TaxTMI 
TaxTMI 
2017 (11) TMI 376
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....,301/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RELATION TO NON-INTEREST BEARING SHAREHOLDERS DEPOSIT: 1. On the facts and in circumstances of the case in law, the Ld. AO, pursuant to the directions of the Ld. DRP, erred in making addition of Rs. 1,27,66,301/- on account of transfer pricing adjustment towards interest on 'non-interest bearing shareholders' deposit'. 2. The Ld. AO failed to appreciate and ought to have held that: a. The deposit amount was receivable from an associate company for royalty on technical knowhow and as per restructuring agreement it was converted into a non- interest bearing shareholders' deposit: b. Non-interest bearing shareholder's deposits made in earlier years is not an international transaction: c. RBI and Government of Indonesia have given approval and accordingly, the same cannot be regarded as not being at Arm's length. 3. The Appellate prays that the addition of Rs. 1,27,66,301/- made by the AO be deleted." 3. Brief facts are that during the year under consideration, the assessee held non-interest bearing shareholders deposit amounting to Rs. 15,21,60,920/- with P.....
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....Discussions and directions of the DRP 6.3.1. We have considered the submissions of the assessee. We find that this issue was also subject matter of dispute before the CIT(A)-15, Mumbai and this issue has been decided against the assessee by CIT(A)-15 vide order No. CIT(A)-15/IT-294/Addl.cit Rg.2(1)/11-12 dt. 30-11-2011 for AY 2007-08. 6.3.2. The facts of the case remain the same during the year under reference. Hence, there is no reason to deviate from the decision of the CIT(A)-15, Mumbai. 6.3.3. In view of the foregoing, the objection raised by the assessee is rejected." 5. Before us Sh. Yogesh Thar Ld. Counsel for the assessee stated the facts that the Reserve bank of India (RBI) vide its Letter Ref No. 3735/19.02.17/97-98 dated 27.03.1998, have given its approval on treating the Outstanding entitlements on account of technical know-how fees for the period Jan 1981 to Dec 1995 estimated to US $ 32,00,692.48 (INR 15.22 Crores) as a shareholder deposit. He stated that RBI has given permission vide the said approval to obtain repayment of the said deposits on or before 2010 or earlier as the case may be and further, this repayment date is extended to 2....
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....f PTFSI was not good as it was making significant losses, it was not able to make the remittance of technical know-how fee to assessee as well as to other joint venture partner. Operations of PTFSI have suffered considerably on account of continues devaluation of Indonesia Rupiah during the construction period & subsequently due to hostile trading environment. As a result, it was unable to remit technical know- how fees to assessee and the other joint venture partner as per terms of agreement with the consortium lenders. In view of this scenario, PTFSI had entered into a Memorandum of Understanding ("MOU") with the consortium lenders, dated 19.12.1995. The total amount outstanding to be payable to the consortium lenders by PTFSI towards principal as on 30.11.1995 was US $55.077million. In the said MOU it has been stated that PTFSI, due to financial difficulties has requested the consortium lenders to review and restructure the repayment schedule o the amounts due and owning by PTFSI. The relevant Para 1 of the restructuring clause stated as under: - The Lenders hereby agree that out of the total dues of US $ 54,977,270.57 ( fifty four million nine hundred and seventy-seven....
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....will be subordinated to the commitments as contained in this Memorandum of Undertaking to be fulfilled by the Borrower to the Consortium of Lenders. It is, however understood between the parties that the irrevocable undertaking from The Bombay Dyeing & Manufacturing Co. Ltd. would be made available to the Lenders subject to the Bombay Dyeing & Manufacturing Co. Ltd. receiving the requisite Reserve Bank of India approval under the Foreign Exchange Regulation Act in this behalf b) .......... c).......... d) The Borrower shall not declare any dividend so long as the obligation under this Memorandum of Understanding is subsisting without prior approval of the Lenders." 7. In view of these facts, it is clear that the technical know- how fees are recoverable for the period 1981 to 1995 by both the joint venture partners namely The Bombay dyeing & Mfg Co Ltd and Common Wealth textiles. The RBI has given its approval on treating the Outstanding entitlements on account of technical know-how fees for the period Jan 1981 to Dec 1995 estimated to US $ 32,00,692.48 (INR 15.22 Crores) as a shareholder deposit. RBI has given permission vide approval to obtain repayme....
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....PO on this issue and allow this issue of the appeal of assessee. 8. The next issue in this appeal of assessee is against DRP order directing the AO/TPO to make Transfer Pricing Adjustment towards technical knowhow fees from an associate enterprise P.T. Five Star- Indonesia (PTFSI) amounting to Rs. 1,05,35,800/-. For this assessee raised following grounds of appeal: - GROUND NO. 2: ADDITION OF Rs. 1,05,35,800/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS TECHNICAL KNOWHOW FEES FROM AE, P.T FIVE STAR-INDONESIA ('PTFSI'): 1. On the facts and in the circumstances of the case and in law, the Ld. AO, pursuant to the directions of Ld. DRP, erred in making an adjustment of Rs. 1.05,35,800/- on account of Fees for technical knowhow from the Associate Enterprise ('AE'). P.T. Five Star-Indonesia. 2. Ld. AO failed to appreciate and ought to have held that: a. the fees for technical knowhow has not been received/ accrued in view of the had financial conditions of the AE, PTFSI. b. since there is uncertainty involved in collection of the technical know-how fees from PTFSI due to its bad financial condition, the Appellant has right....
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....ssessee has relied on Accounting Standard -9 'Revenue recognition' and Accounting Standard- I submitted that it is the 'real' income and not hypothetical income which is to be taxed under the Act and 'real' income has to be ascertained from realistic and practical point of view. The arguments advanced by the assessee that it is the 'real' income and not hypothetical income which is to be taxed tinder the Act and 'real' income has to be ascertained from realistic and practical point of view is misplaced. 7.3.6 It is a fact that the assessee has reflected the receipt of royalty for providing technical know- how as an international transaction in the audit reports in form 3 CEB in the earlier years, and the assessee has recognized this fee amounting to Rs. 1.02 crores on accrual basis for financial year 2009-10. However, the assessee has not recognized this technical fee in the annual accounts for FY 2011-12 and it has also not reported this is receivable from its non-resident AE in form 3CEB for AY 2013-14. 10. Against this Ld. Counsel invited our attention to the point no. 15 at page no. 13 of annual accounts of PTFSI, wherein it i....
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.... "In view of uncertainty attached to future events, profits are not anticipated but recognized only when though not necessarily in cash" 11. In view of the above facts and circumstances, we are of the view that since there is uncertainty involved in collection of the technical knowhow fees from the PTFSI due to its bad financial condition, the assessee has rightly not recognized the revenue. This view of ours is supported by the decision of Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (SC), wherein the question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity had to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter was considered in this light it was not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the AO while passing the assessment orders in respect of the assessment years under consideration. Hon'ble Supreme Court held that the Tribunal, therefore, had rightly held that the cl....
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....ondon for loans granted to PTFSI. (iii) Rs. 17.39 crores in favour of Bank of Bahrain & Kuwait, Bahrain for loans granted to PTFSI. According to assessee the definition of international transaction u/s 92B of the Act, the above said Counter Indemnity is not covered. This Counter Indemnity is provided to IDBI Bank, Mumbai and Bank of Bahrain & Kuwait, Bahrain. It is not in the nature of purchase, sale or lease of any property and also not in the nature of provision of services or lending or borrowing money, or any other transaction having bearing on the profits, income, losses or assets of such enterprises and there is no mutual agreement between The Bombay Dyeing & Mfg Co Ltd & PTFSI for allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. It is relevant to note that assessee is debiting the actual commission on counter guarantee charged by banks to PTFSI. The AO/TPO made adjustment of Rs. 1,30,86,649/- on account of risk involved in giving guarantee on loans advanced to associate company. The DRP also confi....
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....of the considered opinion that the issue has to be kept alive and hence the addition made by the TPO needs to be sustained. 14. Before us assessee contended that DRP as well as AO/TPO failed to understand that the provision of counter guarantee to a third party for the loans borrowed by the JV of the assessee cannot be regarded as an 'International Transaction' within the meaning of section 92B of the Act. Furthermore, the assessee had already debited actual commission on counter indemnity charged by banks for the year ended 31.03.2012 to the associate company's account. It was claimed that similar issue had also arisen in the assessee's own case for AY 2006-07, wherein the DRP has deleted the said disallowance made by the AO on account of the counter guarantee charges and the relevant para of DRP order reads as under: - "In view of the submissions made by the assessee that counter indemnity charges have already been debited to PTFS, the very basis on which the TPO has made the adjustment appears to have gone. As the TPO had merely taken a benchmark of 3% while the assessee has debited the actual expenses, the adjustment made on this account is directed ....
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....g dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the Assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which is, as discussed above, excluded. In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent. or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case. We have held that even after the amendment in Section 92 B'by amending Explanation to Section 92 B, a corporate guarante....
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....orporate guarantee by a parent company to its wholly owned subsidiary without charging any commission/fees would still be regarded as being at arm's length price, if such corporate guarantee was provided by the parent company for the overall benefit of the business of the group and therefore, ultimately benefiting the parent company itself. Having regard to the direct or indirect commercial interest of the Company, corporate guarantee is given with a view to safeguard and to further business interest. Hence, relying on the Hon'ble Supreme Court's decision in case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC), wherein it has been held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure and having regard to the circumstances of the case. 19. Further we have also gone through the decision of the Mumbai Tribunal in the case of ACIT v. Nimbus Communicati....
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....upra), we, in the present case are of the view that the above transaction does not fall within the purview of international transaction as defined under section 92B of the Act and hence, the orders of the lower authorities are reversed. This issue of assessee's appeal is allowed. 21. The next issue in this appeal of assessee is against the order of DRP confirming the action of AO/TPO in making of addition on account of transfer pricing adjustment towards interest on outstanding balances of the AE-PTFSI amounting Rs. 1,40,04,120/- For this assessee raised following grounds: - GROUND NO. 4: ADDITION OF Rs. 1,40,04,120/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS INTEREST ON OUTSTANDING BALANCES OF THE AE: 1.On the facts and in the circumstances of the case and in law the Ld. AO, pursuant to the directions of the Ld. DRP, erred in making addition of Rs. 1,40,04,120/- towards interest on outstanding debit balances with the associate company. 2. Ld. AO failed to appreciate and ought to have held that: a. the outstanding debit balance with the associate company cannot be regarded as an 'International Transaction' within the meaning of....
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....erest on outstanding balance from PTFSI, it could not have recovered the same from PTFSI, as PTFSI has not honored its commitments to the lenders, as well as it has incurred heavy losses year after year. It was argued by Ld Counsel that following the real income principle it can be said that no interest accrues to the Company based on business prudence, commercial expediency and exigency. 24. We find from records that the AO has treated the debit balance outstanding on the year end as an "International Transaction" and have made proposed addition of notional interest. Now the question arises whether outstanding debit balance with the associate company cannot be regarded as an 'International Transaction' within the meaning of section 92B of the Act. Further, Ld Counsel drew our attention to section 92B of the Act which defines the term "international transaction" used in section 92(1) of the Act as under: - "International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing m....
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....stries to less developed areas of the state, announced the said PSI w.e.f. April 1,2007; b. the PSI was applicable based on the level of Fixed Capital investment or Employment Generation; c. the Appellant has during the year under consideration made investments in new plant commenced at Patalganga and Ranjangaon; d. The character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted and 3. Without prejudice to above. Ld. AO ought to have held in the alternative, that since the subsidy is relatable to the acquisition of capital assets/fixed assets, the same be allowed to be reduced from the cost of fixed assets. 4. The Appellant prays that the subsidy received from the Government of Maharashtra amounting to Rs. 30,60,02,721/- be held as a capital receipt and hence. not chargeable to tax or alternatively it be held that the same be allowed to be reduced from the cost of related fixed assets.'' 26. Brief facts are that the State Government of Maharashtra with a view to encourage the dispersal of industries to the less developed areas of th....
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....industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the scheme for discharging such loans, it cannot be said that the incentive given being post-production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by the Supreme Court in the case of K.C.P. Lid. vs. (31' (supra), it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling within the capital field or out of it. 11. If the true character of the incentive here is to enable the assessee to meet the capital cost, then Mal true character must be given full recognition and the fact that the receipt was ....
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....ustry. The very terms of the concession would show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to apply the subsidy for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State Government. 10.3.4 In view of the foregoing, the objection raised by the assessee is rejected." 27. Before us Ld. Counsel for assessee narrated facts that during the year assessee company has accrued subsidy under PSI from Government of Maharashtra of Rs. 30.60 crores which is credited to the Profit & Loss Account and the same has been claimed as capital subsidy and accordingly reduced while computing income from business/profession in view of the followings: -. i. Assessee company is eligible for getting subsidy on account of investment made in new plant commenced at Patalganga and Ranjangaon. ii. The Supreme Court in the case of CIT vs. Ponni Sugars & Chemicals Ltd. (2008) (306 ITR 392)(SC), after considering Sahney Steel & Press Works Ltd. Vs. CIT (1997) 228 ITR 25....
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....rpose for which the subsidy is given. If the purpose is to help the assessee to set up its business or complete a project, the moneys must be treated as having been received for capital purpose. But, if moneys are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. 28. We have gone through facts and circumstances of the case and noted the facts that the State Government of Maharashtra with a view to encourage the dispersal of industries to the less developed areas of the State of Maharashtra announced "The Package Scheme of Incentives, 2007" w.e.f. 01.04.2007. The PSI was applicable based on the level of Fixed Capital Investment or Employment Generation. Assessee Company is eligible for getting subsidy on account of investment made in new plant commenced at Patalganga and Ranjangaon. Further, in the context of subsidy, the question as to whether it is of 'revenue' or 'capital' in nature will have to be determined, having regard to the purpose for which the subsidy is given. If it i....
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....rce is irrelevant and the form of subsidy is irrelevant. Attention is also invited to a recent decision of the Hon'ble Jammu & Kashmir High Court in Shri Balaji Alloys vs. CIT (2011) 333 ITR 335 (J&K), wherein, considering Ponni Sugar (supra) and Sahney Steel (supra) it is held that the excise duty refund, interest subsidy and insurance subsidy received under a State Scheme are of 'capital' in nature. In arriving at its decision, the High Court noted that the foregoing incentives were given to achieve dual objectives, viz. acceleration of industrial development and generation of employment in the State and that such incentives designed to achieve a public purpose, could not be construed as production or operational incentives for the benefit of the assessee alone. Similarly, the Hon'ble Calcutta High Court in CIT v. Rasoi Limited (2011) 335 ITR 438 (Cal), following the ratio of Supreme Court in Ponni Sugar (supra) has held that subsidy received from Government of West Bengal under scheme of industrial promotion for expansion of its capacities, modernization and improving its marketing capabilities would be 'capital' receipt. 30. Further, the Central Board....
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....ve, Ld. AO. failed to appreciate that the Appellant has sufficient interest free/own funds to cover the tax free investments and therefore no disallowance could be made u./s. 14A in view of the set legal position as per the Jurisdictional High Court. 5. The Appellant prays that the disallowance of Rs. 2,73,960/- a/s. 14A r.w.r. 8D be deleted. 32. Brief facts are that the AO/TPO made disallowance u/s. 14A of the Act read with Rule 8D of the Rules expenses incurred for earning exempt income in absence of any exempt income being earned by assessee. The DRP as well AO/TPO, failed to appreciate that no disallowance under section 14A of the Act should be made in absence of any exempt income. Assessee has not made any investment in equity shares and also not earned any dividend income. Further the investment in associates reflected in Balance Sheet has been made before F.Y 2002-03. Therefore, no disallowance u/s 14A is made in the computation of income. The AO has considered following investments which do not yield exempt income and the investments on which company has not received any exempt income during the year: - "Zero Interest debenture and fully convertible deb....
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....aluation of land. 2. AO failed to appreciate and ought to have held that: a. adjustments to Book Profits are restricted to those specified in the Explanation to section 115JB of the Act; b. the revaluation reserve was not created by debiting the Profit and Loss Account; c. Without prejudice. the Id. AO erred in not allowing to reduce the book profits as per Explanation I to section 115JB of the Act to the extent the revaluation reserve is released and credited to Profit and loss Account. 3. The Appellant prays that addition of Rs. 768,18,00,000/- made by the AO while computing the book profits u/s. 115JB be deleted or alternatively be directed to reduce the book profits to the extent of revaluation reserve released and credited to the Profit and Loss Account. 35. Brief facts are that the assessee started carrying on real estate development business from the financial year 2005-06 relevant to assessment year 2006-07. For the purpose of the real estate business, the assessee revalued and converted the land from fixed asset to stock in trade. The revalued land which is now the stock in trade of the assessee was utilized for the purpose o....
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.... accordingly the value of the capital asset so converted was excluded from the carrying amount of fixed assets and included in the carrying amount of land cost in real estate activity. The following accounting entries passed in the books of the assessee explains the transaction of the assessee - Sr. No. Account Debit Credit Narration 1 Revaluation of land-Transfer from fixed asset to Stock in Trade ONE ICC Stock in trade-One ICC-Revalued Land Cost 37785,47,250 FSI 251903 15 Sq. Ft. Rs.15,000/- sq. Ft One ICC-Land Cost 4,03,630 Rs. 8,20,584 34XFSI 231828.74 Sq. Ft/512121.74 Sq. Ft Legal Charges (SM & TM) 80,98,175 (SM) TM Restructuring Expenses 51,87,896 SM Operating Expenses (Land related exps) 57,86,070 Reval Res One ICC 38834,36,643 2. Transfer of land t....
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....e dev work in progress 5058,52,388 Car park Stock in trade 541,17,781 To real estate dev work in progress 541,17,781 128521,54,744 128521,54,744 From the above, it is evident that, the revaluation reserve has been created on account of the revaluation of the fixed asset and not by debiting to the P&L Account. The transaction of revaluation and conversion of land is independent of the actual utilization of the land for the purpose of the assessee's real estate business. In case, the assessee converts larger piece of land, however does not in the same year utilize the land or utilise a small piece of land, the revaluation reserve would be created for the full land which ....
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....9; of accounting. Revenue is recognized in relation to the sold areas only, on the basis of percentage of cost incurred as against the total cost of project (including land). Revenue is recognized if the cost incurred is in excess of 25% of the total estimated cost. The estimates of saleable area and cost of construction are revised periodically by the management. The effect of such changes to estimates is recognized in the period such changes are determined. The estimated cost of construction as determined is based on management's estimate of the cost expected to be incurred till the final completion and includes cost of materials, service and other related overheads. Unbilled costs are carried as real estate work in progress. Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, some of which are of a technical nature, concerning, where relevant, the percentages of completion, costs to completion, the expected revenues from the project/ activity and the foreseeable losses to completion. 38. Further, the assessee has made disclosure by way of a note at serial no. 31 & 32 in Notes to Financial Statement in r....
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....profit neutral (i.e. has no impact on the profit of the company) and therefore, there is no question of any adjustment in the book profit of the Company. In view thereof, assessee claimed that no adjustment is called for or justified in terms of clause (ii) of Explanation 1 of section 1I5JB of the Act and there is no other provision u/s 115JB of the Act which requires adjustment of the amount credited to revaluation reserve as aforesaid. 40. The AO/TPO added back the revaluation reserve amounting to Rs. 768,18,00,000/- while calculating book profit u/s 115JB of the Act but failed to appreciate that Adjustments to Book Profits are restricted to those specified in the Explanation to section 115JB of the Act. The revaluation reserve was not created by debiting the P&L account. The assessee without prejudice, stated that the AO should decrease the book profit as per Explanation 1 to section 11 5JB of the Act to the extent the revaluation reserve is released i.e. Rs. 165.27 crores and credited to profit and loss account. According to assessee, the AO has proceeded on pure misconception by observing that the revaluation reserve has been created by debiting profit and loss account. The....
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....he 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, shaft 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. Explanation. -For the purposes of this section, "hook profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared tinder subsection (2), as increased by- (a) the amount of income....
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.... requirement of the provision of section 45(2) of the Act, the assessee got the market value of the land determined by approved valuer as per valuation report dated 10.03.2011. This report is filed by assessee in its Paper Book before us. The entries for conversion were passed in the books of account at such market value. Thus, for these two transactions, viz. (i) revaluation of fixed asset; and (ii) its conversion into stock-in-trade, assessee has passed one consolidated accounting entry as under: - For ICC Project 1: Account Code Grouped as Entry Debit Credit 13270 Current Assets, Loans and Advances Stock-intrade A/c 377,85,47,250 11105 Fixed Assets To Land A/c. 4,03,630 11521, 11525, 11510 Capital work in Progress (under Fixed Assets) To capitalized Costs A/c. 1,86,04,439 22210 Reserves & Surplus To Revaluation 375,95,30,182 Reserve For ICC Project 2: Account Code Grouped as Entry Debit Credit 13270 Current Assets, Loans and Advances Stock-intrade A/c 390,32,79,000 11105 Fixe....
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....percentage completion method needs to be released to the P&L account. Thus, to that extent, the proportionate part of the 'Revaluation Reserve' is withdrawn and credited to the Profit and Loss Account (Amount Rs. 165.27 Crs.). Entries passed for release from Revaluation Reserve (a) For ICC-I Project: Revaluation Reserve............ Dr. 81,69,56,453 To Profit and Loss Account... Cr. 81,69,56,453 (b) For ICC-2 Project: Revaluation Reserve........... Dr. 83,57,27,418 To Profit and Loss Account. . . Cr. 83,57127,418 This is given by the assessee in its paper book at page 82 note no. 31 to 32, the audited accounts explaining this Position. 43. Having recognized the revenues as above, the assessee claimed that it is now left with Closing stock-in-trade and its valuation. As the revalued amount of land is included in the cost of the project, to the extent of the revenues from the project are not yet recognize the revalued amount is carried forward as part of work-in-progress by crediting the P&L account and carrying forward the closing WIP to the Balance Sheet. This is reflected in the following accounting treatment: (a) For ICC-....
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....rned to' are used, in clause (c ) of Explanation 1, it appears that the following shades, of meaning are relevant in the present context; viz.;- In Merriam Webster's Collegiate Dictionary: '6: to transfer from one place (as a column) to another (---, a number in adding)' '4: a quantity that is transferred in addition from one number place to the adjacent one of higher place value'. In. the Oxford English Reference Dictionary: (in reckoning) transfer (a figure) to a column of a higher value' It is apparent from the plain reading of the phrase 'amounts carried to' in clause (b) of Explanation 1 read with the above referred shades of meanings of the word 'carry' that the amounts contemplated to be increased in computing the book profits are the amounts that are transferred from the Profit and Loss Account to the Reserves Account. As claimed by Ld Counsel Sh. Thar in the present case, there is no transfer of amounts from the Profit and Loss Account to the Reserves Account. Indeed, the reserves in the present case are created by way of revaluation of land which means that the reserves do not reflect the a....
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....s not a reserve. It is not appropriation of profits.... The term 'Appropriation of profits' is explained in the Guidance Note on 'Terms used in Financial -Statements' issued by the Institute of Chartered Accountants of India in the following words: "An account sometimes included as a separate section of-the- profit and loss statement showing application of profits towards dividends, reserves etc." It is evident on the given facts that the revaluation reserve is not created by 'Application of profits'. Indeed, the debit to the Profit and Loss Account indicates the cost of land to the real estate division and not 'Application of profits". 46. Therefore, we are of the view that in the light of the decision of Supreme Court in National Hydroelectric Power Corporation Ltd. (supra), the addition made by invoking the provisions of clause (b) of the Explanation-I to section 115JB(2) cannot be sustained. 47. The assessee claimed that disclosure under section 217 of the Companies Act 1956 is made and as per Clause (b) of section 217(1) of the Companies Act, 1956, requires disclosure in the report by the Board of directors in respect of the amo....
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....estion of adding the same to the book profits by invoking clause (b) of Explanation f (I) to section 115JB (2) does not arise. 49. We are of the view that the action of the AO is contrary to the scheme of the provisions of MAT - clause (1) of the Explanation I to section 115JB (2) of the Act. Clause (j) of the Explanation 1 requires that the book profits shown in the profit and loss account for a given year should be increased by - 'the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset ' The said clause was introduced by Finance Act, 2012. The Memorandum explaining the provisions of Finance Bill, 201.2 has explained the rationale in the following words. "It is noted that in certain cases, the amount3landing in the revaluation reserve is taken directly to the general reserve on disposal of revalued asset. Thus, the gain attributable to revaluation of the asset is not subject to MAT liability. It is, therefore, proposed to amend section II5JB to provide that the book profit of the purpose of section 115JB shall be increased in the amount standing in the revaluation reserve relating to the revalued asset w....
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....ase this is not to be added as income under section 115JB of the Act. This issue of assessee's appeal is partly allowed. 50. The next issue in this appeal of assessee is against the order of DRP confirming the action of AO/TPO in making of addition towards capital gains on conversion of land into stock-in trade amounting Rs. 96,17,31,250/-. For this assessee raised following grounds: - GROUND NO. 8: ADDITION OF Rs. 96,17,31.250/- TOWARDS CAPITAL GAINS ON CONVERSION OF LAND INTO STOCK-IN-TRADE: On the facts and circumstances of the case and in law, pursuant to the directions of' the Id. DRP. Id. AO erred in re-computing the Long Term Capital Gains on sale of land recognized by the Appellant on land convened into stock in trade at Rs. 259,44,03,914/- instead of Its. 116,29,63,578/-as offered by the assessee and thereby making incremental addition of Rs. 96,17,31,250/- to the total income. 2. Ld. AO failed to appreciate and ought to have held that the Appellant has already offered proportionate capital gains on conversion of' land into stock-in-trade to the extent of sale of the flats based on the percentage completion method in view of provisions....
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....same method of accounting has been accepted in the past assessments as well as by other statutory authorities for e.g. Service Tax department, Sales Tax authorities. Under this method "revenue" is recognized during the period of construction as against "project completion method" where under revenue "sale of flats" is recognized when the possession of the flats is handed over to the purchasers. Under the Percentage Completion Method there is no relevance of possession for recognition of revenue. The revenue is recognized even before the flats are constructed. Hence the revenue is not booked as income from sale of flats (Stock in trade). The relevant paragraph of the AS- 7 is reproduced herewith for ready reference: - 24. The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract 116 AS 7 (revised 2002) costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on t....
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....luation reserve. Revenue arising on sale of undivided interest in the underlying freehold land pertaining to fiats / office premises, which are under construction, is being accounted on the percentage of completion method. Revenue from construction activity is recognized on the 'Percentage of Completion Method' of accounting. Revenue is recognized in relation to the sold areas only, on the basis of percentage of cost incurred as against the total cost of project (including land). Revenue is recognized if the cost incurred is in excess of 25% of the total estimated cost. The estimates of saleable area and cost of construction are revised periodically by the management. The effect of such changes to estimates is recognized in the period such changes are determined. The estimated cost of construction as determined is based on management's estimate of the cost expected to be incurred till the final completion and includes cost of materials, service and other related overheads. Unbilled costs are carried as real estate work in progress. Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, ....
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....ing the construction activity and the capital gains portion of there is chargeable to tax in a different year i.e. when the project is completed. A reading down of section 45(2) of the Act would therefore mean that the capital gains on conversion should be charge to tax in the same year in which the corresponding business income is offered to tax, on the same basis i.e. percentage completion method which the company is following. Further, the assessee has made disclosure by way of a note at serial no. 31 in Notes to Financial Statement in relation to the Revaluation Reserve and amount released from the revaluation reserve on credited to profit and loss account and which is read as under: "31. The Company has during the year ended March 31, 2012 converted a part of the freehold land under real estate development from Fixed Assets to Stock in trade at market value and the difference between the market value and cost amounting to Rs. 764.30 crores (2010-11 Rs. 853.96 crores) has been credited to Revaluation Reserve. An amount of Rs. 165.27 crores (2010-11 Rs. 70.57 crores) has been released from revaluation reserve to Statement of Profit and Loss in proportion of revenue reco....