TMI Blog2017 (11) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred in compliance of law or the direction of the statutory authorities, the same is allowable. This view is supported by the case law relied on by the assessee of Hon’ble Bombay High court in the case of CIT vs. Hukumchand Mills Ltd. (1983 (2) TMI 1 - BOMBAY High Court). We are of the considered opinion that no addition on account of transfer pricing adjustment can be made in relation to interest @ 8.39% in relation to non-interest bearing shareholder’s deposits with an associate company. We reverse the orders of DRP and AO/TPO on this issue and allow this issue of the appeal of assessee. Transfer Pricing Adjustment towards technical knowhow fees from an associate enterprise P.T. Five Star- Indonesia (PTFSI) - Held that:- We are of the view that since there is uncertainty involved in collection of the technical knowhow fees from the PTFSI due to its bad financial condition, the assessee has rightly not recognized the revenue. This view of ours is supported by the decision of Hon’ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997 (4) TMI 4 - SUPREME Court) wherein rightly held that the claim at the increased rates as made by the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ('CBDT') has issued Circular No. 142 dated 01-08-1974 wherein it has clarified that where the subsidy is primarily given for helping the growth of industries and not for supplementing their profits, such subsidy can be regarded as 'capital' receipt in the hands of the recipient. Further, it has been time and again held by various Courts that Circulars issued by CBDT are binding on Revenue and it is not open to the Revenue even to raise a contention contrary to the binding circular. Therefore, it is the purpose' under the Scheme which is relevant to decide whether the incentives are 'capital' or 'revenue' receipt and other factors like the point of time when incentive is received, the form, etc are irrelevant considerations. For the same reasons, nomenclature given to any incentive/component of an incentive will not be decisive for determining the 'revenue' or 'capital' nature of such benefits. Thus, considering that the purpose of PSI is to enable the Company to set up a new unit or to expand an existing unit to encourage industrial development in the State, the subsidy / incentives received is on capital account in the present case of the assessee and hence, not chargeable to tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on total misreading of the relevant provision of the Act and have brought to tax the whole of the capital gain on the conversion of the land (fixed asset) to stock in trade in the year in which only part sale of stock in trade is effected and assessee has offered the proportionate capital gain in the year under consideration. We, in view of the above facts and circumstances, direct the AO to verify the sale of stock in trade effected and offered the proportionate capital gains in the relevant years and the same should be taxed accordingly. This issue of assessee’s appeal is set aside for verification purpose only with the above directions. Addition of disallowance under section 14A of the Act r.w.r 8D while computing book profit under section 115JB - Held that:- This issue is covered in favour of assessee and against Revenue by the decision of Special Bench of this Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] wherein the Tribunal has clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB of the Act. The learned CIT Departmental Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee held non-interest bearing shareholders deposit amounting to ₹ 15,21,60,920/- with P.T. Five Star Industries Ltd ('PTFSI'), Joint venture Company, Indonesia. The background relating to this issue is that the assessee had entered into a technical collaboration agreement with PTFSI on 09.08.1978. Under this agreement, the assessee agreed to collaborate with the JV for setting up of their integrated textile mill at Indonesia and also supply technical experience and knowledge in the field of production including continuous technical, industrial and marketing expertise. The assessee also agreed to depute its technicians to the JV to assist and train them in installation and commissioning of the plant. The agreement was entered into, initially for a period of 20 years, and further agreed that PTFSI would pay the assessee for a period of 20 years commencing from the date of production, technical knowhow fee of 2% of ex- factory net selling price of each of the textile products manufactured by PTFSI in convertible foreign currency. The commercial production of PTFSI started in 1981 and it was liable to pay technical knowhow fees from 1981 onwards. As the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r before 2010 or earlier as the case may be and further, this repayment date is extended to 2015 by RBI. He further argued that the transaction of interest free deposit was consummated in the year 1998, much before transfer pricing regulation were introduced in Indian tax law. These contractual obligations bind the assessee and the assessee cannot be expected to go back on its contact, which is approved by the RBI. The provision of Section 92 of the Act comes into play only if there is any income earned or an expense claimed. In the absence of any income whatsoever, the question of applying TP provision does not arise. In this behalf he placed reliance in the case Dana Corporation in re. Authority For Advance Rulings (Income-Tax), New Delhi (2010) 321 ITR 178 (AAR), wherein it has been held that where there is no consideration, there is no income chargeable u/s 45 of the Act and hence TP provisions cannot be invoked to hold that the assessee must charge a minimum consideration so as to meet ALP norms. The AAR held that section 92 of the Act is not an independent charging section. Furthermore, according to him, besides, there is no 'transaction' in the current year. The depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total dues of US $ 54,977,270.57 ( fifty four million nine hundred and seventy-seven thousand two hundred and seventy United States Dollars and Fifty - seven cents) as on 30 November 1995 to forgo the balance of the total debt ( including unpaid accrued interest ) and also not to initiate recovery proceedings against the Borrower under the said loan agreements, subject however to the borrowing paying US $ 29,715,000.00 (twenty nine million seven hundred and fifteen thousand United States Dollars) out of which US 5,150,000.00 (Five million one hundred and fifty thousand United States Dollars) to be paid on the date of execution of this Memorandum of understanding and the remaining US $ 24,565,000.00(twenty four million five hundred and sixty-five thousand United States Dollars) without default as per clause- 3 hereunder, in 28 half yearly installment within 14 years commencing from 1St July 1996 and compliance of the terms of the Memorandum of Understanding. From the above reading it is clear that the JV was not able to pay even the principal amount of the term loan and working capital loan taken from the consortium lenders due to financial constraints and continuous loss i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder deposit. RBI has given permission vide approval to obtain repayment of the said deposits on or before 2010 or earlier as the case may be. This repayment date is extended to 2015 by RBI. Copy of relevant letters issued by RBI is enclosed at Annexure-4 of the assessee s paper book. Under the facts of the case, we appreciate the argument of the assessee that the said interest free deposit cannot be considered as an international transaction for the previous year ended 31st March 2012 as the said transaction was entered into during the previous year ended 31 March 1998 with the approval of statutory authorities. The statutory permissions required under the foreign exchange laws of India, are equally applicable to controlled and uncontrolled enterprises i.e. they are universally applicable and hence the very restrictions for permissions would be deemed to encompass the principle of neutrality and hence, the standard of arms length is inherent in the provision of law. Hence the company has a contractual and statutory obligation with the PTFSI for not charging any interest on the shareholder deposits and thereby it cannot take any recourse for charging interest till the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w-how fees from PTFSI due to its bad financial condition, the Appellant has rightly not recognized the revenue. 3. The Appellant prays that the addition made by the AO amounting to ₹ 1,05,35,800/- towards technical knowhow fees be deleted. 9. Brief facts relating to this issue are that the assessee claimed before the AO/TPO that it has not received/accrued technical know-how fee from PTFSI in view of bad financial condition of the associate company. On the facts and in the circumstances of the case and in law, the AO/TPO erred in proposing adjustment of ₹ 1,05,35,800/- on account of Fees for technical knowhow from the AE, PTFSI for the reason that the fees for technical knowhow as has been received/ accrued, even in view of the bad financial condition of the AE, PTFSI. The DRP also confirmed the action of AO/TPO by observing as under in para 7.3 of its order: - 7.3.1 The fact of the case is that the appellant entered into technical collaboration agreement with the PTFS on 09.08 1978. The agreement was initially for a period of 20 years. It was further added that the TFS would pay the appellant a technical know-how fee of 2% on the ex-factory net selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the point no. 15 at page no. 13 of annual accounts of PTFSI, wherein it is mentioned that effective 2003, the company charges the technical knowhow fees on the cash basis as and when it is paid instead of accrual basis. It means, according to Ld. Counsel, the AE itself is not accounting the technical fee on accrual basis in its books of accounts due to bad financial condition. Further AE has accumulated losses approx $28 million as on 31.12.2011. Even assuming that the assessee would have provided for technical knowhow fee receivable from PTFSI but the assessee could not have recovered the same from PTFSI; as PTFSI has not honored its commitments to the lenders, as well as it has incurred heavy losses year after year. Following the real income principle, it can be said that no technical fee accrues to the assessee based on business prudence, commercial expediency and exigency. This was explained by Ld. Counsel that the assessee vide agreement with PTFSI, entered into initially for a period of 20 years, it was agreed that PTFSI would pay the assessee for a period of 20 years commencing from the date of production, technical knowhow fee of 2% of ex-factory net selling price of eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, therefore, had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Assessing Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. Taking the same principle, in the present case before us, we delete the addition made AO / TPO and confirmed by DRP on account of transfer pricing adjustment towards technical knowhow fees from its AE i.e. PTFSI. We direct the AO accordingly. This issue of assessee s appeal is allowed. 12. The next issue in this appeal of assessee is against the order of DRP confirming the action of AO/TPO in making of addition on account of transfer pricing adjustment towards risk involved in guarantee on loans advanced to the AE-PTFSI amounting ₹ 1,30,35,649/-. For this assessee raised following grounds: - GROUND NO. 3: ADDITION OF ₹ 1,30,86,649/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS RISK INVOLVED IN GIVING GUARANTEE ON LOANS ADVANCED TO AN AE: 1. On the facts and the circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns advanced to associate company. The DRP also confirmed the action by observing in its order by observing in para 8.3 as under: - 8.3 Discussions and Directions of the DRP: 8.3.1 We have considered the submissions of the assessee. We find that this issue was subject matter of dispute before the CIT(A)-10, Mumbai and this issue has been decided in favour of the assessee by CIT(A)-15 vide order No. C1T(A)-10 Addl. CIT Rg.2(1)/ IT-106/1 3-14 dt.12.03.2012 for AY 2008-09. 8.3.2 We may observe here that the DRP is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before it. The final assessment order is yet to be passed by the assessing officer. 1-lence, the DRP is not an appellate authority and the proceeding before the DRP is continuation of assessment proceedings. This view is fortified by the decision of the division bench of the Hon'ble High Court of Bombay in the Writ Petition No. 1877 of 2013 in the case of Vodafone India Services Pvt. Ltd. vs. Additional Commissioner of Income Tax Ors. (2014) 264 CTR 0030 (Bom) (2013) 96 DTR 0193 (Bom): (2014) 361 FIR 0531 (Bom) (2014) 221 1axrnan 0166 (Born); wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t made on this account is directed to be deleted. Further, in assessee own case for AY 2007-08, this transaction was accepted at arm's length and no addition was made. Further in assessee own case for AY 2008-09 addition was made by AO but deleted by CIT(A) on this ground. It was argued that the lower authorities observed that the assessee has assumed risk in providing the counter guarantee to bank for lending money to its subsidiary and for that it should have charged risk premium for assuming the risk by providing the counter guarantee. 15. It was argued that the transaction is not an international transaction per Section 92B of the Act, which defines an 'international transaction' as under: - International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of international transaction' to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us. For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute ' international transaction' within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 33,10,161. The assessee gets the relief accordingly. 17. We further notice that the decision of Ahmedabad Tribunal in the case of Micro Ink Ltd. Vs. Add. CIT [2016] 157 ITD 132 (Ahd-Trib.), which has followed the decision of Bharti Airtel (supra) held that issuance of corporate guarantees was in the nature of shareholder's activity/quasi capital, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ACIT v. Nimbus Communications Ltd. [2013] 145 ITD 582 (Mum-Trib.), wherein it was held as under: For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee-company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for transfer pricing purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; within the meaning of section 92B of the Act; b. the said outstanding debit balance has arisen mainly on account of reimbursement of the counter guarantee fee and not in the course of business. 3. The Appellant prays that the aforesaid adjustment amounting to ₹ 1,40,04,120/- made by the AO he deleted or appropriately reduced. 22. Brief facts are that the AO/TPO an adjustment of ₹ 1,40,04,120/- on account of interest on outstanding debit balances with the associate company. The assessee contended that the outstanding debit balance with the associate company cannot be regarded as an 'International Transaction' within the meaning of section 92B of the Act. It was contended that the said outstanding debit balance has arisen mainly on account of reimbursement of the counter guarantee fee and not in the course of business. The assessee, therefore prayed that the adjustment amounting to ₹ 1,40,04,120/- made by the AO/TPO be deleted The DRP also confirmed the action of the AO/TPO by observing as under in para 9.3 of its order:- 9.3 Discussions and directions of the DRP 9.3.1 We have considered the submissions of the assessee. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more enterprises. As will be observed from the above provision the outstanding debit balances with the associates is not directly covered within the ambit of 'international transaction'. Also, the terms any other transaction having a bearing on the profits, income, losses or assets of such enterprises must be interpreted ejusdem generis with the transactions mentioned in the preceding clause or at least analogous to it and therefore would not include the provision of guarantee for loans taken by associate enterprises. In view of the above, we are of the view that it is the real income and not the hypothetical income which is to be taxed and real income is to be ascertained from the realistic and practical point of view as held by Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas of the State of Maharashtra announced The Package Scheme of Incentives, 2007 (PSI) w.e.f. 01.04.2007. The PSI was applicable based on the level of Fixed Capital Investment or Employment Generation. During the year the assessee has accrued subsidy under Package Scheme of Incentive from Government of Maharashtra of ₹ 30.60 crores which is credited to the Profit Loss Account and the same has been claimed as capital subsidy. The assessee is eligible for getting subsidy on account of investment made in new plant commenced at Patalganga and Ranjangaon. The AO treated the subsidy received from Government of Maharashtra under Package Scheme of Incentive ('PSI ) as revenue receipt and includible in the total income on the ground that the scheme is applicable after commencement of production. The assessee contended that the State Government of Maharashtra with a view to encourage the dispersal of industries to the less developed areas of the State of Maharashtra announced PSI w.e.f. 01.04.2007, which was applicable based on the level of Fixed Capital Investment or Employment Generation. The assessee during the year under consideration made investments in new plant commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt was subsequent to the commencement of productino should not be allowed to stand in the way of it i proper treatment as a receipt in the capital fie/d meant to meet a capital cost. The line separating capita!' front revenue is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital field or in the revenue field. 18. The question refereed also, refers to the purchase-tax benefit enjoyed by the assessee. So far as this concession extended by the State Government is concerned, it was in noway linked to the expenditure incurred in setting up the industry. The very terms of the concession would show that it was a, concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to app/y the subsidy equivalent to the quantum of the purchase-tax for the period for which it was given for any particular purpose. That amount was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reiterated that the character of the receipt in hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such case, one has to apply the 'purpose test'. The point at which the subsidy is paid is not relevant. Also the form of subsidy and the source of the subsidy is immaterial. On the facts of this case, it was held that Incentive subsidy received by the sugar mill was a capital receipt not chargeable to tax having regard to the purpose of the relevant scheme of incentives. iii. Also, attention is invited to the decision of the Special Bench of Mumbai Tribunal in DCIT vs. Reliance Industries Limited [2004] 88 ITD 273 (Mumbai) (SB), wherein the Tribunal has, after considering the decision of the Supreme Court in Sahney Steels (supra) and held that if a subsidy is received for development of industries in backward areas, it constitutes capital receipt regardless of the fact that it has been received only after the commencement of production as it is the 'purpose' of the scheme which is of fundamental importance in determining the nature of the subsidy as revenue or capital. The decision of the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistance in carrying on the business, it has to be treated as a 'trading' receipt. The source of the fund is immaterial. If the purpose was to help in setting up a business or complete a project, it must be treated as having been received for 'capital' purpose. But if it is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of trade. This view has been taken by the Hon ble Supreme Court in case of Saliney Steel and Press Works Ltd. (supra). Similarly, Delhi Tribunal in case of L G Electronics India Pvt. Ltd. v. Addl. CIT in ITA No. 1404/Del/2007 for AY 2002-03 vide order dated 26-02-2010, has held the sales tax subsidy availed by the assessee as revenue receipt since it was not linked with setting up of industry, rather linked with the production. Reliance was also placed on the decision of the Special Bench of Mumbai Tribunal Reliance Industries Limited (supra), wherein the Tribunal has, after considering the decision of the Supreme Court in Sahney Steels (supra), held that if a subsidy is received for development of industries in backward areas, it constitutes 'capital' receipt reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;CBDT') has issued Circular No. 142 dated 01-08-1974 wherein it has clarified that where the subsidy is primarily given for helping the growth of industries and not for supplementing their profits, such subsidy can be regarded as 'capital' receipt in the hands of the recipient. Further, it has been time and again held by various Courts that Circulars issued by CBDT are binding on Revenue and it is not open to the Revenue even to raise a contention contrary to the binding circular. Therefore, it is the purpose' under the Scheme which is relevant to decide whether the incentives are 'capital' or 'revenue' receipt and other factors like the point of time when incentive is received, the form, etc are irrelevant considerations. For the same reasons, nomenclature given to any incentive/component of an incentive will not be decisive for determining the 'revenue' or 'capital' nature of such benefits. Thus, considering that the purpose of PSI is to enable the Company to set up a new unit or to expand an existing unit to encourage industrial development in the State, the subsidy / incentives received is on capital account in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come is not exempt. Equity shares in foreign companies the dividend on which is not exempt. 33. We find that during the relevant previous year relevant to this assessment year, the assessee has not earned any dividend on investments, and not claimed it as exempt income u/s. 10(34) of the Act. Therefore, no disallowance u/s. 14A can be called for. We find that this issue is covered in favour of assessee and against Revenue by the decision of the Hon ble Delhi High Court in the case of Cheminvest Limited vs. CIT in ITA No 749/2014 dated 02-09-2015, which reads as under: - 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Respectfully, following the Hon'ble Delhi High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claimed before the lower authorities that at the time of revaluation of the land, the enhanced cost of the land is credited to the 'Revaluation Reserve' and as and when the land is sold/transferred, the proportionate amount of reserve is withdrawn from the reserve and credited to the profit and loss account. The revalued land (which is now stock in trade) is utilized by treating the same as the cost of the project/work in progress. Therefore, the revalued land amount (i.e. the original cost + expenses on improvement + legal charges + revaluation amount) is debited to the profit and loss account of the assessee. As the revalued amount is included in the cost of the project, to the extent of the land unsold, the revalued amount is reflected in the credit side of P L Account as closing stock. To the extent of the land sold, as stated aforesaid, the proportionate part of the 'Revaluation Reserve' is withdrawn and credited to the profit and loss account. Therefore, the effect of revaluation is profit neutral as the same amount is reflected both on the debit and credit side. This basis of representation and revenue recognition has been accepted by the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucturing Expenses 51,87,896 SM Operating Expenses (Land related exps) 57,86,070 Reval Res One ICC 38834,36,643 2. Transfer of land to P L be used under construction from stock in trade One ICC Land Cost 37785,47,250 To stock in trade 37785,47,250 3. Cost of Sale One ICC Reval Res ONE ICC 8169,56,453 Land Cost 17976,81,125 Land Construction and Revaluation Reserve for one ICC TRF to cost of sales Construction cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Car park Stock in trade 541,17,781 To real estate dev work in progress 541,17,781 128521,54,744 128521,54,744 From the above, it is evident that, the revaluation reserve has been created on account of the revaluation of the fixed asset and not by debiting to the P L Account. The transaction of revaluation and conversion of land is independent of the actual utilization of the land for the purpose of the assessee's real estate business. In case, the assessee converts larger piece of land, however does not in the same year utilize the land or utilise a small piece of land, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity is recognized on the 'Percentage Completion Method' of accounting. Revenue is recognized in relation to the sold areas only, on the basis of percentage of cost incurred as against the total cost of project (including land). Revenue is recognized if the cost incurred is in excess of 25% of the total estimated cost. The estimates of saleable area and cost of construction are revised periodically by the management. The effect of such changes to estimates is recognized in the period such changes are determined. The estimated cost of construction as determined is based on management's estimate of the cost expected to be incurred till the final completion and includes cost of materials, service and other related overheads. Unbilled costs are carried as real estate work in progress. Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, some of which are of a technical nature, concerning, where relevant, the percentages of completion, costs to completion, the expected revenues from the project/ activity and the foreseeable losses to completion. 38. Further, the assessee has made disclosure by way of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. Further the entries passed for revaluation of land in the assessee's book is profit neutral (i.e. has no impact on the profit of the company) and therefore, there is no question of any adjustment in the book profit of the Company. In view thereof, assessee claimed that no adjustment is called for or justified in terms of clause (ii) of Explanation 1 of section 1I5JB of the Act and there is no other provision u/s 115JB of the Act which requires adjustment of the amount credited to revaluation reserve as aforesaid. 40. The AO/TPO added back the revaluation reserve amounting to ₹ 768,18,00,000/- while calculating book profit u/s 115JB of the Act but failed to appreciate that Adjustments to Book Profits are restricted to those specified in the Explanation to section 115JB of the Act. The revaluation reserve was not created by debiting the P L account. The assessee without prejudice, stated that the AO should decrease the book profit as per Explanation 1 to section 11 5JB of the Act to the extent the revaluation reserve is released i.e. ₹ 165.27 crores and credited to profit and loss account. According to assessee, the AO has proceeded on pure misconception by obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act, - (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, shaft 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. -For the purposes of this section, hook profit means the net profit as shown in the profit and loss account for the relevant previous year prepared tinder subsection (2), as increased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement of the provision of section 45(2) of the Act, the assessee got the market value of the land determined by approved valuer as per valuation report dated 10.03.2011. This report is filed by assessee in its Paper Book before us. The entries for conversion were passed in the books of account at such market value. Thus, for these two transactions, viz. (i) revaluation of fixed asset; and (ii) its conversion into stock-in-trade, assessee has passed one consolidated accounting entry as under: - For ICC Project 1: Account Code Grouped as Entry Debit Credit 13270 Current Assets, Loans and Advances Stock-intrade A/c 377,85,47,250 11105 Fixed Assets To Land A/c. 4,03,630 11521, 11525, 11510 Capital work in Progress (under Fixed Assets) To capitalized Costs A/c. 1,86,04,439 22210 Reserves Surp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the real estate segment, these have been duty considered separately. It was claimed by the assessee before us that the Revenues from the said construction business is recognized on the basis of 'percentage completion method'. See note 31 on page 1 2 of the Annual Accounts as part of the notes on Significant Accounting Policies. Accordingly, the Assessee has recognized revenue of ₹ 258,62,49,100/- in respect of ICC-1 Project and revenue of ₹ 260,78,49,630/-for ICC-2 Project, aggregating to ₹ 519,40,98 730/-, Working of the Real Estate Projects based on the percentage completion method. Having recognized the revenues as above, the portion of the Revaluation Reserve which relates to the sale recognized as per percentage completion method needs to be released to the P L account. Thus, to that extent, the proportionate part of the 'Revaluation Reserve' is withdrawn and credited to the Profit and Loss Account (Amount ₹ 165.27 Crs.). Entries passed for release from Revaluation Reserve (a) For ICC-I Project: Revaluation Reserve Dr. 81,69,56,453 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned by the assessee in respect of the portion of the project not yet completed and not yet sold and which is carried forward as part of closing work-in-progress. 44. We have gone through the provision of Clause (b) of Explanation to section 115JB(2) of the Act, which applies only in case of Appropriation of profits. Clause (b) of Explanation I to section 115JB(2) requires the book profits to be increased by the amounts carried to any reserves by whatever name called. The underlined words imply a transfer of the relevant amounts, from the Profit and Loss Account to the Reserve Account. Indeed, this is duly supported by not only the dictionary meaning of the word 'carry as we shall shortly see, but, also by the use of the words 'if any amount' referred to in clauses (a)(i) debited to the profit and loss account in the text of Explanation 1 itself. The word 'carry' has several shades of meaning as would be evident from the extracts from the Webster's dictionary and the Oxford dictionary. However, in the context in which the words 'earned to' are used, in clause (c ) of Explanation 1, it appears that the following shades, of meaning are relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account, and as reduced by 10. We find merit in this civil appeal. On reading explanation L quoted above, it is clear that to make an addition under clause (b) two conditions must be jointly satisfied: (a) There must be a debit of the amount to the profit and loss account. (b) The amount so debited must be carried to the reserve. Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account The amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause b) of Explanation I 'was not applicable. Further, reserve as contemplated by clause (b) of the Explanation Ito section 1 15JB of the 1961 Act is required to be carried through the profit and loss account. At this stage it may be stated that there are broadly, two types of reserves, viz., those that are routed through profit and loss account and those which are not carried via profit and loss account, for example, a Capita! Reserve such as Share Premium Account. AAD is not a reserve. It is not appropriation of profits . The term 'Appropriation of profits' is explained in the Guidance Note on 'Terms us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, 1956, the appropriations by of transfer to / from reserves needs to be disclosed under the caption 'Reserves and Surplus'. Annexure -6 sets out a copy of the relevant portions of the format of Revised Schedule VI. Ld Counsel explained that in compliance with the above requirements, the amounts transferred to General Reserve have been disclosed at page 69 of the audited annual accounts under the caption 'Appropriations' and the list of 'Appropriations' so disclosed does not include any amount transferred to 'Revaluation Reserve'. The accounts have been duly audited by the statutory auditors of the company, approved by the shareholders of the company and filed with the Registrar of Companies. None of the three authorities have alleged that the accounts are not in accordance with the Revised Schedule and hence, this conclusively proves that Revaluation Reserve is not created out of the profits of the company. These reserves are not in the nature of appropriation of profit and therefore, the question of adding the same to the book profits by invoking clause (b) of Explanation f (I) to section 115JB (2) does not arise. 49. We are of the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. In any case, this is not a case of revaluation of stocks. The Indian Accounting Standards (AS-2) does not permit upward revaluation of stock-in-trade. This is, a case of transfer of Fixed Asset to Stock-in-trade at a revalued amount. Indeed, in the year of creation of Revaluation Reserve, there is no commercial profit earned by the Assessee Company by virtue of revaluation. The entire purpose of introduction of MAT was that certain companies were declaring significant book profits, paying dividends to its shareholders but not paying any tax because of various tax shields like investment allowance, depreciation etc. Accordingly, we delete the addition made by AO of the entire amount of revaluation reserve created during the year to its audited profit applying the provisions of section clause (b) of explanation (1) to section 115JB (2) of the Act. However, the AO will verify whether the assessee has released a sum of ₹ 165,26,83,871/- from revaluation reserve and credited to the profit and loss account, in that case this is not to be added as income under section 115JB of the Act. This issue of assessee s appeal is partly allowed. 50. The next issue in this appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset is convened into stock in trade then it would be considered as transfer of such capital asset and capital gain or loss would be computed in the year of sale of the stock in trade. Therefore, the time of chargeability of income-tax for capital gain arising from the conversion of capital asset to stock-in-trade is the point when the stock-in-trade is sold or otherwise transferred. Therefore, The AO is directed to verify salt of the stock in trade and compute the capital gain on the conversion of the land (fixed asset) to stock in trade in the year in which only part sale of stock in trade is effected. 52. Facts are that one of the business segments of company is Real estate activity. Revenue is recognized on the 'Percentage of Completion Method' of accounting. This method of accounting has been consistently followed since F.Y. 2005-06. This method of accounting is as per Accounting Standard ('AS')-7/AS-9 read with Guidance Note on accounting for real estate activity issued by ICAI as applicable. Further the same method of accounting has been accepted in the past assessments as well as by other statutory authorities for e.g. Service Tax department, Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, etc. (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities. (d) The construction or development activities form a significant proportion of the project activity. The accounting policy followed in respect of real estate activity as disclosed in Notes to Financial Statements at (d) under Significant Accounting Policies, is as under: (d) Revenue from real estate is recognized on the transfer of all significant risks and rewards of ownership to the buyers and it is not unreasonable to expect ultimate collection and no significant uncertainly exists regarding the amount of consideration. The freehold land under Real Estate Development planned for sale is converted from fixed assets into stock-in-trade at market value. The difference between the market value and cost of that part of freehold land is credited to revaluation reserve. Revenue arising on sale of undivided interest in the underlying freehold land pertaining to fiats / office premises, which are under construction, is being acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment . Hence, under section 45 of the Act, profits gains arising from such transfer (conversion to stock in trade) is chargeable to tax in the year of transfer. However as per non obstante provision contained in sub section (2) of section 45, the capital gains shall be chargeable to income tax as income of the previous year in which such stock in trade is sold or otherwise transferred by him. Since the sale of Stock in Trade would actually happen when the flats are completed and ownership transferred, a strict interpretation of section 45(2) would suggest that the capital gains arising on conversion of stock in trade would be chargeable to tax when project is completed. However, it would be inconsistent to say that the business profits arising from real estate activity would be chargeable to tax on percentage completion method each year during the construction activity and the capital gains portion of there is chargeable to tax in a different year i.e. when the project is completed. A reading down of section 45(2) of the Act would theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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