TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 886
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....o take care of the affairs of the company and more so, the issues to be resolved before the regulatory authorities. In view of the continuous non-cooperation from the side of the assessee, we deem it fit to dispose of this appeal by hearing the ld. DR and based on the materials available on record. 3. The assessee has raised the following grounds of appeal:- "Following grounds of appeal are without prejudice to each other: 1) The Learned CIT (A) has erred in law & on facts in upholding the Learned AO's action of making addition of Rs. 2,35,349/-u/s. 14A rw.r 8D of the Income Tax Act, 1961 2) The Learned CIT (A) has erred in law & on facts in upholding the Learned AO's action of adding Rs.2.35.349/- while computing Income from Business & Profession u/s 115JB of the IT Act, 1961 being disallowance made u/s 14A r. w. Rule 8D of the IT Act 3) The Learned CTT (A) has erred in law & on facts in upholding the Learned AO's action of adding debenture redemption reserve to the tune of Rs 10,30,00,000/-while computing book profit under section 115JB of the IT Act 4) The Learned CIT (A) has erred in law & on facts in upholding the Learned AO's action of imposing ....
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....recedents, the ground Nos. 1 & 2 raised by the assessee are hereby allowed. 5. The ground No.3 raised by the assessee is challenging the addition of debenture redemption reserve to the tune of Rs. 10.30 Crores while computing book profits u/s.115JB of the Act. 5.1. We have heard ld. DR and perused the materials available on record. We find that in the return of income, the assessee has shown book profit u/s.115JB of the Act at Rs. 3,27,700/- after deducting Debenture Redemption Reserve of Rs. 10.30 Crores from the Net Profit as per Profit and Loss account of Rs.10.32 Crores. In the opinion of the assessee, the said Debenture Redemption Reserve of Rs. 10.30 Crores represent provision made for ascertained liability and not reserve as it is not in the nature of charge against profit but merely appropriation of profit and hence, deductible while computing book profit u/s.115JB of the Act. We find that the ld. CIT(A) had addressed this issue by observing as under:- 6.11. I have considered the facts and submissions carefully Pirst the facts are noted. The Profit and Loss statement of the appellant as seen: from the published audited accounts is as follows. Rs. Total Reven....
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....rom the net profit. 29. In the account for the previous year relevant to the assessment year under appeal, the assessee-company had transferred a sum of Rs. 25 crores to debenture redemption reserve (DRR). While computing book profits for the purposes of section 115JB, the Assessing Officer held that this amount cannot be reduced from the book profits and accordingly he treated the said amount of Rs 25 crores as part of the taxable book profits. The contention of the assessee was that DRR was not in fact a reserve as contemplated in section 115JB for the reason that the amount was set aside by the assessee-company to meet an ascertained liability. The assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of National Rayon Corporation Ltd. v. CIT (1997) 227 ITR 764 30. The Commissioner of Income tax (Appeals) in the light of the above judgment and the explanation offered by the assessee held that the amount set apart by the assessee-company in fact is al provision and not a reserve. The Commissioner of Income tax (Appeals) found that the Hon'ble Supreme Court in the case of National Rayon Corporation Ltd. v. CIT 1997) 227 ITR 764 was in fact exa....
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....profit and loss account to work out the net profit even under the provision of the Companies Act, 1956. Even under the Companies Act such deduction to not made from the net profits but as an appropriation of the profits. It will be therefore, usually such adjustments and transfers made in the appropriation portion of the profit and loss account. If the provision made for ascertained liability is towards expenses and other revenue items, the same would be charged to the profit and loss count 36. Now coming to the specific context of section 115JB, even if the provision is made for ascertained liability the same cannot be deducted in computing the book profits the ascertained liabilities are in the nature of capital abilities Even in the case of provision for ascertained liabilities, the deduction can be claimed only in respect of liabilities assumed for revenue expenditure. The fundamental distinction between capital and revenue in the context of computing the profits of an assessee, cannot be overlooked only for the reason that the expression used in the Explanation to section 115JB is the provision made for meeting ascertained liabilities in this context, it is necessary to find....
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....part refers to increase in book profit by amounts specified in sub paragraphs (a) to (g). Explanation in the second part states that the book profit shall be reduced under clause (i) to (iii). Thus, the book profits of the previous years preferred in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, have to be decreased or increased as per the express mandate of the Explanation Section 115.1B (2) of the Act. 4. In the present case, we are concerned with clause(b) to Explanation 1 which states that book profit prepared in accordance with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount carried to any reserve by whatever name called, other than a reserve specified under Section 334C of the Act. The legislature in express, lucid and categorical terms has stipulated that the book profit shall be increased by the amounts carried to any reserve. The word "any", it is obvious, refers to all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression "reserve by whatever name called". There could not have been more clarity an....
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....known liability of which, the amount cannot be determined with substantial accuracy However, the expression "reserve" has been defined in a negative manner, and would exclude, i.e, not include, any amount written off retained by way of providing for depreciation, renewal or diminution in value of assets, or retained by way of providing for any known liability Therefore, an amount retained in excess of the amount retained for any known liability was not necessarily a reserve. A provision, it was held, is a charge against profits and therefore to be taken into account against gross receipts in the Profit and Loss account. The "reserve", on the other hand, is appropriation of profits, the assets by which it is represented being retained to form a part of the capital employed in business. Whether an amount was a "reserve or "provision", it was observed, must be determined with reference to the nature and character of sum retained and substance of the matter The balance-sheet contains separate heads for reserve and surplus" and "current liabilities and provisions" 7. The aforesaid position still holds good when we refer to the Guidance Note issued by the Institute of Chartered Accoun....
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...., building and machinery and a floating charge on the undertaking. The High Court held that this was merely a "provision" to enable it to redeem debentures when they became due for redemption. The aggregate amount of the debentures was higher than the amount of Debenture Redemption Reserve. The High Court on the aforesaid reasoning held that the amount set aside to meet the future liability, which was certain to come into existence was a "provision and not a reserve" The Supreme Court, therefore, disagreed with the said reasoning observing that the High Court itself had come to the conclusion that the Debenture Redemption Reserve was less than the company's liability on this account. Further, the liability had arisen the moment money was borrowed, which would be repayable. The obligation or liability to repay would not cease just because the fact that the date of repayment was deferred by an agreement, as the obligation was an ascertained liability Therefore, the money set apart for redemption of debentures must be treated as money set apart to meet a known liability and the amount should be shown as a liability. In these circumstances, it was held that the amount set apart was....
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....it of each year, not only the current liabilities and the contingencies but future contingencies should also be considered. Thus, Chapter VI of the Companies Act in Part II and III. provides for Provision and Reserves which relate to future payments, future needs and contingencies for which a part of the current earning is set aside. 31. The underlying purposes of financial accounts may not necessarily be the same as those of taxing accounts which are maintained and computed in accordance with the provisions of the taxing statute, Le the Income Tax Act, 1961 Notwithstanding clear commonalities such as matching of income with expenses, in the case of financial accounts there is greater emphasis on ensuring that the profits are not overstated, in contrast in the tax accounts the emphasis is on ensuring that the profits are not understated. 32. As noticed above, provision and reserves' are different accounting terms. A created meet a known liability is a charge against the profit. Hence, it is debited to the Profit and Loss account and reduces the profit. Provisions should be created, even if there is insufficient profit. Provision in not, therefore, invested. On the other ha....
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....IT Circle 11(5) reported in 2013] 34 taxmann.com/ 152 (Mumbai Trib) as below but in view of the jurisdictional High Court decision in the case of CIT v Raymond Ltd. [2012] 209 Taxman 65/21 taxmann.com 60 (Bom) was decided in favour of the assessee. 4. The issue arising per ground nos 2 & 3 relates to whether the amount set aside out of the profits as Debenture Redemption Reserve (DRR) by the assessee-company, is to be considered as a reserve Le, an appropriation of profits, or as a provision, for meeting a liability and, therefore, deductible in the computation of book profit u/s. 115JB of the Act. The same has been argued before us from the assessee's side as covered by the decision by the Hon'ble jurisdictional High Court in the case of CIT vs. Raymond Ltd. (2012) 209 Taxman 65/21 tazmann.com 60 (Bom.), confirming the tribunal's view. The Revenue, though unable to rebut this claim, Le, of the said issue as being the same as adjudicated by the Hon'ble court, would yet contest the assessee's said ground on merits, relying on the orders by the authorities below. 5. We have given our careful consideration to the matter, pursuing the impugned orders by the assessing a....
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....ndated by the provisions of the companies act, is so by the accounting norms. Here I would also be not out of the place to state that the Companies Acceptance of Deposit Rules, 1975, as prescribed u/a.34A of the companies act, also provide, similarly, for a set aside, over a period of time i.e, the tenure of the public deposits, of the profits of the depositee company, investing a part thereof in liquid government securities each year This ensures that the of the redemption are met in a timely manner fest of the fund so created), and there are no defaults by the depositee-companies, as where the company invests its profits on expansion or in business of otherwise dissipates them, as by way of dividends, so that the liquid funds are not available for discharge of the loan liability at the relevant time, Le, the time of redemption, but at hand through the sale/realization of the liquid securities. This can thus also be considered as a measure to protect investor's confidence as well as to promote investment climate and corporate discipline. The set aside of profits is, therefore, only a sinking fund to fund (meet) a capital liability (out of the profits), the rationale of which s....
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....on) nor the profit set aside (for its discharge) could be considered as a charge against the profits. This is precisely the reason that the same is not either claimed or allowed as deduction in the computation of income under the regular provisions of the Act. So, however, the decision by the Hon'ble jurisdictional high court in the case of Raymond Ltd. (supra), as aforesaid, is squarely on the point, and binding on us. In fact, even in its absence, our view, being ostensibly not in consistence with that expressed by the co-ordinate bench of the tribunal, our purview in the present proceedings would only have been to refer this matter for consideration by a large bench of the tribunal. There is, under the circumstances, no question of taking any different view in the matter. Accordingly, respectfully following the said decision by the Hon'ble high court, we allow the assessee's appeal on its grounds, so that the adjustment made by it in the computation of book profit u/s. 115JB gets validated. The assessee succeeds on its relevant grounds. 6.17 The third point that arises for consideration is that there was no DRR created last year and the creation this year is ob....
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....rises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as monies set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of a company as a liability. Being monies set apart to meet a known liability, a Debenture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956 In National Rayon Corporation, the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. Vs. CIT [1982] 132 ITR $59, in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of that concept would have to be gathered from the meaning attached in the Companies Act itself. The following observations of the Supreme Court are of significance: The debenture....
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....nguishable on facts. 6.20 Now the argument that the assessing officer or the assessee cannot tinker with the accounts prepared under the Companies Act other than the adjustments provided in Explanation to section 115JB for which case laws are cited by appellant does not advance the case of the appellant in as much as it is the appellant who has claimed to make adjustments which are found to be not legally and on accounting principles tenable The appellant has also referred to the decision of the Hon'ble ITAT in the case of Repute Properties P Ltd but copy of the same was not filed and in also not found in journals and CDs showing reported decisions After making efforts and locating the order, it is found that there is merely a mention but there is no discussion of the decision Hon'ble Delhi High Court in case of Seri Infrastructure Finance Ltd, v/s ACIT (2015) taxman. Com 254 (Delhi). Further the issues raised in the preceding paragraphs here were not considered In that decision in the case of Repute Properties P. Ltd. the Bombay High Court decision in the case of Raymonds Ltd. has been merely followed. The reasons why the decision in the case of Raymonds Ltd. is not appl....