TaxTMI 
TaxTMI 
TaxTMI 
2025 (6) TMI 1463
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.... Act (the Act] passed by the Assistant commissioner of Income tax. Circle -1 Jamnagar [the Ld. assessing officer] determining the total income of assessee as per normal computation of income at Rs. 50,17,35,726/- against returned income of Rs. 49,85,50,620/- and determining the Book profit u/s 115JB of the Act at Rs. 45,58,90,530/-against Returned Book loss of Rs. 28,40,37,610/-. 2. Grounds of Appeal in relation to computation of book profit u/s 115JB Hon. CIT(A) erred in law as well as in facts in (i). confirming addition made by assessing officer of Rs. 73.99 crores to the book profits under Clause (1) of Explanation 1 to Section 115JB(2) of the Income Tax Act. 1961. (ii). failed to appreciate that the amount written off is not a provision for diminution in the value of any asset as contemplated under Clause (i) of Explanation 1 to Section 115JB(2), but an actual write-off, which is not covered by the scope of adjustments permitted under the said Explanation. (iii). upholding assessing officer's treatment of 'the actual write off' made in the books of account as 'provision' as per Clause (i) of Explanation 1 to Section 115JB(2) of the Income Tax Act, 1961.....
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....s in facts in (i). proposing enhancement of assessment in the form of direction given to assessing officer for the matter which has not been considered by assessing officer in assessment order. (ii). proposing enhancement of assessment in the form of direction given to assessing officer without issuing a show cause notice to assessee as required u/s 251(2) of the Act. (iii). linking two different transactions i.e., the capital reduction of assessee- company and capital reduction of its investee companies. (iv). considering capital reduction of assessee company, as deemed dividend u/s 2(22)(d) of the Act, despite the fact that capital reduction is carried out for NIL consideration. (v). considering transaction of capital reduction of assessee- company, as buy back to be covered u/s 115QA, despite the fact that capital reduction is carried out for NIL consideration. 4. Grounds of Appeal in relation to computation of deduction u/s 80-1A Hon CIT(A) has erred in law as well as in facts in (i). confirming addition made by assessing officer by considering Rent Income of Rs. 30,84,582/-as Income from house Property instead of business income and considering the same as not....
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....ong with detailed questionnaire, on 15.01.2019. The authorised representative of the assessee, in response to these notices, submitted written submissions and relevant documentary evidences, before the assessing officer, through ITBA. During the course of assessment proceedings, the assessing officer noticed that a sum of Rs. 73.99 Crores, (Rs.7399.28 lakhs,) has been debited to the profit & Loss Account, being "Exceptional Items". On a further perusal, the assessing officer observed that the said amount of Rs. 73.99 Crores, appears to be, on account of investments, written off, in the following companies: Company name Nature Amount (Rs. in lakhs) Polestar Maritime Limited Equity shares 200.00 Polestar Maritime Limited Preference shares 1913.51 Seabridge Reality Pvt. Ltd. Preference shares 3589.92 Triton Maritime Pvt. Ltd. Preference shares 1685.85 Total 7399.28 The Assessing Officer noticed that in the calculation of taxable income, such amount of exceptional items has been added back, while calculating income under the regular provisions of the Act. However, such amount is not added back in computation of the tax payable under the provisions of section 1....
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....ansfer of asset. Hence, an actual write off on account of capital reduction is in the context of the fact that at the end of the year there is no asset in respect of which loss on capital reduction is debited. Hence, in absence of any asset no amount can be considered to set aside for diminution in value of asset. Based on these facts, the assessee submitted before the assessing officer that the fundamental premise of existence of asset to treat the amount under clause (i) of Explanation 1 of Section 115JB(2) is lacking, and hence no addition should be made in the hands of the assessee. 8. However, the Assessing Officer rejected the above contention of assessee and observed that assessee has done these transactions under a larger scheme of planning to avoid taxes. Therefore, assessing officer did not accept the plea of the assessee that such reduction in value of investment cannot be added back, while computing the book profit under section 115JB of the Act. That is, assessing officer held that such reduction in value of investment is a part of clause (i) of Explanation 1 of Section 115JB(2) of the Act, and it should be added while computing the book profit under section 115JB of ....
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....it and loss account, hence, there is no tax evasion on the part of the assessee. However, this action of "write off" does not fall in clause (i) of Explanation 1 of section 115JB(2) of the Act, therefore, the assessing officer should not make any adjustment for the purpose of calculation of MAT liability under section 115 JB of the Act. That is, the Ld. Senior Counsel for the assessee submitted that there was no inflow of on-money on account of capital reduction, and this capital reduction was done by the assessee company as per the order of the Hon`ble Bombay High Court, and hence the Ld. Senior Counsel for the assessee took us through paper book page-18, which is the order passed by Hon'ble Bombay High Court in respect of assessee, in relation to capital reduction, wherein the Hon'ble Bombay High Court in Company Scheme Petition No. 917 of 2016, vide order dated 22.12.2016, has observed as follows: "3) Learned Counsel for the Petitioner submits that Article 8 of the Articles of Association of the Petitioner Company empowers the Petitioner Company to rude its Share Capital, inter alia, from time to time in any manner for the time being authorised by law AND the Petitioner Compan....
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....it is further inter alia sated that the proposed capital reduction does not affect or prejudice the interests of its creditors and does not involve the diminution of liability in respect of unpaid equity and preference share capital or payment to any equity and preference shareholder of any paid up equity and preference capital AND in view of the above, the provisions of and the procedure prescribed under Section 101(2) of the Companies Act, 1956 was not applicable and the same was dispensed with along with publication of the notice of hearing of the Petition in the Maharashtra Government Gazette and newspapers and the formality of words "And Reduced" while describing the capital structure of Petitioner Company while confirming the proposed reduction of equity and preference capital was also dispensed with vide order dated 15th December, 2016 passed in Company Summons for Direction No.1034 of 2016." 11. The Ld. Senior Counsel for the assessee, also took us through to the schedule No.37 to notes to "accounts" of the assessee-company, which are reproduced below: "37. Investments written off: During the year under review, in order to streamline the shareholding for better and mor....
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....stments on account of capital reduction and the same loss was taken, as a base to compute the Minimum Alternate Tax (MAT)/ book profit u/s 115JB of the Act. The Ld. Senior Counsel also took us through the audit report of the Chartered Accountant, (vide page-74 of the paper book) wherein ld. Counsel has explained that audit report has not expressed any negative comment on the assessee, that is, the audit report was not qualified by the chartered accountants of the assessee-company. Thereafter, Ld. Senior Counsel also submitted that on account of capital reduction, the assessee-company has not received any amount from the holders, therefore the same should not be taken into consideration for the calculation of book profit u/s 115JB of the Act. To prove the above stand, the Ld. Senior Counsel for the assessee relied on the following judgments: (i) Kartikeya vs. Sarabhai vs. CIT [1977] 94 Taxman164 (SC) (ii) CIT vs. Narasiman (1999) 236 ITR 327 (SC) (iii) PCIT vs. Juptiter Capital (P.) Ltd. [1981] 170 taxmann.com 305 (SC) (iv) Vazir Sultan Tobacoo Co. Ltd. [1981] 7 Taxman 28 (SC) (v) Southern Technologies Ltd. vs. JCIT 320 ITR 577 (SC) (vi) Vijaya Bank vs. CIT 323 ITR 166 (SC) (vii) PC....
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.... any asset. The reduction in capital without paying any amount, does not fall in the definition of diminution. The diminution in the value of asset means when let say, any asset held by the company is value at Rs. 100/- and at the time of making balance-sheet, the Fair Markt Value the said asset, is only Rs. 20/-, then it would be said that Rs. 80/- has to be set aside on a provision for diminution in the value of the asset, which is not the case here in the assessee`s case under consideration. The concept of "reduction in capital" is different then diminution in the value of the asset. The ld. Counsel further stated that on account of reduction of capital, there is a loss, which assessee-company could have claimed in its profit and loss account. However, the assessee-company has not claimed any loss on account of reduction of capital in the profit and loss account. Therefore, assessee's case is on better footing and the addition so made by the Assessing Officer should be deleted. 16. We have given our thoughtful consideration to rival contention. We have perused case file as well as paper books furnished by assessee with the able assistance of Shri S. N. Soparkar, (Senior advocat....
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....,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including [statement of profit and loss]; (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 [statement of profit and loss] and laid before the company at its annual general meeting in accordance with the provisions of [section 129] of the Companies Act, 2013 (18 of 2013)]: Provided further that where the company has adopted or adopts the financial year under the [Companies Act, 2013 (18 of 2013)], which is different from the previous year under this Act,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including [statement of profit and loss]; (iii) the method and rates adopted for calculating the depreciation, shall 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 [statement of profit and loss] for such financial year or part of such financial year falling within the relevant previou....
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....nt standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, " 17. Having gone through the above Clause (i) of Explanation 1 to Section 115JB(2) of the Act, we note that as per clause (i) of Explanation 1 of Section 115JB(2) of the Act, the following adjustment is made, in computing the book profit: "the amount or amounts set aside as provision for diminution in the value of any asset" 18. Therefore, as per clause (i), above, the amount, set-aside, as provision for diminution, in the value of any asset is required to be added back while computing book profits. However, written off amount, in the books of account is not a diminution in the value of any asset. Therefore, the major difference between the terminology of "written off amount", and "diminution", is that in case of "written off amount", the asset does not exist in the books of accounts, whereas, in case of "diminution", the asset exists in the books of accounts. Therefore, in order to make addition of any amount under clause (i) of Explanation 1 to Section 115JB(2) of the Act, the following three conditions must be fulfilled: (i) There should be amount or amounts set asid....
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....se of provisions where there was a rise in the value, the provisions are written back and the net amount of provision has been debited to the profit and loss account. Thus, insofar as the provision for diminution of value of investment to the extent of Rs. 13.85 crores are concerned, the same has actually been written off from the asset side of the balance sheet and, therefore, is in the nature of a write off. Under the circumstances, the amount of Rs. 13.85 crore is not of the nomenclature of provision for diminution of value of investment. It is actual write off, cannot be added to the book profit under section 115JB(2)(i) of the Act." (2). Hon'ble Gujarat High Court in case of CIT v Vodafone Essar Gujarat Pvt Ltd "(5) wherein at para 23 it was held that with insertion of clause (i) to the Explanation with retrospective effect, any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under section 115JB. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by s....
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.... 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 1st day of April, 1988 but before the 1st day of April, 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 chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). Explanation.-For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A), as increased by- (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts....
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....A) 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 sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A or sub-section (3) of section 80J." 4. For deciding this issue, it is necessary for us to examine the object of introducing section 115J which can be easily deduced from the Budget Speech of the then Finance Minister of India made in the Parliament while introducing the said section which is as follows : "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly pr....
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.... argument of the revenue that it is still open to the Assessing Officer to rescrutinise the accounts 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 in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income- tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the....
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.... is entitled for the benefit of that section. The assessee contends that its income from sale and purchase of units of the UTI is part of its regular business and that it has held these units as stock-in-trade and has been doing the business of buying and selling the same. The assessee also contends that its income from this business of investment in the units of the UTI and its business of manufacture and sale of tyres are pooled together in a common account of funds which is managed by one common management. It is also the submission of the assessee that these two businesses, namely, the business of buying and selling units of the UTI and the manufacture and sale of tyres, are so intertwined and interlaced that the same cannot be separated and treated independently, therefore, this income from the UTI being part of its business income, it is entitled to claim the benefit of section 32AB. A perusal of section 32AB, as it stood at the relevant time, shows that if an assessee has a total income including the income chargeable to tax under the head 'Profits and gains of business or profession' and if the income from such business is derived from an 'eligible business....
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....treated as a speculative business? For this purpose, the revenue argues that the units purchased by the assessee-company from the UTI are shares, therefore, as per Explanation to section 73 of the Act, the said business of purchasing and selling of shares will have to be treated as a business of speculation. The revenue in support of this argument, relies on section 32(3) of the UTI Act which reads as follows : "(3) Subject to the foregoing sub-sections, for the purposes of the Income-tax Act, 1961,- (a) any distribution of income received by a unitholder from the Trust shall be deemed to be his income by way of dividends; and (b) the Trust shall be deemed to be a company." 9. Relying on the above provision of the UTI Act, the revenue contends that if the UTI is a company and income from its units is dividend, then ipso facto the units will have to be shares, therefore, the business of purchase and sale of units conducted by the assessee-company will have to be deemed to be a business in shares which business, according to the revenue, attracts Explanation to section 73. On this basis, it is contended that the business of purchase and sale of units by the assessee-company a....
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.... Copy of order of Bombay High Court, copy of petition for capital reduction and working of actual write off / loss on capital reduction has been submitted during the course of assessment proceedings. Under section 101 of the Companies Act, 1956, the company may reduce its share capital by extinguishing any of its shares subject to approval of members and High Court. In this case, both the shareholders, as well as, the High Court have duly approved the capital reduction of shares in all three companies. Further, the same is also registered by the Registrar of Companies and issued certificate in respect thereof. Copy of certificate was submitted by the assessee during the assessment proceedings. Hence, capital reduction has resulted in extinguishment and cancellation of investment in the group company. It amounts to transfer u/s 2(47) of the Income Tax Act. On approval of Capital Reduction by the Hon'ble Bombay High Court (supra), shares of the assessee -company gets cancelled, and rights attached with the shares - dividend, redemption, share in liquidation of company (in case of equity share), voting rights, etc. are extinguished. The name of assessee in the members register is also....
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....ion 1 to Section 115JB(2) of the Act, for calculation of book profit u/s 115JB of the Act. Therefore, the direction of enhancement, which is given by the Ld. CIT(A), is very much connected with the adjudication of the issue in relation to book profit u/s 115JB of the Act, hence there was no requirement to issue the separate notice for enhancement of assessment. 26. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We do not agree with learned DR for the revenue, to the effect that it is not necessary to issue the separate notice for enhancement. We note that sub-section 2 of section 251 of the Income Tax Act, clearly states that if the ld CIT(A) wants to enhance the assessment, a separate show-cause notice and of hearing should be given to the assessee. The provisions of section 251 of the Act, is reproduced below: "SECTION 251:Powers of the [Joint Commissioner (Appeals) or the "[Commissioner (Appeals)]. 251. (1) In disposing of an appeal, the [Commissioner (Appeals)] shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce en....
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....ficer for enhancement of assessment, without issuing show cause notice to the assessee u/s 251(2) of the Act to treat deemed dividend u/s 2(22)(d) of the Act, in the hands of the assessee, is bad in law and therefore not sustainable in the eye of law. 28. We note that Ld. CIT(A) has directed the Assessing Officer to make a further addition on account of deemed dividend u/s 2(22)(d) of the Act and u/s 115QA of the Act, such direction is tantamount to enhancement of assessment. Therefore, before making any enhancement of the assessment, it is the duty of the Ld. CIT(A) to give a notice to the assessee to that effect and after getting reply from the assessee, the Ld. CIT(A) may enhance the assessment, if any, and for that we rely on the following judgments: (i) CIT vs. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC) (ii) CIT vs. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC). We also that capital reduction is carried out for NIL consideration, therefore, considering capital reduction of assessee- company, there should not be deemed dividend u/s 2(22)(d) of the Act. That is, no deemed dividend arises on losses/crystalised losses. Moreover, the said transaction is also ....
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....on at Serial No. (b) requires separate block for user agencies equipped with basic facilities. Similarly, Serial No. (j) provides for accommodation for bank. In compliance with such conditions, the Company has created office spaces for the user agencies and bank on which it earns rental income. 3. The rental income is derived from the eligible business of Industrial Undertaking i.e. Container Freight Station. As the income is derived from the activities necessary for carrying out the business, it can be said to have been directly related to the business of the assessee and first-degree source of income. Hence, there is direct nexus between business of the assessee and rental income earned by the assessee and therefore assessee company submits that rental income earned is income from the business of eligible industrial undertaking. 4. CBDT vide Circular No. 16/2017 dated 25.04.2017 has clarified and put to rest the controversy on 'house property' versus 'business income' classification for income from letting out of premises /developed-space along with other facilities in an industrial park or SEZ. CBDT stated that lease rentals would be charged as 'business ....
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....available on the profits and gains derived by an undertaking or an enterprise from an eligible business as referred to in the provisions of section 80IA(4) of the Act. Therefore, income from rent cannot qualify for deduction u/s. 80IA of the Act. Therefore, the claim of the assessee for deduction u/s. 80IA of the Act was reduced to the extent of rental income of Rs. 30,84,582/-. 33. Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before Ld. CIT(A), who has confirmed the addition made by the Assessing Officer. The ld. CIT(A) noticed that assessee company had earned rent income of Rs. 30.84 lacs from providing office space to various use's agencies like Custom House Agents, Shipping Agent etc. and Sate Bank of India. The ld. CIT(A) noted that the CBDT never accepted the definition of the CFS given by Ministry of Commerce and issued clarification vide letter dated FN 178422010- ITA-I dated 06.01.2011 that CFS are not inland ports and not eligible for 80IA(4)(i) of the Act. The assessee relied on Circular 16/2017 of CBDT dated 24-04-2017. This circular relates to rental income arising from the infrastructure facility not form auxiliary activity. ....
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.... to the earlier and subsequent years, the position accepted/determined needs to be followed even on the principle of consistency. We note that issue under consideration is also covered by the following judgements: 1. A.S. Shipping Agencies (P.) Ltd. v. Assistant Commissioner of Income-tax [2011] 15 taxmann.com 247 (Chennai) "Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment years 2003-04 to 2005-06 - Assessee company derived income as a steamer agent for shipping companies besides running a container freight station (CFS) -Whether income from letting of bonded warehouse being part of infrastructure in business of running of CFS, would be eligible for deduction under section 80-IA - Held, yes [In favour of assessee] 2. VITP (P.) Ltd. v. Additional Commissioner of Income-tax, Range-3, Hyderabad [2012] 25 taxmann.com 178 (Hyd.) "Rent received from letting out a portion of administrative building space to maintenance-contractor of industrial park is eligible for deduction under section 80- IA(4)(iii)." 3. Commissioner of Income Tax, Delhi-1 v. Container Corporation of India Ltd., [2018] 93 taxmann.com 31 (....