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Varun Corporation Limited Versus ITO, Ward-2 (3) (4) , Mumbai

2016 (5) TMI 1032 - ITAT MUMBAI

Allowability of loss on demerger in the computation of book profit u/s 115JB - MAT - Held that:- The claimed loss was disclosed by the assessee in the profit & loss account as an extraordinary item and such loss was arrived at by reducing the same from the book value of the asset transferred and further the treatment as given by the assessee to the loss, arose on demerger is in accordance with part II & III to schedule VI of the Companies Act and such demerger was approved by the Hon’ble High Co .....

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the profit & loss account for the relevant previous year

In the present case, such amount is the loss of ₹ 66,86,13,773/-. There is no concept like multiple profit in the profit & loss account. It is well settled proposition of law that, as per explanation-1 below section 115JB(2) of the Act, only adjustment as permitted to the book profit are those as provided in the said explanation. The purpose of section 115JB of the Act is to provide an alternative method of computation of .....

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by Shri Nitesh Joshi For The Revenue : Shri M. Dayasagar ORDER Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 13/03/2013 of the First Appellate Authority, Mumbai, on the grounds mentioned in the grounds of appeal. 2. During hearing of this appeal, so far as, the first ground is concerned, Shri Nitesh Joshi, ld. counsel for the assessee contended that it is general in nature, therefore, requires no adjudication, consequently, dismissed being general in .....

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guments advanced from both sides, both these grounds are sent to the file of the Commissioner of Income Tax (Appeal) for fresh adjudication on merit in accordance with law. The assessee be given opportunity of being heard with further liberty to furnish evidence, if any, in support of its claim, thus, both these grounds are allowed for statistical purposes only. 4. The only ground remained for adjudication by this Tribunal and agitated/argued by the assessee is ground number 2, which is with res .....

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to profit and loss account as extra ordinary item. The contention of the Ld. Assessing Officer that this loss cannot be allowed, being not a real loss was challenged by the assessee. Our attention was invited to paper book page 32 containing the scheme, page 37- clause 1.9, page 40 para 4.1, page 43 para 6, page 44 para 7. The ld. counsel also invited our attention to the order dated 19/09/2008 of the Hon ble High Court available at page-32, page 33 of the paper book and also page 5 containing p .....

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ecial Bench). It was also explained that the accounting treatment (page 44 of the paper book) has been affirmed by Hon ble High Court and the Department has not doubted the credibility of the accounting treatment. 4.1. On the other hand, the ld. DR contended that the computation of income is not as per schedule, therefore, the addition was rightly made. So far as, the cases relied upon by the assessee is concerned, the ld. DR contended that these are on different facts. The crux of argument is i .....

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sort division, the assessee was running a resort namely Infinity Resort at Corbett, Ramnagar. With effect from 15/07/2008, the assessee demerged its resort division (referred to in the scheme as hospitality undertaking) to a company namely Khatau Resorts Pvt. Ltd. in accordance with section 391 to 394 of the Companies Act, 1956. The demerged scheme was approved by Hon ble jurisdictional High Court on 19/09/2008, pursuant to demerger, the assessee transferred its resort division alongwith all ass .....

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all the asset and liabilities relating to the hospitality undertaking from its books of accounts. The difference being the excess of the book value of the assets transferred over the book value of the liabilities transferred was to be adjusted by the assessee in its profit & loss account (page 44, para 7 of the paper book). The Hon ble High Court while approving the scheme has observed (para-5 & 6, page 33 of the paper book) as under:- 5. Upon perusal of the entire material placed on rec .....

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iled by the Resulting Company are made absolute in terms of prayer clauses (a) to (c) of the respective petitions. In the aforesaid observation, the Hon ble High Court has clearly observed that the assessee has not violated any provisions of the law and such the scheme was never opposed by either party. It has been further observed that the requisite statutory compliance has been made. 4.3. The assessee in its annual accounts, prepared for year ending 31/03/2009, inter-alia, debited loss of S .....

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anies Act as well as accounting standard 5 dealing with net profit or loss for the period prior period items and changes in accounting policies issued by ICAI. 4.4. On 05/01/2010, the assessee declared nil income (Assessment year 2009-10), in regular computation of income and loss of ₹ 64,21,12,555/- was computed u/s 115JB of the Act (page 1 & 2 of the paper book). This computation of income was based on the annual accounts prepared for the year ending 31/03/2009, which were audited by .....

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opinion and to the best of our information and according to the explanations given to us, the said accounts read together with the notes thereon in Schedule U , give the information required by the Companies Act, 1956, in the manner so required and subject to comments made in paragraphs 1.4 & 1.5 above, give a true and fair view in conformity with the accounting principles generally accepted in India. The auditors have accepted the book treatment in respect of loss arising on account of deme .....

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115JB of the Act, the Ld. Assessing Officer started with the net profit as reflected in the profit & loss account of ₹ 78,37,68,201/- i.e. such profit before provisions of fringe benefit tax, prior period adjustment and extraordinary adjustment. However, the claim of the assessee is that such computation should start with net loss of ₹ 66,86,13,773/-, being the loss as shown in the profit & loss account after extraordinary adjustment. The stand of the ld. Assessing Officer is .....

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he Assessing Officer u/s 115JB of the Act, was upheld. According to the Commissioner of Income Tax (Appeal), the amount of profit/loss, in the profit & loss account was reflected at five different placed in profit & loss account of which four of them were correctly mentioned. However, with respect to the 5th amount/loss of ₹ 66,86,13,773/-, as taken by the assessee, the starting point for computation of book profit was held to be not correct. He also observed that scheme of arrange .....

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it as shown in the profit & loss account for the relevant previous year. In the present case, the amount of loss is ₹ 66,86,13,773/-(Profit & loss account is available at page-5 of the paper book). Which is tabulated as under:- If the aforesaid table is analyzed, there could be only net profit which is the last entry, as appearing in the said account. There is no concept like multiple profits in the profit & loss account. The assessee by way of debit of loss arising on demerger .....

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ee, 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, 2012, is less than eighteen and one-half 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 eighteen and one-half per cent. (2) Every assessee, .....

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evant previous year in accordance with the provisions of the Act governing such company: 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; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid b .....

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g the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.-For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepare .....

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amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or Following clauses (fa), (fb) and (fc) shall be inserted after clause (f) in Explanation 1 below sub-section (2) of section 115JB by the Finance Act, 2015, w.e.f. 1-4-2016 : (fa) the amount or amounts of expenditure relatable to, income, being share of the assessee in the income of an association of persons or body of indi .....

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an the provisions of this Chapter, it is a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share or a special purpose vehicle to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) ofsect .....

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fer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be; if any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit .....

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fter 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 section 11 or section 12 apply, if any such amount is c .....

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lanation 1 below sub-section (2) of section 115JB by the Finance Act, 2015, w.e.f. 1-4-2016 : (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions ofsection 86, if any, such amount is credited to the profit and loss account; or (iid) the amount of income accruing or arising to assessee, being a foreign company, from,- (A) the capital gains arising on trans .....

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l purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the profit and loss account; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units .....

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unabsorbed depreciation is nil; or (iv) to (vi) [***] (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under subsection (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the a .....

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on 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (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. Explanation 3.-For the removal of doubts, it is hereby clarified that for the purposes of this section, the assessee, bein .....

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d after Explanation 3 to subsection (2) of section 115JB by the Finance Act, 2015, w.e.f. 1-4-2016 : Explanation 4.-For the purposes of sub-section (2), the expression "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). (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 ye .....

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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 subsection (1) of section 142. (5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section. (5A) The provisions of this section shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115 .....

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analyzed, as per Explanation-1 below section 115JB (2) of the Act, only adjustment as permitted to the book profit are those as provided in the said explanation. The stand of the assessee is that there is no adjustment prescribed in the said explanation with respect to increasing the book profit by loss arising on transfer of asset and liabilities upon demerger. The position was initially explained by Hon ble Apex Court in Apollo Tyers Ltd. vs CIT 255 ITR 273 and reiterated in CIT vs HCL Comnet .....

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as per the provisions of the Act. Our view find supports from the decision in CIT vs Kehtan Chemicals and Fertilizers Ltd. 307 ITR 150 (Del.) and Tamilnadu Cements Corporation Ltd. vs JCIT 349 ITR 58 (Madr.). It is also observed that such treatment (given by the assessee) was approved by Hon ble jurisdictional High Court and the Revenue has not challenged the approval. The accounting treatment in the books of KIL is reproduced hereunder (page 44 of the paper book) for ready reference and analys .....

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onal High Court vide order dated 19/09/2008. As per clause 2(b) of part II to schedule VI of the Companies Act, 1956, the profit & loss account should disclose every material features/fact including credits or receipt and debit and expenses in respect to non-recurring transactions or transaction of an exceptional nature, which is available page 72 of the paper book. As per clause 3(xii)(b) of the said part of the schedule, one also has to be reflect profit & losses in respect of transact .....

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section 115J of the act, in the case of an assessee being a company, if the total income is less than 30 per cent of its book profits then the total income of such company shall be deemed to be an amount equal to 30 per cent. Of such book profit and such income shall be chargeable to tax. The important thing to be noted is that while calculating the total income under the Income Tax Act, the assessee is required to take into account income by way of capital gains under section 45 of the Income .....

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aring, the Ld. DR invited our attention to the decision of the Tribunal in the case of M/s Shivalik Ventures Pvt. Ltd. vs DCIT (ITA No.2008/Mum/2012), order dated 19/08/2015, wherein, view has been taken against the assessee. The relevant portion of the same is reproduced hereunder for ready reference and analysis:- 24. It is undisputed fact that the long term capital gain earned by the assessee is included in the net profit determined as per profit and loss account prepared as per Part II and P .....

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to in sub-section (3C) of section 211 of the Companies Act, and further reported that the balance sheet and profit and loss account read together with the notes thereon, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted. As per audited profit and loss account, the assessee has included long term capital gain. In the notes on accounts, it is nowhere mentioned and clarifi .....

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ared in accordance with Parts II and III of Schedule VI to the Companies Act. Moreover, the taxability of capital gain is relevant only for the purpose of computation of income under the normal provisions of Income tax Act, and has nothing to do with the preparation of profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act…. The Ld A.R submitted that, since the assessee before the Special Bench did not comment about such inclusion .....

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sessee explained that the note mentioned in the aforesaid order was not put in, therefore, the aforesaid conclusion will not apply to the facts of the present appeal. Broadly, we are of the view, in Rain Commodity (40 SOT 265)(Special Bench), there is a recording that where there is no such notes, the profit and loss accounts is sacrosanct . The schedules annexed to and forming part of the balance sheet and profit and loss account as on 31/03/2009 is available page 18 of the paper book and not s .....

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cheme of Arrangement. A Composite Scheme of Arrangement under Section 391 to 394 of the Companies Act,1956 between the Company (and its Shareholders) (hereinafter referred to as the Scheme) and Khatau Resorts Private Limited (and its shareholders) was approved by the Hon'ble High Court of Bombay vide its order dated 19/09/2008.The Scheme amongst others, provided demerger of Resort Undertaking of the Company located at Ramnagar, Delhi and Mumbai (hereinafter referred to as Demerged Undertakin .....

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eme. Carrying amounts of Assets and Liabilities attributable to Resort Division which were transferred to Resulting Company as on the effective date were as follows. In accordance with the scheme of demerger, the Shareholders of Varun Corporation Limited (formerly known as Khatau International Ltd.) have been allotted one share of Khatau Resorts Pvt. Ltd., for every twenty nine shares held by them in Varun Corporation Ltd. on 15th July 2008. The face value per share and the aggregate paid up sha .....

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377; 39,83,16,862/-. 4.11. If the conclusion drawn by the Tribunal in the case of M/s Shivalik Venture Pvt. Ltd. vs DCIT (supra) is analyzed with the facts of the present appeal and also the factum that such demerger was approved by the Hon ble jurisdictional High Court, it can be concluded that the facts are different. Even otherwise, before the Special Bench, the assessee did not comment about such inclusion in the notes of accounts but merely claimed deduction while computing book profit u/s .....

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ances of the case, the Tribunal erred in law in holding the loss of an amount of ₹ 919.52 lakhs on account of transfer of investment division of the assessee could not be adjusted in section 115JB of the Act although the loss is booked in the profit & loss account, the Hon ble High Court considered various decisions including the decision in Apollo Tyers from Hon ble Apex Court and Malayala Manorma Company Ltd. vs CIT (2008) 300 ITR 251, CIT vs Ispat Industries Ltd. (2008) 2 DTR (Cal) .....

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', more specifically stated in Annexure A and shall include the following: 1.5.1 (i) all assets and properties of KIL pertaining or relating to the Hospitality Undertaking (whether movable or immovable, corporeal or incorporeal, present, future or contingent) as on the Appointed Date; (ii) all immoveable property, including land' and building at Uttaranchal, livestock, plant, investment in companies engaged / to be engaged in Hospitality Undertaking, current assets, funds, capital work i .....

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, powers and facilities' of every kind, nature and description whatsoever, rights to use and avail of telephones, telexes, facsimile connections and installations, utilities, electricity and other services, provisions, funds; benefits of all agreements, contracts and arrangements arid all other interests, privileges, advantages and, benefits in connection with or in relation thereto as on the Appointed Date; (iv) all records, files papers, engineering and process information,' computer p .....

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xxxxxxxxxxxxxxx 1.6. Any question that ma arise as to whether a specific asset liability pertains or relates, or does not pertain or relate to the Hospitality Undertaking or whether it arises out of the activities or operations of the Hospitality Undertaking shall be decided by mutual agreement between the Board of Directors of KIL and KRPL. 1.7. "KIL" Or "the Demerged Company" means Khatau International Limited,' a company incorporated under the' Act and having its r .....

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r alia, includes 3,95,34,243 equity shares of ₹ 10 each of Varun Shipping Company Limited, 84.09.870 equity shares at ₹ 10 each of Tarun Shipping & Industries Limited, loans received from Cholamandalam Investments & Finance Co. Ltd. IL & FS Financial Services Ltd, Infrastructure Development & Finance Co. Ltd. Infrastructure Leasing & Financial Services Ltd. 4.13. The arrangement for transfer of hospitality undertaking into KRPL is also reproduced hereunder for rea .....

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KIL therein, subject however, to all charges, liens, mortge.ges and encumbrances, If any, affecting the same or any part thereof and arising- out .of the liabilities which shall also stand transferred to KRPL. The transfer and vesting of the Hospitality Undertaking to KRPL shall be effected in the manner as provided hereinbelow. 4.14. Thus, if the totality of facts and the judicial pronouncements discussed hereinabove, if kept in juxtaposition with the facts of the present appeal, we note that .....

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tors have accepted the book treatment in respect of loss arose on account of demerger, thus, we are not in agreement with the observation of the Ld. Assessing Officer that such loss could not be debited to the profit and loss account and ought to have been adjusted against the reserve of the assessee company. The starting point for computation of book profit u/s 115JB of the Act is the net profit as shown in the profit & loss account for the relevant previous year. In the present case, such .....

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