TaxTMI 
TaxTMI 
2023 (10) TMI 910
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....for deduction u/s 80IA of the Act and has wrongly disallowed the same which should be considered for the purpose of Computation of Profit. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION OF PROFIT FROM SALE OF FIXED ASSETS - RS. 68,95,58,090 On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in adding back the said sales consideration as profit on sale of fixed assets which has already been considered in the turn-over by the company. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 3. Claim of Debenture Redemption Reserve (DRR') created during the year for Rs. 100 Crores On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in not allowing the Reserve created as per requirement of the statute towards redemption of debentures issued by the company as a deductible item for the purpose of working the tax liability u/s 115JB of the Act. The Ld. CIT(A) erred by holding that the DRR created is not in nature of a provision for asce....
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....s wrongly disallowed the same which should be considered for the purpose of Computation of Profit. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION U/S 41 ALLEGING CESSATION OF LIABILITY ON BASIS OF SOME INFORMATION RECEIVED - Rs. 1,609,565 The Dy. Commissioner of Income Tax has erred in adding back the said amount u/s 41 since the same has not been actually done by us in books of accounts." Section 80IA - Income from Other Sources: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 ITA No. 2741/Del/2017 : A.Y. 2012-13 Sale of Fixed Assets: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 5. Before us, the assessee submitted additional evidences under Rule 29 of the Income Tax (AT) Rules, 1963. It was submitted that the additional evidences could not be submitted before the authorities below and are of seminal importance. The plea of the assessee is found to be acceptable. Since, the revenue did not get the opportunity of owing to the evidences, in the interest of justice, we remand the matter to the file of....
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....on by the appellant actually pertains to the computation of capital for the purpose of surtax assessment as per the provisions of the Surtax Act, 1964 and not the computation of book profit u/s 115JB of the I. T. Act. Without prejudice to the aforesaid, even in this judgment the Hon'ble Court observed that an amount which is in excess of what is reasonably necessary for meeting a known liability shall be treated as reserve and not provision. 11. The assessee has placed reliance on section 117C of the Companies Act to emphasize the fact that transfer of Rs.100 crores during the year to the Debenture Redemption Reserve was mandatory for the appellant, as per the requirement of law. Section 117C of the Companies Act is reproduced below:- "Where a company issues debentures after the commencement of this Act, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, from out of its profits every year until such debentures are redeemed." 12. The question as to what amount is adequate for meeting the liability for redemption of debentures has been clarified by the Ministry of Corporate Affairs vide....
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....lauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882; (d) in unencumbered bonds issued by any other company which is notified under cause (f) of section 20 of the Indian Trusts Act, 1882 (v) The amount deposited or invested as the case may be, above shall not utilized for any purpose other than for the repayment of debentures maturing during the year referred to above, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below 15 percent of the amount of debentures maturing during the 31^st day of March of that year. 13. Thus in the case of the assessee company, creation of a Debenture Redemption Reserve to the extent of 25% of the amount of debentures issued i.e. 25% of Rs. 500 crores or Rs. 125 crores only in all, would have been adequate to meet the requirement of the Companies Act, including section 117C on which the appellant has been vehemently placing reliance. 14. In other words, contrary to the claim of the appellant in its submissions before me, it was not mandatory for the appellant, to set apart Rs. 100 crores every year for 5 consecutive years beginning from F.Y. 2008-09 in o....
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....ed that in terms of Section 45-IC of the Reserve Bank of India Act, 1934. the appellant- assessee does not have any title over the reserve and, therefore, it is a case of diversion of income at source. Reliance is placed upon several decisions relating to Molasses Storage Fund, namely, DCM Ltd. Vs. Commissioner of Income Tax [2004] 192 CTR 0408, Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285. Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690, Somaiya Orgeno- Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291. On the issue of Debt Redemption Reserve, again reliance is placed upon decision in National Rayon Corporation (supra) to the effect that the amount was neither a reserve nor a provision for unascertained liability so as to attract clause (b) or (c) of Explanation 1 to Section 115JB(2) of the Act. Revenue has contested and argued to the contrary. Decision of the Supreme Court in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, [2010] 320 ITR 577 (SC), was referred. 12. In order to appreciate the controversy, we would like to reproduce the provisions of Section....
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....in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called 24 [, other than a reserve specified under section 33AC]; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which 25[section 10 (other than the provisions contained in clause (38) thereof) or 26[***] section 11 or section 12 apply; or [(g) the amount of depreciation,] [(h) the amount of deferred tax and the provision therefor, [(i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,--]] [(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise....
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....e assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.-- For the purposes of this clause, " net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 35 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the profit and loss account.] Explanation 2.-- For the purposes of clause (a) of Explanation 1. the amount of income-tax shall include- (i) any tax on distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if....
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...., 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 33AC 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 and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i. e. book profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under Section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded. Guidance Note on re....
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....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. 17. The aforesaid position still holds good when we refer to the Guidance Note issued by the Institute of Chartered Accountants of India on revised Schedule VI to the Companies Act, 1956 (December, 2011 Edition) in which it has been observed:- 8.1.2.1 Reserve: The Guidance Note on Terms Used in Financial Statements defines the term Reserve' as ― the portion of earnings, receipts or other surplus of an enterprise (whether....
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....ggregate 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 not a ― reserve. Reference was made to Batliboi' s Advanced Accountancy with reference to nature of sinking funds and it was held that redemption of debenture would not be....
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....; because liability is certain and definite amount whereas a provision is an amount which is estimated (See Note 3 of Schedule III of the Companies Act, 2013, with reference to the term ― current liabilities). Reserves fall on the other end/ side for they are associated with equity. Transfer of such reserves is appropriation of retained earnings rather than expenses. Contingent liability, however, is not a provision or liability. It is less certain than a provision as the possible obligation has not yet been confirmed and the assessed does not have control whether or when it will be confirmed or the amount cannot be measured with sufficient reliability. The potential obligation is so uncertain that it should not be recognized in the accounts. A provision, therefore, is somewhat between accrual and the contingent liability. 25. The argument in respect of Section 45-IC of the Reserve Bank of India Act, 1934 and diversion of income at source is misconceived. The decisions of different courts including the Supreme Court and the Delhi High Court in the case of Molasses Storage Fund are inapplicable. Diversion of income at source by way of overriding title as a principle i....
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....urt observed (page 207): ― In the present case, the statute requires the electricity company to create certain reserve if its clear profit exceeds a reasonable return (clause II, Sixth Schedule). Again, the contingencies reserve is to be created from existing reserves or from the revenues of the undertaking'. This clearly indicates that the monies which have to be put into the contingencies reserve, reach the electricity company and are not diverted away from it. The Supreme Court further observed: ― It is the electricity company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position. The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and, it being a taxable receipt/ earning, it must be taken into account. 26. Section 45-IC of the Reserve Bank of India Act, 1934 reads as under:- 45-IC Reserve fund.--(1) Ev....
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....der Section 45-IC of the Reserve Bank of India Act, 1934 and debt redemption reserve were below the line allocations, after computing the financial profit and were not treated and regarded as expenditure/ liability for the for the purpose of the profit and loss account in the accounts. The amount treated as reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 was not regarded as diversion of income at source by the statutory auditors. Indeed, the reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 can neither be diversion of income at source nor constitute an expenditure or liability. Reserve under Section 45-IC of the Reserve Bank of India Act, 1934 of not less than 20% of net profit every year can only be computed after net profit is calculated and computed. Reserve, so created is not a liability known or ascertained, even estimated. Section 45-IC ensures that a Non- Banking Finance Company does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. No separate bank account is required to be maintained.....