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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE PRESEIDENT & SHRI PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESEIDENT AND SHRI PADMAVATHY S, ACCOUNTANT MEMBER
ITA Nos. 1999, 2002 & 2003/Bang/2016 Assessment years : 2008-09, 2011-12 & 2012-13
Brindavan Beverages Pvt. Ltd., Vs. The Deputy Commissioner # 214/33, 7th Cross, of Income Tax, Cunningham Road, Central Circle 2(3), Vasanth Nagar, Bangalore. Bangalore. PAN: AAACB 7390R APPELLANT RESPONDENT
Appellant by : Shri V. Srinivasan, Advocate Respondent by : Shri Dilip, Standing Counsel for the Dept.
Date of hearing : 26.05.2022 Date of Pronouncement : 13.06.2022 O R D E R Per Padmavathy S., Accountant Member These appeals by the assessee are against the separate orders of the CIT(A)-11, Bengaluru, all dated 26.09.2016 for the assessment years 2008-09, 2011-12 & 2012-13. Certain common issues are involved in these appeals which were heard together and disposed of by this consolidated order for the sake of convenience and brevity.
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The assessee has raised the following grounds for the AY 2008-09:-
“1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The order of assessment passed u/s 153A rws 143[3] of the Act is bad in law and void-ab-initio in as much there was no valid search conducted in the premises of the appellant and consequently, the provisions of section 153A of the Act, have no application and therefore, the impugned order passed deserves to be cancelled. 2.1 Without prejudice to the above, there is no justification to issue the warrant to search the premises of the appellant as the conditions specified in terms of Sec. 132[1] of the Act did not exist and therefore the search action is illegal and consequently the impugned assessment order founded thereon deserves to be cancelled. 3. The learned CIT[A] is not justified in upholding the assessment of book profit u/s. 115JB of the Act, at Rs. 120,97,36,141/- under the facts and in the circumstances of the appellant's case. 3.1 The learned CIT[A] ought to have appreciated that the appellant had erroneously returned a book profit of Rs. 119,98,62,241/- in the return filed in response to the notice u/s. 153A of the Act and there cannot be an assessment merely on account of the consent of the appellant and therefore, the acceptance of the said returned book profit ought not to have been sustained. 3.2 The learned CIT[A] is further not justified in sustaining an addition of Rs. 98,73,900/- to the book profit u/s. 115JB of the Act under the facts and in the circumstances of the appellant's case.
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Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-A, 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.” 3. The assessee is a company engaged in the business of bottling for aerated drinks and also generation of power generation of power through windmills and real estate business.
The facts of the case for the AY 2008-09 are that the assessee filed a return of income on 26/09/2008 u/s. 139(1) of the Income-tax Act, 1961 [the Act]. In this return, the assessee had shown total income of Rs. 13,82,01,580/- under the normal provisions of the Act and had computed the book profits at Rs. 87,00,58,628/- u/s. 115JB of the Act. After filing the aforesaid return of income, an assessment order u/s. 143[3] of the Act was passed on 16/12/2010. In this order, the income of the appellant was determined at Rs. 13,94,66,288/- under the normal provisions of the Act. Book profit u/s. 115JB of the Act was determined at Rs. 87,03,95,824/- and this order of assessment was not challenged in appeal.
A survey action u/s. 133A of the Act was conducted in the business premises of the appellant on 24/07/2012. After the survey
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action was conducted, a notice u/s.148 of the Act, dated 25/10/2012 was issued by the A.O. In response to the said notice, the assessee filed a return of income on 02/11/2012 re-computing the book profit u/s. 115JB of the Act at Rs. 119,99,86,225/- by making adjustment towards impairment of assets and depreciation on windmill. In connection with the survey proceedings and the additional income declared, the assessee had written a letter dated 30/10/2012 explaining that it was offering the additional income to purchase peace with the Department.
During the pendency of the assessment proceedings, a search action u/s. 132 of the Act was conducted in the appellant's case on 18/12/2012. After the search, proceedings were initiated u/s. 153A of the Act by issue of notice dated 18/03/2014. The assessee filed the return of income in response to the aforesaid notice on 30/04/2012 by furnishing the same return of income that was filed earlier in response to the notice issued u/s. 148 of the Act, which proceedings abated after the search was conducted.
The AO passed the assessment order u/s. 153A rws 143(3) of the Act, by making an addition of Rs. 59,68,494/- as deemed dividend protectively. That apart, the A.O. has also made an addition u/s. 115JB of the Act of Rs. 98,73,900/- in respect of certain investments written off by the appellant and determined the book profit of the appellant at Rs. 120,97,36,141/-.
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Aggrieved by the order of the AO the assessee preferred an appeal before the CIT(A). The assessee challenged the validity of the assessment made u/s.153A on the legal ground relating to assumption of jurisdiction by the AO. The assessee also contended on merits of assessing on book profits of Rs.1,20,97,36,141 and the addition of deemed dividend of Rs.59,68,494. The CIT(A) was of the view that the validity of a search cannot be questioned before him and rejected the legal grounds raised before him. On merits the CIT(A) deleted the protective assessment of deemed dividend. However the CIT(A) retained the assessment of book profits without going into the merits stating that that the assessee in the return filed in response to notice 153A has filed the return with the adjustments now challenged.
Ground Nos.1 & 5 are general in nature not warranting separate adjudication hence dismissed. Ground no.4 is consequential. Ground Nos. 2 & 2.1 are legal grounds relating to assessment framed u/s. 153A r.w.s. 143(3) and the search action u/s. 132(1) of the Act which the learned AR did not press during the course of hearing and dismissed as not pressed.
Ground No.3 including 3.1 & 3.2 are regarding computation of book profits u/s. 115JB of the Act at Rs.120,97,36,141 which is adjudicated in the ensuing paragraphs.
The assessee filed the return on 26.9.2008 declaring total income of Rs.13,82,01,580 under the normal provisions of the Act and also
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reported a book profit of Rs.87,00,58,628 u/s. 115JB of the Act which was confirmed in the scrutiny assessment u/s.143(3). Post survey conducted on 24.07.2012 u/s. 133A of the Act, the assessee filed a letter dated 30.10.2012 stating that the book profits would be recomputed after considering the Impairment loss of Rs.16,00,00,000/- and Depreciation as claimed in the books of accounts on Windmill at Rs.17,70,66,417/- and filed the return in response to notice u/s.148 with these adjustments to book profit. Subsequently there was a search conducted u/s. 132 of the Act in the business premises of the assessee. In response to notice u/s. 153A of the Act the assessee filed same return computing the book profits taking into account the adjustment towards impairment loss and depreciation on goodwill. During the course of assessment, the AO made an additional adjustment towards investments written off by the assessee of Rs.98,73,900 to the book profits.
The assessee challenged the entire adjustment made to book profits before the CIT(A). It was submitted that the adjustment towards impairment loss and depreciation on windmill was done during the course of survey, only to buy peace and ward off litigation with the department. However, a search was initiated by the department and the assessee is embroiled with the litigation. The assessee submitted that the law is well settled that a mere concession or consent of the assessee does not confer jurisdiction for making an assessment. Thus, although the assessee has returned an income of Rs
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1,19,98,62,241/- in the return filed in response to the notice u/s 153A of the Act, the same cannot form the basis for assessment of income u/s 115JB of the Act, which ought to have been determined by the AO in accordance with the provisions of sec. 115JB of the Act. Thus, the assessee submitted that the below amounts assessed as part of the book profit require to be excluded as they cannot be added back in terms of the Explanation 1 to section 115JB of the Act -
a. Impairment loss Rs. 16,00,00,000/- b. Excess depreciation on Windmill. Rs. 17,70,66,417/-
The CIT(A) dismissed the appeal regarding the adjustments to book profits without going into the merits of the case and hence the assessee is in appeal before the Tribunal challenging the same.
The ld AR submitted that :-
a. The impairment loss of Rs. 16,00,00,000 has been debited to the profit and loss account in respect of the loss incurred by the assessee on Plant & Machinery, bottles and wooden crates and the same is recognized in accordance with the Accounting Standard AS-28 while preparing the profit and loss account and Balance Sheet.
b. This is not a provision for the impairment of assets but actual write off in respect of the assets Plant and Machinery, Bottles and Wooden crates, which recognized
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after a physical verification and based on the valuation report given by M/s. Apex Surveyors Private Limited dated 24/03/2008 hence an ascertained liability.
c. In respect of depreciation on windmills claimed, the assessee had debited a sum of Rs. 17,70,66,417 in the profit and loss account with the deprecation provided at a higher rate on account of the fact that the windmills installed did not generate electricity as projected and expected by the assessee.
d. The rates prescribed under the Companies Act are only the minimum rate of depreciation that has to be adopted and, the assessee is free to provide higher rate of depreciation as per the opinion of the Board of Directors on the extent of depreciation.
e. That there is no requirement under the Companies Act, 1956, or for that matter, in Explanation 1 to section 115JB[2] of the Act, that the assessee has to necessarily adopt only the minimum depreciation prescribed under the Companies Act for preparing the financial statement.
f. The provisions of clause [g] read with clause [iia] of Explanation 1 to Section 115JB [2] of the Act, are only to the effect that the depreciation on revaluation of assets cannot be claimed as a deduction in the profit and loss
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account and therefore, the same has to be added back for computing the book profit u/s 115JB of the Act.
The ld. DR supported the decision of lower authorities.
We have considered the rival submissions and perused the material on record. We notice that the CIT (A) did not go into the merits of the case stating that the assessee’s the return of income filed in response to notice u/s.153C of the Act had recomputed the profits u/s.115JB after adjusting impairment of assets and depreciation on Windmill. This contention of the CIT(A) is not correct as there is no estoppel in tax laws. The CIT(A) ought to have examined the adjustment under the provisions of the Act before deciding whether the said adjustments are correctly done in accordance with law. He cannot confirm the adjustments merely based on the fact that the assessee himself has made such adjustment. On the issue of whether the AO / CIT(A) can make adjustments to book profits computed u/s.115JB, we notice that similar issue came up for consideration before this Tribunal in the case of DCIT v. M/s. Cauvery Aqua Pvt. Ltd. in ITA No.375/Bang/2017, order dated 13.10.2017, wherein it was held as under:-
“3.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the only issue for adjudication before us in this appeal is with regard to the computation of book profits u/s 115JB of the Act. From perusal of the records, it is seen that as per the return of income filed that the assessee had computed and declared the ‘Book Profits’ u/s
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115JB of the Act at a loss of Rs.(-)41,68,196/-. The assessee has claimed an amount of Rs.2,99,00,000/- as depreciation on windmill @ 100% of the cost of windmill. In the order of assessment, the AO has restricted the claim for depreciation on windmill to 1/15th of its cost i.e, Rs.19,19,333/-and recomputed the ‘book profits’ u/s 115JB of the Act at Rs.2,37,38,520/- by making an addition/disallowance of Rs.2,79,06,666/- in respect of depreciation. 3.4.2 In the factual matrix of case, as discussed above, the ld CIT(A) while allowing the assessee’s claim has held as under at para 6.2.6 to 6.2.8 of the impugned order. “6.2.6 The second contention of the appellant regarding the power of the A.O. to rework the book profits of the appellant is well founded. I find that the Hon'ble Karnataka High Court in the case of HARIRAM HOTELS in ITA No. 53/2009 vide judgment dated 16/12/2015 has held that the A.O. has to accept the audited accounts as certified by the statutory auditors and approved by the company in the general body meeting by following the judgment of the Hon'ble Supreme Court in the case of APPOLLO TYRES (supra). The relevant observations of the Hon'ble jurisdictional High Court are as follows:- "11. Section 1151B of the Act during the relevant period provides that notwithstanding anything contained in any other provisions of this Act, in the case of an assessee being a company, the income tax payable on the total income as computed under the Act is less than 7 1/2% of the book profit, the tax payable for the relevant previous year shall be deemed to be 7 1/2% of such book profit. Thus, the assessee has to first compute the total income in accordance with the Act and if the total income is less than 7 1/2% of the book profit, then the assessee has to prepare profit and loss account for the previous year, then fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 7 1/2% of such book profit. The Income Tax Officer has computed the book profit and the regular income. As tax on regular income is more than tax on book profit, tax on regular income is adopted. The Authorities have consistently relied upon Clause 3 (XII(b)) of Part-11 of Schedule VI to the Companies Act, to come to a conclusion that capital gains has to be mandatorily taken into
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profit and loss account while computing the book profit. That having not been done by the Assessee, the authorities have recomputed the book profit. At this juncture, it would be beneficial to refer to the Judgment of the Apex Court in Apollo Tyres (supra) which is rendered while dealing with an identical provision of Section 115J of the Act. It is held thus: "Therefore, we are of the opinion, the Assessing Officer while computing the income under section 1151 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 increases 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." 12. In the subsequent Judgment of the Apex Court in HCL Comnet Systems (supra), following the Judgment of Apollo Tyres (supra), it is held that the adjustment required to be made to the net profit disclosed in the profit and loss account for the purpose of section 349 of the Companies Act are quite different from the adjustment required to be made under the explanation to be made under section 11 51A of the Act. For the purpose of section 1151A, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the explanation thereto. 13. The explanation appended to Section 115JB provides certain Items which if debited to the profit and loss account can be added back to the net profit for computing the book profit. Clause (b) of the said explanation provides for the amount carried to any reserves by whatever name called. In the present case, it is true that the capital gains are directly taken to capital reserve without taking the said amount of capital gain to the profit 'and loss account however, no such capital gain is debited to the profit and loss account, as such, the said explanation is not applicable to the facts of the present case.
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We have noticed the auditor's report, certified with a qualification that the profit and loss account and balance sheet referred to in the report comply substantially in all material respects with the applicable accounting standards referred to in Section 211 (3C) of the Companies Act except the land and building sold during the year, the capital gain has been transferred directly to capital reserve account instead of crediting to profit and loss account, which in the opinion of the directors is more appropriate. However, it is not disputed that this auditor's report is accepted by the General Body, the books of account and the balance sheet are filed before the Registrar of Companies. It is also noticed by us that Clause 3(XII)(b) and (c) of Part II of Schedule VI of the Companies Act provides that profit and losses in respect of transactions of a kind, not usually undertaken by the Company or undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount and miscellaneous income, are required to be disclosed in the profit and loss account. Considering, the capital gain income falling under these clauses, it is incumbent on the Company to disclose the said amount of capital gain in the profit and loss account. Section 211 of the Companies Act contemplates, form and contents of balance sheet and profit and loss account. Sub-sections 3(A),3(B) and 3(C) of Section 211 provides that every profit and loss account and balance sheet of the company shall comply with the accounting standards, where the profit and loss account and balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and the balance sheet the following mainly: (a) the deviation from the accounting standards; (b) the reasons for such deviation; and the financial effect, if any, arising due to such deviation. 15. For the purpose of Section (3C) of Sec.211 of the Companies Act, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949) as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of Section 210(A).
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The proviso to the said Section 211(3)(C) of the Companies Act makes it clear that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under the sub- section 3(C). The Assessing Officer has placed reliance on the accounting standards, vide No.9949 dated 25.1.1996 and has held that the transaction of sale property should have been brought into the profit and loss account as an extraordinary item since the assessee has failed to follow the accounting standards, determined the book profit after allowing the deduction towards cost as per provision to Section 115JB (2) of the Act. This order is confirmed by the appellate authority as well as by the ITAT. However, this exercise of the assessing authorities, in recomputing the book profit of the assessee is contrary to the principles of law laid down by the Apex Court in Appollo Tyres (supra). The Apex Court has held that the only power vested with the Assessing Officer is to make increases and deductions as provided in the explanation to Section 115JB of the Act. Assessing Officer has no power to embark upon a fresh enquiry in regard to the entries made in the books of accounts of the company. In the light of the judgment of Apollo Types (supra), we are of the opinion that the Assessing Officer has no power to recompute the book profit and has to rely upon the authentic statements of accounts of the company, the accounts being scrutinized and certified by the statutory auditors though with a qualification, approved by the company in general body meeting and thereafter filed before the Registrar of Companies, who has a statutory obligation to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act" It is very clear from the above judgment of the jurisdictional High Court that the power of the A.C. with regard to the computation u/s. 115JB of the Act is very limited in scope. The AC. has to examine the accounts and see if the same has been accepted by the Statutory Auditors of the company and the shareholders in the AGM. Thereafter, he has to only take the book profit as shown in the accounts and make the adjustments as per explanation to section 115JB of the Act. Testing the action of the A.O. on the ratio of the aforesaid decision, it is seen that the A.O has rendered a finding that the appellant has claimed excess depreciation in the profit and loss account and
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therefore, the A.O has recomputed the same by allowing only 1/15th of the cost of the asset as depreciation. Whatever be the correctness or otherwise of the said view taken by the A.O., it is clear that the appellant has provided depreciation at 100% of the cost in the profit and loss account and has mentioned in the notes to accounts at point 4 to Schedule 17 of the financial statements that Depreciation on Windmills is provided at 100% of the cost" and the same is duly disclosed and accepted by the Statutory Auditors and the Shareholders in the AGM. Thus, the same cannot be called into question by the A.O. in the assessment proceedings in light of the judgment of the jurisdictional High Court supra. It is also relevant to notice here that the A.O. has relied upon 2 decisions of the Hon'ble ITAT in support of the-view that the A.O. is entitled to rework the book profits of the appellant in the event the same is not prepared in accordance with the provisions of the Companies Act. The appellant has distinguished these decisions of Hon'ble ITAT by pointing out that the subsequent judgment of the Hon'ble Bombay High Court in the case of ADBHUT TRADING CO. PVT Ltd., in 338 ITR 94 (Born.). At any rate, there is a judgment of the jurisdictional High Court in the case of HARIRAM HOTELS (supra), which is binding on me and the same has to be followed. Hence, the decisions relied upon by the A.O. in the assessment order are of no avail. 6.2.7 I have also considered the provision of Explanation (1) to section 115JB of the Lt under which there can be additions and deletions to the book profit as per the profit and loss account. In terms of the clause (g) of Explanation 1, the book profit has to be increased by the amount of depreciation that has been provided in the accounts of the appellant. However, by virtue of clause (iia) of the very same Explanation 1, the amount of depreciation debited to the profit and loss account has to be deducted. However, while doing so, depreciation on account of revaluation of the asset cannot be deducted by virtue of the exclusion of the same in clause (iia) of Explanation 1. From a combined reading of these 2 clauses, it is clear that the legislature has intended to prohibit the allowance of depreciation as a deduction while computing the book profits to the extent it relates to the depreciation on revaluation of t assets. Such a situation is not obtaining in the case of the appellant.
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There is no revaluation of the asset and the extent of depreciation claimed is on the original cost of the windmill. Thus, even if, the provisions of Explanation 1 to sec. 115JB of the Act are applied, the amount of increase as well as reduction in the figure of depreciation remains the same and thus, the book profits returned by the appellant cannot be disturbed. 6.2.8 For the aforesaid reasons, the computation of income u/s. 115JB of the Act by making an addition of Rs. 2,79,06,066/- by the A.O. cannot be allowed to stand. The said computation of income u/s. 115JB of the Act is hereby vacated and the income as computed by the appellant of Rs. 41,68,146/-requires to be accepted. It is directed accordingly. Grounds No. 3 & 4 are ALLOWED. 3.4.3 On a perusal of the finding rendered by the ld CIT(A) on the issue before us (Supra), we find that the ld CIT(A) has followed the judgments of the Hon’ble Apex Court in Appollo Tyres Ltd., (255 ITR 273) (SC) and of the Hon’ble Jurisdictional High Court in the case of Hariram Hotels in ITA No.53/2009 dated 16/12/2015, while holding that the AO was not competent to go into the computation of ‘Book Profits’ u/s 115JB of the Act except to the limited extent of making additions and reductions as laid out in Explanation (1) to sec. 115JB of the Act. We find that the ld CIT(A) has also tested the claim of depreciation as per the provisions of Explanation (1) to sec. 115JB while coming to the view that the AO was not authorized to make the addition while re-working the extent of depreciation claimed by the assessee. The accounts of the assessee have been certified by the Statutory Auditors. The accounting policies followed by the assessee have not been found fault with by the Statutory Auditors or the authorities concerned under the Companies Act. In such cases, the AO is not permitted to make any variation by holding that the assessee has not followed the mandate of the Accounting Standards and the provisions of Companies Act while preparing its financial statements. The object of sec. 115JB of the Act is to bring to tax the book profits as shown by the company to its shareholders and keeping in view the aforesaid object behind sec. 115JB of the Act and the judicial pronouncements on the scope of the ‘AO’s powers computing the book profits, we do not find any reason to interfere with the impugned order passed by the ld
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CIT(A) on this issue and therefore uphold the same. Consequently, the grounds raised by Revenue are dismissed.” 17. Considering the decision of the coordinate bench of the Tribunal in the case of M/s. Cauvery Aqua Pvt. Ltd. (supra) and in the light of the fact that the CIT(A) has not gone into the merits of the case, we are of the considered view that the issue should go back to the CIT(Appeals) to examine the case afresh on merits and decide the adjustment to be made under section 115 JB in accordance with the provisions of the Act.
As regards the addition of Rs. 98,73,900/- made by the AO to the computation of the income u/s. 115JB of the Act for the AY 2008-09, it was submitted that the assessee had written off certain investments made in two companies viz., M/s. Bolore Software Private Ltd. of Rs. 18,67,300/- and M/s. Manikya Plastichem Pvt. Ltd. of Rs. 80,06,600/- aggregating to a sum of Rs. 98,73,900/- in the profit and loss account. The A.O. called upon the assessee as to whether the said amount written off was added back to the income u/s. 115JB of the Act. The assessee submitted that the aforesaid amounts were written off as M/s. Bolore Software Pvt. Ltd. had stopped the business operations and had later been struck off u/s 560 of the Companies Act by the Registrar of Companies in the year 2010 and M/s. Manikya Plastichem Pvt. Ltd. was under liquidation. These investments made by the assessee in the said companies were irretrievably lost and there was no chance of any recovery. This view was taken by the Board of
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Directors after considering the financial statements of the above two companies. The AO, however, took a view that the amount written off is nothing but a provision for diminution in the value of the assets and made an addition under Explanation (1) to section 115JB(2) of the Act. On further appeal the CIT(A) confirmed the addition without going into merits.
The ld AR submitted that there was no justification for the AO to hold that the write off of investments amounts to diminution in the value of assets. He also submitted that there can be a diminution in the value considering the investment made only if an asset has some positive value, but when the asset has NIL value, it is a case of total loss and not a mere diminution in value. The ld AR also submitted that the amounts written off is not a provision made but the actual write off. The learned AR drew our attention to the ledger accounts of the assessee (page 318 of paper book) were the entries are made as investments write off against these two companies.
The ld DR submitted that these are provisions made and not actual write off as one of the companies is still in liquidation.
On perusal of the materials on record it is clear that the investments have indeed been written off by the assessee in the books of accounts and it is not provision made. Therefore it will not fall within the Explanation to section 115JB(2). In view of the above and respectfully following the decision of the coordinate bench of the
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Tribunal in the case of M/s. Cauvery Aqua Pvt. Ltd. (supra), we delete the addition made by the AO. Thus, this appeal is partly allowed.
ITA No.2002/Bang/2016
For the assessment year 2011-12, the assessee challenged the legality of order passed u/s.153A r.w.s. 143(3). On merits the assessee raised grounds pertaining to the issue of addition made to book profits u/s.115JB of the Act and also raised ground pertaining to disallowance made u/s.14A r.w.r. 8D.
Before going into the merits of the case, the ld AR during the course of hearing contended that the additions made by the AO in the impugned year is not based on any incriminating materials found in the course of search and liable to be quashed based on the fact that that the year under consideration i.e. 2011-12 is unabated. In this regard the ld.AR brought to our notice that for assessment year 2011-12, there is no assessment pending and therefore the AO cannot make an assessment without any incriminating material. The below facts were brought to our attention by the ld. AR:-
a. The assessee filed the return of income for the assessment year 2011-12 on 25/09/2011. b. The time limit for issue of notice u/s.143(2) expired on 30/09/2012. c. Date of search is 18/12/2012.
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It was thus contended by ld. AR that since pursuant to the return of income filed by the assessee for the year under consideration, the acknowledgement had already been issued by the AO and since no further proceedings by issue of notice u/s. 143(2) within the time contemplated by law was issued, the assessments became final and be disturbed only if incriminating material is found in the course of search. He highlighted the fact that the additions made by the AO in the year under consideration have no relevance, whatsoever, to any material found in the course of search and since the additions in question have been made without any reference to any incriminating material found as a result of search, the additions made by the AO deserves to be deleted.
The ld DR relied on the order of the AO / CIT(A) in respect of the additions made
We notice that the coordinate bench of the Tribunal in the case of Sree Lakshmi Venkateshwara Minerals vs DCIT (ITA No. 1816 to 1818 / Bang/2017) vide order dated 30.09.2020 had dealt with a similar issue and held as under:–
“26. We have given a careful consideration to the rival submissions. The provisions of section 153C(1) reads as follows:- ‘153C. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,—
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(a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or (b) any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, a person other than the person referred to in section 153A, then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years referred to in sub-section (1) of section 153A :’
The provisions of Sec.153C of the Act, shown in bold letter and underlined as given above were substituted by the Finance (No.2) Act, 2014 w.e.f 1.10.2014 for the following words “and that Assessing Officer shall proceed against each of such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of Section 153A” 27. The Assessments in the present case relate to the period prior to the amendment referred to above. The aforesaid amendment has been held to be clarificatory in nature and therefore has to be held as applicable retrospectively from the inception of Sec.153C of the Act in the statue, by the ITAT Kolkata Bench in the case of Trishul Hi-Tech Industries Vs. DCIT IT(SS)A.Nos.84-86/Kol/2011 (AY 04-05, 05-06 & 06-07)
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order dated 24.9.2014. In the aforesaid decision the Hon’ble Kolkata Bench of ITAT, after considering the amended provisions of Sec.153C of the Act by the Finance Act, 2014, held that the provisions of Sec.153C of the Act as amended by Finance (No.2) Act, 2014 though is made applicable on and from 1.10.2014, is also relevant for earlier assessment years as it cures the infirmities of the previous legislation and also makes the provisions workable by avoiding absurd consequences. Accordingly, such provision is to be given retrospective operation and is also applicable to pending proceedings. In proceedings u/s.153C of the Act, the Assessee would not be a person who was subjected to a search u/s.132 of the Act and therefore proceedings u/s.153A of the Act could not be initiated against the Assessee. Even if no incriminating material whatsoever are found in the course of a search relating to some other person, in terms of Sec.153-C of the Act, prior to its amendment by the Finance Act, 2014 w.e.f. 1-10-2014, the AO has to proceed to issue notice u/s.153C of the Act for making an assessment of income for the periods referred to in Sec.153A of the Act. This would cause undue hardship. Take for instance in the course of search of a person a copy of sale deed of some other person is found which does not per se indicate any undisclosed income and based on which on adverse inference can be drawn, the AO, however, has to make an assessment in the case of the other person u/s.153C of the Act for the six assessment years referred to in Sec.153A of the Act, even if no incriminating material was found in the course of search. This created hardship and this was the reason why the provisions of Sec.153C of the Act were amended by the Finance Act, 2014. With the amendment by the Finance Act, 2014, the AO of the other person after receiving the material from the AO of the Searched person has to make an Assessment based on the material so received by him which has a bearing on the determination of the total income of the other person. This is clear from the amended provisions of the law which reads thus: “and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets
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seized or requisitioned have a bearing on the determination of the total income of such other person for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years referred to in sub- section (1) of section 153A :” The Kolkatta Bench of the ITAT in the case of Trishul Hi-Tech Industries (supra) dealt with the purpose behind the aforesaid amendment and as to why it should held to be retrospective. The condition precedent for assessing or reassessing income u/s.153C is that the AO has to be satisfied that the seized material in the course of search has a bearing on determination of the total income of the other person i.e., it should be incriminating in nature. 28. We are in respectful agreement with the view expressed by the ITAT Kolkata Bench in the case of Trishul Hi-Tech (supra). We may also add that it is settled rule of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. Ordinarily the Courts are required to gather the intention of the legislature from the overt language of the provision as to whether it has been made prospective or retrospective, and if retrospective, then from which date. What happens sometimes is that the substantive provision, as originally enacted or later amended, fails to clarify the intention of the legislature. In such a situation, if subsequently some amendment is carried out to clarify the real intent, such amendment happens to be retrospective from the date the earlier provision was made effective. Such clarificatory or explanatory amendment is declaratory. As the later amendment clarifies the real intent and declares the position as was originally intended, it takes retroactive effect from the date the original provision was made effective. Normally such clarificatory amendment is made retrospectively effective from the earlier date. It may so happen that sometimes the clarificatory or explanatory provision introduced later to depict the real intention of the legislature is not specifically made retrospective by the statute. Notwithstanding the fact that such amendment to the substantive
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provision has been given prospective effect, nonetheless the judicial or quasi-judicial authorities, on a challenge made to it, can justifiably hold such amendment to be retrospective. The justification behind giving retrospective effect to such amendment is to apply the real intention of the legislature from the date such provision was initially introduced. The intention of the legislature while introducing the provision is gathered, inter alia, from the Finance Bill, Memorandum Explaining the Provision of the Finance Bill. Any amendment to the substantive provision which is aimed at clarifying the existing position or removing unintended consequences to make the provision workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively. The above principles, if applied to the amendment to the provisions of Sec.153C of the Act by the Finance Act, 2014, can lead to only one conclusion that the said amendment is clarificatory and therefore should be held to be retrospective in operation. 29. A plain reading of the amended provisions of section 153C(1) of the Act, would show that the AO is required to arrive at a satisfaction that the seized assets, books of account or documents belongs to or relates to a person other than the person was subjected to search. For arriving at such a satisfaction, it is necessary for the AO to prima facie spell out the nature of seized documents and how it belongs to or relates to the assessee. Before the Hon’ble High Court of Karnataka in the case of IBC Knowledge Park, 385 ITR 346 [Kar] the issue for consideration and adjudication was whether the Tribunal was right in holding that it was not necessary to record a satisfaction to the effect that seized material shows undisclosed income. While deciding this issue, the High Court came to the conclusion at para 50 thereof, that “the detection of seized material leading to an inference of undisclosed income is a sine qua non for invocation of section 153C of the Act”. The Honble Court came to the above conclusion after considering the decision of the Hon’ble Apex Court in the cases of Manish Maheshwari Vs. ACIT (289 ITR 341) and CIT Vs. Calcutta Knitwears (2014) 362 ITR 673 and other judgments of the Hon’ble Apex Court and other Hon’ble High Courts and CBDT, Circular No.24/2015 dated 31.12.2015. The Hon’ble High Court also took the view that the AO is
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expected to spell out as to how the documents were incriminating in nature and prima facie represent undisclosed income. In this regard, we also find that in the order of assessment, the AO has not proceeded to make any assessment on the basis of material referred to in the satisfaction note. On the other hand, he has made additions which are not based on any seized material which pertains to assessee. Such a course is not permissible u/s. 153C of the Act as laid down by the Hon’ble High Court of Karnataka in the case of IBC Knowledge Park (supra). The decision of the Hon’ble Supreme Court in the case of Sinhgad Technical Education Society (supra) also supports the plea of the assessee that additions made cannot be sustained in the absence of any incriminating material. 30. In the present case, the assessment in all the three AYs 2008-09 to 2010-11 have already been completed prior to the date of search in the sense that the return filed by the Assessee was accepted and no assessment u/s.143(3) of the Act was framed within the time contemplated in law. The proceedings for these Assessment years were not pending and did not abated by virtue of the second proviso to Sec.153A(1) of the Act, which provides that any assessment proceedings for any of the six assessment years set out in Sec.153A (1) of the Act, which is pending as on the date of initiation of search u/s.132 of the Act, such assessment proceedings would abate and the AO will make one assessment after considering the original return of income as well as materials found in the course of search. The assessment proceedings which have been completed as on the date of search u/s.132 of the Act will however continue to remain valid. Thus the former proceedings are referred to as “abated assessment proceedings” and the latter proceedings are referred to as “unabated assessment proceedings”. 31. Therefore the scope of making assessment of total income u/s.153C of the Act in an unabated assessment proceedings is limited and can be only of assessing income that is not disclosed which is detected or which emanates from material found in the course of search of some other person and which relate to the Assessee. Since the impugned addition of disallowance of expenses are not based on any incriminating material found
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during the course of search, the additions are liable to be deleted. As far as the addition made on protective basis for AY 2008-09 to 2010-11 are concerned, the said addition was made not on the basis of any incriminating material found in the search of K.Mahesh Kumar which relate to the Assessee and therefore the said addition can also not be sustained as it is contrary to the provisions of Sec.153C of the Act. There is no basis for protectively assessing the income in the hands of the Assessee and substantively in the hands of K.Mahesh Kumar. There is no material to show that the income declared by K.Mahesh Kumar is either his income or that of the Assessee. From the fact that K.Mahesh Kumar was a Partner in the Assessee firm it cannot be concluded that the income declared by K.Mahesh Kumar in his hands was either his income or the income of the partnership firm in which he was a partner. The declaration of income by K.Mahesh Kumar is in his hands and not in the hands of the Assessee firm in his capacity as partner. Even going by the theory of the AO that there are differences in the credits in the bank account which have to be regarded as undisclosed business receipts, such differences in the credits in the bank account was not found as a result of search in the case of K.Mahesh Kumar. As we have already observed assessment u/s.153C of the Act has to be based on material found in the course of search which are relate to or belong to Assessee.” 27. In the present case, the time limit for issue of notice u/s.143(2) has expired on 30/09/2012 and the search happened on 18/12/2012. Hence on the date of search the proceedings for the assessment year 2011-12 would be ‘unabated proceedings’ and the additions made in the assessment would be restricted to materials found in the course of search which are incriminating. We notice that the various additions made by the AO are not related to any incriminating materials found in search. We, therefore, respectfully following the decision of the
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coordinate bench of the Tribunal hold that the additions made by the AO for the assessment year 2011-12 is to be deleted.
Since the additions are deleted on merits, we don’t deem it necessary to deal with the other grounds raised by the assessee in the appeals. Accordingly, the appeal of the assessee is allowed.
ITA No.2003/Bang/2016
In the appeal filed for the assessment year 2012-13, the assessee raised the similar grounds pertaining to additions made to book profits u/s.115JB and disallowance made u/s.14A r.w.r 8D. Though the assessee raised legal grounds pertaining to the validity of the assessment u/s.153A r.w.s. 143(3) the ld.AR did not press for the same during the course of assessment.
Ground no.4 pertains to addition to the book profit u/s.115JB of the Act as investments written off. During the year the assessee had written off a sum of Rs.4,55,80,758 in M/s Deccan Aviation Ltd. and Rs.7,28,000 in M/s.Guru Prasad Hotels Pvt Ltd., aggregating to Rs.4,63,08,758 in the profit and loss account. The AO treated this write off as an addition to the book profits computed u/s.115JB which was confirmed by the CIT(A).
The appeals on similar issue of computation of book profits u/s. 115JB, on identical facts, are allowed for AY 2008-09 in para 17 of
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this order. Considering the same, this ground raised by the assessee is allowed in favour of the assessee.
The other issue that remains for consideration in AY 2012-13 is regarding the disallowance made u/s. 14A of the Act with reference to the provisions of Rule 8D(2)(ii) & (iii) of the I.T. Rules (Ground 3).
The AO for the AY 2012-13 observed that the appellant had investment in shares of other companies of Rs.8,36,95,987/- at the beginning of the year and Rs.5,36,73,978/- at the end of the year and that dividend from the same was exempt from taxation. He thereupon proceeded to make the disallowance u/s.14A of the Act, by applying the provisions of Rule 8D(ii) & (iii) totaling to Rs.33,17,680.
The CIT(Appeals) directed the AO to recompute the disallowance u/s. Rule 8D(2)(ii) of the Rules considering other borrowing cost of Rs.2,41,61,144 for AY 2012-13, observing that it cannot be said to relate to any particular source of receipt or source of income.
Before us, the ld. AR firstly submitted that :-
a. The A.O. is not justified in making the impugned disallowance by invoking the provisions of Rule 8D of the I.T. Rules since as per the Rule, the AO has to arrive at the dissatisfaction with the claim of the appellant that there was no expenses incurred to earn exempt income, having regard
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to the accounts of the appellant before employing the computation mechanism in Rule 8D[2] of the I.T. Rules.
b. Without prejudice to the above it is submitted that the working made by the AO is grossly incorrect. The learned A.O. has clearly recorded that there are no direct expenses incurred by the appellant for earning exempt income and therefore there is no computation in terms of Rule 8D[2][i] of the I.T. Rules.
c. The computation is provided in Rule 8D[2][ii] of I.T. Rules is not correct in so far as the interest adopted by the AO which is the total amount debited in the profit and loss account as Finance Expenses. The AO has not analyzed the breakup of the finance expenses reproduced below from which it would become clear that only other borrowing cost is not relatable to any particular source of income / receipt. The rest of the finance expenses are directly related to the purpose of business on which Rule 8D(2)(ii) cannot be applied.
Interest on term loan – Rs.10,97,61,347 Interest on cash credit – Rs. 2,19,90,729 Interest – Loan against deposits – Rs, 6,06,66,133 Interest on vehicle loan – Rs. 13,28,055 – Rs. 2,41,61,144 Other borrowing cost
The ld. DR supported the order of the CIT(Appeals).
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We have heard the rival submissions and perused the material on record. It is settled law that disallowance u/s. 14A cannot exceed the amount of exempt income earned by the assessee. The co-ordinate Bench of this Tribunal in the case of GMR Enterprises (supra) has held as under:-
“3.4 We have heard rival submissions and perused the material on record. It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. In this context, the following judicial pronouncements support the stand of the assessee:- (i) Joint Investments Pvt. Ltd. v. CIT (59 Taxmann.com 295) – it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income. (ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRV- ITAT-MUM-123) – has held that disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. (iii) M/s.Pinnacle Brocom Pvt. Ltd. v. ACIT (ITA No.6247/M/2012) – has held that disallowance u/s 14A cannot exceed the exempt income. (iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) – held that the disallowance u/s 14A of the Act cannot exceed the exempt income. 3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T. Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187.
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3.6 However, in this case, the assessee had made disallowance of Rs.145,02,09,668 voluntarily while filing the return of income. In this context, it is important to refer to the judgment of the Hon’ble Madras High Court in the case of M/s. Marg Limited v. CIT in Tax Case Appeal Nos.41 to 43 & 220 of 2017 (judgment dated 30.09.2020). The Hon’ble Madras High Court followed the judgment of the Hon’ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41 (Kar.)]. In the case considered by the Hon’ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14A of the I.T. Act more than the dividend income earned and the Tribunal confirmed the disallowance made u/s 14A of the I.T.Act. However, the Hon’ble Madras High Court held that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year. The relevant finding of the Hon’ble Madras High Court reads as follow:- “20. Before parting, we may also note with reference to the Table of disallowance voluntarily made by the Assessee, which is part of the Paper Book before us for the four assessment years in question. In the Table quoted in the beginning of the order, shows that the Assessee himself computed and offered the disallowance beyond the exempted income in the particular year, namely AY 2009-10, as against the dividend income of Rs.41,042/- and the Assessee himself computed disallowance under Rule 8D of the Rules to the extent of Rs.2,38,575/-, which was increased to Rs.98,16,104/- by the Assessing Authority. Similarly, for AY 2012-13, against Nil dividend income, the Assessee himself computed disallowance at Rs.8,50,000/-, which was increased to Rs.2,61,96,790/-. 21. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank(2018) 95 Taxman.com 41 (Kar.) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee
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nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income Tax Rules, 1962.” (underlining supplied) 3.7 In view of the above judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT (supra), it is clear that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is directed to restrict the disallowance u/s 14A of the I.T.Act to Rs.27,37,47,187. 3.8 In the result, ground No.II raised by the assessee is allowed.”
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We also notice that coordinate bench of the Tribunal in assessee’s own case (ITA No.1338/Bang/2012 dated 28.08.2014) had directed the AO to examine and include only interest that is not attributable to any particular income / receipt for the purpose of arriving at the disallowance u/s.8D(2)(ii) of the I.T. Rules. Respectfully following the decision of the coordinate Bench of the Tribunal in GMR Enterprises (supra) and assessee’s own case (supra), we direct the AO to recompute the interest and the disallowance should be restricted to the amount of exempt income earned by the assessee. We direct accordingly.
The ground relating to interest u/s. 234A, 234B, 234C in all the years is consequential in nature.
In the result, the appeals of the assessee are allowed.
Pronounced in the open court on this 13th day of June, 2022.
Sd/- Sd/-
( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER
Bangalore, Dated, the 13th June, 2022. /Desai S Murthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.