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M/s Shivalik Venture Pvt. Ltd. Versus Dy. Commissioner of Income Tax-8 (3) , Mumbai

2015 (8) TMI 979 - ITAT MUMBAI

MAT - Profit on transfer of development rights to the fully owned subsidiary company - Whether it is required to be included in the book profit u/s 115JB ? - Held that:- We find merit in the contentions of the assessee that the profit arising on transfer of capital asset to its wholly owned Indian subsidiary company is liable to be excluded from the Net profit., i.e., the Net profit disclosed in the Profit and Loss account should be reduced by the amount of profit arising on transfer of capital .....

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aside the order passed by Ld CIT(A) on this issue and direct the AO to exclude the above said profit from the computation of “Book Profit” for the reasons discussed above. - Decided in favour of assessee.

Disallowance made u/s 14A - Held that:- A perusal of the orders of the tax authorities would show that they have not considered the submission about the availability of interest free funds. Before us, the ld A. R has contended that the interest free funds available with the assessee .....

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the assessee, including the contention with regard to the availability of interest free funds and the average value of investments - Decided in favour of assessee for statistical purposes. - I. T. A. No.2008/Mum/2012 - Dated:- 19-8-2015 - SHRI JOGINDER SINGH AND B. R. BASKARAN, JJ. For The Appellant : Shri Vijay Mehta For The Respondent : Shri Neil Philip ORDER PER B. R. BASKARAN (AM) The assessee has filed this appeal challenging the order dated 31.01.2012 passed by Ld CIT(A)-18, Mumbai and it .....

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sue are that the assessee company is engaged in the business of Development and leasing of Commercial Complexes and Rehabilitation of buildings under Slum Rehabilitation Scheme. The assessee company was formed on 24.3.2008 by converting an earlier partnership firm into a company under the provisions of PART-IX of the Companies Act, 1956. The assessee company also owns a wholly owned Indian subsidiary company named SVI Realtors Private Limited . The assessee company held a parcel of land admeasur .....

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e as Extra Ordinary Income in the profit and loss account. Under the provisions of sec. 47(iv) of the Act, the transfer of a capital asset by a company to its wholly owned Indian subsidiary company (subject to certain conditions) is not regarded as transfer and hence the Capital gain arising on such transfer is not chargeable to tax u/s 45 of the Act. In the instant case, there is no dispute that the provisions of sec. 47(iv) of the Act are applicable to the transfer made by the assessee to its .....

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taching following Notes to its accounts:- During the year the company has derived a surplus over cost of acquisition of assets held by it as CWIP amounting ₹ 300.24 crores. In view of the fact that it is a capital receipt and a transaction is not regarded as a transfer under the Income-Tax Act, the company interprets that since it is not being in the nature of income it does not came within purview of Section 115JB. The company interpretation on the matter of applicability to minimum alter .....

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; 131 TTJ 514). In the above said case also, the assessee therein generated a gain of ₹ 99.42 crores on transfer of assets to its 100% subsidiary company and claimed that the same was exempt under the provisions of sec. 47(iv) of the Act. The Special bench took the view that the same cannot be excluded from the Net profit, since the Explanation to section 115JB does not specifically provide for exclusion of income covered by sec. 47(iv) of the Act, while computing the book profit. Accordin .....

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he hands of assessee therein has been included in the profit and loss account and it has further been accepted that the accounts have been prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. He submitted that the Special bench has specifically observed that the assessee before it did not clarify anything about the same in the Notes to accounts. He submitted that the Special bench, based on the above said facts, held that the profit arising on t .....

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is not the case of the assessee that the capital gain earned by the assessee was not included in the net profit determined as per profit and loss account of the assessee prepared under the Companies Act. As per the audited accounts of the assessee, the statutory auditors have reported that amongst others, that in their opinion, the profit and loss account and the balance sheet are in compliance with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, an .....

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ofit and loss account but it is not to be includible in the net profit in terms of provisions of Part II and Part III of Schedule VI to the Companies Act or the accounting principles accepted under the Companies Act….. 25. It is to be noted that the assessee has not made any claim of deduction of long term capital gain from the book profit, which goes to show that capital gain as such is not deductible from the net profit prepared in accordance with Parts II and III of Schedule VI to the .....

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me of computing Book Profit u/s 115JB of the Act, the Special Bench took the view that the assessee, having included the capital gain in the Profit and Loss account which was agreed to have been prepared in accordance with Parts II and III of the Schedule VI to the Companies Act, cannot claim that the same should be excluded from net profit for the purpose of computing book profit u/s 115JB of the Act. 7. The ld. Counsel submitted that the assessee herein has taken a specific stand that the impu .....

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nd hence the decision rendered by the Special Bench in the Rain Commodities Ltd (supra) is not applicable to the facts of present case. 8. The ld. Counsel further submitted that the Notes forming the part of accounts should also be read along with the profit and loss account and hence expression net profit as shown in the profit and loss account used in the section 115JB is required to be understood by giving due effect to the items stated in Notes to accounts accompanying annual accounts and ha .....

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indian subsidiary company is not regarded as transfer under sec. 47 of the Act and hence the profits or gains arising from such transfer is not chargeable to tax under the head Capital gains in terms of provisions of sec. 45. Hence the profits or gains so generated shall not fall within the definition of income at all as per the definition of the term Income given in sec. 2(24) of the Act. In view of the above said provisions, such profit is not includible in computing the total income under the .....

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equired to be excluded at the source level itself. Accordingly he contended that there is no requirement of making specific provision to exclude the same in the Explanation to sec. 115JB of the Act. 10. The Ld D. R, on the contrary, submitted that the provisions of sec. 115JB is a self contained code and hence only those items prescribed under that section can alone be added or excluded from the Net Profit disclosed in the Profit and Loss account. He further submitted that the assessee has credi .....

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e was considered by the Special bench in the case of Rain Commodities Ltd (supra) and the Special bench of Tribunal has held that such kind of profit cannot be excluded while computing Book Profit . Accordingly he submitted that the facts prevailing in the instant case and the case considered by the Special bench are identical in nature and hence the decision rendered by the Special bench shall be squarely applicable to the facts of present case. Accordingly, he submitted that the Ld CIT(A) was .....

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ted by it. The contention of the revenue is that the provisions of sec. 115JB are a self contained code and the Book Profit has to be strictly computed in accordance with the provisions stated therein. 12. The provisions of sec. 115JB shall come into operation, only if the income tax payable under the normal provisions of the Act by an assessee, being a company, is less than the prescribed percentage of book profit . The expression Book Profit is defined under Explanation 1 to sec. 115JB of the .....

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Act is less than the amount of tax prescribed u/s 115JB of the Act. 13. Though the assessee has credited the profit and loss account with the profits arising on transfer of a capital asset to its subsidiary company, yet it has excluded the same from the net profit while computing book profit in terms of sec. 115JB of the Act. Admittedly, the said profit is not an item of exclusion prescribed under the Explanation 1 to sec. 115JB of the Act. The contentions advanced by the assessee in support of .....

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to take care of the qualifications given in the Notes. Thereafter only, the provisions of Explanation 1 to sec. 115JB should be applied. (b) the gain arising on transfer to assets to subsidiary company does not fall under the definition of income at all. Hence, once a particular receipt is not regarded as income at all, the question of bringing the same to tax under any of the provisions of the Act does not arise. 14. It is an undisputed fact that the assessee has attached a note in the Notes fo .....

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ced reliance on the decision rendered by the Hon ble Delhi High Court in the case of Sain Processing & Weaving Mills (P) Ltd (supra). In the case before Hon ble Delhi High Court, the assessee therein issue did not charge depreciation to the Profit & Loss account, but disclosed the same in the Notes forming part of accounts. However, while computing book profit u/s 115J of the Act, it claimed the amount of depreciation as deduction from the Net profit disclosed in the Profit and loss acco .....

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t. As already noted it is obligatory under clause 3(iv) of Part II to Schedule VI to the Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears. According to us, once this information is disclosed in the notes to the accounts it would clearly fall within the ambit of the Explanation to section 115J of the Act which defines book profit to mean net profit as shown in the profit and loss account for the relevant assessment ye .....

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sub section (1A) as well as the Explanation to section 115J of the Act . 15. The decision rendered by Hon ble Delhi High Court, cited above, was followed by the Pune A Bench of the Tribunal in the case of K.K. Nag Ltd Vs. Addl CIT (2012)(52 SOT 381). In this case, the incremental liability towards leave encashment was not debited to Profit and Loss account, but otherwise disclosed in Notes to Accounts. The Tribunal held that the said liability would have to be deducted while determining Book Pr .....

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er in its books of accounts, though it disclosed the details of waiver in the notes on accounts. The assessing officer noticed that the assessee would be liable to pay tax as per the provisions of Section 115JA of the Act, (Minimum Alternative tax), if the waiver benefits are incorporated in the books of accounts accordingly he included the waiver benefits in the book profit. The Tribunal, after considering the decision of Hon ble Delhi High Court in the case of CIT Vs. Sain Processing Mills (P) .....

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account for the relevant previous year prepared under sub-section (2), as increased by- In sec. 115JB(2), it is provided that the profit and loss account shall be prepared in accordance with the provisions of part II of Schedule VI to the Companies Act, 1956. So the profit and loss account prepared as per the provisions of Companies Act is required to be considered for the purpose of provisions of sec. 115JB of the Act, meaning thereby the interpretation given to the various provisions of Compan .....

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mpanies Act, which read as under:- (6) For the purpose of this section, except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto giving information required by this Act and allowed by this Act to be given in the form of such notes or documents. Hence, in the case of Sain Processing Mills (P) Ltd (supra), the Hon ble Delhi High Court observed as under, after considering the provisions of Co .....

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, it would come within the ambit of the expression shown in the profit and loss account, as notes to accounts form part of the profit and loss account by virtue of subsection (6) of section 211 of the Companies Act, 1956. This is quite evident if the provisions of sub-section (6) of section 211 of the Companies Act, are read in conjunction with sub section (1A) as well as the Explanation to section 115J of the Act . Hence, in the decision given by Hon ble Delhi High Court (supra and also other t .....

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f these decisions is that the expression net profit as shown in the profit and loss account should not be understood as the net profit disclosed in the profit and loss account, but the net profit adjusted to the effects of notes given in the Notes forming part of accounts. Hence the Court as well as Tribunals, in the above cited cases, held that the depreciation, incremental liability on leave encashment, loan waiver benefits have to be adjusted to the profit/loss shown in the Profit and loss ac .....

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process of arriving at Net Profit at the source level. 18. In the case of Sain Processing Mills (P) Ltd (supra) and other two decisions rendered by the Tribunal (supra), the items not disclosed in the Profit and Loss account, but disclosed in the Notes forming part of accounts was held to be adjusted while arriving at Net profit. However, in the instant case, the assessee has disclosed an item of income in the Profit and Loss account, but claims that the same should be excluded by referring to .....

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a) should be applied in the instant case also. This factual aspect distinguishes the instant case against the facts available in the case of Rain commodities Ltd, which was decided by the Special bench. Accordingly, we are of the view that the ratio of Special bench decision cannot be applied straingly in the instant case and hence we are unable to agree with the decision rendered by Ld CIT(A). 20. Accordingly, we find merit in the contentions of the assessee that the notes given to Notes to acc .....

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ticed that the Special bench of Tribunal, in the case of Rain Commodities (supra) had specifically observed about the absence of any comment in the notes of accounts. The Ld Counsel sought to distinguish the decision rendered by the Special bench by submitting that the assessee herein has furnished a note with regard to the profit arising on transfer of a capital asset to the wholly owned Indian subsidiary company. The Special bench was also conscious of the fact that the notes given in the Note .....

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t profit and then follow the adjustments of MAT as usual…. In view of the foregoing discussions, we find merit in the submission of the assessee that the facts prevailing in the instant case is distinguishable from the facts of the case before the Special bench. 22. At this stage, we feel it relevant to discuss about a decision rendered by the co-ordinate Mumbai bench and which stands approved by Hon ble Bombay High Court. In the case of ACIT Vs. Akshay Textiles Tdg & Agencies P Ltd ( .....

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d the order of the Tribunal in its order reported in (2008)(304 ITR 401). The said decision was later followed by the Tribunal in a group of cases, viz., DCIT Vs. M/s Arundhati Traders Pvt Ltd and others (ITA No.6293/Mum/2006 and others dated 02-12-2009). In all these cases, there is no mention about the notes, if any, given in the Notes to accounts with regard to the method of accounting followed by these assessees. Hence, the assessing officer was held to be not justified in including the inco .....

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ed by the Auditors to the effect that the same are maintained as per the requirements of the Companies Act and the same are approved by the shareholders of the company in its annual general meeting and filed before the Registrar of companies, the authenticity of such accounts has to be accepted by the Assessing Officer, while computing the book profits under section 115J/115JA/115JB of the I. T. Act. The assessing officer is however empowered to make such adjustments as provided for in the Expla .....

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ce the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income u/s 2(24) of the Act and since it does not enter into computation provision at all under the normal provisions of the Act, the same should not be considered for the purpose of computing book profit u/s 115JB of the Act. In order to appreciate the contentions of the assessee, we feel it pertinent to extract the relevant provisions here. The provisions of sec. 2(24) of .....

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be chargeable to income tax under the head Capital gains and shall be deemed to be the income of the previous year in which the transfer took place. We notice that the provisions of sec. 45 postulate three conditions, viz., (a) There is a capital asset. (b) There is a transfer of the above said Capital asset. (c) The said transfer results in any Profits or gains. If all the above said three conditions are satisfied, then the profits or gains arising from the transfer of a capital asset shall be .....

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a Capital asset by the assessee to its subsidiary company should normally fall under the definition of transfer given in sec. 2(47) of the Act. However, the provisions of sec. 47 of the Act provides certain exceptions by holding that certain transactions shall not be regarded as transfer , meaning thereby, even if a transaction falls under the definition of transfer as per the provisions of sec. 2(47) of the Act, yet they shall not be chargeable to tax u/s 45 of the Act, in view of the provisio .....

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of capital asset by a company to its wholly owned Indian subsidiary company is included in sec. 47 of the Act under clause (iv) and hence the said transaction is not regarded as transfer . The existence of the element of transfer is an essential condition for bringing the profits and gains arising on a transfer of a capital asset into taxation u/s 45 of the Act. Accordingly, in the absence of transfer , the profits and gains arising on said transfer of capital asset by a company to its wholly o .....

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e Act and hence it does not enter into the computation provisions of the Income tax Act. Accordingly it was contended that, an item of receipt which is not considered as income at all and which does not enter into the computation provisions of the Income tax Act, cannot be subjected to tax u/s 115JB of the also. 26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not for .....

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1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of income , are excluded for the purpose of computing Book Profit , since the said receipts are exempted u/s 10 of the Act while comput .....

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ssee on this legal point. 27. A careful perusal of the decision rendered by the Special bench in the case of Rain Commoditites Ltd (supra) would show that the above said legal contentions were not considered by the Special bench. We notice that the Special bench considered the following decisions:- (a) Malayala Manorama Co. Ltd Vs. CIT (2008)(300 ITR 251)(SC) (b) N.J. Jose & Co. (P) Ltd (321 ITR 132)(Ker) (c) CIT Vs. Veekaylal Investment Co. (P) Ltd (249 ITR 597)(Bom) In all these cases, the .....

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ition of income given u/s 2(24) of the Act. Further, we notice that the Special bench did not have occasion to consider the argument urged before us that the profits and gains arising on transfer of a capital asset by a holding company to its wholly owned Indian Company does not fall under the definition of income at all u/s 2(24) of the Act and hence the same does not enter into the computation provisions of the Act at all. We are impressed by the arguments advanced in this regard and we have a .....

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ecial bench. Hence on this factual aspect also, the decision rendered by the Special bench is distinguishable. 28. In view of the foregoing discussions, we find merit in the contentions of the assessee that the profit arising on transfer of capital asset to its wholly owned Indian subsidiary company is liable to be excluded from the Net profit., i. E., the Net profit disclosed in the Profit and Loss account should be reduced by the amount of profit arising on transfer of capital asset and the am .....

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sed by Ld CIT(A) on this issue and direct the AO to exclude the above said profit from the computation of Book Profit for the reasons discussed above. 29. The next issue urged by the assessee relates to the disallowance made u/s 14A of the Act. The assessee had earned dividend income of ₹ 3,49,66,452/- and claimed the same as exempt. It also disallowed a sum of ₹ 60,01,613/- as per the provisions of sec. 14A of the Act. The AO noticed that the disallowance worked out by the assessee .....

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the AO was not correct. The Ld CIT(A), however, did not agree with the contentions of the assessee, but directed the AO to re-work the disallowance by adopting correct amount of average value of investments. Aggrieved, the assessee is challenging the decision of Ld CIT(A) before us. 30. The Ld A. R submitted that the assessee is possessing sufficient amount of interest free funds, which is far in excess of the investments and hence it cannot be presumed that the assessee has used interest beari .....

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