M/S SERVEALL CONSTRUCTION PVT. LTD.,VASAI vs. DY. CIT CENTRAL 5(4), MUMBAI

M/s. Serveall Construction Pvt. Ltd. 5) The Learned CIT (A) has erred in law & on facts in upholding the Learned AO's action of imposing interest under Section 234B & 234C of the Income Tax Act 1961 6) The Appellant craves leave to add to and/ or amend and/ or delete and/or modify and/or alter the aforesaid grounds of appeal as and when the occasion demands 7) All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.”

4. The ground Nos. 1 & 2 raised by the assessee are challenging the disallowance made u/s.14A of the Act under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act.

4.1. We have heard ld. DR and perused the materials available on record. It is not in dispute that the assessee had not earned any exempt income. The ld. AO by applying the computation mechanism provided under Rule 8D (2) of the Income Tax Rules made disallowance of Rs.15,38,414/- both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. In fact the ld. AO had arrived at the disallowance of Rs.75,62,760/- but restricted the same to the total expenses claimed in the profit and loss account by the assessee in the sum of Rs.15,38,414/-. The issue to be decided herein is whether the disallowance u/s.14A of the Act would at all come into operation in the absence of any exempt income. This issue is no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 wherein it was held that disallowance u/s.14A of the Act could not be made in the absence of any exempt income. We find that the provisions of Section 14A of the Act had been amended by the Finance Act 2022 w.e.f. 01/04/2022 by way of insertion of an Explanation which reads as under:-

M/s. Serveall Construction Pvt. Ltd. “[Explanation-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income”] 4.2. This explanation has been held to be operative prospectively from A.Y.2022-23 onwards as per the Explanatory Memorandum to the Finance Act as well as the decision of the Hon’ble Delhi High Court in the case of PCIT Central 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.36 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.Nil after deducting Debenture Redemption Reserve of Rs.36 Crores from the net profit as per profit and loss account of Rs.35.81 Crores. In the opinion of the assessee, the said Debenture Redemption Reserve of Rs.36 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. First the facts are noted. The Profit and loss statement of the appellant as seen from the published audited accounts is as follows M/s. Serveall Construction Pvt. Ltd. Total Revenue 35,92,96,997 Total Expenses 15,38,414/- Profit before tax 35,77,58,583 Current Tax 0 Deferred tax charge (3 88,461) Profit for the year 35,81,47,044 The balance sheet shows the following Share Capital 10,00,000 Reserves and surplus 36,54,41,299/- The notes to financial statements shows the following Debenture Redemption Reserve Opening Balance 0 Add Transferred from statement of Profit and Loss 36,00,00,000/- Less: Transferred to general reserve 0 Closing balance 36,00,00,000 Surplus in the Statement of Profit and Loss Opening balance 73.29,019 Add short provision for tax of earlier years 5829 Add: Net profit for the current year 35,81,47,044 Less Transferred to Debenture Redemption Reserve 36,00,00,000 Less: Adj depreciation 40,593 Closing balance 54,41,299/- 6.12 The first point that emerges for consideration is what is the "net profit as per Profit and Loss Account since section 115JB Explanation 1 defines "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 M/s. Serveall Construction Pvt. Ltd. are permissible. It is clear from the details culled out from the audited accounts mentioned above that the net profit is Rs. 10,32,27,700. To this the provisions for tax has to be added. The items listed for deduction does not include "transfer to debenture reserves". 6.13. The appellant in its computation of income has considered the net profit as Rs. 10,32,,82,464/- (which is profit before tax) from which it has reduced Debenture Redemption Reserve of Rs 10,30,00,000/- This is not as per the literal reading of section 115JB. 6.14. The second point is that there is another aspect of the issue. The reserve for redemption of debentures is in the nature of capital payment. This cannot be considered as charge for determination of profits in any recognized method of accounts. This aspect was considered by the Hon'ble ITAT Bangalore Bench as reported in [2010] 3 ITR (T) 151 (Bangalore) in the case of D.R. Ranka Charitable Trust & Director of Income-tax Exemptions). The relevant portion is reproduced below. "28. The next issue raised by the Revenue in its appeal is that the Commissioner of Income-tax (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.

M/s. Serveall Construction Pvt. Ltd. excluded Rs. 25 crores from the computation of book profits under section 115JB

31. It is the case of the Revenue that the amount set apart to redeeming debentures is to be treated as a reserve. Accordingly the same is covered by clauses (b) and (c) of the Explanation to section 1150 and as such, the said amount is to be added to the net profit for computing book profit for the purpose of section 115JB of the Act.

32. The assessee has relied on the following decision to support its argument (1) National Rayon Corporation Ltd. v. CIT (1997) 227 ITR Z04 (2) CIT. National Rayon Corporation 119861 160 ITR 716 (Bom) (3) CIT v. Tube Investments of India Ltd. [1999] 153 CTR (Mad) 432. 33. We considered this issue very carefully. As per clause (c) of Explanation 1 to section 115JB, the amount or amounts set aside to the provision made for meeting liabilities other than ascertained liabilities are to be added to increase the book profits worked out by the assessee. Literally reading, it means provision made for meeting ascertained liabilities need not be added back to the book profits under section 115JB. It is on the basis of the above specific exclusion that the assessee-company has relied on various judgments to argue that the debenture redemption reserve is a provision made by the assessee-company to meet liabilities, i.e, redemption of debentures ascertained 34. From page 6 of the assessment order, it is clear that the assessee has computed the book profits on the basis of the profits transferred to the balance-sheet of the assessee-company, where the profit was reduced by debenture redemption reserve before transferring the profits to the balance-sheet. It means that the assessee has worked out the book profits for the purpose of section 115JB after deducting the amount set apart under debenture redemption reserve. 35. Now, while considering the 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 M/s. Serveall Construction Pvt. Ltd. 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 of computing the profits of an assessee, cannot be overlooked only for the reason that the expression used in the Explanation to section 115JB is the provision made for meeting ascertained liabilities in this context, it is necessary to find that the provision made for ascertained babies is provision relating to revenue expenditure.

M/s. Serveall Construction Pvt. Ltd.

9. Similarly, in the Guidance Note on the Terms Used in Financial Statements GN(A) 5 issued in 1983, the terms as under "reserve" and "provision were explained “14.04 Reserve The portion of earnings, receipts or other surplus of any enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types capital reserves and revenue reserves. 13.14 Provision An amount written off or retained by way of providing 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."

M/s. Serveall Construction Pvt. Ltd.

M/s. Serveall Construction Pvt. Ltd. The said interest would stand to be debited to the profit and loss account (P & L A/c) or the operating statement of the enterprises for the relevant period, as well as deducible u/s.36(1)() in the computation of the income for the relevant assessment year u/s.28 of the Act. The only exception would be where the capital asset being acquired thereby is under construction or otherwise in the process of being initialized, so that it is not put to use. The interest, under such circumstances, would stand to be capitalized as a part of the cost of acquisition of the relevant asset in the assessee's accounts. It would also, likewise, form part of the actual cost of the said asset in terms of section 43 read with Explanation 8 thereto, and not allowable w/s.36(1)(ii) in the computation of business income. The accounting treatment of both the loan liability as well as of the interest thereon, Le, as prescribed by the applicable accounting standards as well as the principles of commercial accounting, is in complete harmony and agreement with the corresponding provisions of the Act. As the debenture funds form part of the capital structure of the enterprise, the relevant provisions 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 the loan liability at the relevant time, Le, the time of redemption, but at hand through the sale/realization of the liquid securities. This can thus also be considered as a measure to protect investor's confidence as well as to promote investment climate and corporate discipline. The set aside of profits is, therefore, only a sinking fund to fund (meet) a capital liability (out of the profits), the rationale of which stands discussed hereinabove. In the case of National Rayon Corporation, Lad CIT (1997) 227 ITR 764/93 Taxman 754 (SC), also relied upon by the assessee, sinking funds, which fall under the heading Reserve and Surplus (in the balance-sheet as per Schedule VI stood specifically M/s. Serveall Construction Pvt. Ltd. excluded w/r. 1 of second schedule to the Companies (Profits) Surtax Act, 1964 in the computation of capital The set aside of profits, though for meeting a liability, is of one on capital account, so that neither the assumption thereof the liability)) nor its liquidation (discharge) would impact the operating statement of the enterprises, Le, the company's P & L A/c prepared to be prepared under Parts II and III of Schedule VI to the companies act The adjustments to the book profit u/s 115JB are, again, also consistent with the preparation of the P&L A/c under the companies act. The set side of the profits is not to meet a trading liability or a liability on revenue account, so as to form part of or get incorporated therein, Le, the P&L a/c In fact, no set aside for meeting a trading liability would be required in actual practice, as such a liability would itself be charged to the operating statement, reducing the profit to that extent. That is, even if not actually discharged out of the profits as where the same stand locked up in an asset/s, the profits have been deemed to have been absorbed to that extent, so as to become the source of its discharge. In our humble view, therefore, the Revenue is not incorrect in stating that the said set aside of the profits is only an appropriation of profits, and would not amount to a provision, so as to qualify for deduction in the computation of the profit of the assessee company. The issue, in fact, is not if it is a provision (against an ascertained liability) or a 'reserve per se, but whether it could be considered as deductible in computing the profit of the enterprise. On the contrary, as afore stated, 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 taking any different view in the matter. Accordingly, respectfully following the said decision by the Hon'ble high court, we allow the M/s. Serveall Construction Pvt. Ltd. assessee's appeal on its grounds, so that the adjustment made by it in the computation of book profit u/s. 115JB gets validated. The assessee succeeds on its relevant grounds. 6.17 The third point that arises for consideration is that there was no DRR created last year and the creation this year is obviously out of motive to avoid taxes since gains have arisen of sale of shares. No basis or working has been provided by the appellant based on which DRR of as high as Rs 36 crores is created. 6.18. Now let us look at the decision in the case of Raymond Led. In the case of Raymond Ltd., the Hon'ble Bombay High Court held as follows 1. This appeal by the Revenue against the order of the Income Tax Appellate Tribunal dated 13 February 2009 relates to AY 1997-98. Two questions of low have been framed by the Revenue which are as follows: (a) Whether on the facts and in the circumstances of the case and in law, the ITAT was right in deleting the adjustment made by the AO relating to Redemption of Debentures Reserve amounting to Rs 18.80 Crores (b) Whether on the facts and in the circumstances and in law, the ITAT was right in deleting the disallowance in respect of capital expenditure incurred in respect of Steel Division at Nashik as revenue expenditure? 2. Re question (a): Section 115JA of the Income Tax Act, 1961 provides in subsection (2) that every assessee, being a company shall for the purpose of the section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and II of Schedule VI the Companies Act, 1956. The explanation to the Section provides that for the purpose of the section, "book means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased inter alia by (b) the amounts carried to any reserves by whatever name called Part III of Schedule VI to the Companies Act. 1956 provides inter alia in Clause 7(1)(b) that, the expression reserve shall not include 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 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 M/s. Serveall Construction Pvt. Ltd. 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 earlier decision in Vazir Sultan Tobacco Co. Ltd. Vs. CIT [1982] 132 ITR $59, in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of that concept would have to be gathered from the meaning attached in the Companies Act itself. The following observations of the Supreme Court are of significance: The debentures were nothing but secured loans. Merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist. It was redeemable or repayable at a future date. But it was a known liability, In the form of balance sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading liabilities Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries, and (4) other loans and advances The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be reserve" The interpretation clause of the balance-sheet in Schedule VI of the Companies Act specifically lays down that reserves shall not include any amount written off or retained by way of providing for a known liability."

M/s. Serveall Construction Pvt. Ltd.

6.19. 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 less account and 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 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 efforts and locating the order, it is found that there is merely a mention but there is no discussion of the decision Hon'ble Delhi High Court in case of Seri Infrastructure Finance Ltd, v/s ACIT (2015) taxman. Com 254 (Delhi). Further the issues raised in the preceding paragraphs here were not considered In that decision in the case of Repute Properties P. Ltd. the Bombay High Court decision in the case of Raymonds Ltd. has been merely followed. The reasons why the decision in the case of Raymonds Ltd. is not applicable here has already been discussed earlier and distinguished 6.21 The appellant has towards the fag end of the appellate proceedings referred to the decision of the Hon'ble ITAT on this issue in the case of HDIL dated 10.1.2019 for AY 2009-10 and 2010-11. A perusal of the same shows that they were in respect of the orders u/s 263 passed by Ld. Pr CIT (Central)-3 Mumbai. The Hon’ ble ITAT has held that the Pr CIT (Central) 3 Mumbai did not have jurisdiction to pass an order u/s 263. It was held that the order u/s 263 has been passed in respect of the re- assessment order passed by the assessing officer. The re-assessment was in respect of financial transactions entered into by HDIL with Bhoomi Group etc. The issue of DRR was not a subject matter of the re- assessment order. Hence the time limit will commence from date or original assessment order and holding thus, it was concluded that order u/s 263 was time barred. The Pr CIT has sought to revise an issue which was allowed in the original assessment proceedings and which was not subject matter of re-assessment proceedings. Hence the time limit has to be reckoned from the date of M/s. Serveall Construction Pvt. Ltd. passing the original assessment order. Further it was held that the fact that the issue of DRR had reached higher courts show that the issue is debatable and whatever may be the reasoning given by the Pr CIT, it cannot be denied that he has taken a different view and this is therefore this is not a case where an assessment order can be termed as erroneous and prejudicial to the interests of revenue. The context and ratio of that case is different and not applicable to the facts before me 6.22 In the light of the facts and discussion above, the decision of the assessing officer is upheld. Hence, this ground of appeal no. 3 is dismissed.

5.2. No contrary material has been brought on record by the assessee before us to controvert the aforesaid observations of the ld. CIT(A) who had taken a decision after considering the various judicial precedents. Hence, we do not find any infirmity in the order of the ld. CIT(A) dismissing the ground of the assessee. Accordingly, the ground No.3 raised by the assessee is dismissed.

6. The ground No.4 raised by the assessee is challenging the disallowance of Rs.10,05,28,048/- being interest expenses u/s.43B of the Act and reducing the same from ‘work in progress’ as on 31/03/2015.

6.1. We have heard ld. DR and perused the materials available on record. The assessee had capitalised the finance cost of Rs.10,05,28,048/- to the ‘work-in-progress’ as on 31/03/2015. This interest is paid on loan availed from Punjab and Maharashtra Co-operative Bank Ltd. (PMC Bank Ltd.) but the same had not been paid by the assessee. Accordingly, the ld. AO invoked the provisions of Section 43B of the Act and disallowed the same. We find that the ld. CIT(A) had observed in this regard as under:-

7.4. I have considered the facts and submissions carefully. The admitted fact is that the interest claimed is not paid till due date of filing of return M/s. Serveall Construction Pvt. Ltd. and section 43B applies. The appellant is following mercantile basis of accounting The interest expenses claimed pertaining to borrowings from financial institutions are covered u/s 438 which begins with a non- obstante clause. If interest claimed is unpaid, the same is disallowable u/s 43B If such expenditure is capitalized as WIP such portion of interest will have to be reduced from closing WIP The distinction between interest accrued but not due and interest accrued and due is not germane to application u/s 438. What has to be seen is the expenditure claimed during the year. Further this will also apply to interest claimed during the year but capitalized on WIP The ground of appeal no 4 is dismissed.

6.2. No contrary material has been brought on record by the assessee before us to controvert the aforesaid observations of the ld. CIT(A). Hence, we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the ground No.4 raised by the assessee is hereby dismissed.

7. The ground No.5 raised by the assessee is challenging the levy of interest u/s.234B and 234C of the Act. This is consequential in nature and interest is leviable thereof. Hence, dismissed.

Order pronounced on 06/01/2023 by way of proper mentioning in the notice board.