2012 (4) TMI 127 - HC - Income Tax

Supreme Court Upholds ITAT Decision on Debenture Redemption Reserve & Capital Expenditure Disallowance

The Supreme Court upheld the ITAT's decision to delete the adjustment made by the AO concerning the Redemption of Debentures Reserve, stating that a ... Debenture Redemption Reserve - whether qualify as reserve for the purpose of Section 115JA - AY 1997-98 – Held that:- Supreme Court in National Rayon Corporation Ltd. Vs. CIT (1997 (7) TMI 113 - SUPREME Court) have held that “basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve”. Where a company issues debentures, the liability to repay arises the moment the money is borrowed. The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve. Consequently, Tribunal was correct in holding that the Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA – Decided in favor of assessee.Dis-allowance of pre-operative expenses by A.O. treating it to be capital expenditure – Held that:- Tribunal deleted the dis-allowance in view of its earlier decision in relation to AY 85-86 confirmed by this court treating Pre-operative expenses viz salary and wages, staff welfare expenses, power, travelling, legal and professional fees and miscellaneous expenses to be revenue expenditure – No infirmity found in the order – Decided in favor of assessee. Issues:1. Whether the ITAT was right in deleting the adjustment made by the AO relating to Redemption of Debentures Reserve amounting to Rs. 18.80 croresRs.2. Whether the ITAT was right in deleting the disallowance in respect of capital expenditure incurred in respect of Steel Division at Nashik as revenue expenditureRs.Analysis:Issue 1:The appeal by the Revenue against the ITAT order regarding the adjustment made by the AO concerning the Redemption of Debentures Reserve was considered. Section 115JA of the Income Tax Act, 1961 was analyzed, emphasizing the definition of 'book profit' and the treatment of reserves under Part III of Schedule VI to the Companies Act, 1956. The Supreme Court's ruling in National Rayon Corporation Ltd. Vs. Commissioner of Income Tax (1997) 227 ITR 764 was referenced, highlighting that a Debenture Redemption Reserve (DRR) should be treated as monies set apart to meet a known liability, not as a reserve. The Court emphasized that the labeling of a Debenture Redemption Reserve as a reserve does not alter its nature as a provision for a known liability. Consequently, the Tribunal's decision to delete the adjustment was upheld, stating that no substantial question of law arose in this regard.Issue 2:Regarding the deletion of the disallowance in respect of capital expenditure incurred for the Steel Division at Nashik, the Tribunal's decision was based on precedents from previous assessment years. The Assessing Officer's order highlighted that the pre-operative expenses included various items of a revenue nature, such as salary, wages, staff welfare expenses, and legal fees. The Tribunal's reliance on previous orders treating such expenses as revenue expenditure was deemed appropriate. As a result, it was concluded that this issue did not give rise to any substantial question of law, leading to the dismissal of the appeal with no order as to costs.