TaxTMI 
TaxTMI 
2007 (11) TMI 322
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.... fact that the provision of non-performing assets was made on the basis of prudential norms prescribed by the RBI for non-banking finance companies; (b) In not appreciating the fact that the said sum represented provision for doubtful debts and accordingly, was allowable as deduction under s. 36(1)(vii). 2.3 In view of the above grounds of appeal, the appellant prays that the provision for non-performing assets amounting to Rs. 1,01,40,295 ought to be allowed as a deduction under s. 36(l)(vii). 3. Addition of Rs. 3,79,303 on account of lease equalization charge On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 3,79,303 in respect of lease equalization charge. 4. Determination of indexed cost in respect of shares of IL&FS On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of AO adopting cost inflation index pertaining to asst. yr. 1994-95 instead of pertaining to asst. yr. 1989-90 determining indexed cost of IL&FS shares sold during the year. 5. Treatment of whole lease rent as income Without prejudice to grounds of appeal in relation t....
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....er of the Tribunal in the case of J.K. Chemicals Ltd. vs. Asstt. CIT, ITA No. 8206/Bom/l989 for asst. yr. 1986-87. The AO was not convinced with the contention of the assessee and he accordingly disallowed the set off of this loss against the income under the head 'Capital gain'. 4. Assessee preferred an appeal before the CIT(A) and reiterated its contentions but the CIT(A) was not convinced with it. The CIT(A) re-examined the issue in the light of the order of the Tribunal in the case of J.K. Chemicals and has held that in that case assessee has sold out the entire plant and machinery and has treated the surplus arising out of the sale as business income whereas the AO has taken a view that the excess amount was liable to be computed as short-term capital gain under s. 50 of the IT Act (hereinafter referred as 'Act') and not as business income. In that situation, the Tribunal has held that though the computation was to be made as short-term capital gain under s. 50 of the Act but the same has to be dealt with under the head "Profits and gains of business or profession". Thus in that case the matter related to income resulting on sale of assets but in the instant case there is no ....
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....l with the sale of assets resulting in a loss. Therefore, the submissions of the learned Authorised Representative in the instant case with reference to s. 50 are misconceived and the contention raised is on a legally incorrect premise. I may also add that the AO is also equally confused about the provisions of s. 50 inasmuch as he has observed that the 'loss so incurred is a short-term capital loss by virtue of s. 50'. It is seen that both the AO as well as the appellant have lost sight of the provisions of cl. (iii) of sub-s. (1) of s. 32 of the IT Act, 1961. Clause (iii) reads as under: '(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under cl. (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the money payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the WDV thereof: Provided that such deficiency is actually written off in the books of the assessee. Explanation-For the purpose of this clause,- (1) 'moneys....
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....mputed as per s. 50 of the IT Act. Sec. 50 is not restricted to computation of capital gains in case of depreciable assets. The provision of s. 50 can be invoked in both the situations where profit or loss on the sale of depreciable assets accrued to the assessee. He has also invited our attention to the other provisions of Chapter IV in support of his contention that the legislature has used the words 'capital gain' in most of the sections but it does not restrict the meaning to the gain only. It rather includes the loss accrues to the assessee on transfer of assets. The learned counsel for the assessee further contended that the issue is squarely covered by the order of the Tribunal in the case of J.K. Chemicals. He has also placed reliance upon the judgment of the Supreme Court in the case of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) in support of his contention that where the plain literal interpretation of a statutory provision produces manifestly unjust result which could never have been intended by the legislature. the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational con....
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....ed under the said clause and not under s. 50 of the IT Act. The learned Departmental Representative further contended that the order of the Tribunal was passed on different set of facts. As such, the ratio laid down in that case cannot be applied to the present case. He, however, supported the order of the CIT(A). 8. Having heard the rival submissions and from a careful perusal of the orders of the lower authorities and relevant provisions of the Act in the light of the judgment referred to by the parties, we find that undisputedly assessee has sold a flat being the only asset of the block of building and suffered a loss. Assessee claimed it to be a short-term capital loss and claimed its set off against the business income as per provisions of s. 50 whereas the Revenue has held that the claim of loss of the assessee cannot be considered under s. 50. It can only be considered under s. 32(1)(iii) of the Act. Since the assessee has not actually written off the deficiency in its books of account, assessee is not entitled for deduction under s. 32 also. Before adjudicating the controversial issue we deem it proper to examine the scope of s. 50 and s. 32(1)(iii) of the IT Act. The titl....
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....fully we would find that through the mode of computation. given in this section only profit earned on transfer of block of assets can be worked out. According to it, where the full value of consideration received or accrued as a result of transfer of asset together with the value of such considerations received or accrued as a result of transfer of another capital asset falling within the block of assets during the previous year exceed the aggregate of the expenditure wholly and exclusively incurred in connection with such transfer, WDV of the block of assets at the beginning of the previous year and the actual cost of any of assets falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gain arising from the transfer of short-term capital asset. Meaning thereby, the provisions of sub-s. (1) can only be invoked where the entire block of assets including the new assets which are acquired during the previous year and fall within the same block of assets are transferred and the sale proceeds exceed the aggregate of expenditure on transfer, WDV of the asset and the actual cost of new asset acquired during the previous year. Th....
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....on.-For the purposes of this clause.- (1) 'moneys payable' in respect of any building, machinery, plant or furniture include- (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to cl. (1) of s. 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any), the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso; (2) 'sold' includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalg....
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....he course of hearing, opted not to press this ground and we accordingly dismiss the same being not pressed. 13. Ground No. 3 relates to confirmation of addition of Rs. 3,79,303 in respect of lease equalization. Assessee has claimed deduction on account of lease equalization of Rs. 3,79,303, but the same was disallowed by the AO after treating it to be capital expenditure. Before the CIT(A) it was contended that observation of the AO is factually incorrect because the assessee has not claimed the impugned expenditure. What the assessee has done is that it has credited a sum of Rs. 3,79,303 to P&L a/c being lease equalization and has reduced the sum while computing the income. Since the accounting year 1997-98, the company has adopted the recommendation of the Institution of Chartered Accountants of India contained in the guidance note on accounting for leases. Accordingly, the difference between annual lease charge (i.e. lease rental net of finance charge) and depreciation is debited/credited to the annual lease equalization account in the P&L a/c and credited to the lease terminal adjustment account. The balance outstanding in the lease terminal adjustment account is adjusted in t....
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....ansaction of sale of shares by the holding company to subsidiary company shall not be regarded to be transfer while s. 49 provides that in such a case the cost of the previous owner shall be deemed to be cost of acquisition. He further contended that if the reasonings of the AO are accepted it would lead to an anomalous situation where the actual cost of asst. yr. 1989-90 is taken while base year for indexation is taken as asst. yr. 1994-95. The assessee contended before the CIT(A) that the rule of harmonious construction should be applied for determining the base year for ascertaining the indexed cost and accordingly, the year in which the holding company acquired the said shares should be considered as base year. The CIT(A) re-examined the issue in the light of assessee's contention, but was not convinced with it and confirmed the view of the AO. While disallowing the claim of the assessee the CIT(A) held that since the shares held by the assessee company as stock-in-trade were admittedly purchased in March, 1994, the base year for indexation has been rightly taken by the AO as asst. yr. 1994-95. We, however, for the sake of reference extract the relevant portion of the order of ....
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.... Feb., 2003, appearing on p. 17, has admitted that it had purchased the shares from the holding company, Mukand Ltd. during the year ended on 31st March, 1994. Meaning thereby, the assessee has purchased these shares against sale consideration of certain price and that should be the cost of acquisition in the hands of the assessee. Since it is not a case of transfer of capital assets by the holding company to its subsidiary company, provisions of s. 49 cannot be invoked. According to s. 49, sub-s. (1)(iii)(e) r/w s. 47(iv), the cost of acquisition of assets on its transfer by the holding company to its subsidiary company shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In the instant case, the shares were admittedly purchased by the assessee from its holding company against certain sale consideration. Though it may be a capital asset but it is not a case of transfer of the capital asset without any consideration by the holding company to its subsidiary company. If the transfer of shares is affected against som....
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....red it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be." 20. From a bare reading of these sections, we find that computation of capital gain on transfer of those assets which fall under s. 47 would not be governed by the normal provisions of s. 45 of the IT Act. Cost of acquisition of the capital asset falling within the ambit of ss. 47(iv), 47(v), 47(vi), 47(via) and 47(viab) are to be computed as per provisions of s. 49 of the Act. With regard to transfer of capital asset by a holding company to its subsidiary company. it has been stated in ss. 47(iv) and 49(1)(iii)(e) that the cost of acquisition of a capital asset, which has been transferred by a holding company to its subsidiary company, if the holding company or its nominee holds whole of the share capital of the subsidiary company and the subsidiary company is an Indian company, shall be deemed to be the cost for which the holding company acquired the said capital asset as increased by the cost of any improvement of the asset incurred or borne by the holding company or the subsidiary company in whose hands cost of acquisition is to be com....
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....exation. shall be the year in which the capital was acquired by the holding company and the indexation may be computed accordingly. But in this case where the capital asset is sold by the holding company to its subsidiary company, the year of indexation in the hands of the subsidiary company shall be the year of transfer of capital asset in favour of the subsidiary company on its sale. In the instant case undisputedly the capital asset was purchased by the subsidiary company from its holding company. As such the year of purchase of the capital asset shall be the year of acquisition of the asset and the indexation would be taken as asst. yr. 1994-95 in which the capital asset was purchased and not the year in which it was acquired by the holding company. On careful perusal of the order of the CIT(A) we find that the CIT(A) has categorically held that the provisions of s. 47 has no application to the present case as assessee has purchased the shares from its holding company for a price. We find no infirmity in this observation of the CIT(A) in the light of the foregoing discussion. The CIT(A) further observed that it is a case of purchase of stock-in-trade by the assessee for a price....
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....t to charge to tax. The rental income received by the assessee is partly in respect of capital price of the plant and machinery and partly rent for using the machinery. If the transaction is treated to be financial transaction such capital reimbursement cannot be taxed. We, therefore, restore this issue to the AO with the direction that interest income accruing to the assessee may be brought to charge of tax in place of rental income assessed by him after allowing opportunity of hearing to the assessee." 24. Since the matter is squarely covered by the aforesaid order of the Tribunal, we, following the same, set aside the order of the CIT(A) and restore the matter to the file of the AO with similar direction that interest income accruing to the assessee may be charged to tax in place of rental income assessed by him as the lease transaction is held to be a financial arrangement, after affording opportunity of being heard to the assessee. 25. Ground No. 6 relates to disallowance of interest under s. 14A of the Act. 26. During the course of assessment proceedings the AO has noticed that the assessee has received dividend income which is exempted from tax and he accordingly disallow....
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....e. He accordingly confirmed the disallowance made by the AO. 29. Now, the assessee has preferred an appeal before the Tribunal and has reiterated its contentions. 30. The learned Departmental Representative, on the other hand, has placed heavy reliance upon the order of the CIT(A). 31. Having given a thoughtful consideration to the rival submissions and from a perusal of record and the provisions of s. 14A, we find that s. 14A was brought on the statute by the Finance Act, 2002, with retrospective effect from 1st April, 2001. After the introduction of provisions of s. 14A a strong apprehension was raised on behalf of the corporate sector and different assessees that this provision may be misused and assessment may be reopened. In order to avoid misuse of this provision proviso to this section was introduced by the Finance Act, 2002 with retrospective effect from 11th May, 2001 and through this proviso a restriction was imposed upon the AO that he shall not be empowered either to reassess under s. 147 or pass order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under s. 154, for any assessment year beginning on or ....
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....egular assessment was framed after issuance of notice under s. 143(2) which cannot be called to be reassessment under s. 147 or rectification under s. 154 of the Act. As such, assessee's case does not fall within any of the prohibitory conditions. We accordingly hold that the Revenue authorities have rightly invoked s. 14A of the Act and no assistance can be drawn from the order of the Tribunal (SMC) in the case of V. Uppalaiah in favour of the assessee. We therefore find ourselves in agreement with the order of the CIT(A) in this regard. So far as the disallowance on merit is concerned, we find that undisputedly assessee is a non-banking finance company and is engaged in the business of investment and trading in shares and finance and leasing. The dividend income accrued to the assessee on both the types of shares, either kept as stock-in-trade or in investment. Though the dividend income earned on its shares which are kept in stock-in-trade is also exempted from tax but the interest paid on the borrowed funds invested in trading of shares cannot be disallowed because it was borrowed for the purpose of business and is an allowable expenditure under s. 36(1)(iii) of the Act. Disall....
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.... assets and any provisions for diminution of value of current assets is not in the nature of provision of liability and hence cl. (c) of Explanation to s. 115JA is not applicable to provision for NPAs. He placed heavy reliance upon the judgment of jurisdictional High Court in the case of CIT vs. Echjay Forgings (P) Ltd. (2001) 166 CTR (Bom) 100 : (2001) 251 ITR 15 (Bom) in support of his contentions that the provisions for NPAs are an ascertained liability. Reliance on other judgment in the case of CIT vs. Eicher Ltd. (2006) 205 CTR (Del) 469 : (2006) 287 ITR 170 (Del) was also placed. 36. The CIT(A) was not convinced with the contentions of the assessee and he disallowed the claim after having observed that the adjustment has to be made as per the narrations in the P&L a/c and since the provision in respect of NPAs is not a liability and much less an ascertained liability, the AO was right in making the adjustment and the same is confirmed. 37. Now, the assessee has preferred an appeal before us and reiterated its contentions. The learned counsel has invited our attention to the order of the Special Bench of the Tribunal in the case of Jt. CIT vs. Usha Martin Industries Ltd. (20....
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....previous year which are to be recovered something from the debtors by the assessee can be called to be a liability for the purpose of s. 115JA of the Act and the Tribunal has held that the provisions for bad and doubtful debts not being a provision for liability but a provision for diminution of the value of the assets, i.e., debts and as such cl. (c) of s. 115JA is not applicable. The Tribunal further held that the provisions made by the assessee not being excessive or unreasonable, it cannot be considered as a reserve under the cl. (b) of Explanation and therefore the same could not be added back to the net profit for computing the book profit within the meaning of s. 115JA. The relevant observation of the Tribunal is extracted hereunder for the sake of reference: "As per s. 115JA, the P&L a/c is to be prepared as per Parts II and III of Sch. VI to the Companies Act. Part III of Sch. VI defines the expression 'provision', which means any amount written off or retained, by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability, of which the amount cannot be determined with substantial accuracy. The ....
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....ability, because even if a debt is not recovered, no liability would be fastened upon the assessee. In that example, if as against the outstanding debt of Rs. 1 crore only Rs. 90 lakhs have been realized, then due to non-realization of the debt of Rs. 10 lakhs, there is no question of any liability upon the assessee. The debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision towards irrecoverability of the debt cannot be said to be provision for liability. Once it is held that the provision for bad and doubtful debt is not a provision for any liability, the question whether the liability is ascertained liability or unascertained liability does not arise. Therefore, the provision for bad and doubtful debt is not a provision for liability but it is a provision for diminution in the value of the assets. Once the provision is not for any liability, the question whether the liability is ascertained or unascertained does not arise. Therefore, cl. (c) of the Explanation to s. 115JA would not be applicable in respect of provision for bad and doubtful debts. As regards the alternate argument of the Revenue that the pro....
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....he case of the assessee, would fall within the cl. (b) of the Explanation to s. 115JA, could not be accepted. Accordingly, the order of the CIT(A) deleting the addition of Rs. 1.56 crores made by the AO in respect of provision for bad and doubtful debt was upheld." 40. If the facts of the case are examined in the light of the order of the Special Bench, we would find that in the instant case assessee has maintained an account for NPAs and whatever recovery of the outstanding debts is not properly effected and certain defaults in instalments are committed, assessee put those outstanding dues under the head "Non-performing assets" and accordingly, he made a provision for NPAs while computing the total income of the assessee. In the case of bad and doubtful debts similar type of practice is being adopted by the asses sees whenever they failed to recover the debt. We therefore are of the view that same analogy can also be applied to the present case. In the case of bad and doubtful debts, Tribunal has categorically held that the provision for bad and doubtful debts is not a provision for any liability, it is rather a provision for diminution in the value of assets, i.e., debts because....