TMI Blog2009 (9) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... on of liability. Once it is not considered as a liability, the question of adding the same for computing book profit under s. 115JA does not arise product warranty falls within the definition of a contingency, which means that though it is a liability as on the date of balance sheet, in view of the uncertainty surrounding the claims, it would fall under the category of "unascertained liability". Hence it is liable to be added to the book profit as per cl. (c) of Explanation to s. 115JA - except the provision made for guarantee repairs amounting to Rs. 1.10 crores, all other provisions would fall outside the purview of s. 115JA - Appeals are partly allowed - - - - - Dated:- 14-9-2009 - Member(s) : SUNIL KUMAR YADAV., B. R. BASKARAN. ORDER-B.R. BASKARAN, A.M.: These two appeals, filed at the instance of the assessee, are directed against the order passed by the learned CIT(A)-I, Visakhapatnam and they relate to the asst. yrs. 1999-2000 and 2000-01. Since certain issues agitated in these two appeals are identical in nature and further, these two appeals were heard together, we find it convenient to dispose of both the appeals by this consolidated order. 2. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred heavy losses and was facing financial problems, it proposed a capital restructuring plan to the Government of India. Accordingly by a waiver order dt. 24th March, 1999 passed by the Government of India vide its letter No. SY11018/34/90/HSL (Vol. III), following benefits were accorded to the company: (Amount in crores) (a) Conversion of loans into equity Rs. 120.20 (b) Write off of Government loans to the Rs. 158.25 extent of (c) Write off of interest on Government Rs. 312.68 loans and guarantee fees ---------- Rs. 591.13 ---------- However, the assessee did not account for these benefits in its accounts for the year ending 31st March, 1999, though the details of waiver benefits were disclosed in the annual report of that year. The AO agreed with the contention of the assessee that the conversion of loans into equity and the write off of Government loans are not liable to tax. With regard to the third item, the assessee, in its annual report, had stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s placed on the decision of the Hyderabad Tribunal in the case of NCL Industries Ltd. vs. Jt. CIT (2004) 88 TTJ (Hyd) 747 : (2004) 88 ITD 150 (Hyd). (d) Even if the amount so waived off or written back is treated as income, the Revenue cannot bring the same within the purview of s. 115JA for the reason that s. 115JA is a self-contained code without having regard to anything contained in any other provisions of the IT Act. Reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of Amichand Investment (P) Ltd. vs. Dy. CIT (2008) 216 CTR (Guj) 230 : (2008) 6 DTR (Guj) 249 : (2008) 304 ITR 97 (Guj). 7. On the contrary, learned Departmental Representative submitted that the assessee is bound to account for the waiver benefits in its books of accounts as the company is following mercantile system of accounting and further it has disclosed the details of waiver in the annual report. Since the assessee has failed to account for the same, the auditors have qualified their audit report in which case, the accounts cannot be said to be certified to have been prepared in accordance with the provisions of Part II and Part III of Sch. VI. The very fact that the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government of India loans into equity share capital to the tune of Rs. 120.20 crores. The ministry also indicated in its annual report 1998-99 vide cl. No. 4.2.6 submitted to Parliament that 'the impact of capital restructuring would be reflected in the companies records only after receipt of approval of MAT exemption from the Government'. The administrative ministry recommended exemption of MAT and it is under active consideration of the Ministry of Finance. In view of the above, the capital restructuring effect is not considered in the books of accounts." The auditors of the company M/s Sudhakar Kumar Associates, Visakhapatnam in their audit report dt. 25th Aug., 1999 have qualified their report at para 4(i), by stating that losses and liabilities are subject to non-effecting of capital restructuring as provided by the Government of India. Further para 5 of the auditors' report reads as under: "5. In our opinion and to the best of our information and according to the explanation given to us the accounts together with the notes thereon give the information required by the Companies Act, 1956, in the manner so required and subject to para (4) above give a true and fair view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dt. 24th March, 1999, has accrued in the hands of the company by virtue of the letter dt. 24th March, 1999 cited supra, i.e., during the financial year relevant to the asst. yr. 1999-2000. The assessee company did not account for the benefits because the concerned Ministry of Government of India, in its report submitted to Parliament has said that the impact of capital restructuring would be reflected in the company's records only after receipt of approval of MAT exemption from the Government. In this connection, we extract below the observations of learned CIT(A) in this regard, with our approval: "In this context reliance is placed on the decision of Bombay High Court in the case of CIT vs. ACE Builders (P) Ltd. (1994) 116 CTR (Bom) 224 : (1993) 202 ITR 324 (Bom), wherein it was held that income is held to accrue only when the assessee acquires a right to receive that income, or in other words, income can be said to accrue on the date when the debt becomes due and unless the right to profits comes into existence, there is no accrual of profits. In the present case, Government of India have accepted the proposal for waiver of interest in the financial year relevant to the asst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of s. 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income-tax both maintained under the same Act. If the legislature intended the AO to reassess the company's income, then it would have stated in s. 115J that income of the company as accepted by the AO. In the absence of the same and on the language of s. 115J, it will have to hold that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the AO while computing the income under s. 115J 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 the said section. To put it differently, the AO does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting year relevant to the asst. yr. 1999-2000. While deciding the issue the AO has considered the letter dt. 24th March, 1999 issued by the Government of India conveying the approval for capital restructuring. Clause 2(a) of Part II of Sch. VI to the Companies Act, requires disclosure of credits or receipts and debits or expenditure in respect of non-recurring transactions or transactions of an exceptional nature. Further cl. 3 (xii)(b) of Part II of Sch. VI to the Companies Act requires disclosure of profits or losses from such transactions. Therefore, in the given circumstances in the assessee's case, applying AS-5, interest waived by Government of India vide approval dt. 24th March, 1999 should have been shown in financial year relevant to asst. yr. 1999-2000 for the purpose of computing income under s. 115JA of the Act. Moreover according to sub-s. (4) of s. 115JA all other provisions of the IT Act are applicable and therefore, the provisions of s. 145 of IT Act can be invoked for determining the income under the provisions of s. 115JA." 8.3 The assessee placed reliance on the decision of the Mumbai Tribunal in the case of Greaves Chitram Ltd. vs. Dy. CIT to conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch provision is not made by means of a depreciation computed in accordance with s. 205(2) of the Act shall be disclosed by way of a note." After considering these two provisions the Hon'ble Delhi High Court has observed as under: "4.7 Thus disclosure, according to us, in the notes to the account is obligatory by virtue of the provision of sub-s (1A) of s. 115J of the Act which requires that every assessee shall prepare P L a/c in accordance with the provision of Parts II and III of Sch. VI to the Companies Act, 1956. 4.8 Having said that, the issue still remains as to whether notes to accounts form part of the accounts, and whether the fact that the current year's depreciation which has not been debited to the P L a/c would in any way deprive the assessee of its claim for the deduction from the 'net profit' in arriving at the figure of 'book profit' for the purposes of s. 115J of the Act. 4.9 The answer to this poser is found in sub-s. (6) of s. 211 of the Companies Act, which provides that except where the context otherwise requires any reference to a balance sheet or P L a/c shall include the notes thereon or documents annexed thereto, giving information required to be g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0; (b) CIT vs. Hukumchand Mohanlal 1972 CTR (SC) 273 : (1971) 82 ITR 624 (SC); (c) Commr. of Agrl. IT vs. Kerala Estate Mooriad Chalapuram (1986) 58 CTR (SC) 136 : (1986) 161 ITR 155 (SC); (d) CIT vs. Bipinchandra Maganlal Co. Ltd. (1961) 41 ITR 290 (SC). Finally the Tribunal held that: "The only conclusion that can be drawn from this is that normally such extraordinary items are not considered as revenue. The Special Bench of the Tribunal in the case of Sutlej Cotton Mills has clearly laid down the proposition that under s. 45 of the IT Act capital gains, as deemed income, cannot be brought to tax for the purposes of determining book profits under s. 115J. Thus the proposition is clearly laid down at para 19 of that judgment which is at p. 1141. On similar analogy we are inclined to agree with the argument of the assessee's counsel that s. 41(1) which is brought into the statute to supersede the principle that under general law remission of a trade liability is income cannot be brought in for the purposes of calculating book profit under s. 115J. The proposition laid down by the Hon'ble Supreme Court in that case of Bipin Chandra Maganlal Co. Ltd. is binding on us an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider capital gains for the purposes of computing book profits under s. 115J of the Act. Further, under cl. (2) of Part II of Sch. VI to the Companies Act where a company receives the amount on account of surrender of leasehold rights, the company is bound to disclose in the P L ale the said amount as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature i.e., whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve. Such receipts are also covered by cl. 2(b) of Part II of Sch. VI to the Companies Act which, inter alia, states that P L a/c shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Lastly, even under cl. 3(xii)(b) profits or losses in respect of transactions not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature show clearly that capital gains should be included for the purposes of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Provision for doubtful debts Rs. 3,95,363 (ii) Provision for reduction in ship repair bills Rs. 4,76,92,514 (iii) Provision for obsolescence of materials Rs. 62,26,319 (iv) Losses on account of unlinked advanced Rs. 7,11,598 --------------- Total Rs. 5,50,25,794 --------------- Aggrieved, the assessee carried the matter in appeal before the learned CIT(A) who deleted the last item in the list, viz., Rs. 7,11,598 and confirmed the other three additions. Still aggrieved, the assessee is in appeal before us. 10. Similarly, in the asst. yr. 2000-01, the AO added a sum of Rs. 108.67 crores debited in the P L a/c under the head "Provisions and losses". The break-up details of the same are given by the learned CIT(A) as under: (i) Provision for doubtful debts 14,53,983 (ii) Provision for reduction in ship repair bills 7,59,19,638 (iii) Provision for obsolence of materials 2,52,77,268 (iv) Provision for future losses 77,00,6,831 (v) Prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets or to provide for a liability. Under s. 115JA what is required to be added is the amount provided for meeting liabilities other than ascertained liabilities. Therefore, the provision made to provide for depreciation, renewals or diminution in value of assets is not required to be added to the book profit as per cl. (c) of Explanation to s. 115JA. We find support for this view from the decision of Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems Services Ltd. (200B) 219 CTR (SC) 222 : (200B) 13 DTR (SC) 105 : (200B) 305 ITR 409 (SC), wherein, it was held that cl. (c) of Explanation to s. 115JA is targeted only with respect to the amount provided for meeting a liability other than ascertained liability. Accordingly the Hon'ble apex Court held that the provision for bad and doubtful debts, being a provision made for the diminution in the value of the assets is not hit by cl. (c) of Explanation to s. 115JA. Hon'ble Ahmedabad Bench of Tribunal in the case of Deepak Nitrite Ltd. vs. Dy. CIT (2008) 114 TTJ (Ahd) 980 : (2008) 3 DTR (Ahd)(Trib) 511 has held that any provision made for diminution in value of assets by way of obsolence loss is not covered under cl. (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to (a) provision of doubtful debts, (b) provision for reduction in ship repair bills and (c) provision for obsolescence of material, as stated in para 11.3 supra, fall outside the purview of cl. (c) of Explanation to s. 115JA. 11.4.1 The provision for future losses does not relate to any liability. According to paras 55 and 56 of AS-29, no provision is required to be made for future operating loss, as it does not meet the definition of liability. Once it is not considered as a liability, the question of adding the same for computing book profit under s. 115JA does not arise. 11.4.2 The assessee has explained the nature of the "provision for liquidated damages" as under before learned CIT(A): "2.2.3 Regarding the provisions for liquidated damages it was submitted that in the ship building industry it is a common feature that time bound contracts usually ranging over a number of years, are executed for the purpose of construction of ships, with stringent damages in case of delay in handing over delivery. The assessee has made a provision for the liquidated damages that has to be paid for the delay already taken place for the ships under construction as vessels under repair, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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