-settled that though the subject of charge under the Income-tax Act is income of the previous year, the law to be applied is that in force in the assessment year unless otherwise stated or implied. Therefore, for determining the liability of the assessee-company in respect of the income of the amalgamating company for the previous year ending 30-6-1975, the law applicable on the first day of the assessment year 1976-77, i.e., 1-4-1976, would apply and not the law applicable during the previous year. " [Emphasis supplied] Similar view is taken by the Hon ble Apex Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping company. During the year under conside-ration, the assessee claimed deduction under section 33AC at Rs. 13,80,00,000. The Assessing Officer disallowed the same on the ground that as per proviso to section 33AC(1), where the aggregate of the amount carried to the reserve account as provided under section 33AC(1) exceeds twice the aggregate of the amounts of paid-up share capital and general reserve, then no deduction under section 33AC is allowable. As per the Assessing Officer, the total of paid-up share capital and general reserve is negative and, therefore, the assessee is not entitled to deduction under section 33AC at all. The above view of the Assessing Officer was based upon the following findings : ( a )Preference share capital is not part of paid-up share capital. ( b )General reserve is to be reduced by : ( i )Amount transferred from capital redemption account to profit and loss account; and ( ii )Amount transferred from section 33AC reserve utilized account to profit and loss account. 14. In respect of all the above three points, the learned counsel argued at length, which are summarized as under : ( a )Preference share capital - It is submitted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 27 of the assessment order, the Assessing Officer has worked out the balance in the general reserve account to be negative sum of Rs. 10,69,25,000. From the balance in general reserve account, as per assessee s balance sheet, the Assessing Officer reduced the sum of Rs. 7,13,50,000 being the amount transferred from capital redemption account to profit and loss account, and also the sum of Rs. 16,75,99,000 transferred from section 33AC reserve utilized account to profit and loss account. He submitted that at page 20 of the assessment order, the Assessing Officer has given the complete chart with regard to preference share capital. As per his own total, the amount transferred from capital redemption account to profit and loss account was only Rs. 4,82,50,000. Rs. 7,13,50,000 was the amount for which capital redemption reserve was required to be created. He submitted that the above working by the Assessing Officer is absolutely incorrect and it is neither in conformity with the provisions of the Companies Law nor the Accounting Guidelines provided by the Institute of Chartered Accountants of India. That as per the Assessing Officer, the assessee s working in this regard since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funding its long-term working capital needs". It was pointed out by the learned counsel that first of all, there was no redemption in the year under consideration out of the fresh issue of preference shares. Therefore, the above observation/finding of the Assessing Officer is pertaining to earlier years. That the assessments of all earlier years have been completed under section 143(3). The same are neither reopened under section 147 nor set aside under section 263 of the Act, and, therefore, the Assessing Officer, while completing the assessment of assessment year 2004-05, has no jurisdiction to examine/comment upon the matter which has taken place in the preceding years and accepted by the revenue. Even otherwise, the object of the placement is mentioned in wide term. Out of the proceed of preference shares, part was utilized for redemption of preference shares and part for long-term working capital needs. He also pointed out that during the year under consideration, the preference capital redeemed was only Rs. 96,00,000 for which redemption reserve was already created from time to time since issue of preference shares. That the balance in the capital reserve redemption account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve is utilized for the purpose of business, the condition of the Act is satisfied and by subsequent merging of the reserve with the general reserve, there is no violation of the Act. He, therefore, submitted that the Assessing Officer was not justified in taking the view that the assessee was not permitted to transfer the section 33AC reserve to general reserve even after its utilization for acquisition of new ships. The learned counsel, therefore, concluded his argument with the submission that the Assessing Officer was not justified in denying the claim of deduction under section 33AC. It was also pointed out by the learned counsel that the learned CIT(A) not only upheld the order of the Assessing Officer in this regard, but he also expressed doubt about the overall eligibility of the appellant s claim for deduction under section 33AC of the Act. He observed that the assessee is not engaged in the business of operation of ships but only providing ancillary services. It is contended by the learned counsel that the Assessing Officer has never held that the assessee is not eligible to deduction under section 33AC; but while computing the deduction under section 33AC, he worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced before us. The assessee has claimed the deduction under section 33AC at Rs. 13,80,00,000, which was denied by the Assessing Officer as per proviso to section 33AC(1). Section 33AC(1) and proviso thereof reads as under: "33AC. Reserves for shipping business. (1) In the case of an assessee, being a Government company or a public company formed and registered in India with the main object of carrying on the business of operation of ships, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount not exceeding fifty per cent of profits derived from the business of operation of ships (computed under the head "Profits and gains of business or profession" and before making any deduction under this section), as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account, to be utilized in the manner laid down in sub-section (2) : Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the aggregate of the amounts of the paid-up share capital, the general reserves and amount cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f paid-up share capital and general reserve is negative, the assessee is not entitled to any deduction under section 33AC of the Act. In the above working, the Assessing Officer has not considered the paid-up preference share capital amounting to Rs. 4,24,17,000 as part of paid-up share capital and from the general reserve, as per assessee s balance sheet, he reduced the amount transferred from capital redemption account and 33AC reserve utilized account. The learned counsel challenged the above working of the Assessing Officer, while the learned DR has supported the working of the Assessing Officer. We have summarized the arguments of both the parties in the preceding paragraphs. The CIT(A) has not only confirmed the order of the Assessing Officer, but he also observed that the assessee is not eligible for deduction under section 33AC, as it is not in the business of operations of ships. We find this observation of the CIT(A) to be without any basis or material on record. In the assessment order, at page 27, the Assessing Officer has given the details of year-wise deductions allowed under section 33AC, to the assessee. As per the Assessing Officer, the assessee is being allowed de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the date of the winding up or repayment of capital; and ( ii )any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Explanation. Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely ( i )that, as respects dividends, in addition to the preferential right to the amount specified in clause ( a ), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; ( ii )that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amount specified in clause ( b ), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid. (2) "Equity share capital" means, with reference to any such company, all share capital which is not preference share capital. (3) The expressions "preference share" and "equity share" shall be construed accordingly." "86. New issues of share capital to be only of two kinds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave no right to participate in the company s affairs on account of fees paid for acquiring the preferential shares. It was further explained that the shares were redeemable in three years. It was also explained that no enduring benefit was acquired by the assessee nor any capital asset was created. The counsel of the assessee has stated that the amount received by the company on account of preferential redeemable shares are not capital in nature but revenue in nature as amount was redeemable in three years. The attention of the Bench was drawn on the letter/MOU issued by General Insurance Corporation on account of issue of 16 per cent redeemable cumulative preference shares of aggregate face value of Rs. 5 crores. After going through the contents of the letter issued by General Insurance Corporation we noted that proceeds of the preferential shares shall be utilized by company for the purpose of meeting the long-term working capital. The company was required to furnish Auditor s certificate to the above effect to General Insurance Corporation and subsidiaries annually. In the same letter at page 2 in clause F it has been provided that company shall create Preference Shares Redempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital and they were of the opinion that by issue of preference share capital, the capital of the assessee has not increased permanently because the preference share capital was redeemable and was ultimately redeemed. Therefore, the expenditure incurred on the issue of redeemable preference share capital was not capital expenditure. They have also observed that the capital raised through redeemable preference share is akin to loans. However, the Bench never said that the preference share capital is not the part of share capital. Merely because the share capital is held to be akin to loan, it does not loses its character as the share capital. Therefore, the above decision of ITAT would not support the case of revenue for holding that preference share capital is not part of share capital. As per Companies Act, 1956, there are two types of share capital - "preference" and "equity". The Legislature has also used the words "paid-up share capital" and not "equity share capital". Therefore, whatever is the amount of either preference or equity share capital, which is actually paid-up, would be considered for the purpose of proviso to section 33AC(1). In view of above, in our opinion, the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the chart prepared by the Assessing Officer, at page 27 of the assessment order, wherein he has computed the allowability of deduction under section 33AC, he has reduced the sum of Rs. 7,13,50,000 with the narration : " Less : Transferred from capital redemption account". Now, as per the chart, with regard to preference share capital prepared at pages 20 and 21 of the assessment order and also reproduced by us above, it is evident that the amount transferred from capital redemption account to the profit and loss account was Rs. 4,82,50,000 and not Rs. 7,13,50,000. In fact, Rs. 7,13,50,000 is the total amount, for which capital redemption reserve was required to be created, as per the Assessing Officer. Therefore, it is not clear what the Assessing Officer actually wanted to reduce from the general reserve because he gave the narration of one column and the amount from other column. We also find that while making the above working, the Assessing Officer has considered the relevant details beginning from financial years 1996-97 to 2003-04. The assessment for the year under consideration before us is for assessment year 2004-05, i.e., for financial year 2003-04. It was pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer. We direct him to examine whether the capital redemption reserve balance amounting to Rs. 3,69,41,800 includes any reserve created for redemption of the preference share capital amounting to Rs. 96,00,000, redeemed in the year under consideration. If the capital redemption reserve created against the redemption of preference share capital of Rs. 96,00,000 exceeds or is equal to Rs. 96,00,000, there would be no reduction from the general reserve. However, if the capital redemption reserve created is less than Rs. 96,00,000, to the extent of shortfall, the general reserve would be reduced. 16.8 Regarding transfer from section 33AC reserve utilized account - The Assessing Officer has reduced the sum of Rs. 16,75,99,000 from the general reserve on account of transfer from section 33AC reserve utilized account. The working of the general reserve account, as given by the Assessing Officer at page 26 of the assessment order, reads as under : "General Reserve Account: (Rs. In lakhs) FY Cl. Bal. as per accounts Credit from capital redemption reserve account Credit from section 33AC Shipping Reserve utilized a/c. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33 of the Income-tax Act, 1961, which was allowed for installation of new machinery or plant. The assessee was required to create development rebate reserve equivalent to 75 per cent of the development rebate. The amount earmarked for such reserve was to be utilized by the assessee within the period of eight years for the purposes of business of the undertaking other than for distribution by way of dividend or profits. The assessee created a development rebate reserve of Rs. 4,42,975 during the accounting year relevant to assessment year 1971-72. In the next year, the same was transferred to general reserve account, on the ground that the same was already utilized for purchase of plant and machinery. The dividend was distributed out of general reserve. On the above facts, the development rebate was disallowed by the Assessing Officer, on the ground that the development rebate reserve was utilized for paying dividend, which was prohibited user of such reserve. The Tribunal held that the assessee was entitled to development rebate. On reference, the Hon ble Gujarat High Court confirmed the views of the Tribunal and held as under : ". . . that an amount more than equivalent to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). In the instant case, the assessee had duly complied with the condition of purchasing new plant and machinery within the prescribed time and, therefore, any transfer of investment allowance reserve to partners account after purchase of the new machinery would not result in withdrawal of the investment allowance in the facts and circumstances . . . . " [Emphasis supplied] 16.9 Thus, in all the above cases, an unanimous view is taken by the ITAT, Ahmedabad Bench; Hon ble Gujarat High Court; and jurisdictional High Court that once the reserve created for any specific purposes is utilized for that specific purpose, it becomes a free reserve and could be utilized for any purposes as assessee think fit and proper. It can be transferred to general reserve; it can be transferred to partners capital account; or can be utilized for distribution of dividend. The learned DR has not pointed out any contrary decision to our knowledge, but he has contended that none of the above decisions is with regard to section 33AC and, therefore, will not be applicable. We agree with him that none of the above decision is pertaining to section 33AC, but at the same time, we find that the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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