TMI Blog2007 (11) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... loss whereas s. 50 deals only with those types of cases where the profit accrued, to the assessee on transfer of block of assets. Thus, we are of the view that the CIT(A) has properly adjudicated the issue and we find no infirmity therein. Accordingly we confirm his order. Addition on lease equalization - difference between annual lease charge (i.e. lease rental net of finance charge) and depreciation is debited/credited to the annual lease equalization account in the P L a/c and credited to the lease terminal adjustment account. The balance outstanding in the lease terminal adjustment account is adjusted in the net book value of the leased asset in the balance sheet. This method of accounting is accepted by the AO in earlier years. HELD THAT:- During the course of hearing, the ld DR could not explain how the profit of the assessee is being affected by passing these journal entries. Since the assessee has been following this method of accounting for the last so many years, this method cannot be disturbed in the impugned year without establishing that by passing these journal entries the profit of the assessee is being affected. We, therefore, find no merit in this disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e kept as stock-in-trade or as an investment. We, therefore, are of the view that this issue requires fresh adjudication by the AO to identify the borrowed funds, which were invested in shares, held as investment and only with regard to these borrowed funds disallowance under s. 14A can be made. The interest paid on the borrowed funds which were invested in shares kept as stock-in-trade deserves to be allowed as revenue expenditure under s. 36(1)(iii) of the Act. We accordingly set aside the order of the CIT(A) in this regard and restore the matter to the file of the AO with the direction to readjudicate the issue afresh in terms indicated above after affording opportunity of being heard to the assessee. Computation of book profit u/s 115JA - Assessee has maintained an account for NPAs and whatever recovery of the outstanding debts is not properly effected and certain defaults in instalments are committed, assessee put those outstanding dues under the head Non-performing assets and accordingly, he made a provision for NPAs while computing the total income of the assessee. We are of the view that the ratio laid down in the case of Usha Martin Industries Ltd.[ 2006 (12) TMI 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of IL FS On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of AO adopting cost inflation index pertaining to asst. yr. 1994-95 instead of pertaining to asst. yr. 1989-90 determining indexed cost of IL FS shares sold during the year. 5. Treatment of whole lease rent as income Without prejudice to grounds of appeal in relation to allowance of depreciation on leased assets taken in earlier years, learned CIT(A) erred in confirming treatment by AO of whole amount of lease rent received as income instead of restricting the taxability to only interest component out of lease rent received. 6. Disallowance of interest under s. 14A of IT Act The learned CIT(A) erred in confirming disallowance of a sum of Rs. 10,73,358 under s. 14A of IT Act. 7. Computation of book profits under s. 115JA 7.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) (while computing book profits) erred in confirming the action of AO of addition of Rs. 1,01,40,295 being provision of non-performing assets. 7.2 Without prejudice to the foregoing grounds of appeal and on the facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (hereinafter referred as 'Act') and not as business income. In that situation, the Tribunal has held that though the computation was to be made as short-term capital gain under s. 50 of the Act but the same has to be dealt with under the head "Profits and gains of business or profession". Thus in that case the matter related to income resulting on sale of assets but in the instant case there is no income resulting from the sale of asset, i.e., building and the sale resulted in a loss as the sale consideration is less than the WDV of the asset in question. The CIT(A) accordingly held that in the given situation the provisions of s. 50 cannot be invoked. It is rather a case of claim of deduction under s. 32(1)(iii) of the Act. Since the assessee has not written off the deficiency in its books of account deduction cannot be allowed while computing the income under the head 'Business or profession'. The CIT(A) accordingly rejected the claim of the assessee. Since the CIT(A) has adjudicated the issue in the light of legal provisions, we deem it proper to extract it hereunder: "2.2 I have considered the foregoing submissions and I have also perused the impugned order of assessment. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year (other than the previous year in which it is first brought into use), the amount by which the money payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the WDV thereof: Provided that such deficiency is actually written off in the books of the assessee. Explanation-For the purpose of this clause,- (1) 'moneys payable' in respect of any building, machinery, plant or furniture includes- (a) any insurance, salvage or compensation money payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to cl. (1) of s. 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any), the same proportion as the amount of twenty-five thousand rupees bears to be the actual cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) in support of his contention that where the plain literal interpretation of a statutory provision produces manifestly unjust result which could never have been intended by the legislature. the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. 6. The learned Departmental Representative, on the other hand, has submitted that the provisions of s. 50 can only be invoked for computing the capital gain on sale of depreciable assets. The language employed in the section clearly states that the proviso to this section can only be invoked when there is a gain on sale of a capital asset. Its sub-s. (1) makes it more clear that the provision can only be invoked for computing the capital gain only on depreciable assets. According to it where the full value of consideration received or accruing as a result of transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any capital asset falling within the block of assets during the previous year, exceeds the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the claim of loss of the assessee cannot be considered under s. 50. It can only be considered under s. 32(1)(iii) of the Act. Since the assessee has not actually written off the deficiency in its books of account, assessee is not entitled for deduction under s. 32 also. Before adjudicating the controversial issue we deem it proper to examine the scope of s. 50 and s. 32(1)(iii) of the IT Act. The title of s. 50 is "Special provision for computation of capital gains in case of depreciable assets". Assessee has raised a controversy that the words 'capital gains' included capital loss also. The intention of the legislature whether the words 'capital gain' include capital loss can be examined not by reading the title but by full reading of s. 50. We, therefore, prefer to extract the relevant provision of s. 50 as under before interpreting it: "50. Notwithstanding anything contained in cl. (42A) of s. 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian IT Act, 1922 (11 of 1922), the provisions of ss. 48 and 49 shall be subject to the following modifications: (1) where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of short-term capital asset. Meaning thereby, the provisions of sub-s. (1) can only be invoked where the entire block of assets including the new assets which are acquired during the previous year and fall within the same block of assets are transferred and the sale proceeds exceed the aggregate of expenditure on transfer, WDV of the asset and the actual cost of new asset acquired during the previous year. This provision would not apply to those excess where part of the block of assets are transferred. Sub-s. (2) deals with those types of cases where any block of assets ceased to exist for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block assets shall be the WDV of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets. Provision of this section does not apply to those cases where the block of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso; (2) 'sold' includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company or in a scheme of amalgamation of a banking company, as referred to in cl. (c) of s. 5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution as referred to in sub-s. (15) of s. 45 of the said Act, sanctioned and brought into force by the Central Government under sub-s. (7) of s. 45 of that Act, of any asset by the banking company to the banking institution." 10. If both the sections, i.e., s. 32(1)(iii) and s. 50, are read together one would find that these sections deal with different types of situations on transfer of capital assets of the assessee. Sec. 50 deals with those cases where the profit accrued to the assessee on transfer of its any block of assets whereas s. 32(1)(iii) deals with those cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Institution of Chartered Accountants of India contained in the guidance note on accounting for leases. Accordingly, the difference between annual lease charge (i.e. lease rental net of finance charge) and depreciation is debited/credited to the annual lease equalization account in the P L a/c and credited to the lease terminal adjustment account. The balance outstanding in the lease terminal adjustment account is adjusted in the net book value of the leased asset in the balance sheet. This method of accounting is accepted by the AO in earlier years and there is no valid reason to disallow the claim of the assessee in this year as it is only a journal entry and there is no element of profit. Having not convinced with the explanation of the assessee, CIT(A) confirmed the disallowance. Now the assessee is before us and has reiterated his contentions. 14. During the course of hearing, the learned Departmental Representative could not explain how the profit of the assessee is being affected by passing these journal entries. Since the assessee has been following this method of accounting for the last so many years, this method cannot be disturbed in the impugned year without establishi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of assessee's contention, but was not convinced with it and confirmed the view of the AO. While disallowing the claim of the assessee the CIT(A) held that since the shares held by the assessee company as stock-in-trade were admittedly purchased in March, 1994, the base year for indexation has been rightly taken by the AO as asst. yr. 1994-95. We, however, for the sake of reference extract the relevant portion of the order of the CIT(A) as under: "6.2 I have considered the foregoing submissions. The learned Authorised Representative has contended that s. 47 provides that the transaction of sale of shares by a holding company to its subsidiary company shall not be regarded to be transfer and that s. 49 provides that in such a case the cost to the previous owner shall be deemed to be the cost of acquisition. On going through the provisions of s. 47 it is seen that in that section there is no reference to the transaction of shares by a holding company to a subsidiary company. The appellant had purchased 50,000 shares from Mukand Ltd. for a price. These shares were held by the appellant as stock-in-trade. The purchase was made in 1994. Therefore, s. 47 has no application. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets incurred or borne by the previous owner or the assessee, as the case may be. In the instant case, the shares were admittedly purchased by the assessee from its holding company against certain sale consideration. Though it may be a capital asset but it is not a case of transfer of the capital asset without any consideration by the holding company to its subsidiary company. If the transfer of shares is affected against some sale consideration, that sale consideration shall be the cost of acquisition in the hands of the assessee and not the cost paid by the holding company at the time of its acquisition. 19. Having given a thoughtful consideration to the rival submissions and from a careful perusal of the records, we find that in the instant case, it is not a normal transfer of capital asset by the holding company to its subsidiary company as envisaged in s. 47(iv) of the Act. Through its letter dt. 4th Feb., 2003, appearing at p. 17 of the compilation of the assessee filed before the AO, assessee has categorically stated that the 50,000 shares of IL FS Venture Corporation, which were sold during the impugned assessment year, were purchased by it from its holding company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to its subsidiary company, if the holding company or its nominee holds whole of the share capital of the subsidiary company and the subsidiary company is an Indian company, shall be deemed to be the cost for which the holding company acquired the said capital asset as increased by the cost of any improvement of the asset incurred or borne by the holding company or the subsidiary company in whose hands cost of acquisition is to be computed. If we read both these provisions we would find that the cost of acquisition in the hands of the holding company shall be deemed to be the cost of acquisition in the hands of the subsidiary company in case of transfer of capital asset by the holding company. This proposition would not be applicable if the capital assets are sold by the holding company to the subsidiary company. Once the capital assets are sold to the subsidiary company the sale value of the capital asset shall be the cost of acquisition in the hands of the subsidiary company. 21. We have also examined the provisions of ss. 47 and 49 of the Act. It can only be invoked where the holding company transfers its capital asset without any considerations to its subsidiary company but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. On careful perusal of the order of the CIT(A) we find that the CIT(A) has categorically held that the provisions of s. 47 has no application to the present case as assessee has purchased the shares from its holding company for a price. We find no infirmity in this observation of the CIT(A) in the light of the foregoing discussion. The CIT(A) further observed that it is a case of purchase of stock-in-trade by the assessee for a price and in this regard we do not find any fact borne out from the records. Had it been a case of trading of shares and shares were purchased as stock-in-trade there would not be any question of computation of capital gain. At one stage the CIT(A) held this purchase of the shares as stock-in-trade and at other point he computed the capital gain on the sale of shares as per Expln. 5 to s. 48 of the IT Act and finally he has agreed that capital gain is to be computed and for indexation the assessment year would be taken as 1994-95. We agree with this finding of the CIT(A). In the light of the foregoing discussion we do not agree with the observation of the CIT(A) that the purchases were made as stock-in-trade. These purchases are a part of investment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee may be charged to tax in place of rental income assessed by him as the lease transaction is held to be a financial arrangement, after affording opportunity of being heard to the assessee. 25. Ground No. 6 relates to disallowance of interest under s. 14A of the Act. 26. During the course of assessment proceedings the AO has noticed that the assessee has received dividend income which is exempted from tax and he accordingly disallowed the interest on borrowed funds invested in shares. The assessee preferred an appeal before the CIT(A) and raised preliminary objection that provisions of s. 14A cannot be invoked in the light of the proviso inserted by the Finance Act, 2002, with retrospective effect from 11th May, 2001. The learned counsel for the assessee further stated that in the instant case the refund of Rs. 41,23,167 was issued under s. 143(1)(a) and now as a result of the addition refund already granted shall be reduced by Rs. 4,13,224. As such, provisions of s. 14A cannot be invoked in the light of the proviso to s. 14A according to which the AO is not empowered to invoke the provisions of s. 14A either to reassess under s. 147 or pass an order enhancing the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to avoid misuse of this provision proviso to this section was introduced by the Finance Act, 2002 with retrospective effect from 11th May, 2001 and through this proviso a restriction was imposed upon the AO that he shall not be empowered either to reassess under s. 147 or pass order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under s. 154, for any assessment year beginning on or before 1st April, 2001. Meaning thereby that the proviso to s. 14A is applicable to a situation where the assessment order for an assessment year beginning on or before 1st April, 2001 has already been passed and subsequently reassessment is sought to be made under s. 147 or the income assessed or refund issued. as the case may be, sought to be enhanced or reduced by passing an order under s. 154 of the Act. For invoking the proviso to this section there should be an assessment order passed which is sought to be reopened or rectified by the subsequent act of the AO. In the instant case undisputedly, there is no assessment order passed under s. 143(3) of the Act. Only an intimation was issued through which refund was granted. It has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and leasing. The dividend income accrued to the assessee on both the types of shares, either kept as stock-in-trade or in investment. Though the dividend income earned on its shares which are kept in stock-in-trade is also exempted from tax but the interest paid on the borrowed funds invested in trading of shares cannot be disallowed because it was borrowed for the purpose of business and is an allowable expenditure under s. 36(1)(iii) of the Act. Disallowance of interest on borrowed funds can only be made where the borrowed funds were invested in shares and the shares were held by the assessee to be investment or capital asset. In the instant case, Revenue authorities have disallowed the interest on borrowed funds which were invested in shares without looking to the nature of shares whether they were kept as stock-in-trade or as an investment. We, therefore, are of the view that this issue requires fresh adjudication by the AO to identify the borrowed funds, which were invested in shares, held as investment and only with regard to these borrowed funds disallowance under s. 14A can be made. The interest paid on the borrowed funds which were invested in shares kept as stock-in-trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be made as per the narrations in the P L a/c and since the provision in respect of NPAs is not a liability and much less an ascertained liability, the AO was right in making the adjustment and the same is confirmed. 37. Now, the assessee has preferred an appeal before us and reiterated its contentions. The learned counsel has invited our attention to the order of the Special Bench of the Tribunal in the case of Jt. CIT vs. Usha Martin Industries Ltd. (2006) 105 TTJ (Kol)(SB) 543 : (2007) 104 ITD 249 (Kol)(SB) in support of his contention that provision for NPAs is not at all a liability. This provision was created on account of certain defaults in payment by the debtors. It is not in the form of liability which is to be cleared by the assessee. He has also argued in the alternative that the AO be directed to reduce Rs. 46,29,010 being the provision for NPAs written back. 38. The learned Departmental Representative, on the other hand, submitted besides placing heavy reliance on the order of the CIT(A), that the judgment referred to by the assessee is on different issues, i.e., with regard to cl. (a) of Explanation to s. 115JA. Through this judgment the provision for doubtful d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted hereunder for the sake of reference: "As per s. 115JA, the P L a/c is to be prepared as per Parts II and III of Sch. VI to the Companies Act. Part III of Sch. VI defines the expression 'provision', which means any amount written off or retained, by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability, of which the amount cannot be determined with substantial accuracy. The identical definition of the word 'provision' is given by the Institute of Chartered Accountants of India in the guidance notes issued for its members. Similar definition is given in the Books of Accountancy by William Pickles. Thus, the provision can be for (i) depreciation; (ii) renewals; (iii) diminution in the value of assets; and (iv) for any known liability, of which the amount cannot be determined with substantial accuracy. The question was whether the provision for bad and doubtful debt was the provision for diminution in the value of asset or for known liability, of which the amount cannot be determined with substantial accuracy. The provision for bad and doubtful debt is made when the assessee is of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the provision for bad and doubtful debt is not a provision for liability but it is a provision for diminution in the value of the assets. Once the provision is not for any liability, the question whether the liability is ascertained or unascertained does not arise. Therefore, cl. (c) of the Explanation to s. 115JA would not be applicable in respect of provision for bad and doubtful debts. As regards the alternate argument of the Revenue that the provision for bad and doubtful debt would be covered by cl. (b) of the Explanation to s. 115JA, it is seen that the expression 'reserve' has been defined in a negative manner by cl. 7(1)(b) of Part III of Sch. VI to the Companies Act and it only says that the reserve shall not include any amount written off or retained by way of providing for depreciation, renewals, diminution in the value of assets or retained by way of providing for any known liability. Thus, if the provisions made by the assessee for depreciation, renewals and diminution in the value of the assets are for any known liability, if it is in excess of the amount which is reasonably necessary for the purpose for which the provision is made, the excess shall be treated as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad and doubtful debts similar type of practice is being adopted by the asses sees whenever they failed to recover the debt. We therefore are of the view that same analogy can also be applied to the present case. In the case of bad and doubtful debts, Tribunal has categorically held that the provision for bad and doubtful debts is not a provision for any liability, it is rather a provision for diminution in the value of assets, i.e., debts because even if a debt is not recovered no liability, would be fastened upon the assessee. Debt is the amount receivable by the assessee and not any liability payable by the assessee and therefore any provision towards recoverability of the debt cannot be said to be the provision for the liability. Similar is the position with regard to provisions for NPAs. In that case also, if the debt is not recovered no liability would be fastened upon the assessee. It is the amount receivable by the assessee and not the liability payable by the assessee. We, therefore, are of the view that the ratio laid down in the case of Usha Martin Industries Ltd. by the Special Bench strictly applies to the present case and following the same we hold that the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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