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2023 (1) TMI 886
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....ompany would be having other Directors also to 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....
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....vs. Era Infrastructure India Ltd. reported in 288 Taxman 384 (Del). In view of the aforesaid judicial precedents, 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 ....
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....x (Appeals) is not justified in directing the Assessing Officer to recompute the book profits under section 115JB by deleting debenture redemption reserve of Rs 25 crores from 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 ....
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....e expression ascertained liabilities" we have to be very cautious. Ascertained liabilities may be of two types; one in capital nature and the other in revenue nature. The liability arising on capital accents cannot be charged to the 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 o....
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....ng effect to the said section. Sub-section (2) states that every assessee being a company shall prepare a Profit and Loss account for the previous year in accordance with the of Part II and III of Schedule VI of the Act, 1956 Explanation to the said section in the first 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....
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.... Referring to Part I and II of the Schedule VI, it was observed that the expression "provision" has been defined positively and meant any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any 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 ....
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.... for depreciation or diminution in value of assets or retained by way of providing for any known liability the amount of which cannot be determined with substantial accuracy." 20. In the case of National Rayon Corporation (supra), the assessee company had issued secured redeemable mortgage debentures against the security of land, 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 fac....
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....efaults by the Non Banking Financial Companies Section 45-IC of the Reserve Bank of India Act, 1934 also permits appropriation but in restricted or controlled manner by a Nan Banking Financial Company 30. Accounts in case of a company are prepared as a going concern assuming that the business will continue in the foreseeable future. To ascertain the net profit 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 p....
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.... have to be answered against the appellant-assessee and in favour of the respondent Revenue. To this extent, the appeal is dismissed. As the substantial question of law relating to rate of depreciation has been answered in favour of the appellant-assessee, we are not inclined to impose costs 6.16. This aspect of the matter was noted by the Hon'ble ITAT Mumbai in the case of JSW Energy Ltd. vs ACIT 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....
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....ions of the companies act provide that its profits are to that extent, and over the period of its currency, set aside for the purpose. This ensures, simultaneously, two things. Firstly, that the debentures are redeemed out of the profits of the enterprise and, two, that the profits are capitalized to that extent. This, thus, is also a measure of prudence, which is a fundamental accounting assumption, so that even if not mandated 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 t....
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....ated, the said accounting treatment, i.e., the set aside of profit, ensures capitalization of the profits, so that the debenture funds forming part of the capital structure, the same (capital) is no depleted on the redemption of the liability representing the said source of funds. In short, the liability. for the discharge of which the profits are being set aside, is in the capital field, so that neither the liability (on its assumption) 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 taki....
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.... 3. The nature of a Debenture Redemption Reserve [DRR) has been considered by the judgment of the Supreme Court in National Rayon Corporation Ltd. Vs. Commissioner of Income Tax (1997) 227 ITR 764. The Supreme Court after adverting to the provisions of Clause 7 of Part II to Schedule VI of the Companies Act 1956 held that the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve Where u company issues debentures, the liability to repay arises 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 ear....
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....not raised and hence not considered and discussed. Further, another distinction in fact in the present case in that there is no increase in debenture redemption reserve and the net effect in that profits as per profit and loss statement only adds to general reserves. The net profit as per profit and loss account is reflected in the audited accounts of the appellant at Rs 226.33 crores which is after reducing provisions for taxes which have to added back Thus, the decision in the case of Raymond Ltd. is distinguishable 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 effo....