TaxTMI 
TaxTMI 
2016 (7) TMI 576
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....after referred to as "the Act") vide order dated 28.3.2014 and the total income under normal provisions was determined at loss of Rs. 20,313/- and the book profits u/s.115JB of the Act was determined at Rs. 19,99,79,887/-. Aggrieved by the order of AO, matter was carried in appeal before ld.CIT(A) who vide order dated 14.10.2015 (in Appeal No.CIT(A)-4/147/Wd-2(2)(2)-14-15) dismissed the appeal of the assessee. Aggrieved by the order of ld.CIT(A), Assessee is now in appeal before us and has raised the following grounds: "1. The learned CIT(A) has erred on facts and in law in confirming the action of the Assessing Officer ('AO') of adjusting 'book profit' to INR 19,99,79,887 under section 115JB of the Act on account of revaluation reserve by adopting approach contrary to the provisions of the Income-tax Act, 1961 ('the Act'). 2. The learned CIT(A) has erred on the facts and in law in confirming levy of interest under section 234A, 234B, 234C and 234D of the Act when no such interest is liable to be paid. 3. The learned CIT(A) has erred on facts and in law in not adjudicating initiation of penalty proceedings under section 271(1)(c) of the Act." 3. Before....
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....d Loss account by including the revaluation reserve to the profits for the purpose of determining book profits u/s.115JB of the Act and accordingly determined the books profits for the purpose of 115JB at Rs. 19,99,79,887/-. Aggrieved by the order of AO, Assessee carried the matter before ld.CIT(A) who vide order dated 14/10/2015 (in appeal No CIT(A)-4/147/Wd-2(2)(2)-14-15) upheld the act of AO by holding as under:- "5. I have carefully considered the observations of the AO and the submissions made before me by the appellant. Ground No.1 & 2 are against the addition of Rs. 19,52,64,900/- in book profit for calculating MAT u/s 115JB of the Act. It is undisputed fact that the appellant company had revalued its investment which it held in the shares of subsidiary company namely NSI Infinium Global Pvt Ltd from Rs. 1 lakh to Rs. 20,01,00,000/- and while investment was shown at enhanced value at Rs. 20,01,00,000/-, the difference in valuation was carried to capital reserve directly in the balance sheet. While it is pertinent to note that the report of the Chartered Accountant who valued the intangible assets of NSI Infinium Global Pvt Ltd is dated 21.08.2010, the appellant comp....
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....i) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, 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. shall 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. Explan....
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....ssets); or (iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause(iia); or] (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation- For the purposes of this clause,- (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] (iv) the amount of profits eligible for deduction under section 80HHC. computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (vi) The amount of profits eligible for deduction under section 80HHF computed un....
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....se provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.] (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.] 5.4 Reading the aforesaid provision it is clear that Section 115 JB is a code by itself and contains charging as well as machinery provision for computation of book profit. Sub-section (2) of Section 115 JB provides that every assesses being a company shall for the purpose of this section prepare its profit and loss account in accordance with provision of Part II and III of Schedule VI to the Companies Act, 1956. Proviso to subsection (2) prescribes that while preparing the annual account including profit and loss account, the accounting policies, the accounting standards and the methods and rates adopted for calculating depreciation shall be the same as have been adopted for the purpose of preparing such accounts as laid before the company at its annual general meet....
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....;e' hereunder. The company has revalued its investments based on the revaluation of intangible assets/business by NSI Infinium Global P Ltd. Due to this reasons investment value is increased by Rs. 20,00,000/- in the year under consideration. Revaluation of investments in this manner is not in line with AS- 13 issued by the Institute of Chartered Accountants of India. (e) The Company has issued Bonus Shares in September, 2010, for Rs. 19,52,64,900/-(1,95.26,490 Equity Shares of Rs. 10)/- each, fully paid up) by capitalizing its re-valuation reserve. Accordingly, the paid up capital of the company stands increased by Rs. 19,52,64,900/- and the revaluation reserve stands reduced by that amount. The issue of bonus share is not in accordance with the circular issued by the Department of Company Affairs bearing No. 9/94 dated 6-9-1994 and the recommendation of the Institute of Chartered Accountants of India. 5.6 Accounting Standard 13 relating to "Investment" issued by ICAI is mandatory so far as assessee is concerned. Even sub-section (3A) of Section 211 of the Companies Act 1956 provides that "every profit and loss account and balance sheet of the company shall c....
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....ordance with provision of Part II and III of Schedule -VI to the Companies Act, not only it should be in accordance with Part - II of Schedule - VI of the Companies Act 1956 but it should also be in accordance with the accounting standards adopted for preparing such account including profit and loss account. If the assessee while preparing its profit and loss account does not prepare the same in accordance with Part - II of Schedule VI to the Companies Act or does not follow the accounting standards adopted, the Assessing Officer is not only competent to, but is duty bound to give effect to the accounting standards as also the provision of Part - II and III of Schedule VI to the Companies Act. 5.9 In the case of CIT v. Khaitan Chemicals & Fertilizers Ltd. [2008] 307 ITR 150 (Delhi), the Hon'ble High Court observed that when accounting standard (AS-5) required prior period expenses/extraordinary items to be shown separately and the assessee was required to prepare P&L account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, the fact that prior period expenses/extraordinary items were shown separately after the figure of net prof....
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....ons of Parts II and III of Schedule VI to the Companies Act and the fact that the items of current depreciation or prior period expenses/extraordinary items were disclosed or shown separately in the accounts prepared and laid before company under the Companies Act did not mean that they would not constitute part of the net profit as per Companies Act for the purpose of computing "book profit" under section 115 J or 115 JA of the Act. The Court held that the information disclosed in the notes appended to the accounts or the item shown separately after the net profit had been struck down in the P&L account as per requirement of the provisions of Companies Act would form part of the accounts of the assessee-company and would come within the ambit of 'net profit' as shown in the P&L account for the relevant assessment year as notes to the account form part of the P&L account by virtue of sub-section (6) of section 211 of the Companies Act, read with clause 3(iv) of Part II of Schedule VI to the Companies Act. Thus, following the above-referred two decisions of Hon'ble Delhi High Court, I hold that the net profit shown in the profit and loss account may be adjusted by the it....
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....int for making adjustment envisaged in Explanation-1 to section 115JB will require proper relooking by the AO keeping in view the purpose of introducing the provisions of MAT. In the instant case, the appellant, though having shown that it has become prosperous and richer by an amount of Rs. 20 Crores in terms of value of investment due to increase in value between the date of investment and the date of revaluation and has also, on that count issued bonus shares to the shareholders, by not including the said gain as profit while computing "book profit" is defeating the purpose of section 115JB. It is true that as far as the provisions of normal income computation are concerned, it is only the difference between realized sales consideration and the actual cost which shall be the capital gain liable to be taxed. However, the present issue is not about such actual gain or profit realized while computing income under normal provisions of the Act but the profit which must be shown when the tax is not payable under normal provisions. The appellant not merely transferred the revaluation amount to capital reserve directly but thereafter also utilized the said reserve for distribution as bo....
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.... profit and loss account, no adjustment while computing net profit (to arrive at further the figure of 'book profit') can be made. In my opinion, therefore mere observation of the AO about the revaluation as notional profit does not debar him to look in to the aspect whether the act of the appellant in treating the said revaluation reserve as available for issuing bonus shares particularly in the situation when the reserve is actually so utilized for such purpose requires adjustment in the net profit which is not in accordance with the provisions of the Companies Act, 1956 read with the relevant accounting standards. The argument of the appellant that non compliance with requirement of AS 13 would not affect computation of book profit u/s 115JB does not deserve acceptance looking at the purpose of introduction of the provisions of section115JB and more particularly looking to the method adopted by the appellant to avoid tax under MAT for the year under consideration as also for the year in which the same might be sold. 5.13 The appellant's reliance on the judgment of the Supreme Court in the case of Indo Rama Synthetics (I) Ltd 330 ITR 363 is misplaced. The judgmen....
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....cation then only the A.O has no power to make adjustment. 5.14 So far as the judgment of the Supreme Court in the case of J.K. Industries Ltd vs Union of India (2007) 80 SCL 283 (SC) [297 ITR 176] is concerned, the said judgment dealt with the question whether AS-22 regarding deferred tax provision is inconsistent and ultra vires with the provisions of the Companies Act, 1956 and hence the same is not relevant for deciding the issue whether revaluation reserve actually utilized for issue of bonus shares is part of the book profit or not. Besides this factual difference, the Supreme Court has laid down in the said case that measurement and recognition methods are not the items under the Companies Act and the methods of recognition and measurements are talked about by the provisions of the Companies Act but recognition and measurement of various items of revenue expenses, etc., stand covered only by the accounting standards. The Court held that it cannot be said that the said standards are contrary to the provisions of the Companies Act. The contention in this regard that mere valuation of any asset does not result in to any gain until it is disposed off is valid so far as t....
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....who are in the close relation. The Supreme Court in the case of Juggilal Kamlapat vs CIT 73 ITR 702 has held that income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction. The Court held that while it is true that from juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members, but in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. It was held that the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. As discussed above, the appellant has adopted the device of avoiding tax under the provisions of section 115JB permanently on the ground that revaluation is not real profit but at the same time, utilizing the same for issuance of bonus shares. No consent to such a method can be sanctioned in law in view of the fact that the accounts are not prepared by following the accounting standard an....
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....Tribunal in the case of ITO vs. Galaxy Saws P Ltd (2011) 13 taxmann.com 179 (Mum). He further submitted that in the year under consideration the investments have not been sold and therefore there is no tax liability and if at all any tax liability under clause (j) of Explanation (1) to s. 115JB of the Act will arise, it would be only in the year of retirement or disposal of asset. He submitted that since during the year, there is no disposal of shares which are held by the assessee as investments, no adjustments could have been made under clause (j) of Explanation (1) to s. 115JB of the Act. He further placed reliance on the following decisions: 1. ITO vs Maxwell Dyes & Chemicals P Ltd (2005) 2 SOT 461 (Mum). 2. ITO vs Orson Trading P Ltd (2005) 2 SOT 503 (Mum). 3. Sutlej Cotton Mills Ltd Vs ACIT (1993) 45 ITD 22 (Cal) (SB). 5.1. He therefore reiterated and submitted and in the absence of any taxable income arising on account of revaluation, no adjustment could be made to the profit and loss account for the purpose of "book profits" u/s 115JB of the Act. He therefore submitted that the addition made by the AO and confirmed by the Ld.CIT(A) be set aside....
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....ook and from which the following key figures are extracted. As at 31st March 2011 As at 31st March 2010 Share Capital 1,00,000 1,00,000 Reserves & Surplus being Revaluation reserve 35,35,34,247 0 Unsecured loans 8,31,32,878 5,25,69,449 Total funds Employed 43,67,67,125 5,26,69,449 Application of funds Net fixed assets 36,53,16,948 1,25,25,156 Investments 9,00,000 9,00,000 Current assets, loans & advances 7,19,09,835 3,88,32,965 Less: current liabilities & provisions 1,98,77,336 77,92,052 Net current assets 5,20,32,499 3,10,40,913 Misc Exps not written off 1,98,400 2,97,600 Profit & Loss Account 1,83,19,278 79,05,780 Total assets (net) 4,36,76,77,123 5,26,69,449 6.1. Key Figures of audited Profit and loss account of NSI Infinium Global P Ltd are as under:- 31st march 2011 31st march 2010 Sales 40,60,38,796 23,82,20,023 Depreciation 28,66,296 5,07,304 Net Loss ....
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....ny and which was the basis for the revaluation of the investments. (vi) By issuing the bonus shares out of revaluation reserve, the assessee has virtually treated the revaluation reserve as a free reserve though in reality it is not a free reserve available for distribution as held by the Circular issued by Department of Company Affairs which reads as under: Circular No 9/94 dated 6.9.1994 issued by the Department of Company Affairs, Ministry of Law, Justice and Company Affairs, Government of India. 1. I am directed to say that it has come to the notice of the Department that a number of unlisted companies (existing private/closely held public companies) are resorting to revaluation of their assets and issuing bonus shares therefrom. The latest SEBI's guidelines on bonus shares dated 13.4.1994, inter alia, stipulate that the bonus issue has to be made out of free reserves built out of genuine profits or share premium collected in cash only and reserves created by revaluation of fixed assets cannot be capitalized for this purpose. These guidelines are applicable only to listed companies. 2. The matter has been considered in the Department and the ....