Loading judgment…
Facts
The assessee, a wind energy producer, filed a return declaring a loss. The assessment was completed with additions and disallowances, including for Asset Retirement Obligation (ARO) and CSR expenses. The CIT(A) partly allowed the assessee's appeal, leading to the present appeal before the Tribunal.
Held
The Tribunal held that the provision for Asset Retirement Obligation (ARO) is an allowable expenditure as it represents an ascertained liability. Regarding CSR expenses, the Tribunal held that while not allowable under Section 37, they cannot be added back to book profits for MAT computation as per Section 115JB. The disallowance of upfront fees for a loan was remanded for verification.
Key Issues
Whether provision for Asset Retirement Obligation (ARO) is an allowable expenditure, and whether CSR expenses can be added back to book profits for MAT purposes. Also, whether upfront loan fees are disallowable.
Sections Cited
250, 143(3), 115JB, 37, 44B, 44BB, 44BBA, 44BBB, 90, 90A, 92CC, 92CE, 115-O, 115R, 115B, 115BAB, 115BABA, 115BABAA, 115BAC, 115BBF, 47, 37(1), 33AC, 86, 10, 11, 12, 115BBF, 3, 42
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI “B” BENCH: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
The present appeal is filed by the assessee against the order dated 21.01.2020 of Ld. Commissioner of Income Tax (A)-4, New Delhi [“Ld.CIT(A)”] in Appeal No.227/18-19/CIT(A)-4 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 17.12.2018 passed u/s 143(3) of the Act pertaining to Assessment Year 2016-17.
Brief facts of the case are that the assessee is a company, engaged in the business of generation of electricity through wind energy and is operating as a renewable energy independent power producer. The return of income was filed on 21.09.2016, declaring loss of INR 99,47,982/- and book profit of INR 11,23,37,662/- was declared. The case of the assessee was selected for scrutiny and the assessment was completed at a total income of INR 7,44,53,592/- under normal provision of Income tax Act and MAT was assessed at INR 11,39,61,871/- by making various additions/disallowances. The assessee preferred appeal before Ld.CIT(A) who vide impugned order dated 21.01.2020, partly allowed the appeal of the assessee thus, the assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. “The CIT(A) has erred in law and on facts in upholding the disallowance of amortization of Asset Retirement Obligation (ARO) amounting to Rs. 40,21,965 mainly on the ground that (a) it pertains to prior period (b) basis of estimation of the expenditure required to be incurred under ARO is not reliable (c) method of accounting is not regularly followed and (d) the lease period could be extended not requiring the assets to be dismantled.
2. The CIT(A) has erred in law and on facts in upholding the addition of CSR expenses of Rs. 16,24,209 while computing the book profit u/s 115JB of the I.T. Act on the ground that the decision of the SC in Appollo Tyres Ltd is not applicable since the assessee has not followed generally accepted accounting standards. The CIT(A) has further erred in relying on Circular No.1/2015 issued by CBDT on 21/01/2015 and in equating CSR expenses with Dividend and while upholding the action of the AO.
3. The CIT(A) has erred in law and on facts in upholding the disallowance of upfront fees of Rs. 1,10,32,000 paid while availing loan from financial institution on the ground that its capitalized in books of accounts.
4. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”
In Ground No.1, the assessee has challenged the disallowance of 3. provision of Asset Retirement Obligation (“ARO”) of INR 40,21,965/-.
Before us, Ld.AR of the assessee submits that the assessee had installed wind mill plant on the land taken on lease for a certain period and after completion of the period, the land has to be handed over to the owner by removing the structure and other construction carried out on the said lease land and therefore, the expenses for removal needs to be incurred and it is an ascertained event. Accordingly, the assessee credited INR 1,95,50,000/- for ARO in the accounts for which a sum of INR 40,21,965/- was charged to Profit & Loss Account as provision which include a sum of INR 28,82,200/- being pertained to earlier years. Ld. AR submits that since it is ascertained that the assessee has to carry out assess restoration at the time of handing over the said land to the owner after the expiry of leas period, therefore, the expenditure Page | 2 to be incurred at that time is estimated and year-wise provision is made. As for the first time, the provision is made in the year under appeal therefore, it contained provision pertaining to earlier years. He therefore, prayed that the disallowance made deserves to be deleted and provision being on ascertained liability deserves to be allowed. He placed reliance on the judgement of Hon’ble Karnataka High Court in the case of CIT vs Gogte Minerals [1996] 85 taxman 163 (Kar.).
On the other hand, Ld. Sr. DR for the Revenue vehemently supports the orders of the lower authorities and submits that Ld.CIT(A) has discussed this issue in details and finally concluded that the expenditure being not in accordance with the provision of Act and there is no reasonable certainty about the incurrence of the event of removal of structure as there is a possibility that the lease period would be extended and therefore, such provision could not be allowed. He, therefore, requested for the confirmation of the addition made.
Heard both the parties and perused the material available on record. In the instant case, it is seen that the assessee has installed 45 MW wind energy in the State of Rajasthan. For this, the assessee has taken various lands on lease. According to the lease agreement, one primary condition is that at the time of completion of lease/vacation of lease lands, the assessee has to restore the land to its original condition and any structure created thereon has to be removed. It is the submission of the assessee that for installation of 45 MW plant, certain civil and other structures were constructed which needs to be removed at the time of handing over the leased land to the owner which certainly attract some cost. As per the assessee, it is ascertained that this expenditure has to be incurred in terms of the lease agreement. Accordingly, the provision was made to meet out this future liability and during the year under appeal, certain amount were charged to Revenue towards such expenditure titled as “ARO”. Since this ARO is ascertained liability, the provision made for the same is an expenditure and therefore, the provision made is an allowable expenditure. This view is supported by the judgement of Hon’ble Delhi High Court in the case of Vodafone Mobile Services Ltd. vs Page | 3 DCIT [2025] reported in 3 TMI 659 (Delhi) wherein the Hon’ble High Court has held as under:- 35. We are of the firm view that the usage of the phrase „if any damage is caused in the lease agreement cannot be construed as detracting from the right of the assessee to provision for a liability which flowed from an existing obligation and the occurrence of which was not liable to be viewed as an improbability. In our opinion, the phrase „if any damage is caused as it occurs in the agreement would only be germane to the issue of actual computation of the expenditure that would be incurred in the course of restoration. The qualificatory language as adopted in the agreement is thus liable to be viewed as merely being pertinent to identification of actual damage at the end of the lease term and the true or concrete expense to be incurred in repair and restoration. The said qualification would, in any case, have to be read in conjunction with the primary obligation to restore the premises to its original condition. The obligation to repair and restore forms the core of the contractual obligation which stood placed upon the assessee. It was therefore entitled to provision for such an expense provided it was considered probable and could be quantified on the basis of a reasonable estimation. The usage of the phrase „if any damage is caused did not transform that obligation into a contingent liability. We thus find ourselves unable to countenance the view expressed by the AO and the Tribunal in this respect.
A provision can be validly made, provided it be in line with the prescriptions set out in AS-29. That accounting standard is not concerned with events of certainty or an ascertained liability as the AO and the Tribunal understood. In our considered view, the stand taken by the respondents firstly proceeds on the incorrect premise of the liability being one which already exists and in respect of which there cannot possibly be a doubt. It is while proceeding on this fundamental postulate which has led to the Tribunal seeking to discern the existence of an ascertained liability. This clearly runs contrary to the express language of AS 29 when it defines a liability to be one whose settlement is expected to result in an outflow. AS 29 while explaining when a provision may be justifiably made speaks of the probability of an outflow. The usage of the expression „probable is equated to „more likely than not . Thus, it is the reasonable likelihood of the outflow as opposed to a remote or uncertain possibility which is deemed to be germane and relevant. It thus has to be viewed as distinct from unforeseen liabilities and obligations. As we view the contract term, we have no hesitation in recognising the same as being the manifestation of a positive commitment to repair and restore. The duty to repair and restore stands attached to the removal of equipment as well as the liability to restore the Page | 4 premises to its original condition. The contract thus constitutes the past event and which in turn creates an obligation in praesenti pertaining to a liability which is probable and ascertainable. Thus, the only facets which are left to conjecture are the exact timing and the amount of outflow that may occur.
A contingent liability on the other hand is concerned with a possible obligation and which may or may not arise since it would be dependent upon the occurrence or non-occurrence of an uncertain future event. These are liabilities which are neither considered probable nor can they be reasonably estimated. The obligation and outflow which is spoken of in connection with contingent liabilities are prefaced by the words „possible , „one or more uncertain future events and where the occurrence or non- occurrence of those events is itself unclear and uncertain. A contingent liability is one where both the obligation as well as the occurrence of the event which would trigger the same are to be found in the realm of conjecture. It is the facet of such liabilities neither being probable, more likely not to occur and being immeasurable which distinguishes these liabilities from those in respect of which a provision may be legitimately made.
The provision as made thus, clearly appears to follow lines similar to the site restoration situation which the Madras High Court had an occasion to review in Vedanta Ltd. As was held by that High Court, the words „laid out or „expended are not confined to an immediate expenditure but would also comprehend an expenditure which may arise in the future. Their Lordships noted that the assessee in that case was placed under the contractual obligation to expend monies on site restoration and the creation of the provision itself being based on empirical principles. It thus held that all that Section 37(1) requires is that the expenditure should be "laid out" or "expended" for the purposes of business.
The Madras High Court also had an occasion to notice a whole body of precedent which had, while speaking of provisions for liabilities being made, clearly interpreted the words „laid out or „expended as including an expenditure likely to be incurred in the future. It was thus held that the provision so made, on the basis of and informed by commercial prudence would clearly qualify the prescriptions of Section 37.
We are thus of the considered opinion that the provisioning for ARC qualified the prescriptions of AS 29 and the assessee was thus justified in accounting for the same. The ARC obligation clearly met the test of a positive obligation flowing from a past event, being a conceivable probability as well as being measurable. In any event, both the AO as well as the Tribunal appear to have proceeded on the basis that only an ascertained liability could have been provisioned for. That view is not only erroneous but also unsustainable in law. Page | 5
We are also of the view that the Tribunal in any case failed to notice or engage with the contention of the assessee in the alternative and which was based on Section 37 of the Act. By placing its case within the ambit of Section 37, the assessee stood relieved of getting into the quagmire of „actual cost and other related issues. All that it was left to establish was that the expenditure had been laid out. As the Madras High Court correctly explains in Vedanta, the usage of the expression „laid out and „expended in Section 37 are indicative of that section not being confined to immediate expenditure but also factoring for situations where an amount may be set apart for a determined or specified objective. The appellant was thus clearly entitled to succeed on this point.
Further the Hon’ble Karnataka High Court in the case of CIT vs Gogte Minerals (supra) also held that where the liability has been arising in terms of the agreement, assessee is entitled to deduction on pit filling expenses.
Thus, by respectfully following the judgement of Hon’ble Jurisdictional High Court in the case of Vodafone Mobile Services Ltd. (supra) and of the Hon’ble Karnataka High Court in the case of CIT vs Gogte Minerals (supra), we are of the view that the claim of the assessee towards the provisions created for ARO expenditure deserves to be allowed. With respect to the provision related to earlier years, it is seen that no such provision is made in preceding years and for the first time in the year under appeal, such provision is created therefore, the amount pertaining to previous year is charged to the Revenue account in the year under appeal. Admittedly, this relates to previous years therefore, the same cannot be allowed in the year under appeal and could be only allowed when the actual expenditure is incurred. Therefore, the deduction to the extent of INR 11,39,659/- pertaining to year under appeal is allowed and the remaining amount of provision of INR 28,82,200/- is disallowed as related to provision prior period expenses. Accordingly, Ground No.1 raised by the assessee is partly allowed.
Ground No.2 is with respect to the adjustment made in the books profit on account of CSR expenses of INR 16,24,209/- disallowed by the AO.
Before us, Ld. AR of the assessee submits that CSR expenses though are allowable expenses under the normal provisions of the Act however, there is no provision under the Income Tax Act for making disallowance on this account. For this, he placed reliance on the judgement of Co-ordinate Bench of the Tribunal in the case of Green Infra Solar Energy Ltd. vs ACIT in & Others order dated 01.12.2022.
On the other hand, Ld. Sr. DR for the Revenue supported the orders of the lower authorities and requested for the confirmation of the disallowance made.
Heard the contentions of both the parties and perused the material available on record. It is an admitted fact that CSR expenses are not allowable expenses u/s 37 of the Act, however, the same cannot be added back to the book profits for the purpose of charging MAT u/s 115JB of the Act. The provision of section 115JB of the Act, where the adjustment to the book profits is provided, is reproduced as under:- 115JB. Special provision for payment of tax by certain companies. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on 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, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent: Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words "eighteen and one-half per cent" occurring at both the places, the words "fifteen per cent" had been substituted. (2) Every assessee,— (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, Page | 7
for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss,— (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 previous year. Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss 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, 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 section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa)the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (fb)the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,— (A)the capital gains arising on transactions in securities; or (B)the interest, [dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc)the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or (fd)the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; 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, (j)the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k)the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; if any amount referred to in clauses (a) to (i) is debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss, 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 than by way of a debit to the statement of profit and loss), if any such amount is credited to the statement of profit and loss: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Page | 9
Explanation or Explanation below the second proviso to section 115JA, as the case may be; or (ii)the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the statement of profit and loss; or (iia)the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets); or (iib)the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or (iic)the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the statement of profit and loss; or (iid)the amount of income accruing or arising to an assessee, being a foreign company, from,— (A)the capital gains arising on transactions in securities; or (B)the interest, [dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie)the amount representing,— (A)notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B)notional gain resulting from any change in carrying amount of said units; or (C)gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the statement of profit and loss; or (iif)the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; or (iig)the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (iih)the aggregate amount of unabsorbed depreciation and loss brought forward in case of a— (A)company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013) has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act; (B)company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016). Explanation.—For the purposes of this clause,— (i)"Adjudicating Authority" shall have the meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016); (ii)"Tribunal" shall have the meaning assigned to it in clause (90) of section 2 of the Companies Act, 2013 (18 of 2013); (iii)a company shall be a subsidiary of another company, if such other company holds more than half in the nominal value of equity share capital of the company; (iv)"loss" shall not include depreciation; or (iii)the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih). Explanation.—For the purposes of this clause,— (a)the loss shall not include depreciation; (b)the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or (iv)to (vi) [***] (vii)the amount of profits of sick industrial company for the assessment year commencing on and from the 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 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 statement of profit and loss.
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 any, as levied by the Central Acts from time to time. Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this section, the assessee, being a company to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, has, for an assessment year commencing on or before the 1st day of April, 2012, an option to prepare its statement of profit and loss for the relevant previous year either in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013) or in accordance with the provisions of the Act governing such company. Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if— (i)the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or (ii)the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies. Explanation 4A.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections. Explanation 5.—For the purposes of sub-section (2), the expression "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). (2A)For a company whose financial statements are drawn up in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit Page | 12 as computed in accordance with Explanation 1 to sub-section (2) shall be further— (a)increased by all amounts credited to other comprehensive income in the statement of profit and loss under the head "Items that will not be re- classified to profit or loss"; (b)decreased by all amounts debited to other comprehensive income in the statement of profit and loss under the head "Items that will not be re- classified to profit or loss"; (c)increased by amounts or aggregate of the amounts debited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10; (d)decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10: Provided that nothing contained in clause (a) or clause (b) shall apply to the amount credited or debited to other comprehensive income under the head "Items that will not be re-classified to profit or loss" in respect of— (i)revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38; or (ii)gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109: Provided further that the book profit of the previous year in which the asset or investment referred to in the first proviso is retired, disposed, realised or otherwise transferred shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the first proviso for the previous year or any of the preceding previous years and relatable to such asset or investment. (2B)In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computation of book profit of the resulting company under this section. (2C)For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount: Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the Page | 13 aggregate of the amounts referred to in the said sub-clauses relatable to such asset or investment: Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations. Explanation.—For the purposes of this sub-section, the expression— (i)"year of convergence" means the previous year within which the convergence date falls; (ii)"convergence date" means the first day of the first Indian Accounting Standards reporting period as defined in the Indian Accounting Standards 101; (iii)"transition amount" means the amount or the aggregate of the amounts adjusted in the other equity (excluding capital reserve and securities premium reserve) on the convergence date but not including the following:— (A)amount or aggregate of the amounts adjusted in the other comprehensive income on the convergence date which shall be subsequently re-classified to the profit or loss; (B)revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38 adjusted on the convergence date; (C)gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the convergence date; (D)adjustments relating to items of property, plant and equipment and intangible assets recorded at fair value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards 101 on the convergence date; (E)adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the convergence date; and (F)adjustments relating to cumulative translation differences of a foreign operation in accordance with paragraph D13 of the Indian Accounting Standards 101 on the convergence date. [(2D) In the case of an assessee being a company, where there is an increase in book profit of the previous year due to income of past year or years included in the book profit on account of an advance pricing agreement entered into by the assessee under section 92CC or on account of secondary adjustment required to be made under section 92CE, the Assessing Officer shall, on an application made to him in this behalf by the Page | 14 assessee, recomputed the book profit of the past year or years and tax payable, if any, by the assessee during the previous year under sub- section (1), in such manner as may be prescribed and the provisions of section 154 shall, so far as may be, apply and the period of four years specified in sub-section (7) of that section shall be reckoned from the end of the financial year in which the said application is received by the Assessing Officer: Provided that the provisions of this sub-section shall apply only if the assessee has not utilised the credit of tax paid under this section in any subsequent assessment year under section 115JAA: Provided further that the provisions of this sub-section shall also apply to an assessment year beginning on or before the 1st day of April, 2020 and notwithstanding anything contained in any other provisions of this Act, no interest shall be payable to such assessee on the refund arising on account of the provisions of this sub-section.] (3)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. (4)Every company to which this section applies, shall furnish a report in the prescribed form from an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section [before the specified date referred to in section 44AB] or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142. (5)Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section. (5A)The provisions of this section shall not apply to,— (i)any income accruing or arising to a company from life insurance business referred to in section 115B; (ii)a person who has exercised the option referred to under section 115BAA or section 115BAB. (6)The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be: Provided that the provisions of this sub-section shall cease to have effect in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012. (7)Notwithstanding anything contained in sub-section (1), where the assessee referred to therein, is a unit located in an International Financial Page | 15
Services Centre and derives its income solely in convertible foreign exchange, the provisions of sub-section (1) shall have the effect as if for the words "eighteen and one-half per cent" wherever occurring in that sub- section, the words "nine per cent" had been substituted. Explanation.—For the purposes of this sub-section,— (a)"International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (b)"unit" means a unit established in an International Financial Services Centre; (c)"convertible foreign exchange" means a foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999) and the rules made thereunder.”
A perusal of the adjustments provided in section 115JB as stated above, from any adjustment on account of disallowance/ addition towards CSR expenses to the book profits. Further, Hon’ble Supreme Court in the case of Apollo Tyres [2002] 255 ITR 173 (SC) has held that “the AO cannot tinker with the book profit and any adjustment that can be done is with respect to Explanation provided u/s 115JB of the Act.
This being so, adjustment made in the book profit without there being no specific provision to this effect in the statutes, action of the AO in making addition to the book profit of INR 16,24,209/- being disallowance of CSR expenses cannot be made and therefore, the same is hereby deleted. This view is also supported by the decision of Co-ordinate Bench of Delhi, ITAT in GE Power in and in case of Green Infra Solar Energy Ltd. vs ACIT (supra). Thus, respectfully following the decisions of Co-ordinate Bench of ITAT, Ground No.2 raised by the assessee is allowed.
Ground No.3 raised by the assessee is with regard to the disallowance of 15. INR 1,10,32,000/- is paid as upfront fees while availing loan from financial institution.
Before us, Ld.AR for the assessee stated that the amount has not been claimed in the year under appeal and it was claimed and allowed in the immediately preceding assessment year. As per ld. AR, the AO as well as Ld. CIT(A) has ignored this fact and made the disallowance. He thus prayed that since the expenses were not claimed in the year under appeal, therefore, there is no question of making disallowance and he prayed accordingly.
On the other hand, Ld. Sr. DR for the Revenue submits that the matter needs necessary verification as claimed by the assessee thus, the matter be remanded back to the AO.
18. Heard the contentions of both the parties and perused the material available on record. Before us, it was claimed by the assessee that the expenses was not claimed in P&L Account in the year under appeal. On perusal of the assessment order, it appears that the AO has taken this figure form the computation of income as observed in para 6 at page 13 of the order. In view of these facts, in our considered opinion, this issue needs verification on the part of the AO with respect to the claim of the assessee that no expenditure was claimed in the Profit & Loss A/c. Accordingly, the matter is remand back to the file of the AO for verification whether this amount was claimed in the year under appeal or in preceding year and decide the same in accordance with law. Ground No.3 raised by the assessee is partly allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 04.07.2025.