2020 (8) TMI 796 - AT - Income Tax

Tribunal rules against upward adjustments under section 115JB, clarifies treatment of capital reserve and mutual fund losses.

The tribunal allowed the appeal of the assessee, ruling that the upward adjustments made by the assessing officer under clauses (j) and (f) of Explanation ... MAT computation - Valuation of assets on amalgamation - determining book profit under section 115JB as against book loss declared by the appellant - whether the increase in the value of investment is capital reserve or revaluation reserve? - whether the reserve created by the scheme of amalgamation on account of investing of assets is in the nature of “Revaluation Reserve” or “Capital Reserve” and the upward adjustment in terms of Clause (j) and Clause (f) of the Explanation 1 to Section 115JB by the revenue is correct or not? - HELD THAT:- AO failed to appreciate that a “Revaluation Reserve” is created when an enterprise revalues its own assets, already acquired and recorded in its books at certain values. When an entity makes reinstatement of the book value of its existing assets, it amounts to revaluation of assets. In the instant case, the assessee has not revalued its existing asset but as only recorded the fair values of various assets and liabilities “acquired” by the assessee from the transferor/ “amalgamating companies” pursuant to the scheme of amalgamation as its 'cost of acquisition' in accordance with the terms of the court-approved scheme of amalgamation and the provisions of AS14. As per the accounting standard, upward revaluation of assets is permitted only in terms of AS 10 on 'Accounting for Fixed Assets'. AS 13 which deals with 'Accounting for Investments', does not permit a company to revalue of its long-term investments at a value higher than the cost. For computing book profit, sub-section (2) of section 115JB of the Act mandates that every company shall prepare its Profit & Loss Account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act, 2013 (corresponding to Parts II and III of the erstwhile Companies Act further provides that for computing book profit under the said section, the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (corresponding to section 210 of the Companies Act; 1956) shall be adopted. Since, the capital reserve is out of purview of Section 115JB, and the “Revaluation Reserve” only is considered for upward adjustment of the profit as per the Act, the AO tried to being the capital reserve to the fold of Clause (j) [which rightly deals with revaluation reserve]. Such an action of the AO cannot be sustained. Based on the reading of Clause (j) of Explanation to section 115JB for calculation of book profit u/s. 115JB, provisions of Section 129 of the Companies Act, AS 14 of the recognized accounting standard, keeping in view the fact that the revenue has not brought any tangible material to prove that the scheme is a colourable device to avoid taxes, keeping in view the land holding which has been consolidated owing to the amalgamation of the companies and keeping view the accounting resorted by the group companies regarding the book value of investments in shares pre & post amalgamation, we hereby hold that, the appeal of the assessee on this ground is allowed. Upward adjustment in terms of Clause (f) of Explanation 1 of Section 115JB on account of expenditure relatable to earning of exempt income - HELD THAT:- There is a clear distinction between a business expenditure and business loss. The former is an indicative of a volition but a loss comes to as ab extra without the role of the assessee. While expenditure is voluntarily, business loss is fortuitous [CIT Vs New India Assurance Co. Ltd. [1967 (10) TMI 16 - BOMBAY HIGH COURT]. Hence, the loss cannot be equated with expenditure. The provisions u/s 115JB doesn’t envisage enhancement of taxable profits by adding the loss incurred in redemption of mutual fund for the purpose of Section 115JB. Reliance is placed on the judgment of Hon’ble High Court of Gujarat in the case of CIT Vs JK Paper Ltd. [2012 (4) TMI 237 - GUJARAT HIGH COURT] wherein it was held that the loss incurred by the on account of dividend stripping dealt under sub-Section 7 of Section 97 cannot be applied for the purpose of computing business profit in terms of Section 115JB. Based on the conjoint reading of the provisions of the Act and the judgments of the Hon’ble Apex Court, the appeal of the assessee on this ground is allowed. Issues Involved:1. Determination of book profit under section 115JB of the Income Tax Act, 1961.2. Upward adjustment to book profit in terms of clause (j) of Explanation 1 to section 115JB.3. Treatment of capital reserve created under the scheme of amalgamation.4. Allegation of the scheme of amalgamation being a colorable device to evade tax.5. Upward adjustment in terms of clause (f) of Explanation 1 to section 115JB on account of expenditure related to earning of exempt income.Detailed Analysis:1. Determination of Book Profit under Section 115JB:The assessee challenged the determination of book profit at Rs. 275,16,44,730 against a declared book loss of Rs. 90,74,679. The CIT(A) confirmed the assessing officer's action of making an upward adjustment of Rs. 247,52,73,951 to book profit in terms of clause (j) of Explanation 1 to section 115JB.2. Upward Adjustment to Book Profit in Terms of Clause (j) of Explanation 1 to Section 115JB:The assessing officer contended that the scheme of amalgamation was a device to evade tax and that the difference arising from the revaluation of assets should have been transferred to the revaluation reserve instead of the capital reserve. The CIT(A) upheld this view, leading to an upward adjustment of Rs. 247,52,73,951 to the book profit.3. Treatment of Capital Reserve Created Under the Scheme of Amalgamation:The assessee argued that the accounting treatment was in accordance with the binding scheme of amalgamation approved by the High Court and the provisions of the Companies Act. The difference between the fair value of assets acquired and the liabilities taken over was recorded as 'capital reserve'. The tribunal found that the capital reserve created due to the scheme of amalgamation should not be regarded as a revaluation reserve. The tribunal concluded that the upward adjustment for book profit under clause (j) of Explanation 1 to section 115JB was not warranted.4. Allegation of the Scheme of Amalgamation Being a Colorable Device to Evade Tax:The revenue alleged that the amalgamation was a sham transaction aimed at reducing the tax liability. The tribunal found that the revenue failed to prove that the scheme was a colorable device. The tribunal noted that the consolidation of land holdings through amalgamation was necessary for the business requirements and that the allegations of tax evasion were unsubstantiated.5. Upward Adjustment in Terms of Clause (f) of Explanation 1 to Section 115JB on Account of Expenditure Related to Earning of Exempt Income:The assessing officer made an upward adjustment of Rs. 28,54,45,463, treating the short-term capital loss on mutual funds as expenditure related to earning exempt income. The tribunal found that the loss on redemption of mutual funds could not be considered as expenditure under clause (f) of Explanation 1 to section 115JB. The tribunal relied on the judgment of the Gujarat High Court in CIT vs. JK Paper Ltd., which held that loss from dividend stripping should not be added back for computing book profit under section 115JB.Conclusion:The tribunal allowed the appeal of the assessee, holding that the upward adjustments made by the assessing officer under clauses (j) and (f) of Explanation 1 to section 115JB were not justified. The tribunal emphasized that the capital reserve created under the scheme of amalgamation should not be treated as a revaluation reserve and that the loss on mutual funds should not be considered as expenditure for the purpose of section 115JB.