TaxTMI 
TaxTMI 
2017 (1) TMI 675
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.... Act, 1956. It is engaged in the business of rendering financial assistance to set up industries in the State of Karnataka. Return Of income for the assessment year 2008-09 was filed on 30/9/2008 declaring 'nil' income under normal provisions of the Income-tax Act, 1961 ['the Act' for short]. The assessee-company also claimed carry forward long term capital loss Rs. 1,19,39,267/-. However, the assessee-company returned income of Rs. 34.49,26,560/- under the provisions of section 115JB of the Act. 3. Against said return of income, assessment was completed by the Deputy Commissioner of Income-tax (ACIT), Circle-11(5), [hereinafter referred to as the AO] at total income of Rs. 1,22,64,378/- under normal provisions and at total income of Rs. 46,42,36,471/- under the provisions of section 115JB of the Act. While doing so, the AO made disallowance of under section 14A of Rs. 1,02,74,566/- to the book profits and provision for gratuity of Rs. 11,60,422/-, provision for leave encashment of Rs. 10,58,562/- to the book profits and also denied the claim of the assessee-company for deduction of the indexed cost of acquisition while computing capital gains exempt under the pr....
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....e amount of disallowance to the extent of Rs. 47,01,514/- being 0.5% of average investment under rule 8D(3) of the Income-tax Rules. The CIT(A) however, granted relief on account of provision of gratuity and leave encashment. As regards addition of long term capital gains exempt under section 10(38), the CIT (A) concurred with the view of the AO that the amount of capital gains computed would be liable to tax under section 115JB without taking into consideration the benefit of indexation of the cost of acquisition of asset sold. As regards the claim of set off of brought forward loss or depreciation whichever is lower for the purpose of computing tax liability under section 115JB, the CIT(A) directed the AO to verify details of the claim and allow benefit as per law. Thus the appeal was partly allowed by the CIT(A). 7. Being aggrieved by that part of the order which is against the assessee-company, the assessee-company is in appeal in ITA No.1659/Bang/2013 for the assessment year 2008-09 raising the following grounds of appeal: The Appellant objects to the order of the Commissioner of Income Tax (Appeals) -I, Bangalore, on the following grounds: 1. That the order of the Le....
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....these and such other grounds that may be adduced from time to time, the Appellant requests the Honourable Income tax Appellate Tribunal to consider the petition in the light of principles of justice and cancel the additions made by the Assessing Officer. towards earning any income to which section 10 (other than the provisions contained in clause [38] applies shall be added. 8. Ground Nos.1, 3 and 4 are general in nature and do not require any adjudication. 9. Ground No.2 challenges the computation of tax liability under section 115JB of the Act. Ground No.2(a) challenges the order of the CIT(A) holding that the assessee-company was not entitled for deduction from book profits on account of provision for bad and doubtful debts written back and credited to profit and loss account in the current year. 10. Brief facts leading to the addition on this issue are as under: During the previous year relevant to assessment year under consideration, the assessee-company had credited the profit & toss account [P&L A/c] by a sum of Rs. 16,11,65,105/-being the provision for bad and doubtful debts written back. The assessee-company claimed that the amount of provision was created from....
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.... undisputed fact that the said amount of provision was not added back to the book profits in the year of creation of said reserve. While computing tax liability u/s 115JB of the Act, the Act provides that certain adjustments are required to be made to net profit as shown in the P&L A/c. One of such adjustments is that net profit shall be reduced by the amount withdrawn from any reserve, if any such amount is credited to P&L A/c. But such deduction is permissible only if such provision had gone to increase book profits in the year creation of reserve. It was specifically provided vide clause (i) of Explanation 1 to section 115JB(2) of the Act. In the present case, it is not the case of the assessee-company that provision has been added back to book profits in the year of creation. The only case of the assessee-company is that the provision was not required to be added back in view of law laid down by the Hon'ble Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra) an identical issue was considered by the Hon'ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. v. CIT (330 ITR 363) wherein it was held as follows: "24. The matter could be exa....
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....ee. In our view, the reduction under clause (i) to the explanation could have been availed only if such revaluation reserve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed..................." Further, we notice that even the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (255 ITR 273) had categorically held that the provisions of 115JB are separate code by itself. The AO can disturb book profits only in the circumstances mentioned in the said section. In other words, addition to book profits is permissible only in the situation envisaged therein. In the present case, clause (i) of Explanation to 115JB(2) permits amount of deduction by the amount withdrawn if any such amount is credited to the P&L A/c only. Proviso to said clause (i) further provides that such reduction is possible only in case the amount of provision is added back to book profits in the year of creation of reserve. It is undisputed fact that this condition is not satisfied by the assessee-company. It is settled principle of interpretation of fiscal law t....
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....ss account for the relevant previous year in accordance with the provisions of 13Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956)^14 is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:] Provided that while preparing the annual accounts including profit and loss account,- (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 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 210^14 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)15, which is different ....
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....assessee for the relevant previous years. The Explanation 1 clause (f) to Section 115JB (2) of the Act stipulate that amount of expenditure relatable to any exempt income, other than Section 10(38) of the Act, is liable to be added back to net profit shown in Profit and Loss Account if the amount referred to therein is debited to Profit and Loss Account Now, we refer to Section 14A of the Act which reads as under: "Expenditure incurred in relation to income not includible in total income ^87. ^87a14A[(i) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred^89 by the assessee in relation to33 income which does not form part of the total income^89 under this Act.] ^88[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed^90, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not for....
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....ase is also assessment year 2008-09 and hence Section 14A of the Act read with Rule 8D of Income Tax Rules ,1962 is applicable. It is axiomatic to assume that the amount computed under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 shall have no reference to the amount debited to the Profit and Loss Account and there cannot be any disallowance u/s 14A of the Act unless the expenditure is debited to Profit and Loss Account and hence disallowance u/s 14A is always a part of expenditure debited to the Profit and Loss Account. In the instant case under appeal, the AO has disallowed the expenditure of Rs. 73,07,018 computed u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for computing normal taxable income which is upheld by the CIT(A) in the first appeal and the same amount of expenditure of Rs. 73,07,018/- is added to compute book profit u/s 115JB of the Act which is computed u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962. Our view is fortified by the following decisions : 1. RBK Share Broking (P.) Ltd. (Supra) 2. JSW Energy Ltd. (Supra) 3. Dabur India Ltd. (Supra) 4. Godrej Consumer Products Ltd. (....
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.... the Registrar of Companies. This view of the Tribunal was not accepted by the High Court which held that the Assessing Officer has the authority to examine whether the accounts of the company have been maintained in accordance with the requirement of sub-section (1A) of section 115J and in that process if he finds that the accounts of the company are not in accordance with the provisions of the Companies Act, he could make the necessary changes before proceeding to assess the company for tax under the Explanation to section 115J of the Income-tax Act.' The relevant part of section 115J of the Income-tax Act read as follows : 115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1988 but before the 1-4-1991 (hereafter in this section referred to as the "relevant previous year"), is less than thirty per cent of its book profit, the total income of such assessee chargeab....
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....88, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation ; or (i) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or (ii) the amounts (as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under section 80HHC or section 80HHD; so, however, that such amounts are computed in the manner specified in sub- section (3) or sub- section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be ; or (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956), are applicable. (2) Nothing contained in....
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....hority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income Tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J of the Income Tax Act in support of the above co....
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....e purpose of computing tax liability. However, we make it clear that the amount of addition should be restricted to the actual disallowance made under section 14A read with rule 8D of the IT Rules, 1962. Therefore, we do not find any reason to interfere with the finding of the CIT(A) that this amount is required to be added to the book profits for the purpose of computing tax liability under section 115JB of the Act. Ground No.2(b) is dismissed. 15. In ground No.2(c) the assessee-company contends that while computing the tax liability u/s 115JB, amount of capital exempt u/s 10(38) should alone be considered. It is the contention of the assessee-company that the amount of capital gain computed u/s the IT Act is exempt, though such amount is exempt from tax u/s 10(38) of the Act. In short, it is the contention of the assessee-company that long term capital gain arrived at by reducing indexed cost of acquisition from sale proceeds of the assets sold should be considered for the purpose of computing tax liability u/s 115JB whereas the AO was of opinion that long term capital gain without indexing the cost of acquisition are to be considered for the purpose of computing tax liability....
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....n (38) of section 10 of the Act refers to only the amount of long term capital gains computed under the provisions of section 48 which means that the benefit of indexation of cost of acquisition should be given to the assessee while computing long term capital gain for the purpose of section 115JB of the Act. Even the Hon'ble Supreme Court, in the case of Ajantha Pharma v. CIT (327 ITR 305) in the context of deciding whether amount eligible profits u/s 80HHC or the amount of deduction u/s 80HHC to be deducted from book profits for the purpose of computing u/s 115JB held that it is only the amount of eligible profits which are eligible as deduction from the book profits. The relevant part of the judgment is extracted: "10. One of the contentions raised on behalf of the Department was that if clause (iv) of Explanation to Section 115JB is read in entirety including the last line thereof (which reads as "subject to the conditions specified in that section"), it becomes clear that the amount of profits eligible for deduction under Section 80HHC, computed under clause (a) or clause (b) or clause (c) of subsection (3) or sub-section (3A)f as the case may be, is subject to the cond....
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....2011 had upheld the order of the Tribunal. The same ratio is squarely applicable to the facts of the case. Therefore, the assessee-company is entitled to the benefit of indexation while calculating long term capital gains which are to be considered for the purpose of computing tax liability u/s 115JB of the Act. This ground of appeal viz. 2(b)is allowed. 17. In the result, appeal filed by the assessee is partly allowed for statistical purposes. ITA No.l660/Bang/2013: (AY 2010-11): 18. The assessee-company raised the following grounds of appeal: The Appellant objects to the order of the Commissioner of income Tax (Appeals] -I, Bangalore, on the grounds: 1. That the order of the Learned Commissioner of Income tax (Appeals)-] insofar as it Is prejudicial to the interests of the appellant is opposed to law and facts of the case. 2. That the order of the Learned Commissioner of income tax (Appeals) failed to appreciate expenditure of 'Donation to CM Relief Fund' was incurred wholly and exclusively in the ordinary course of the business of the Appellant and as such is deductible u/s 37 of the Income Tax Act. 3. That the Learned Commissioner of Income tax (App....
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....pose or business. 21. On appeal before the CIT(A), the same was confirmed by the CIT(A). The submission made by the assessee-company before the CIT(A) is as under: B. "NORMAL COMPUTATION (1) Contribution to Chief Minister Relief Fund Rs. 499.13 Lakhs The main business of the company is to provide Finance to Industries in the State of Karnataka and participating in the Infrastructure Development in the state of Karnataka. In the process of Infrastructure Development the company has to incur expenditure as directed by the only shareholder viz., Government of Karnataka. Accordingly any expenditure which results in Infrastructure Development (and which is not capital in nature) is an expenditure incurred wholly and exclusively for the purpose of business of the company. During the AY 2010-2011 the company made a contribution of Rs. 500 Lakhs to Chief Minister Relief Fund to benefit citizens living in flood affected areas of the state for the purpose of improving infrastructure development in these areas. A sum of Rs. 0.87 Lakhs was recovered from the employees and the balance was written off in the Profit and Loss Account and claimed as revenue expenditure expended wholl....
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...." 22. The CIT(A) held that such contributions are eligible for deduction only u/s 80G, in the absence of a positive total income provisions of chapter VIA are not applicable. The CIT(A) has not considered this contribution as admissible contribution u/s 37 of the Act. 23. Being aggrieved, the assessee-company is in appeal before us. 24. We heard rival submissions and perused material on record. The assessee-company made a contribution of Rs. 4,49,13,000/- towards CM Relief Fund towards development and reconstructing infrastructure facility in parts of Northern Karnataka. It is matter of record that the assessee-company was set up for development of infrastructure. Therefore, the contribution was made pursuant to the objectives for which the company was set up. The fact that the amount of contribution is eligible for deduction u/s 80G cannot take away the right of the assessee-company to claim it as a deduction u/s 37 of the Act. Furthermore, since the assessee-company is a Government of Karnataka undertaking, the contribution made to the CM Relief Fund cannot be held to be inadmissible. The Hon'ble Supreme Court in the case of Sri Venkata Satyanarayana Rice MillContrac....
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.... and taxable assets and the burden was on the assessee to furnish the actual amount of interest paid for the purpose of earning the dividend income 4. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 5. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 28. The revenue is aggrieved by the direction of the CIT(A) wherein the CIT(A) held that in absence of nexus of borrowed funds to investment, no disallowance u/s 14A is called for. The relevant part of the CIT(A)'s order is as under: 3.4 It may be seen from the above that the appellant has sufficient funds to make these tax free investments. The investments made during the period relevant to the A.Y. 2010-11 are only to the extent of Rs,101,51,99,189/- Crores. The appellant: sufficiently explained the sources about these investments. The investments made in the earlier period are to the extent of Rs. 101,53,71,936/- Crores. The closing value of investments as on 31/93/2908 after making the provision....