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Income Tax Appellate Tribunal, G BENCH, MUMBAI
order : 17.01.2023 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant has challenged the order, dated 26.03.2018, passed by the Ld. Commissioner of Income Tax (Appeals)-53, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Year 2014-15 whereby the Ld. CIT(A) had dismissed the appeal against the Assessment Order, dated 22.12.2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).
The Appellant has raised following grounds of appeal:
“ 1. The Hon‟ble Commissioner of Income Tax, Appeal-3, Mumbai had erred in law and in facts by confirming the Assessment Year: 2014-15 disallowance of Debenture Redemption Reserve amounting to Rs. 11,00,00,000/- while computing Book Profit u/s 115JB of the Income-tax Act, 1961 disregarding the fact that the said DRR is ascertained liability.”
When the appeal was taken up for hearing, none appeared for the Appellant. A perusal of order-sheet showed that none has been appearing for the Appellant for last several hearings despite notice. A perusal of material on record showed that the Appellant had filed written submission dated 19.01.2022. Therefore, we proceeded to hear the Ld. Departmental Representative to decide the issue raised in the present appeal on merit after taking into consideration the material on record and the aforesaid written submission filed by the Appellant.
The relevant facts, in brief, are that Appellant filed return of 4. income for the Assessment Year 2014-15 on 29.11.2014 declaring loss of INR 132,26,60,667/- under the normal provisions of the Act, and Book Loss of INR 2,59,85,544/- in terms of Section 115JB of the Act. The case of the Appellant was selected for scrutiny and assessment under Section 143(3) of the Act was framed on the Appellant vide Assessment Order dated 22.12.2016. The Assessing Officer computed Book Profits under Section 115JB of the Act at INR 8,40,14,456/- holding as under:
“4.1 During the course of assessment proceedings, the assessee company was asked to show cause why the amount of Debenture Redemption Reserve of Rs.11,00,00,000/- reduced from net profit u/s 115JB should not be excluded. In response to the query, the AR vide letter dated 02-12-2016 submitted detailed reasoning and justification for inclusion of the same, However, the same is not tenable as final accounts of the assessee company for the year under consideration was duly approved by the shareholders and the same has to be considered for the purpose of calculating book profit under 2 Assessment Year: 2014-15 section 115JB of the Income Tax Act, 1961 Debenture Redemption Reserve of Rs.11,00,00,000/- from the calculation of Book Profit u/s. 115JA is not tenable, therefore, the same is ignored. The book profit u/s. 115JB is therefore re-computed accordingly.” 5. Being aggrieved, the Appellant filed appeal before CIT(A) which was dismissed vide order dated 26.03.2018. Therefore, the Appellant is before us in the present appeal.
On perusal of the written submissions, dated 19.01.2022, the submissions of the Appellant can be summarized as follows. Debenture Redemption Reserve is a provision for ascertained liability and not reserve. Therefore, Debenture Redemption Reserve of INR 11 Crores, should not have been added back for the computation of Book Profits under Section 115JB of the Act. Since the same does not fall under Clause (a) to (f) of Explanation 1 to Section 115JB of the Act. Per contra, the contention of the Revenue is that the Net Profits before Tax as per the audited accounts of the Appellant stood at INR 1519.86 Crores. While computing Book Profits under Section 115JB of the Act the Appellant had, in contravention of the provision of Section 115JB of the Act and the judgment of the Hon‟ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT: 255 ITR 73 (SC), reduced the Net Profits as shown in the Profit & Loss statement by INR 11 Crores being Debenture Redemption Reserve created by the Appellant. The Ld. Departmental Representative referred to the order passed by CIT(A) and submitted that Appellant has failed to controvert findings of the CIT(A) who had taken a decision after considering the various judicial precedents.
We have considered the submissions and perused the Assessment Year: 2014-15 material on record. We note that the CIT(A) has confirmed the order passed by the Assessing Officer on three separate counts. Firstly, the CIT(A) upheld the order passed by the Assessing Officer on the ground that the computation of book profits by the Appellant is not as per the provisions of Section 115JB of the Act as the reduction of Net Profits by the Debenture Redemption Reserve of INR 11 Crores is not one of the prescribed adjustments and therefore not permissible. The relevant extract of the order of the CIT(A) reads as under:
“11. The first point that emerges for consideration is what is the "net profit" as per Profit and Loss Account since section 115JB Explanation 1defines "book profit" to mean "the net profit as shown in the profit and loss account
. It is to this figure only that prescribed adjustments and no other are permissible. It is clear from the details culled out from the audited accounts mentioned above that the net profit is Rs1263.82 lakhs. To this the provisions for tax has to be added. The items listed for deduction does not include transfer to debenture reserves.
The appellant in its computation of income has considered the net profit as Rs. 1519.86 lakhs (which is profit before tax) from which it has reduced Debenture Redemption Reserve of Rs. 1100 lakhs. This is not as per the literal reading of section 115JB.” (Emphasis Supplied) 8. We note that the Appellant had placed reliance upon the judgment of Hon‟ble Supreme Court in the case of Apollo Tyres Ltd. (supra) in appellate proceedings before CIT(A). However, the aforesaid judgment supports the case of the Revenue. We note that the Hon‟ble Supreme Court in the case of Apollo Tyres Ltd. (supra), wherein the Hon‟ble Supreme Court has, while examining provisions Section 115J of the Act (pari materia to Section 115JB), has held as under:
Assessment Year: 2014-15 “Therefore, we are of the opinion that the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increase and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.” (Emphasis Supplied) 9. In the present case the books of accounts have been audited and the Net Profit as per the same stood at INR 15,19,86,406/-. The Net Profits could have been increased/decreased only in terms of Explanation 1 to Section 115JB of the Act, which does not provide for reduction of Net Profits by the amount of Debenture Redemption Reserve and rightly so as the same is in the nature of appropriation of profits. We note that as per the provisions of Section 71(4) of the Companies Act, 2013 the debenture redemption reserve is to be created out of the free profits of available for payment of dividends. It is for this reason that Debenture Redemption Reserve is not debited to the audited Profit and Loss Account to arrive at the Net Profits.
The Appellant had computed Book Profits under Section 115JB of the Act as under: Particular Amount (INR) Book Profits as per Companies Act 15,19,86,406 (Profit & Loss A/c) Less: Deduction from Book Profits Income Exempt under Section 11 or 12 6,79,71,950/- Debenture Redemption Reserve 11,00,00,000/- Book Profit under Section 115JB (-) 2,59,85,544/- 5 Assessment Year: 2014-15
The above adjustment made by the Appellant by reducing the Net Profits of INR 15,19,86,406/- by the amount of Debenture Redemption Reserve of INR 11,00,00,000/- does not fall within the ambit of any of the clauses of Explanation 1 to Section 115JB of the Act. In the written submission, dated 19.01.2022, the Appellant has relied upon Clause (c) Explanation 1 to Section 115JB of the Act of the Act which does not apply to the facts of the present case as it provides that the Net Profits be „increased‟ by the amount of provisions for meeting liabilities (other than ascertained liabilities) whereas the Appellant has „reduced‟ the amount of Net Profits by the amount of Debenture Redemption Reserve. As per the above computation the Book Profits as per Profit & Loss Account prepared as per the provisions of Companies Act was INR 15,19,86,406/-. A perusal of the audited statement of Profit & Loss Account for the year ended 31.03.2014 (placed at page 72 of the paper- book) confirms the aforesaid position. Thus, in the facts of the present case it is not the Assessing Officer who has „increased‟ the amount of Net Profits, on the contrary it is the Appellant who had „reduced‟ the Net Profits as shown in the audited Profit & Loss Account prepared as per the provisions of the Companies Act by the amount of Debenture Redemption Reserve created during the relevant previous year. Even if the Debenture Redemption Reserve is taken to be in the nature of a provision, the action of the Appellant was contrary to the law laid down by the Hon‟ble Supreme Court whereas the orders passed by the authorities below are in conformity with the aforesaid judgment of the Hon‟ble Supreme Court. Thus, we do not find any infirmity in the order passed by the CIT(A) which Assessment Year: 2014-15
deserves to be upheld on this ground alone though the CIT(A) has given further reasoning in support of his decision to confirm the order passed by the Assessing Officer.
12. Before parting we would like to observe that the CIT(A) had, in effect, observed that the Debenture Redemption Reserve, though created for ascertained liability, does not pertain to a trading liability having impact on the determination of profits of the Appellant company but pertained to a capital liability. Creation of Debenture Redemption Reserve is not on account of charge on profits but on account of appropriation of profits. On the basis of the aforesaid, the CIT(A) has concluded that the judgment of the Hon‟ble Bombay High Court relied upon by the Appellant in the case of CIT-2, Mumbai Vs. Raymond Ltd: [2012] 21 Taxmann.com 60 (Bom.) was distinguishable on facts and did not apply to the present case. The relevant extract of the order of CIT(A) reads as under:
“18. A perusal of the decision of the Hon'ble High Court in the case of Raymond Ltd. shows that the aspects of i) the book profit being defined as net profit as per profit and loss account and ii) that the debenture redemption reserve is in the field of capital and not a charge on profits and is an appropriation of profits were not raised and hence not considered and discussed. Further, another distinction in fact in the present case is that there is no consistent basis in creation of DRR and its utilization. Thus, the decision in the case of Raymond Ltd. is distinguishable on facts.”
The Appellant has failed to controvert the above findings/observations of the CIT(A) which are also in conformity with the decision of the Bangalore Bench of the Tribunal in the case of D.R. Ranka Charitable Trust v. Director of Income-tax Assessment Year: 2014-15 (Exemptions): [2010] 3 ITR(T) 151 (Bangalore).
In the result, the present appeal is dismissed. Order pronounced on 17.01.2023.