TMI Blog2015 (2) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 113 - SUPREME Court) and Vazir Sultan Tobacco Company Ltd. (1981 (9) TMI 105 - SUPREME Court) and argued that the amounts appropriated‖ under Section 45-IC of the Reserve Bank of India Act, 1934 are not a reserve. We record and express our inability to agree with the said contention for the reasons set out below. Computation of MAT - Book profit - Addition of amount credited to redemption reserve account - transfer by overriding title - Held that:- In respect of Debt Redemption Reserve of ₹ 18,66,00,000/-, no specific explanation was given; on what account and why the said reserve was created. Nothing has been shown or pointed out to us to show why the said reserve was created. The reserve, which is required to be created under Section 45-IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions from the Central Government subject to proviso to sub-section (3) of the said Section. The special reserve under Section 40IC of the Reserve Bank of India A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s No.64/99, 65/99, 73/99 74/99), the Tribunal has remanded the matters back to the AOs to examine whether the leased out vehicles had been actually used by the lessee in the business of hire. In the light of the view taken by us, we do not find any infirmity in such a direction. As a matter of fact, wherever there is a doubt it must be examined whether the leased out vehicles are actually being used in the business of hiring. Only in such a situation depreciation at the higher rate of 40 per cent or 50 per cent as the case may be, is to be allowed under the relevant entry in Appendix I to the Rules.‖ 3. In terms of the aforesaid observations, the Tribunal restored the matter to the file of the Assessing Officer to decide the issue in accordance with law, i.e. end user on part of the persons, who had put the vehicles to use. It was observed that the assessee had canvassed the said factum; however, necessary verification at the end of the Assessing Officer should have been undertaken. The contention of the assessee is that the order of remand should not have been and is not required to be passed. 4. The Supreme Court in the case of ICDS Vs. Commissioner of Income Tax, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AP) ; CIT v. Bansal Credits Ltd. [2003] 259 ITR 69 (Delhi) ; CIT v. M. G. F. (India) Ltd. [2006] 285 ITR 142 (Delhi) ; CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451 (Mad)). In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. We are in complete agreement with these decisions on the said point.‖ 5. On the question of rate of depreciation, it was exemplified:- With regard to the claim of the assessee for a higher rate of depreciation, the import of the same term purposes of business , used in the second proviso to section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier, under section 32(1) of the Act. There- fore, the assessee fulfils even the requirements for a claim of a higher rate of depreciation, and, hence, is entitled to the same. In this regard, we endorse the following observations of the Tribunal, which clinch the issue in favour of the assessee . 15. The Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frastructure construction machinery/equipment and financing of infrastructure projects equipment/machinery. For the assessment year 2006-07, the appellant had filed return on 27th November, 2006, declaring total income of ₹ 2,03,13,738/- under normal provisions and had declared book profit of ₹ 38,95,04,834/- under Section 115JB of the Act. This return was revised on three occasions and in the last revised return dated 31st March, 2008, the returned income under normal provisions was revised to ₹ 1,25,92,360/-. The book profits remained unchanged at ₹ 38,95,04,834/-. By assessment order dated 31st December, 2008, the total income of the appellant-assessee was assessed under the normal provisions at ₹ 16,17,08,631/- and the book profits under Section 115JB of the Act were computed at ₹ 67,92,04,834/-. The appellant approached the Commissioner of Income Tax (Appeals) and then filed an appeal before the Tribunal. By the impugned order, addition of ₹ 9,80,00,000/- to the special reserve as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934 stands confirmed relying upon Explanation 1 clause (b) to Section 115JB(2) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment year 2007-08 reads:- [Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, [2007 ]], is less than [ten per cent] ] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of [ten per cent]]]. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) : Provided that while preparing the annual accounts including profit and loss account,- (i ) the accounting policies; (ii ) the accounting standards adopted for preparing such accounts including profit and loss account; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or] (ii ) the amount of income to which any of the provisions of [ section 10 (other than the provisions contained in clause (38) thereof)] or 31[***] section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or [( iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets); or (iib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii ) surcharge, if any, as levied by the Central Acts from time to time; (iv ) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v ) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.] (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. (4) Every company to which this section applies, shall furnish a report in the prescribed form 37 from an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i ) of sub-section (1) of section 142. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whatever name called, except the reserve specified under Section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded. Guidance Note on revised Schedule VI to the Companies Act, 1956 by the Institute of Chartered Accountants of India would indicate that reserves and surplus are generally classified as; (a) capital reserve; (b) capital redemption reserve; (c) securities premium reserve; (d) debenture redemption reserve; and, (e) revaluation reserve or other reserves. In addition, there can be share options outstanding account and surplus, i.e. the balance in the statement of profit and loss disclosing allocations and appropriations such as dividend, bonus shares and transferred to/from reserves, etc. 15. In view of the aforesaid legal position and language of clause (b) to Explanation (1) to Section 115JB of the Act, the appellant-assessee had adopted a different line of argument relying upon the decision of the Supreme Court in the case of National Rayon Corporation (supra) and Vazir Sultan Tobacco Company Ltd. (supra) and argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tants of India on revised Schedule VI to the Companies Act, 1956 (December, 2011 Edition) in which it has been observed:- 8.1.2.1. Reserve: The Guidance Note on Terms Used in Financial Statements defines the term Reserve as ―the portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.‖Reserves should be distinguished from provisions . For this purpose, reference may be made to the definition of the expression `provision in AS-29 Provisions, Contingent Liabilities and Contingent Assets. As per AS-29, a `provision is ―a liability which can be measured only by using a substantial degree of estimation‖. A liability is ―a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.‖ 'Present obligation -an obligation is a present obligation if, based on the evidence available, its existence at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated as money set apart to meet a known liability and the amount should be shown as a liability. In these circumstances, it was held that the amount set apart was not a ―reserve‖. Reference was made to Batliboi's Advanced Accountancy with reference to nature of sinking funds and it was held that redemption of debenture would not be a ―reserve‖, though it was shown as ―reserve‖ in the balance-sheet. An amount shown as a reserve is in the nature of allocation of profits and not a charge against them. The Debenture Redemption Reserve, it was held, was in the nature of charge against profits and not appropriation of profits. 21. We do not see how this decision can help and assist the appellant-assessee. 22. In respect of Debt Redemption Reserve of ₹ 18,66,00,000/-, no specific explanation was given; on what account and why the said reserve was created. Nothing has been shown or pointed out to us to show why the said reserve was created. The reply dated 9th March, 2009 quoted in the assessment order refers to definition of the term ―provision or reserve‖ and various decisions and in the end it is stated that the amounts s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the contingent liability. 25. The argument in respect of Section 45-IC of the Reserve Bank of India Act, 1934 and diversion of income at source is misconceived. The decisions of different courts including the Supreme Court and the Delhi High Court in the case of Molasses Storage Fund are inapplicable. Diversion of income at source by way of overriding title as a principle is applicable when under a statutory or contractual obligation or under the provisions of Memorandum and Articles of Association, the earning is divested and the assessed has no title over a particular receipt. When such charge exists, the amount or income so charged must be excluded from income of the assessed as income never reaches his hands and in fact belongs to a third person. Thus, the income stands diverted at source. Diversion of income at source implies that income or the amount mentioned therein belongs to a third party and was not income of the assessed. Similar question arose before the Supreme Court in Associated Power Co. Ltd Vs. CIT (1996) 218 ITR 195. In that case, the assessed was a company engaged in the business of generation of electricity and distribution thereof to consumers. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian Trusts Act makes no difference to this position. ‖ The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and, it being a taxable receipt/earning, it must be taken into account. 26. Section 45-IC of the Reserve Bank of India Act, 1934 reads as under:- 45-IC. Reserve fund.- (1) Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. (2) No appropriation of any sum from the reserve fund shall be made by the non-banking financial company except for the purpose as may be specified by the Bank from time to time and every such appropriation shall be reported to the Bank within twenty-one days from the date of such withdrawal: Provided that the Bank may, in any particular case and for sufficient cause being shown, extend the period of twenty-one days by such further period as it thinks fit or condone any delay in making such report. (3) Notwithstanding anything contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed. Reserve, so created is not a liability known or ascertained, even estimated. Section 45-IC ensures that a Non- Banking Finance Company does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. No separate bank account is required to be maintained. It is an added measure of protection created by the statute, to prevent defaults by the Non Banking Financial Companies. Section 45-IC of the Reserve Bank of India Act, 1934 also permits appropriation but in restricted or controlled manner by a Non Banking Financial Company. 30. Accounts in case of a company are prepared as a going concern assuming that the business will continue in the foreseeable future. To ascertain the ‗net profit of each year, not only the current liabilities and the contingencies but future contingencies should also be considered. Thus, Chapter VI of the Companies Act in Part II and III provides for ‗Provision and ‗Reserves which relate to future payments, future needs and contingencies for which a part of the current earning is set aside. 31. The unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
