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2015 (11) TMI 1135 - ITAT KOLKATA

2015 (11) TMI 1135 - ITAT KOLKATA - TMI - Addition on account of deferred tax liability - whether such excess liability was created in order to explain the other assets - CIT(A) deleted the addition - Held that:- The impugned addition could not have been made by the AO for the reason that the deferred tax liability had not come to reduce the total income declared by the assessee in the return of income. The income declared in the return of income was the profit of the three divisions as per the .....

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llaneous receipts and adjustment of earlier years, were not treated as profits eligible for deduction u/s 80HHC of the Act by the CIT(A). In such situation we are of the view that there can be no grievance for the revenue as projected. This ground has probably been taken on misconception that the aforesaid items of receipts were also considered as profit eligible for deduction u/s 80HHC of the Act. - Decided against revenue.

Computation of books profit by considering the amount claime .....

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should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl. (iv) of Explanation to s. 115JB [subject to the conditions specified in sub-cls. (4) and (4A) of that section] to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department. Therefore Clause (iv) of the Explanation to s. 115JB covers full export profits .....

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ion actually allowed u/ 80HHC of the Act.- Decided against revenue.

Unascertained liability on account of gratuity - Held that:- The provision of gratuity was made by the assessee in the books of account on the basis of the report of actuarial valuation and it cannot be said that liability of the assessee on account of gratuity was unascertained liability. Therefore, the said sum cannot be added to the book profits as per clause (c) of Explanation 1 to section 115JB of the Act. - Deci .....

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d as aforesaid is to be treated as agricultural income exempt u/s 10(1) of the Act. Since 60% of the income is exempt u/s 10(1) of the Act. The Assessee’s claim is that 60% of the income which is exempt in terms of Rule 8 of the Rules, is nothing but income exempt u/s.10(1) of the Act and hence the same should be reduced from the book profits under Explanation 1 clause (ii) listing amounts to be reduced u/s 115JB of the Act

The provisions of Sec.115JB of the Act are on the same basis .....

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by the Assessee and in accordance with the directions laid down in the Circular referred above. - Decided in favour of assessee. - ITA No.17/Kol/2012, ITA No.68/Kol/2012 - Dated:- 8-10-2015 - Hon ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM For The Department : Shri Sanjit Kr.Das, JCIT, Sr.DR For The Assessee : Shri Manish Tiwari, FCA ORDER Per Shri N.V.Vasudevan, JM ITA No.17/Kol/2012 (Revenue s appeal) : This is an appeal by the Revenue against the order dated 21.10.2011 of CIT(A)-X .....

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assessment proceedings, the AO noticed that the assessee had in the balance sheet shown under the head Reserve Account deferred tax liability of ₹ 5,48,29,000/- and profit as per Profit and Loss account of ₹ 27,34,000/-. Thus the total amount credited to the reserve account was ₹ 5,75,63,000/- in the liability side of the balance sheet.. Deferred tax was shown in the asset side of the balance sheet at ₹ 5,69,22,000/-. The Assessing Officer was of the view that the excess .....

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the Assessee that the AO computed total income on the basis of profit as per profit and loss account and the deferred tax liability was never shown in the profit and loss account and was only an adjustment made in the Profit and Loss Appropriation Account. Therefore, the adjustment entries made in the appropriation account cannot have any adverse impact. Without prejudice to above it was contended by the Assessee that the so-called discrepancy and/or creation of excess liability was arrived at b .....

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bing depreciation for earlier years as clarified in Note 19 of Schedule 19 of the audited financial statements. In that note it was clarified that provision for deferred tax asset has been made in the accounts in view of amendment in tax laws relating to adjustment of brought forward unabsorbed depreciation. Accordingly, a sum of ₹ 5,47,19,000/- has been added to General Reserve towards deferred tax assets in accordance with AS-22 issued by the ICAI. The adjustment for revaluation reserve .....

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Note 19 of Schedule 19 Rs.5,47,19,000/- Transfer from P & L A/c. ₹ 27,34,000/- Rs.5,69,22,000/- In view of above, it was contended by the Assessee that there was no difference in the deferred tax liability and deferred tax asset by ₹ 6,41,000/- as observed by the A.O. and there was no income element involved therein. Hence, the A.O. be directed to delete the addition of ₹ 6,41,000/-. 5. The CIT(A) deleted the addition made by the AO observing as follows: I have considered t .....

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nt had made aforesaid entries in pursuance to AS-22 issued by ICAI and these were only the adjustment entries and no income element is involved therein. There was no excess liability of ₹ 6,41,000/- as concluded by the A.O. Hence, I am of the opinion that the A.O. was not justified in making the addition of ₹ 6,41,000/- and same is directed to be deleted. The ground no.1 is allowed. 6. Aggrieved by the order of CIT(A) the revenue has preferred ground No.1 before the Tribunal. 7. We h .....

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ion Rs.11,49,343/- Total Rs.90,76,675/- The ld. Counsel brought to our notice the profit and loss account of the assessee for the year ended 31.03.2003 which shows the profit of the assessee as ₹ 90,75,000/- which is duly declared by the assessee in the return which is the starting point of computing of the total income adopted by the AO. The ld. Counsel also brought to our notice that the deferred tax liability was not the item in the debit in the profit and loss account and there is no q .....

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ome. The income declared in the return of income was the profit of the three divisions as per the profit and loss account as on 31.03.2003. The deferred tax liability was never an item of expenditure in the profit and loss account. Therefore, there is no question of excess liability. The other reason given by the CIT(A) that the adjustment in question in the balance sheet item cannot have any impact on the income of the assessee is also a sound basis for deleting the addition made by the AO. For .....

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earlier years for ₹ 2,64,000/- from profits and gains from business as provided u/s 80HHC as the export was in respect of textile division and the above amounts are not related to textile divisions. 10. At the time of hearing of the appeal, it was noticed that the agency commission, miscellaneous receipts and adjustment of earlier years, which are referred to in the ground No.2 raised by the revenue, were not treated as profits eligible for deduction u/s 80HHC of the Act by the CIT(A). In .....

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determine the book profit u/s 115JB in view of direction given to A.O. relating to deduction u/s 80HHC since the decision of CIT(A) on account of deduction u/s 80HHC was already challenged. 4. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in directing the A.O. to delete the addition made on account of provisions for gratuity to ascertain book profit in tea division and textile division since the above two amounts represent only provision and such provision cannot .....

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to the AO what is to be reduced from the profit as per profit and loss account is the eligible deduction that is to be allowed u/s.80HHC of the Act not the profit on which the eligible deduction is to be computed. In the assessment order, the A.O. has mentioned that in the computation for book profit u/s 115JB, the assessee has claimed deduction u/s 80HHC. Since, the deduction available u/s 80HHC comes to nil, no deduction is allowed. Further the AO also increased the book profit of Tea Division .....

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sis of actuarial valuation. Hence, same cannot be considered for the purpose of computation of book profit u/s 115JB of the Act. However, the contention of the assessee was not accepted by the A.O. and he added the amounts of gratuity for computation of book profit u/s 115JB. 11.1. Before CIT(A), the Assessee submitted that the A.O. was not justified in denying the claim of deduction u/s 80HHC for the purpose of computation of book profit as provided u/s 115JB of the Act. As per the provisions o .....

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d for the purpose of computation of book profit, but such liabilities should be other than ascertained liabilities. It was pointed out that the provision for gratuity debited in P&L A/c of Tea Division and Textile Division were based on the report of actuarial valuation and hence the said provisions were made for ascertained liabilities. It was further argued that in Notes to Schedule 19, it has been specifically reported by the Auditors that the year-end accrued liability on gratuity is asc .....

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t justified in making addition on account of provision for gratuity in Tea Division and Textile Division for the purpose of computation of book profit. The said provision has been made by the appellantcompany on actuarial valuation and the liabilities are ascertained liabilities. Hence, the same cannot be added for the purpose of computation of book profit. The A.O. is directed to delete the addition made by him on account of Provision for Gratuity in Tea Division and Textile Division. The A.O. .....

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y the Hon ble Supreme Court in the case of Ajanta Pharma Ltd. Vs. CIT 327 ITR 0305. In the aforesaid decision, the facts were that the Assessee which was a company to which the Minimum Alternate Tax provisions of Sec.115JB were applicable, filed its return of income claiming deduction under s. 80HHC of the IT Act, 1961 (for short, "the 1961 Act"). While computing the "book profits" under s. 115JB of the 1961 Act, the assessee claimed reduction, under cl. (iv) of Explanation t .....

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of the export profits that were eligible for deduction u/s.80HHC(1B) of the Act. This order of CIT(A) was upheld by the Tribunal which took the view that the amount of profit eligible for deduction would not be governed by s. 80HHC(1B) since there is no reference to the said sub-section in cl. (iv) of the Explanation to s. 115JB. Against the concurrent finding the Department carried the matter in appeal to the Bombay High Court, which reversed the order of the Tribunal. On further appeal, the H .....

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xport and secondly that sale proceeds of such exports should be receivable in India in convertible foreign exchange. Hence, s. 80HHC(1) refers to "eligibility" whereas s. 80HHC(3) refers to computation of tax incentive. Coming to s. 80HHC(1B) it is clear that after Finance Act, 2000 w.e.f. asst. yr. 2001-02 exporters would not get 100 per cent deduction in respect of profits derived from exports but that they would get deduction of 80 per cent in the asst. yr. 2001-02, 70 per cent in t .....

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er s. 80HHC(1B) it is the extent of deduction which matters. The word "thereof" in each of the items under s. 80HHC(1B) is important. Thus, if an assessee earns ₹ 100 crores then for the asst. yr. 2001-02, the extent of deduction is 80 per cent thereof and so on which means that the principle of proportionality is brought in to scale down the tax incentive in a phased manner. However, for the purposes of computation of book profits which computation is different from normal compu .....

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profits" from computation of book profits under s. 115JB which imposes MAT on deemed income. The above reasoning also gets support from the Memorandum of Explanation to the Finance Bill, 2000. The argument of the Department, that both "eligibility" as well as "deductibility" of the profit have got to be considered together for working out the deduction as mentioned in cl. (iv) of Explanation to s. 115JB has no merit. If the dichotomy between "eligibility" of pr .....

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n the last sentence in cl. (iv) of Explanation to s. 115JB [subject to the conditions specified in sub-cls. (4) and (4A) of that section] to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department. Therefore Clause (iv) of the Explanation to s. 115JB covers full export profits of 100 per cent as "eligible profits" and the same cannot be reduced to 80 per cent by relying on s. 80HHC(1B); argument of the .....

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provision of gratuity was made by the assessee in the books of account on the basis of the report of actuarial valuation and it cannot be said that liability of the assessee on account of gratuity was unascertained liability. Therefore, the said sum cannot be added to the book profits as per clause (c) of Explanation 1 to section 115JB of the Act. Ground nos. 3 and 4 raised by the revenue are therefore dismissed. 15. In the result the appeal of the revenue is dismissed. ITA No.68/Kol/2012 (Asses .....

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ultural income exempt u/s 10(1) of the Act. 2. That on the facts and in the circumstances of the case, Ld. CIT(A) should have allowed reduction of income exempt u/s 10 as per Explanation 1(ii) attached to Section 115JB (2) of I.T.Act, 1961 in the nature of agricultural income to be computed applying Rule 8 to Composite book profit from the sale of tea grown and manufactures by the assessee company. 17. The Assessee had disclosed book profit u/s 115JB at ₹ 15,89,745/- which consisted of boo .....

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e for the purpose of book profit whereas the Assessee s claim was that only 40% of profit is to be included u/s 115JB in pursuance to provisions of Rule 8 of Income tax Rules and balance 60% is to be treated as Agricultural Income and exempt u/s 10(1) of the I.T.Act. It was contended by the Assessee that expression book profit for the purpose of levy of tax u/s 115JB has been defined in Explanation attached to Section 115JB. According to such definition, book profit means the net profit as shown .....

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profit. In view of above, it was pleaded by the Assessee that the A.O. be directed to treat 60% of composite income as Agricultural income exempted u/s10(1) of the Act. 18. The CIT(A) however upheld the order of the AO, observing as follows: 3.2. I have considered the submission of the appellant and perused the assessment order. On careful consideration of the facts and in law, I am of the opinion that the AO was justified in treating the composite income of tea division as liable for tax u/s 1 .....

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to be reduced from the book profits, provides as follows :- (ii) the amount of income to which any of the provisions of [section 10 (other than the provisions contained in clause (38) thereof)] or section 11 or section 12apply, if any such amount is credited to the profit and loss account; or Section 295 (2) (b) provides as follows :- 295 Power to make rules. (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or .....

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idual who is liable to be assessed under the provisions of sub-section (2) of section 64; Pursuant to the aforesaid provision of Rule 8 of IT Rules 1962 provides that in the case of income derived from sale of tea grown and manufactured by the seller in India, the income shall be computed as if they were income derived from business and 40% of such income shall deemed to be income liable to tax. It is thus clear from the reading of Rule 8(1) that 60% of the income computed as aforesaid is to be .....

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text of Sec.115J of the Act had in CIRCULAR NO. 495 DATED 22ND SEPTEMBER, 1987 in para 36.4 taken the same view: 36.4 In the case of a tea company where income is derived from the sale of tea grown and manufactured by the seller, only 40 per cent of such income is liable to tax under r. 8 of the IT Rules, 1962. Sixty per cent of the income, which is disregarded for the purposes of taxation is considered to be agricultural income and is, therefore, exempt under the provisions of Chapter III. The .....

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