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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri A. T. Varkey, Hon’ble & Dr. M. L. Meena, Hon’ble]
1 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 eआयकर अपील�य अधीकरण, �यायपीठ –“A” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri A. T. Varkey, Hon’ble Judicial Member and Dr. M. L. Meena, Hon’ble Accountant Member] I.T.A. No. 1390/Kol/2019 Assessment Year: 2013-14
Assistant Commissioner of Income- Vs. M/s. India Power Corporation Ltd. tax, circle-2(1), Kolkata. (PAN: AABCD0340G) Appellant Respondent & C.O. No. 20/Kol/2020 In I.T.A. No. 1390/Kol/2019 Assessment Year: 2013-14
M/s. India Power Corporation Ltd. Vs. Assistant Commissioner of Income- (PAN: AABCD0340G) tax, circle-2(1), Kolkata. Cross Objector Respondent Date of Hearing (Virtual) 04.08.2021 Date of Pronouncement 11.08.2021 For the Appellant/Revenue Shri Praveen Kishore, CIT For the Assessee/Cross Shri Soumen Adak, AR Objector ORDER Per Bench:
This appeal preferred by the revenue and the cross objection preferred by the assessee are against the order of Ld. CIT(A)-5, Kolkata dated 06-03-2019 for assessment years 2013- 14.
The appeal of revenue is time barred by two days and revenue has filed petition for condoning the delay. After perusal of the petition and after hearing both the sides, we condone the delay and admit the appeal for hearing.
Ground nos. 1 and 2 of the appeal of the revenue read as under:
“1. The Ld. CIT(A) has erred in facts and circumstances of the case and in deleting the capitalization of interest expenses of Rs.6,63,00,000/- on the basis of submission of the assessee without going into the actual facts and materials of the case regarding the proportionate disallowance made by the AO.
2 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 2. The CIT(A) has erred in deleting the addition of Rs.6,63,00,000/- on account of interest expenses without going into the facts that as per Auditor’s note capital jobs were capitalized for:
(i) 12 MW Thermal Power Plant on commissioning thereof on 25.09.2012
(ii) J. K. Nagar sub-station on completion of construction and commissioning at the close of the year.
The facts as noted by the AO to disallow the claim of the assessee are as under:
“Interest required to be capitalized
From the auditor’s note it appears that during the year, following capital jobs were capitalized:
(i) 12 MW Thermal Power Plant on commissioning thereof on 25.09.2012
(ii) J. K. Nagar sub-station on completion of construction and commissioning at the close of the year.
From the above view it appears that the entire interest was not utilized in full for the business purpose of the assessee of the year under consideration. However, the assessee company had not provided any break up of the proportion to be capitalized. From the letter dated 08.02.2016 submitted by the A/R of the assessee, it is stated that all the borrowed funds have been specifically utilized for acquisition of capital assets and/or meeting the working capital requirements in the following manner:
Sl Particulars Amount (Lakh) Remarks 1 Cash Credit from bank 3188 Used for working capital requirements 2 Term Loan 8541 Financing project envisaging setting up of a 12MW Thermal Plant 3 Non Convertible 12000 Setting up new generation and up gradation of distribution facilities, refinancing of existing debt, working capital and general corporate purpose. Total 23729
From the above facts, it is evident that the term loan was entire utilized for capital purpose therefore, related interest is also required to be capitalized proportionately in the following manner: a) Interest claimed as per P/L account Rs. 1842 Lakhs b) Loan taken by the assessee (to be capitalized) Rs.23729 Lakhs c) Total term loan (3500+5000+42) Rs. 8542 Lakhs therefore, amount determined for to be capitalized as below: 1842 x 8541 23729 = 663 Lakhs In view of the above discussion on amount of Rs. 663 Lakhs is disallowed and added to the total income of the assessee.”
3 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 5. Aggrieved by the aforesaid action of the AO, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to allow the same as under: “I have considered the, submission of the appellant and perused the relevant assessment records. The AO in assessment order had disallowed interest amounting to Rs.6,63,00,000/- on the grounds that it should be capitalized. It appears that the addition has been made on the basis of wrong appreciation of facts. The appellant had taken loan for setting of 12MW Thermal Power Plant and for a substation at J K Nagar from IDBI Bank and South Indian Bank. The interest payable prior to the projects being commissioned were capitalized and the remaining interest pertaining to the period after the asset have been put to use were claimed as deduction as per the provision of section 36(1)(iii) of the I. T. Act, 1961. The A/R of the appellant further submitted that the AO had disallowed part of the interest on proportionate basis which is not as per law. There is merit in the claims of the appellant. There is no dispute regarding the fact that the appellant had incurred interest expenditure. However, the dispute is whether the amount should be capitalized or allowed as deduction u/s 36(1)(iii) of the I T Act, 1961. The A/R of the appellant in a lengthy submission had submitted that part of the interest payment have been capitalized and the balance claimed as expenditure u/s 36(1 (Vi) as provided in the Act. No fault could be found with this reasoning. Moreover, the disallowance of interest had been made on ad hoc basis on the basis of an unscientific calculation which has no legal basis. The disallowance of Rs.6,63,00,000/- is deleted. This ground of appeal succeeds and is therefore allowed.”
Aggrieved by the aforesaid action of the Ld. CIT(A) the revenue is in appeal before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee has taken borrowed funds of Rs.35 cr., Rs. 50 Lakhs and Rs. 41 Lakhs from IDBI Bank, South Indian Bank and Axis Bank respectively totaling Rs.85.41 cr. As per the auditor’s report the assessee has commissioned its Thermal Power Plant on 25.09.2012, therefore, it capitalized the expenditure incurred on the interest outgoing from the borrowed fund for capital projects till that date (25.09.2012) i.e. the assessee had capitalized interest expenditure of Rs.1,26,34,246/- to IDBI Bank and Rs.1,65,61,645/- to South Indian Bank totaling Rs.2,91,95,891/- since it was the interest expenditure incurred till the date of commissioning of Thermal Project (Commencement of Business). After commissioning from 25.09.2012 till 31.03.2013 interest expenditure to the tune of Rs.2,87,49,721/- was claimed as revenue expenditure. The AO has disallowed the claim and has made some calculation which is not understandable to neither the Ld. CIT(A) nor by this Bench which fact has been noted by the Ld. CIT(A) by stating that the AO has made the ad hoc disallowance on the basis of an ‘unscientific calculation’. Anyway, based on the aforesaid facts discussed we are of the view that the assessee has rightly capitalized the interest expenditure to the tune of Rs.2,91,95,891/- till the date of commissioning of Thermal Project in terms of Explanation 8 to Section 43(1) of the Income-tax Act, 1961
4 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 (hereinafter referred to as the “Act”). The interest expenses till date the asset is put to use has to be capitalized to the cost of asset and after commencement of power production the interest (i.e. post the assets are put to use) the expenditure of Rs.2,87,49,721/- was rightly debited to the P&L Account and claimed as revenue expenditure and therefore no fault can be attributed to the action of Ld. CIT(A). The only objection pointed out by the Ld. CITDR was that the Ld. CIT(A) has believed the facts noted by the Auditor’s Report and has taken the date of commissioning of Thermal Project as on 25.09.2012 without making any enquiry or calling remand report from AO. However, we do not agree with the contention of Ld. CITDR for the simple reason that we have reproduced, the AO’s action on this issue and perusal of the same would reveal that the AO has noted the date of commissioning of Thermal Project as on 25.09.2012 from the same source i.e. Auditor’s Report and has not disputed this fact and in fact has accepted it. So when the AO in the assessment order has accepted the date of commissioning of thermal project as on 25.09.2012, the Ld. CIT(A) has accepted the said fact and proceeded to examine the claim of the assessee in respect of capitalization of interest expenditure till the date of commissioning of Thermal Project which was legally correct. Therefore, we find that the Ld. CIT(A) has allowed the claim of the assessee on the well settled principle of law on this subject. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and confirm the same. These grounds of appeal of revenue are dismissed.
Ground no. 3 of revenue appeal reads as under: “3. In the facts and circumstances of the case, on the issue of addition of debenture redemption reserve in computing Book profit u/s. 115JB the order of the Ld. CIT(A) is erroneous. As per explanation 1 of sec. 115JB, the amount carried to any reserves, by whatever name called, is to be included in computing Book Profit. As the debenture redemption reserve is a reserve, the same should be included in the Book profit.”
Brief facts of the case are that the AO has disallowed Rs.3.50 cr. while computing income u/s. 115JB (MAT) of the Act. According to the AO, the Debenture Redemption Reserve (hereinafter referred to as “DRR”) was carried to reserve so it should be added back under Explanation 1(b) to sec. 115JB of the Act and thus added back this amount. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who gave relief to the assessee by observing as under:
5 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 “I have considered the submission of the appellant and perused the relevant assessment records. There is merit in the submission of the appellant. The Jurisdictional ITAT in the case of SREI Equipment Finance Pvt Ltd vs DCIT in I.T.A No. 424/KoI/2011 has held that Debenture Redemption Reserve is a provision that had been credited for meeting a specific liability arising at the time of redemption of debenture. This amount has been set aside for meeting a certain liability and therefore cannot be added back for computing MAT as per Explanation 1, sub section (c) of section 115JB(2). The relevant part of the judgement is reproduced as follows: "The third ground relate to the sustenance of addition of Rs. 16,30,00,000/- while computing the book profit u/s l15JB being the amount transferred to Debenture Redemption Reserve. The facts relating to this addition are that the assessing officer noted that the assessee has made a provision for Debenture Redemption Reserve for Rs. 16,30,00,000/- The assessing officer added the same for computing the book profit u/s 115JB of the Act. When the matter went before the CIT(A), the CIT(A) confirmed the disallowance relying on the decision of “D” Bench of the Kolkata Bench of the tribunal in ITA No.1317/Kol/2006 dated 11.12.2009 for assessment year 2009-10. We heard the rival submission and carefully considered the same we noted that the assessee has created this provision for meeting a specific liability arising at the time of Redemption of Debentures. The amount so transferred therefore cannot be regarded to be the reserve or provision made for meeting the liabilities other than ascertains liabilities. Our aforesaid view is duly supported by the decision of Mumbai High Court in the case of CIT vs Raymond Ltd, 21 Taxmann.com (Mum). No contrary decision taken by any other High Court was brought to our knowledge by the Ld. D.R. The decision of Rayon Corporation vs CIT, 247 ITR 764 (SC) rather support the case of the assessee that it is a provision for a known liability. We therefore, set aside the order of the CIT(A) on this issue and allow the ground no.3 taken by the assessee." Therefore, following the decisions of Jurisdictional ITAT in the case of SREI Equipment Finance Pvt. Ltd. vs. DCIT (supra), provisions for Debenture Redemption Reserve is not to be added back for computation of MAT. This ground of appeal succeeds and is therefore allowed.”
Aggrieved by the aforesaid decision of the Ld. CIT(A), the revenue is in appeal before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that an amount of Rs.3,50,00,000/- was transferred by the assessee to Debenture Redemption Reserve (DRR) which was required to be paid at the time of redemption of the debentures and the assessee claimed exclusion of it while computing book profit u/s 115JB of the Act. However the AO was of the opinion that the amount carried to any ‘reserve’ need to be added as per Explanation 1(b) of Section 115JB of the Act and added it while computing the book profit. On appeal the Ld. CIT(A) has allowed the claim of assessee and excluded it from book profit. When we examine this issue we note that the Hon’ble Supreme Court in the case of National Rayon Corporation Vs. CIT 227 ITR 164 (SC) has held that “ the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve”. It is common knowledge that by issuing debentures a company takes a loan which it has to repay; and the loan is taken against the security of its
6 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 assets. Even though the loan need not be repaid in the year of account, the obligation to repay exists, therefore, any money that is set apart to meet a known liability is shown in the Balance Sheet under the head liability. Since in the present case the amount of Rs.3.50 cr. was transferred to DRR which was compulsory u/s 117C of Companies Act, 1956 which reads as under: “117C. Liability of company to create security and debenture redemption reserve- (1) Where a company issues debentures after the commencement of this Act, it shall create of debenture redemption reserve far the redemption of such debentures, to which adequate amounts shall be credited, from out of its profits every year until such debentures are redeemed, (2) The amounts credited to the debentures redemption reserve shall not be utilized by the company except for the purposes aforesaid.” 4.2. From the perusal of above, it is clear that if a company issues debentures, it is statutorily required to create a Debenture Redemption Reserve for the purpose of redemption of debentures. Therefore, transfer to Debenture Redemption reserve is statutory in nature.”
And it is noted that the amount transferred to DRR is not in excess of the amount to be required to paid at the time of repayment of the debentures, so it cannot be treated as reserve for the purpose of Schedule VI to the Companies Act, 1956; and as discussed the amount set apart to meet a known liability as such the DRR cannot be considered as ‘reserve’ to attract explanation 1(b) of section 115JB of the Act. Moreover, we note that the Ld. CIT(A) has allowed the claim by referring to the decision of this Tribunal in SREI Equipment Finance Ltd. Vs. DCIT, ITA No. 424/Kol/2011 wherein the Tribunal has relied on the ratio of the decision laid by the Hon’ble Bombay High court in the case of CIT Vs. Raymond Ltd. (2012) 71 DTR 265 (Bom.) wherein it has been held that mere fact that the debenture redemption reserve is labeled as a reserve will not render it as a reserve and an amount which is retained by way of providing a known liability is not a reserve within the meaning of explanation (b) of section 115JA of the Act. Therefore, in view of the discussion (supra) we do not find any infirmity in the order passed by the Ld. CIT(A) and, therefore, we confirm the same and dismiss this ground of appeal of revenue.
Coming to the cross objection of the assessee is concerned the first ground of cross objection of the assessee is against the action of the Ld. CIT(A) in confirming the disallowance of claim of education cess amounting to Rs.27,40,223/- in computing total
7 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 income under normal provisions of the Act. The Ld. CIT(A) had decided this issue as under: “I have considered the submission of the appellant and perused the relevant assessment records. The A/R of the appellant has claimed deduction of Rs.27,40,253/- on account of Education Cess. The AO in the assessment order had disallowed the claim. The A/R of the appellant had referred to the decision of the jurisdictional ITAT in the case of M/s. ITC Ltd. vs. DCIT ITA No. 685/Kol/2014 in support of his claim. The relevant portion of the order is reproduced as follows: “the assessee’s additional last/substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to RS.423618317.0 u/s 37 of the Act. We note that Hon'ble Rajasthan High Court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd vs DCIT decided on 31.07.2018 takes into account CBDT Circulated' dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40(a)(ii) applied only on taxes such than earn cess(es). We therefore reject the revenue's contentions supporting the impugned disallowance. The assessee's instant substantive ground is accepted. The AO is direction to verify all the relevant facts and allow the impugned cess(es) as deduction u/s.37 of the Act. The assessee's appeal I.T.A. No. 685/Kol/2014 is partly accepted in above terms." The Cess is specially levy imposed by the Government for certain specific purposes. The payment of cess is directly linked with Income Tax Payable and imposition is sanctioned by Parliament. Under no circumstances, cess can be considered business expenditure and is more of a contribution for national development. In this regard, referenced is made to Circular 3 of 2018 issued by CBDT which lays down the monetary limits for filing of second appeal to the ITAT. The Circular reads as follows: "4. For this purpose, tax effect means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (hereinafter referred to as 'disputed issues'). Further, 'tax effect' shall be tax including applicable surcharge and cess. However, the tax will not include any interest thereon, except where chargeability of interest itself is in dispute. In case the chargeability of interest is the issue under dispute, the amount of interest shall be the tax effect. In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions. In .case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in 'he order to be appealed against." The CBDT Circular is clear that the tax would include applicable surcharge and cess. This Circular would override the CBDT Circular 91/58/66-ITJ dated 18.05.1967 which has been relied upon by the appellant. Therefore, it has to be held that cess and surcharge are integral to tax payable and not deduction on account of payment of cess and surcharge can be allowed u/s 37 of the I TAct, 1961. After careful consideration of the submission of the appellant, perusal of assessment records and relevant CBDT's Circular, the disallowance of Rs.27,40,253/- claimed on account of Education Cess is confirmed. This ground of appeal. fails and is therefore, not allowed.
Aggrieved the assessee is in appeal before us.
We have heard rival submissions and gone through the facts and circumstances of the case. At the outset, the Ld. AR brought to our notice that the issue is no longer res integra in the light of the decision of this Tribunal in the case of SREI Infrastructure Finance Ltd. Vs. Addl. CIT, Range-9(2), Delhi in ITA No. 1318/Del/2012, ITA No. 1302/Del/2012, ITA No.
8 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 1821/Kol/2016 and ITA No. 2003/Kol/2016 dated 31.12.20019 wherein this Tribunal while adjudicating a similar issue has held as under: “25. Concise and summarized ground No.6 is reproduced below for ready reference:
(6). Ld CIT(A) erred in not treating Education Cess as an allowable expenditure under section 37(1) of the Act. (Additional ground raised by assessee in ITA No.1318/Del/2012, for A.Y.2008-09, and Ground No.3 raised by the assessee in ITA No.1821/Kol/16 for A.Y.2011- 12). [ Hon`ble High Court Question No. (v)].
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that this Tribunal in its earlier order dated 27-02-2019, had admitted the additional ground and decided the issue on merits. The Tribunal had disallowed Education Cess on the basis of following contentions:-
a) Education cess is an additional surcharge and hence forms of income tax. b)Decision of Kalimati Investment Company Ltd. -vs.- ITO (ITA No.2706,4508/M/2010,2552,2553/M/2011) and Sesa Goa Ltd. -vs.- JCIT (ITA No. 72/PNJ/2012) are squarely applicable.
Aggrieved by the order of this Tribunal, the assessee filed appeal before the Hon’ble High Court which remanded back the issue to this Tribunal for fresh consideration. Accordingly, the matter is before us for renewed deliberation. The brief facts qua the issue is that during the relevant previous year, the assessee has debited education cess amounting to Rs. 22,36,508/- to the profit and loss account. Ld. AR of the assessee submitted that education cess is not tax and hence not disallowable u/s 40(a)(ii) of the Act. He invited our attention towards the CBDT Circular No. 91/58/66 - ITJ(19) dated 18-05-1967, wherein it has been clarified that the effect of omission of the word ‘cess’ from Sec. 40(a)(ii) of the Act is that only taxes paid are to be disallowed and not cess. Relevant extract of circular is as under:- “Recently a case has come to the notice of the Board where the ITO has disallowed the ‘cess' paid by the assessee on the ground that there has been no material change in the provisions of s. 10(4) of the old Act and s. 40(a)(ii) of the new Act.
The view of the ITO is not correct. Clause 40(a) (ii) of the IT Bill, 1961 as introduced in the Parliament stood as under:
"(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains". When the matter came up before the Select Committee, it was decided to omit the word ‘cess' from the clause. The effect of the omission of the word ‘cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided ” 27. The Ld. AR also relied on the judgment of Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. JCIT (ITA No. 52/2018) which after taking into account aforementioned CBDT circular held that Sec. 40(a)(ii) applies only to taxes and not to education cess. Relevant extract of the decision is reproduced for ease of reference:- “13. On the third issue in appeal no. 52/2018, in view of the circular of CBDT where word "Cess" is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee
9 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14
We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below: (i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) –
“The assessee’s additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317 u/s 37 of the Act. We note that hon’ble Rajasthan high court’s decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue’s contentions supporting the impugned disallowance. The assessee’s instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee’s appeal I.T.A. No. 685/Ko/2014 is partly accepted in above terms. (ii) Peerless General Finance & Investment Co. Ltd. -vs. - DCIT (ITA No. 937/Kol/2018) –
“37. Additional ground raised by the assessee in ITA No.937/Kol/2018 for A.Y.201011 reads as under:“That on the facts and in the circumstances of the case, the authorities below erred in not allowing deduction U/s 37(1) of the Income Tax Act,1961, on account of Education Cesses paid by the assessee while arriving at the assessed income for the year under appeal. ”
After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present ground of appeal is no longer res integra. The education cess being not ‘income tax’ is allowable as deduction under section 37 (1) of the Act. For this, we rely on the judgment of the coordinate Bench of ITAT Kolkata in the case of ITC Limited, ITA No.685/Kol/2014, order dated 27.11.2018, wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the assessing officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. ”
(iii) Tega Industries -vs.- ACIT (ITA no. 404/Kol/2017)- “We further to notice that assessee has raised an identical additional ground in both cases seeking to claim education cess on provision for Income-tax amount of Rs. 71,65,049/- and Rs. 77,76,699 (assessment year wise); respectively as allowable in computing total income other than MAT u/s. 115JB of the Act. Hon’ble Apex Court’s land mark decision National Thermal Power Corporation Ltd (NTPC) V/s. CIT (1998) 229 ITR 383 (SC) as considered by this tribunal’s Special Bench order M/s. All Cargo Global Logistics Ltd V/s. DCIT (12) 137 1TD 26 (Mum.) settles the law that we an very well entertain such a legal question in order to determine the correct tax liability when all the relevant facts form part of records. We thus allow assessee’s additional ground to be raised.
Coming to merits of the hon’ble Rajasthan high court’s decision in Chambal Fertilisers & Chemicals Limited V/s. JCIT(D.B Income Tax Appeal No. 52/2018, dated 31-07-2018 taking note of CBDT’s Circular No. 91/58/66 dated 18-05-1965 as well as co-ordinate bench’s order in ITC Limited V/s. ACIT( ITA No. 685/Kol/2014 dated 27- 11-2018 hold that such a claim of education cess is very much allowable in computing total income under the provisions of the Act.”
The Ld Departmental Representative relied on the earlier decision of ITAT dated 27- 02-2019, wherein this Tribunal had disallowed the claim on the basis of two contentions: (i) Education cess is an additional surcharge and hence forms of income tax and (ii) Decision of Kalimati Investment Company Ltd. -vs.- ITO (ITA No.2706,4508/M/2010,2552,2553/M/2011) and Sesa Goa Ltd. -vs.- JCIT (ITA No. 72/PNJ/2012) squarely applicable against the assessee.
We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education
10 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. These grounds raised by the assessee are allowed.”
From a perusal of the aforesaid order of the co-ordinate bench of this Tribunal, we note that the Tribunal has allowed the deduction of the education cess by relying on the decision of the Hon’ble Rajasthan High court in the case of Chamble Fertilizers & Chemicals Ltd. (supra) wherein it was held that Section 40(a)(ii) applies only to taxes and not to education cess and while deciding so the Hon’ble High Court has taken note of the decision of the Hon’ble Apex Court wherein it was held that cess is not tax. Following the order of High Court, this Tribunal in the case of M/s. ITC Ltd. Vs. ACIT (ITA No.685/Kol/2014), Peerless General Finance & Investment Co. Ltd. Vs. DCIT (ITA No.937/Kol/2018) and Tega Industries Vs. ACIT (ITA No. 1047/Kol/2017 has decided this issue in favour of the assessee. Thus, we are of the opinion that the issue raised by the assessee is no longer res integra. The education cess is not “income tax,” so is an allowable deduction u/s. 37(1) of the Act. Therefore, we allow this ground of appeal of the assessee and direct the AO to allow the claim of the deduction of the education cess while computing the total income of the assessee.
The next ground of assessee is against the action of the Ld. CIT(A) in confirming the action of AO in non-exclusion of profit on sale of fixed assets and investments (net) amounting to Rs.1,73,66,796/- in computation of Book Profits u/s. 115JB of the Act.
Brief facts are that the assessee has earned profit on sale of fixed assets and investments (net of Rs.1,73,66,796/-) which was excluded in the book profit u/s. 115JB of the Act. The AO disallowed the same by taking note that sec. 115JB is applicable on capital profits. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the action of the AO by relying on the decision of Veekay Lal Investment Co. Pvt. Ltd. reported in 249 ITR 597 and has held as under: “I have considered the submission of the appellant and perused the relevant assessment records. There is a cleavage of opinion as whether profits on transfer of assets should be considered while computing MAT. The A/R of the appellant had cited a number of judicial decisions which have held that the profits on sale of fixed assets credited to P/L account need to be excluded while computing the books profit u/s 115JB of the Act. However, there are many other judicial decisions which have held otherwise. In this regard, reference is made to the decision of the Hon'ble Bombay High Court in the case of Veekay Lai Investment CO. Pvt Ltd reported in 24911TR 597 which held as follows :
11 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 "We find merit in this appeal. According to section 115(1), in the case of an assessee being a company if the total income is less than 30% of its book profits then the total income of such company shall be deemed to be an amount equal to 30% of such book profit and such income shall be chargeable to tax. That, the assessee has to first compute the total income in accordance with the Income Tax Act, 1961 and if the total income is less than 30% of the book profit then the assessee has to prepare a profit and loss account for the previous year in accordance with parts II and III of Schedule VI of the Companies Act. In other words, a plain reading of section 115J shows that if the assessee is a company and its total income under the Income Tax Act, 1961 is less than 30% of its book profits then fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 30%" of such book profits. Hence, in such a case, the total income of the assessee is first required to be computed under the Income Tax Act, 1961 and if the total income so computed is less than 30% of the book profits then the profit and loss account shall have to be prepared in accordance with Part-Il and Part-Ill of Schedule-VI of the Companies Act. The important thing to be noted is that while calculating the total income under the Income Tax Act, 1961, the assessee is required to take into account income by way of capital gains under section 45 of the Income Tax Act, 1961. In the circumstances, one fails to understand as to how in computing the book profits under the Companies Act. The assessee company cannot consider capital gains for the purposes of computing book profits under section 115J of the Act. Further, under clause 2 of Part II of Schedule VI to the Companies Act where a company receives the amount on account of surrender of lease hold rights, the company is bound to disclose in the profit and loss account the said amount as non recurring transaction or a transaction of an exceptional nature irrespective of its nature, i.e. whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve (see Companies Act by A. Ramaiya, page 1669, Fourteenth Edition. Such receipts are also covered by clause 2(b) of Part II of Schedule VI to the Companies Act which, inter alia states that the profit and loss account shall disclose every material feature, including credits or receipts and debits or expenses in respect of non recurring transactions or transactions of an exception nature. Lastly, even under clause 3(xli)(b) profits or losses in respect of transactions not usually undertaken by the 2dmpany or undertaken in circumstances of exceptional or non recurring nature shows clearly that capital gains should be included for the purpose of computing book profits. That capital gains would certainly be one of the various items whose information is required to be given to the shareholders under the said clause 3(xii)(b). So also, the disclosure is required to be made in respect of investment in the capital of a partnership firm if the company is a partner on the date of the balance sheet (see page 165) of the Companies Act by A. Samaiya, fourteenth edition). Similarly, profits or losses on such investments are also required to be disclosed (see clause 3(xii)(b) of Part-Il of Schedule VI to the Companies Act. In the circumstances, the question is answered in the affirmative, i.e. in favour of the Department and against the assesses.” Similar view was held by the Delhi ITA T in the case of Growth Avenue Securities Pvt. Ltd. Vs DCIT Appeal Number: ITA No. 3912/Del/2005." Therefore, on conspectus of the various judicial decisions, it has to be held that profits on transfer of assets should be considered while considering MAT. Therefore, there is no interference in computation of MAT made by the AO in which he had added profit on sale of asset and investment amounting to Rs.1,73,66,796/-. This ground of appeal fails and is therefore not allowed.”
Aggrieved by the aforesaid decision of the Ld. CIT(A), the assessee has preferred this ground of cross objection.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the Ld. CIT(A) has confirmed the action of the AO by relying on the decision of the Hon’ble Bombay High court in Veekay Lal Investment Co. Pvt. Ltd. (supra). The Ld. CIT(A) held that profits on transfer of assets should be considered while considering MAT and, therefore, he upheld the action of the AO wherein he had added profit on sale of assets and investments amounting to Rs.1,73,66,796/-. In this context we
12 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 also note that the Special bench of Hyderabad ITAT in the case of Rain Commodities ltd. Vs. DCIT (2010) 131 TTJ 514 has taken a similar view in favour of the revenue and held as under: “Considering the totality of the facts and circumstances of the case as discussed above and in view of the above reasons, we upheld the order of learned CIT in holding that the long-term capital gain is to be included in the net profit prepared under the Companies Act and the same is not deductible from the net profit for the purpose of computing book profit under s. 115JB of the Act. We further hold that merely because the long-term capital gain is exempt under s. 47(iv) of the Act under the normal provision of the Act, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing book profit under s. 115JB of the Act when the Explanation to s. 115JB does not provide for any deduction in terms of s. 47(iv) of the Act. In other words, we hold that s. 47(iv) of the Act has no application in the computation of book profit under s. 115JB of the Act. Thus from a reading of the s. 115JB as well as the analyses of various High Courts and Supreme Court decisions, the inescapable conclusion is that the book profits have to be calculated on the net profits computed as per Parts II and III of Sch. VI to the Companies Act, 1956 and as adjusted by the amounts mentioned in the Explanation. No further rebates or deductions after such adjustments, notwithstanding the fact whether any income is taxable or not under the normal provisions of the IT Act. Computation of income under the normal provisions and the book profits are two parallel computations. While normally followed method of accounting in the books may also be taken for the purpose of computing income under the IT Act, the actual computation of book profits will not affect or be governed by the computation of income under the normal provisions of the IT Act. In fact only because the Government felt that companies availing of various deductions permitted under the IT Act showed a low income for the purpose of income-tax but was able to show healthy profits as per books on the basis of which dividends were distributed and to tax these type of companies that tax on book profits were introduced. By again importing deductions allowed under the normal provisions of income-tax into computation of book profits, we will be negating the very purpose for which these sections were introduced. To sum up, we hold that in the absence of any provision for exclusion of capital gains exempted in the computation of book profit under the provisions contained in Explanation to s. 115JB of the Act, the assessee is not entitled to the exclusion thereof as claimed.”
In the light of the aforesaid decision of the Special bench of this Tribunal in Rain Commodities Ltd. (supra) this issue is no longer res-integra and therefore we are of the opinion that the Ld. CIT(A) rightly upheld the action of AO on this issue, which does not require any interference from our part, so we confirm his action and dismiss this ground of assessee.
In the result, the appeal of revenue stands dismissed and the Cross Objection of assessee are partly allowed. Order is pronounced in the open court on 11th August, 2021.
Sd/- Sd/- (Dr. M. L. Meena) (A. T. Varkey) Accountant Member Judicial Member Dated: 11th August, 2021 JD, Sr. PS
13 ITA No. 1390/Kol/2019 & CO No. 20/Kol/2020 M/s. India Power Corporation Ltd., AY: 2013-14 Copy of the order forwarded to:
Appellant- ACIT, circle-2(1), Kolkata. 2. Respondent – M/s. India Power Corporation Ltd., Block EP, Plot No. X-1, 2 and 3, Sector V, Salt lake City, Kolkata 7090 091. 3. The CIT(A)- 5, Kolkata 4. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail) True Copy By Order Senior Private Secretary/DDO ITAT, Kolkata Benches, Kolkata