TMI Blog2023 (1) TMI 886X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Accordingly, the ground No.3 raised by the assessee is dismissed. - ITA No. 1893/Mum/2019 - - - Dated:- 6-1-2023 - SHRI AMIT SHUKLA, JUDICIAL MEMBER And SHRI M.BALAGANESH, ACCOUNTANT MEMBER For the Assessee : None For the Revenue : Shri H.K. Lal ORDER PER M. BALAGANESH (A.M) : This appeal in ITA No. 1893/Mum/2019 for A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-53, Mumbai in appeal No.CIT(A)-53/DCCC-5(4)/IT-587/2017-18 dated 28/01/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 07/12/2017 by the ld. Dy. Commissioner of Income Tax, Central Circle 5(4), Mumbai (hereinafter referred to as ld. AO). 2. At the outset, we find that this case could not be heard due to continuous adjournment sought from the side of the assessee on the ground that the promoter of the assessee company is under judicial custody. Obviously, the assessee company , being a private limited company would be having other Directors also to take care of the affairs of the company and more so, the issues to be resolved before the regulatory authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act could not be made in the absence of any exempt income. We find that the provisions of Section 14A of the Act had been amended by the Finance Act 2022 w.e.f. 01/04/2022 by way of insertion of an Explanation which reads as under:- [Explanation-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income ] 4.2. This explanation has been held to be operative prospectively from A.Y.2022-23 onwards as per the Explanatory Memorandum to the Finance Act as well as the decision of the Hon ble Delhi High Court in the case of PCIT Central vs. Era Infrastructure India Ltd. reported in 288 Taxman 384 (Del). In view of the aforesaid judicial precedents, the ground Nos. 1 2 raised by the assessee are hereby allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less Transferred to Debenture Redemption Reserve 10,30,00,000 Closing balance (1,27,64,89,376) 6.12 The first point that emerges for consideration is what is the net profit as per Profit and Loss Account since section 115JB Explanation 1 defines book profit to mean the net profit as shown in the profit and loss account it is to this figure only that prescribed adjustments and no other are permissible. It is clear from the details culled out from the audited accounts mentioned above that the net profit is Rs. 10,32,27,700. To this the provisions for tax has to be added. The items listed for deduction does not include transfer to debenture reserves 6:13. The appellant in its computation of income has considered the net profit as Rs. 10,32,82,464/- (which in profit before tax) from which it has reduced Debenture Redemption Reserve of Rs 10,30,00,000/ This is not as per the literal reading of section 115JB. 6.14. The second point in that there is another aspect of the issue. The reserve for redemption of debentures is in the nature of capital payment. This cannot be considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net profit for computing book profit for the purpose of section 115JB of the Act. 32. The assessee has relied on the following decision to support its argument (1) National Rayon Corporation Ltd. v. CIT (1997) 227 ITR Z04 (2) CIT. National Rayon Corporation 119861 160 ITR 716 (Bom) (3) CIT v. Tube Investments of India Ltd. [1999] 153 CTR (Mad) 432. 33. We considered this issue very carefully. As per clause (c) of Explanation 1 to section 115JB, the amount or amounts set aside to the provision made for meeting liabilities other than ascertained liabilities are to be added to increase the book profits worked out by the assessee. Literally reading, it means provision made for meeting ascertained liabilities need not be added back to the book profits under section 115JB. It is on the basis of the above specific exclusion that the assessee-company has relied on various judgments to argue that the debenture redemption reserve is a provision made by the assessee-company to meet liabilities, i.e, redemption of debentures ascertained 34. From page 6 of the assessment order, it is clear that the assessee has computed the book profits on the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such repayment of debentures loan is capital in nature and not deductible in working out the net profits. Therefore, in the present case, even if the DRR set apart by the assessee company is the provision for ascertained liabilities, it cannot be deducted in computing book profits. This position is supported by clause (b) of Explanation I to section 115JB. 38. Therefore, in the facts and circumstances of the case, we find that the Commissioner of Income-tax (Appeals) has erred in allowing the assessee to deduct Rs. 25 crores from computation of book profits under section 115JB. We reverse the order of the Commissioner Income-tax (Appeals) on this point and restore the order of the Assessing Officer to add back the amount of Ra. 25 crores to the book profits of the assessee company 39. The issue accordingly decided in favour of the Revenue 6.15 The Hon'ble High Court of Delhi in the case of SREI INFRASTRUCTURE FINANCE LTD. ITA 371 372/2012 dated 13.2.2015 have considered this issue of computation of book profits u/s 115JB. It has considered the Supreme Court decisions in the case of National Rayon Corporation and Vazir Sultan Tobacco Company Ltd. and also not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serves and surplus are generally classified as; la capital reserve, (b) capital redemption reserve; (c) securities premium reserve; (d) debenture redemption reserve; and, (e) revaluation reserve or other reserves. In addition, there can be share options outstanding account and surplus, le the balance in the statement of profit and loss disclosing allocations and appropriations such as dividend, bonus shares and transferred to/from reserves, etc. 5. In view of the aforesaid legal position and language of clause (b) to Explanation (1) to Section 115JB of the Act, the appellant-assessee had adopted a different line of argument relying upon the decision of the Supreme Court in the case of National Rayon Corporation (supra) and Vazir Sultan Tobacco Company Ltd. (supra) and argued that the amounts appropriated under Section 45-IC of the Reserve Bank of India Act, 1934 are not a reserve. We record and express our inability to agree with the said contention for the reasons set out below. 6. In Vazir Sultan Tobacco Company Ltd. (supra), the Supreme Court was concerned with the Companies (Profits) Surtax Act, 1964 and it was observed that the terms provision and reserve were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this purpose, reference may be made to the definition of the expression provision in AS-29 Provisions, Contingent Liabilities and Contingent Assets. As per AS-29, a provision is a liability which can be measured only by using a substantial degree of estimation A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits Present obligation' an obligation is a present obligation based on the evidence available, its existence at the Balance Sheet date is considered probable, i.e, more likely than not. 8. Thereafter, the Guidance Note under different headings describes capital reserve, capital redemption reserve, securities premium reserve, debenture redemption reserve, revaluation r serve, share options outstanding account and other reserves. 9. Similarly, in the Guidance Note on the Terms Used in Financial Statements GN(A) 5 issued in 1983, the terms as under reserve and provision were explained 14.04 Reserve The portion of earnings, receipts or other surplus of any enterprise (whether capital or revenue) appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------------------------------------------------------------------------- 29. During the course of argument it was ascertained and accepted on behalf of appellant assessee that the reserve under Section 45-IC of the Reserve Bank of India Act, 1934 and debt redemption reserve were below the line allocations, after computing the financial profit and were not treated and regarded as expenditure/liability for the for the purpose of the profit and loss account in the accounts. The amount treated as reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 was not regarded as diversion of income at source by the statutory auditors. Indeed, the reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 can neither be diversion of income at source nor constitute an expenditure or liability. Reserve under Section 45-IC of the Reserve Bank of India Act, 1934 of not less than 20% of net profit every year can only be computed after net profit is calculated and computed.. Reserve, so created is not a liability known or ascertained, even estimated. Section 45 IC ensures that a Non Banking Finance Company does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases the reserve is called the reserve fund. Reserves are shown on the liability side of the balance sheet and are generally treated as belonging to the proprietor just as capital. It is a sum owned by the business to the proprietor. Reserves themselves are not assets but represent a portion of the assets which the proprietor is free to utilize for business as one likes, i.e the assets equalling the reserves that are not required to pay liabilities. Generally reserves are created at the discretion of the management as a matter of prudence, but in certain cases a can direct creation of special reserves. For the purpose of Section 115JB of the Act, statutory reserves are treated alike and in a similar manner as other reserves. 33 Reserves are normally treated as a part of equity which is defined as residual, ie assets less liabilities, but as recorded above sometimes reserves are required to be created by statute in order to give the entity and its creditors an added measure of protection from the effect of losses. 34. To reiterate, a reserve a below the line of allocation of profits. The amount mentioned in the reserve does not get reflected in the Profit and Loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilized as working capital or for acquisition of any fixed asset, or for even discharge of any loan or liability undertaken earlier inasmuch as there is thereby a substitution of the source of financing of the business purpose for which the said liability was assumed, therewith. The said interest would stand to be debited to the profit and loss account (P L A/c) or the operating statement of the enterprises for the relevant period, as well as deducible u/s.36(1)() in the computation of the income for the relevant assessment year u/s.28 of the Act. The only exception would be where the capital asset being acquired thereby is under construction or otherwise in the process of being initialized, so that it is not put to use. The interest, under such circumstances, would stand to be capitalized as a part of the cost of acquisition of the relevant asset in the assessee's accounts. It would also, likewise, form part of the actual cost of the said asset in terms of section 43 read with Explanation 8 thereto, and not allowable w/s.36(1)(ii) in the computation of business income. The accounting treatment of both the loan liability as well as of the interest thereon, Le, as prescribed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumption thereof the liability)) nor its liquidation (discharge) would impact the operating statement of the enterprises, Le, the company's P L A/c prepared to be prepared under Parts II and III of Schedule VI to the companies act The adjustments to the book profit u/s 115JB are, again, also consistent with the preparation of the P L A/c under the companies act. The set side of the profits is not to meet a trading liability or a liability on revenue account, so as to form part of or get incorporated therein, Le, the P L a/c In fact, no set aside for meeting a trading liability would be required in actual practice, as such a liability would itself be charged to the operating statement, reducing the profit to that extent. That is, even if not actually discharged out of the profits as where the same stand locked up in an asset/s, the profits have been deemed to have been absorbed to that extent, so as to become the source of its discharge. In our humble view, therefore, the Revenue is not incorrect in stating that the said set aside of the profits is only an appropriation of profits, and would not amount to a provision, so as to qualify for deduction in the computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questions of low have been framed by the Revenue which are as follows: (a) Whether on the facts and in the circumstances of the case and in law, the ITAT was right in deleting the adjustment made by the AO relating to Redemption of Debentures Reserve amounting to Rs 18.80 Crores (b) Whether on the facts and in the circumstances and in law, the ITAT was right in deleting the disallowance in respect of capital expenditure incurred in respect of Steel Division at Nashik as revenue expenditure? 2. Re question (a): Section 115JA of the Income Tax Act, 1961 provides in subsection (2) that every assessee, being a company shall for the purpose of the section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and II of Schedule VI the Companies Act, 1956. The explanation to the Section provides that for the purpose of the section, book means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased inter alia by (b) the amounts carried to any reserves by whatever name called Part III of Schedule VI to the Companies Act. 1956 provides inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans and advances from subsidiaries, and (4) other loans and advances The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be reserve The interpretation clause of the balance-sheet in Schedule VI of the Companies Act specifically lays down that reserves shall not include any amount written off or retained by way of providing for a known liability. 4. The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve, Consequently the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA of the Income The Act, 1961, No substantial question of law would, therefore, arise 6.19. A perusal of the decision of the Hon'ble High Court in the case of Raymond Ltd. shows that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have jurisdiction to pass an order u/s 263. It was held that the order u/s 263 has been passed in respect of the re- assessment order passed by the assessing officer. The re-assessment was in respect of financial transactions entered into by HDIL with Bhoomi Group etc. The issue of DRR was not a subject matter of the re- assessment order. Hence the time limit will commence from date or original assessment order and holding thus, it was concluded that order u/s 263 was time barred. The Pr CIT has sought to revise an issue which was allowed in the original assessment proceedings and which was not subject matter of re-assessment proceedings. Hence the time limit has to be reckoned from the date of passing the original assessment order. Further it was held that the fact that the issue of DRR had reached higher courts show that the issue is debatable and whatever may be the reasoning given by the Pr CIT, it cannot be denied that he has taken a different view and this is therefore this is not a case where an assessment order can be termed as erroneous and prejudicial to the interests of revenue. The context and ratio of that case is different and not applicable to the facts before me. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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