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2015 (8) TMI 979 - ITAT MUMBAI

2015 (8) TMI 979 - ITAT MUMBAI - [2015] 43 ITR (Trib) 187 (ITAT [Mum]) - 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 .....

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he scheme of the provisions of sec. 115JB of the Act. Accordingly, we set 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. .....

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to examine this issue afresh by duly considering all the contentions of 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 chal .....

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above said issues are stated in brief. The facts relating to the first issue 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 Realt .....

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Term Capital Gain (LTCG) of 300.68 crores. The assessee disclosed the same 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(i .....

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300.68 crores while computing the book profit u/s 115JB of the Act by attaching 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. T .....

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Tribunal in the case of Rain Commodities Ltd V/s DCIT (2010) (40 SOT 265; 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 cov .....

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ecial bench has specifically observed that the capital gains arising in the 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 Specia .....

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t II and Part III of Schedule VI to the Companies Act. In other words, it 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 standard .....

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nd clarified that though the long term capital gain is included in the profit 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 p .....

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inclusion in the Notes of accounts, but claimed deduction only at the time 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 su .....

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assessee is subject to the qualification made in the Notes on accounts and 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 .....

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hat transfer of a capital asset by a holding company to its wholly owned 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 provisio .....

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that such kind of profit, which is not considered as income at all, is required 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 .....

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transfer of asset to its subsidiary. He submitted that the identical issue 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 .....

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luded while computing Book Profit u/s 115JB of the Act for the reasons cited 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 ex .....

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since the tax payable by the assessee under the normal provisions of the 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. .....

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net profit shown in the Profit and loss account shall be first adjusted 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 .....

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given in the Notes to the accounts. In this regard, the assessee has placed 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 depreciati .....

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allowed to be given in the form of notes or documents by the Companies Act. 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 prof .....

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ion (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 . 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 th .....

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ee. However, the said company did not incorporate the effect of such waiver 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 .....

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ection, book profit means the net profit as shown in the Profit and Loss 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, mea .....

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art of accounts , we may refer to the provisions of sec. 211(6) of the Companies 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 D .....

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and loss account but is otherwise dis)closed in the notes of the accounts, 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, .....

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mbit of the expression shown in the profit and loss account . The ratio of 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 benefi .....

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f notes given in the Notes to accounts, i. E., the same forms part of the 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 L .....

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ls (P) Ltd (supra) and other two decisions rendered by the Tribunal (supra) 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 meri .....

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nt used in Explanation 1 to sec. 115JB of the Act. 21. We have earlier noticed 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 Spec .....

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s account, i. E., to say that Assessing Officer should recalculate the net 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 .....

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ected the said action of the AO. The Hon ble Bombay High Court also upheld 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, .....

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any are maintained as per the Provisions of Companies Act and are Certified 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 i .....

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shall now examine the second contention urged by the assessee, viz., since 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 .....

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ise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, 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 t .....

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udes the sale, exchange or relinquishment of the asset. Hence the sale of 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 .....

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an Company. It can be noticed that the transaction involving any transfer 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 gai .....

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does not fall under the definition of Income as given in sec. 2(24) of the 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 .....

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o, except otherwise specifically provided for. Clause (ii) of Explanation 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 Pro .....

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15JB of the Act. Hence, we find merit in the submissions made by the assessee 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. Ve .....

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and consequently, the same does not fall within the purview of the definition 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 .....

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such notes has been inserted, which fact was specifically noted by the Special 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 reduce .....

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visions of sec. 115JB of the Act. Accordingly, we set 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. 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 .....

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sessee also submitted that the average value of investments worked out by 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 .....

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