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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned cross appeals – one by the assessee and the other by the Revenue are directed against the order of the Commissioner of 2 M/s VR Constructions & 5270/Mum/2017 Income Tax (Appeals)-18, Mumbai (in short ‘CIT(A)’) and arise out of the assessment order passed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). As a common order has been passed by the Ld. CIT(A), we are proceeding to dispose off these appeals through a common order, for the sake of convenience.
Assessment Year: 2012-13 2. The ground of appeal filed by the assessee reads as under:
That on the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in confirming addition of Rs.9,50,00,000/- made by the AO to book profit on account of debt redemption reserve which is created for timely payment of debt.
Briefly stated, the facts are that the assessee-company has debited a sum of Rs.9,50,00,000/- to the P&L account being “Debt Redemption” under the head “Other Expenses”. It worked out a net profit of Rs.30,12,848/- after considering the above expense. While working out income for tax purpose, the assessee has added the “Provision for Debt Redemption” of Rs.9,50,00,000/- and enhanced the business profit, thereby claiming deduction u/s 80IB(10) of the Act. The Assessing Officer (AO) while going through Form No. 29B along with Annexure-A observed that the assessee has not considered the above amount of Rs.9,50,00,000/- for computation of income u/s 115JB of the Act. As per the AO, the method for working of 115JB clearly states that “amount of net profit as shown in the profit and loss account should be increased by the amounts referred to in clause (a) to (i) of Explanation 1 of sub-
3 M/s VR Constructions & 5270/Mum/2017 section (2) of section 115 of the Act”. The AO held that the “Provision for Debt Redemption” claimed by the assessee clearly falls under the purview of clause (b) and (c) of Explanation 1 of sub-section (2) of section 115 of the Act
“…(b) the amount carried to any reserve, by whatever name called other than a reserve specified under section 33AC or (c) …the amount or amounts set-aside to provisions made for meeting liabilities, other than ascertained liabilities ; or”
During the course of hearing, the assessee relied on the decision in IOL Ltd. v. DCIT 81 TTJ 525 (Kol), National Rayon Corp Ltd. v. CIT 142 CTR 2020 (SC), CIT v. Raymond Limited [21 taxmann.com 60]. However, the AO was not convinced with the explanation given by the assessee for the reason that the assessee itself has added in computation of income the “Provision for Debt Redemption” while claiming deduction u/s 80IB of the Act. Further, as per clause (b) to Explanation 1, the book profit prepared in accordance with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount created by any reserve by whatever name called, other than a reserve specified u/s 33AC of the Act. Relying on the decision in SREI Infrastructure Finance Limited v. Addl. CIT (IT Appeal No. 371 & 372 of 2012) dated 13.02.2015, the AO held that “Debt Redemption Reserve” is liable for tax u/s 115JB of the Act.
4. In appeal, the Ld. CIT(A) observed that :
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“The liability is defined as per Sec II of the Companies Act, 2013 with reference to term current liabilities. Reserve falls on the other side i.e. associated with equity. Transfer to reserves is essentially an appropriation item out of earnings rather than expense. Morever, contingent liability is not a provision or liability which is less certain than a provision because it may or may not materialize. A provision is therefore, somewhere between accrual and contingent liability. In view of the above if provision is made for unascertained liability the same has to be added while computing books profits u/s 115JB. I therefore find that the facts of the case and case laws relied upon by the Appellant does not support the case in this regard. I find that the Appellant has created Debt redemption Reserve without any known liability and by no stretch of imagination the same could be referred to Debenture Redemption Reserve.”
Accordingly, the Ld. CIT(A) confirmed the disallowance of Rs.9,50,00,000/- made by the AO for calculating profits u/s 115JB of the Act.
Before us, the Ld. counsel for the assessee submits that the above issue is squarely covered in favour of the assessee by the order dated of the Tribunal in the case of Rachana Finance & Investment P. Ltd. v. ITO (ITA No. 5816 & 5817/Mum/2015for AY 2012-13) and ACIT v. Genus Electrotech Ltd. (ITA No. 2826/Ahd/12 for AY 2006-07).
On the other hand, the Ld. DR submits that ‘Book Profit’ is arrived at after making specified adjustments to the net profit as shown in the profit and loss account so prepared. It is argued by him that the net profit as shown in the profit and loss account (prepared as per part II and III of Schedule VI) for the relevant previous year shall be increased
5 M/s VR Constructions & 5270/Mum/2017 by the amounts mentioned in clause (a) to (i) of section 115JB. In the instant case, it is explained by him that the net profit as shown in the profit and loss account for the relevant previous year, shall be increased by the amounts carried to any reserves by whatever name called. It is thus stated by him that the AO shall have power to re-work or re-write the profit and loss account where the profit and loss account submitted is not as per part II and III of the Schedule VI of the Companies Act.
Thus the Ld. DR submits that the order of the CIT(A) confirming the assessment order passed by the AO holding “Debt Redemption Reserve” as liable to tax u/s 115JB be confirmed.
We have heard the rival submissions and perused the relevant materials on record. In the case of Rachana Finance and Investment P. Ltd. (supra), the assessee has adjusted the amount of “Debt Redemption Reserve” created by the Company for an amount of Rs.78,06,403/-, while working out the amount of book profit u/s 115JB of the Act. The Tribunal vide order dated 31.05.2017 allowed the appeal of the assessee by following the judgment of the Hon’ble Bombay High Court in the case of CIT v. Raymonds Ltd. (2012) 21taxmann.com (Bom) which is as under :
“3. The nature of a Debenture Redemption Reserve (DRR) has been considered by the judgment of the Supreme Court in National Rayon Corpn. Ltd. v. CIT [1997] 227 ITR 764/ 93 Taxman 754 . The Supreme Court after adverting to the provisions of Clause 7 of Part III to Schedule VI of the Companies Act, 1956 held that "the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve". Where a company
6 M/s VR Constructions & 5270/Mum/2017 issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as monies set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of a company as a liability. Being monies set apart to meet a known liability, a Debenture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. In National Rayon Corpn. Ltd. (supra) the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 /7 Taxman 28, in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of that concept would have to be gathered from the meaning attached in the Companies Act itself. The following observations of the Supreme Court are of significance:
"The debentures were nothing but secured loans. Merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist. It was redeemable or repayable at a future date. But it was a known liability. In the form of balance-sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading "liabilities". Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries, and (4) other loans and advances. The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be 7 M/s VR Constructions & 5270/Mum/2017
"reserve". The interpretation clause of the balance-sheet in Schedule VI of the Companies Act specifically lays down that reserves shall not include any amount written off or retained by way of providing for a known liability."
The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA of the Income Tax Act, 1961. No substantial question of law would, therefore, arise.”
7.1 In the case of Genus Electrotech Ltd. (supra), during the course of scrutiny proceedings, the adjustment of debt redemption fund at Rs.2.50 crores was declined with the observation that said debt redemption fund is an appropriation for purpose of creating reserve and is a below the line adjustment. And therefore, it does not fall in any category of adjustment provided u/s 115JB of the Act. The CIT(A) confirmed the same and rejected the assessee’s stand that it is covered by the judgment of the Hon’ble Bombay High Court in Raymonds Ltd. In appeal, the Tribunal followed the decision in Raymonds Ltd. (supra) and directed the AO to grant relief to the assessee.
7.2 A ‘Debt’ is a sum owed by one person or entity to another. A ‘Debenture Redemption Reserve’ is a capital reserve into which amounts are transferred from the profit & loss account for debentures that are redeemable at a future date.
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The ratio laid down by the Hon’ble Bombay High Court in the case of Raymond Ltd. (supra) is that “amount which is set apart as a Debenture Redemption Reserve” is not a reserve within the meaning of Explanation (b) to section 115JA of the Act”. That ratio has been followed in the order of the Tribunal in Rachana Finance & Investment P. Ltd. (supra) and Genus Electrotech Ltd. (supra).
However, we find that the complete details regarding ‘Debt Redemption Reserve’ were not filed either before the AO or the CIT(A). Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to follow the decision by the Hon’ble Bombay High Court in Raymond Ltd. (supra). We direct the assessee to file the complete details before the AO.
As the matter has been restored to the file of the AO, we are not adverting to the other case-laws relied on by both sides. 8. In the result, the appeal filed by the assessee is allowed for statistical purposes. Assessment Year: 2012-13
The grounds of appeal
filed by the Revenue read as under:
1. Whether the Ld. CIT(A) has erred in law and facts in allowing the claim u/s 80IB(10) of the Act on pro rata basis when the deduction u/s 80IB(10) is on the profits derived from the housing projects approved by the local authority as a whole and thus cannot be extended to the project when some of the residential units of the project comprised are exceeding the prescribed limit.
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Whether the Ld. CIT (A) has erred in law and in facts in allowing the claim u/s 80IB(10) of the Act. Without adjudicating upon the argument put forth by the AO in the assessment order that the condition pertaining to completion of project for claiming 80IB(10) deduction has not been fulfilled as out of total 5 building, buildings E & F were not completed during the year and such 5 buildings constituted a single project.
3. Whether the Ld. CIT(A) has erred in law and in facts in deleting the addition of Rs.1,12,62,851/- made on account of diversion of interest bearing funds for non-business purpose in absence of any evidence linking such funds with its business.
We begin with the above 1st and 2nd ground of appeal. In a nutshell, the facts are that the assessee has claimed deduction of Rs.9,41,11,488/- in respect of its project named Bhoomi Acres. The assessee claimed before the AO that it is entitled to proportionate deduction u/s 80IB(10) in respect of units not exceeding 1000 sq. ft. built up area. The AO found it untenable for the reason that the housing project, as a whole, either satisfies the prescribed conditions or fails to satisfy them and accordingly, either becomes eligible for 100% of profits derived from the project or ineligible for 100% of the profits derived from the project. The AO noted that there are no provisions in the Act that unable an assessee to avail of proportionate deduction u/s 80IB(10) of the Act.
One more fact noted by the AO is that during the year, the assessee’s project consists of A, B, C, D, E and F buildings. Assessee has submitted copy of agreement for sale, wherein it has treated all the buildings as one project. The building E and F has not been completed
10 M/s VR Constructions & 5270/Mum/2017 during the year. As per the details filed by the assessee, the AO observed that the building E and F are part of the housing project and not excluded by the assessee. Therefore, he presumed that the same is part and parcel of the housing project on which claim of deduction u/s 80IB(10) has been made. As the assessee has not maintained separate books of accounts to derive the profit of E and F wings, the AO disallowed the claim of deduction of Rs.9,41,11,488/- made by the assessee u/s 80IB(10) of the Act.
In appeal, the Ld. CIT(A) followed the judgment of the Hon’ble Madras High Court in Viswas Promoters (P.) Ltd. v. ACIT (2013) 29 taxmann.com 19 (Madras) and allowed the appeal filed by the assessee.
Before us, the Ld. DR relies on the order of the AO. On the other hand, the Ld. counsel for the assessee supports the order passed by the Ld. CIT(A), relying on the decision in Viswas Promoters (P.) Ltd. (supra).
We have heard the rival submissions and perused the relevant materials on record. In the case of Viswas Promoters (P.) Ltd. (supra), the assessee was engaged in the business of development and construction of flats. It undertook four projects viz. Agrini, Vajra, Porkudam Phase I and Porkudam Phase II. In Agrini and Vajra, the assessee had constructed and sold flats measuring less than 1500 sq. ft. as well as flats which were more than 1500 sq. ft. The assessee claimed deduction u/s 80IB(10) in respect of flats measuring less than 1500 sq. ft. of built up area and did not claim deduction in respect of those flats which exceeded 1500 sq. ft. limit. The AO declined the deduction u/s 80IB for 11 M/s VR Constructions & 5270/Mum/2017 the above two projects on the ground that deduction u/s 80IB is the deduction for the project as a whole and all the residential units in the project must satisfy the conditions therein, namely, the built up area be less than 1500 sq. ft. On appeal, the CIT(A) allowed the claim of the assessee. On further appeal, the Tribunal confirmed the order of the AO. Being aggrieved by the order of the Tribunal, the assessee filed an appeal before the High Court. The Hon’ble Madras High Court held that the assessee is entitled to the claim of deduction in respect of all the blocks forming part of the projects called Agrini and Vajra, but to the extent of each of the blocks satisfying the conditions u/s 80IB(10), the assessee would be entitled to the relief on a proportionate basis.
We find that the Ld. CIT(A) by following the above decision has rightly directed the AO to grant pro rata deduction u/s 80IB(10) to the assessee. Therefore, we confirm his order and dismiss the 1st and 2nd ground of appeal.
Now we deal with the 3rd ground of appeal. During the course of assessment proceedings, the AO observed that the assessee had not charged interest on advance of Rs.10,21,50,000/- to Advaita Estate and Development Pvt. Ltd. and Rs.50,00,000/- to Parekh Enterprise. In response to query raised by the AO, the assessee filed a reply dated 19.03.2015 stating that the assessee is a shareholder in M/s Advaita Estate and Development Pvt. Ltd. and the advance was paid in the nature of investment in their project. Regarding payment to Parekh Enterprise, it was submitted before the AO that advance was given for 12 M/s VR Constructions & 5270/Mum/2017 refunding the same to M/s Gundecha Builders, since Mr. Prashant Parekh, owner of Parekh Enterprise was the middleman in the said transaction. It was further explained to the AO that the matter between Gundecha Builders and Parekh Enterprise is in dispute and they have filed various criminal and recovery suits against the assessee-company.
However, the AO was not convinced with the above explanation of the assessee and observed that the assessee has diverted interest- bearing funds for the purpose of making such advances and the interest attributable to these advances is required to be disallowed. The AO calculated the interest attributable to these interest-free advances @ 12% and it comes to Rs.1,28,58,000/-. However, he restricted the disallowance to the amount of Rs.1,12,62,851/- as claimed by the assessee.
In appeal, the Ld. CIT(A) found that the own fund of the assessee was much more than interest-free advances given. Also it is observed by him that the said advances were linked to the business of the assessee. On the basis of the above reason, the Ld. CIT(A) deleted the disallowance of interest of Rs.1,12,62,851/- made by the AO.
Before us, the Ld. DR relies on the order of the AO. On the other hand, the Ld. counsel for the assessee relies on the judgment of the Hon’ble Bombay High Court in CIT v. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 and supports the order passed by the CIT(A).
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We have heard the rival submissions and perused the relevant materials on record. A perusal of the audited accounts of the assessee in the instant case shows that it has share capital of Rs.442,500/- and reserves and surplus of Rs.185,716,574/- as at 31.03.2012, whereas the long term loans and advances are Rs.108,951,198/- as at 31.03.2012. In the case of Reliance Utilities & Power Ltd. (supra), the principle laid down is that “if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments”.
Respectfully following the above decision, we uphold the order of the Ld. CIT(A) and dismiss the 3rd ground of appeal.
In the result, the appeal filed by the Revenue is dismissed.
To sum up, the appeal filed by the assessee is allowed for statistical purposes, whereas the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 30/08/2019.