Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI A. T. VARKEY, JM & DR. A.L. SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini, AM:
The captioned cross appeals filed by the Assessee and Revenue, pertaining to Assessment Years 2008-09 & 2011-12 are directed against the separate orders passed by the Commissioner of Income Tax (Appeals) in appeal No.11/10-11 and appeal No. 415/CIT(A)-18/11-12/Cir-11(2)/Kol, respectively, which in turn arise out of separate assessment orders passed by the assessing officer under section 143(3) of the Act.
Since, the issues involved in all the appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in ITA No.1318/Del/2012, for assessment Year 2008-09, have been taken into consideration for deciding the above appeals en masse.
The Coordinate Bench of this Tribunal passed the order dated 27.02.2019, in assessee`s own case vide ITA No.1302/Del/2012 and ITA No.1318/Del/2012, for A.Y.2008-09. Aggrieved by the order of the Coordinate Bench, the assessee carried the matter in appeal before the Hon’ble High Court of Calcutta. The Hon’ble High Court of Calcutta remanded the matter back to this Tribunal, vide order No. ITAT 121 of 2019, dated 08.08.2019, directing the Tribunal as follows: “ We are of the view that interest of justice would be subserved if the matter is remanded back to the Tribunal to reconsider the above issues afresh upon hearing the parties and by passing a reasoned order within six Months of communication of this order. Only that part of the order of the Tribunal dated 27th February 2019 dealing with the above questions is set aside.”
3 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
In this order we address the questions raised by the assessee before the Hon’ble High Court of Calcutta for A.Y.2008-09. We also adjudicate the cross appeals filed by the Assessee and Revenue for A.Y. 2011-12 on identical issues.
Although, these appeals filed by the Assessee for Assessment Year 2008-09 (in ITA No.1318/Del/2012) and for A.Y. 2011-12 (in ITA No.1821/Kol/2016) and Appeals filed by the Revenue in Assessment Year 2008-09 ( in ITA No.1302/Del/2012) and for A.Y. 2011-12 ( in ITA No.2003/Kol/2016), contain multiple ground of appeals. However, at the time of hearing we have carefully perused all the grounds raised by the Revenue as well as raised by the Assessee. Most of the grounds raised by the Revenue as well as Assessee, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of Revenue and the Assessee as well. With this background, we summarize and concise the grounds raised by the Revenue as well as Assessee as follows:
(1). Ld.CIT(A) restricted the disallowance under section 14A, read with Rule 8D of the Income Tax Rules to Rs. 23,35,176/-, being amount of exempt dividend income earned. (This covers ground No. 1 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09, Ground No.2 raised by the Revenue in ITA No.1302/Del/12, for A.Y.08-09, Ground No. 1 raised by the assessee in ITA No.1821/Kol/16, for A.Y.11-12, and Ground No.1 raised by the Revenue in ITA No.2003/Kol/16, for A.Y.11-12).[ Hon`ble High Court Question No. (i) and (ii)].
(2). Ld. CIT(A) erred in confirming the disallowance of provision for Non- Performing Assets (NPA) of Rs.13,71,00,000/- made in accordance with the prudential norms of the RBI, in the computation of total income under the normal provisions of the Act. (This covers ground No. 2 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09) [ Hon`ble High Court Question No. (iii)].
(3). Ld. CIT(A) erred in confirming the disallowance of provision for leave Encashment of Rs.57,30,833/- in the computation of total income under the normal provisions of the Act. (This covers ground No. 3 raised by the assessee in ITA No.1318/Del/12 for A.Y.08- 09, Ground No. 2 raised by the assessee in ITA No.1821/Kol/16, for A.Y.11-12)
4 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
(4). Ld. CIT(A) erred in confirming the addition of profit on sale of fixed assets/investments of Rs.81,43,970/- in computing Book Profits under section 115JB of the Act. (This covers ground No. 4 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09) [ Hon`ble High Court Question No. (vii)].
(5). Ld.CIT(A) erred in confirming the addition of provision for non-performing assets (NPA) of Rs.13,71,00,000/- in computing the book profit under section 115JB of the Act, in terms of Explanation 1(i) to section 115JB(2) of the Income Tax Act 1961. (This covers ground No. 5 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09, Ground No. 4 raised by the assessee in ITA No.1821/Kol/16, for A.Y.11-12). [ Hon`ble High Court Question No. (viii)].
(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)]. (7). Assessee company prepares books of accounts as per RBI Rules. Section 115JB of the Act is not applicable to the assessee company, as it does not prepare books of accounts as per part II and part III of Schedule VI of the Companies Act,1956. (Additional ground raised by assessee in ITA No.1318/Del/2012, for A.Y.2008-09). [ Hon`ble High Court Question No. (vi)]. (8).Amount transferred to Special Reserve in compliance with the provisions of Section 45IC of the Reserve Bank of India Act, 1934, during the year under consideration of Rs. 22,00,00,0000/- be excluded in computing total income under the normal provisions of the Act. (Additional ground raised by assessee in ITA No.1318/Del/2012, for A.Y.2008- 09, Ground No.5 raised by the assessee in ITA No.1821/Kol/16 for A.Y.2011-12 ). [ Hon`ble High Court Question No. ( (iv)]. (9). The ld CIT(A) erred in deleting the addition of Rs.22,00,00,000/- made by the AO on account of the amount transferred to special reserve, ( out of statutory compulsion in accordance with section 45-IC of RBI Act) while computing book profit u/s 115JB of the Act. (Ground No.3 raised by Revenue in ITA No. 1302/Del/12 for A.Y.2008-09). [ Hon`ble High Court Question No. (ix)]. (10).Ld CIT(A) erred in deleting the disallowance of Rs.57,72,000/- made by AO on account of interest paid on loans which were advanced interest free to subsidiaries of the Assessee Company. (Ground No.1 raised by Revenue in ITA No. 1302/Del/12 for A.Y.2008-09). (11). Ld CIT(A) erred in deleting the addition of Rs.26,53,10,000/- made by AO on account of disallowance u/s 14A, while computing book profit u/s 115JB of the I.T. Act. (Ground No.4 raised by Revenue in ITA No. 1302/Del/12 for A.Y.2008-09, Ground No.3 raised by Revenue in ITA No.2003/Kol/16, for A.Y.2011-12 ). (12). Ld CIT(A) erred in treating the charge of interest u/s 234C as consequential in nature and not directing the AO to compute interest u/s 234C on the tax due on returned income.
5 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
(13). Ld CIT(A) erred in admitting debentures redemption reserve as allowable expenses u/s115JB of the Act. (Ground No.3 raised by Revenue in ITA No. 2003/Kol/16, for A.Y.2011-12) 5. Now, we shall take these concise and summarized grounds one by one.
Concise and summarized ground No.1 is reproduced below for ready reference: “(1). Ld.CIT(A) restricted the disallowance under section 14A, read with Rule 8D of the Income Tax Rules to Rs. 23,35,176/-, being amount of exempt dividend income earned. (This covers ground No. 1 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09, Ground No.2 raised by the Revenue in ITA No.1302/Del/12, for A.Y.08-09, Ground No. 1 raised by the assessee in ITA No.1821/Kol/16, for A.Y.11-12, and Ground No.1 raised by the Revenue in ITA No.2003/Kol/16, for A.Y.11-12).[ Hon`ble High Court Question No. (i) and (ii)].”
Facts of the issue which can be stated quite shortly are as follows: In the assessment order u/s 143(3) of the Act, the AO computed the disallowance u/s14A r.w. rule 8D at Rs. 26.53 Crores. On appeal by the assessee before the first Appellate Authority, Ld. CIT(Appeals) recomputed the disallowance under rule 8D at Rs. 42.61 lacs and restricted the disallowance to Rs. 23,35,776/-, being amount of exempt dividend income earned during the year.
8 On further appeal by the assessee before this Tribunal, the Tribunal vide order dated 27-02-2019, confirmed the order of Ld. CIT(Appeals) on two contentions viz:(a) Rejected assessee's claim that no expenditure is incurred for earning exempt income is sufficient satisfaction [Para 10.5 at Pg 8 of the Tribunal order] and (b) the assessee has not furnished any calculation that it had interest free funds which can be presumed to have been invested in non-interest bearing investments [Para 11 at Pg 9 of the Tribunal order].
Aggrieved by the order of this Tribunal dated 27.02.2019, the assessee carried the matter in appeal before the Hon`ble Calcutta High Court. The Hon`ble
6 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
Calcutta High Court, vide order dated 08.08.2019, has remanded the matter back to this Tribunal, therefore the assessee is in appeal before us.
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 brought on record. We note that the issue involved pertaining to section 14A read with rule 8D in the present appeal is no longer res integra. We note that Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi), wherein it was held that if there is no exempt income earned or received by the assessee, no disallowance is warranted under section 14A read with rule 8D of the Rules. The ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra).
We note that where the assessee was having a common fund consisting of both own funds and borrowed funds and in case the own funds are sufficient to invest in non-business activities, a presumption is drawn that the said investment is made out of own funds. To buttress this plea, we rely on the judgment of Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. (313 ITR 340), wherein it was held as follows: “The assessee claimed deduction of interest on borrowed capital. The Assessing Officer recorded a finding that the sum of Rs.213 crores was invested out of its own funds and Rs. 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest amounting to Rs.4.40 crores calculated at 12 per cent per annum for three months from January, 2000 to March, 2000. The Commissioner (Appeals) found that the assessee had enough interest-free funds at its disposal for investment and accordingly deleted the addition of Rs.4.40 cores made by the
7 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
Assessing Officer and directed him to allow the deduction under section 36(1)(iii). The order of the Commissioner (Appeals) was upheld by the Tribunal. On appeal to the High Court :
" Held, dismissing the appeal, that if there were 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 funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. "
Besides, the principle that the disallowance u/s 14A read with rule 8D should be restricted to the amount of exempt income, has been laid down by number of High Courts which are as follows: i) CIT v. Corrtech Energy Pvt. Ltd. (2015) 325 ITR 97 (Guj.) ii) CIT v. Holcim India Pvt. Ltd. (2014) 111 DTR 158 (Del.) iii) CIT v. Shiva Motors Private Ltd. (2014) 111 DTR 153 (All.)
Taking note of the aforesaid dictum of law laid down by the Hon’ble High Courts and Tribunal, we note that in the assessee`s case under consideration, the assessment year involved is A.Y.2008-09 hence, Rule 8D of the Income Tax Rules read with section 14A of the Act are applicable to the assessee and the AO may compute the disallowance by applying Rule 8D of the Income tax Rules.
So far Rule 8D(2)(i) is concerned, the assessee has not disallowed suo-moto any amount, therefore no any addition under this Rule can be made by assessing officer. Coming to Rule 8D(2) (ii) of the Rules, we note that ld Counsel submitted before the Bench a statement showing own funds vis-à-vis the investments made in shares and securities, which is reproduced below:
8 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
A.Y. Own Fund Total Investment Investment capable of (PB Pg no. 19)( in lakhs) (PB Pg no. 25) (in lakhs) generating exempt income (in lakhs) 2007-08 47,703 14,668 4,548 2008-09 65,808 32,818 10,424
As is evident from the table above, that the own funds of the assessee is far more than the investments and hence it can be safely presumed that the investments were made only out of own funds. Therefore, the AO is directed to delete the addition under rule 8D(2) (ii) of the Rules.
Coming to Rule 8D(2) (iii) of the Rules, we note that addition may be made @ 0.50% of the dividend bearing securities as per the law laid down by the Coordinate Bench in the case of REI Agro Ltd (supra). However, the ld Counsel has also contended that the disallowance cannot exceed the amount of exempt income. In the assessee`s case the exempt income is to the tune of Rs. 23,35,776/-. Ld DR for the Revenue has fairly agreed with the proposition canvassed by the ld Counsel. Having considered the ld Counsel`s contention and the AO's observation, we find that the contention as regard the disallowance u/s 14A being restricted to the amount of exempt income has been considered by number of High Courts which are as follows:
i) CIT v. Corrtech Energy Pvt. Ltd. (2015) 325 ITR 97 (Guj.) ii) CIT v. Holcim India Pvt. Ltd. (2014) 111 DTR 158 (Del.) iii) CIT v. Shiva Motors Private Ltd. (2014) 111 DTR 153 (All.)
Hence, the disallowance in such respect should be restricted to the amount only to the extent of the exempt income following the principles decided on the aforesaid matters by various Hon`ble High Courts. Therefore, we restrict the
9 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
disallowance to Rs. 23,35,776/-, being amount of exempt dividend income earned during the year and hence we direct the AO for both the assessment years, that is A.Y.2008-09 and A.Y.2011-12 to restrict the disallowance to the extent of exempt dividend income earned during the year. Therefore, we dismiss the appeals filed by the Revenue as well as appeals filed by the assessee.
Concise and summarized ground No.2 is reproduced below for ready reference:
(2). Ld. CIT(A) erred in confirming the disallowance of provision for Non- Performing Assets (NPA) of Rs.13,71,00,000/- made in accordance with the prudential norms of the RBI, in the computation of total income under the normal provisions of the Act. (This covers ground No. 2 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09) [ Hon`ble High Court Question No. (iii)].
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 brought on record. Facts of the issue are that during the year under consideration, the company has made a provision of Rs. 1,371 lakhs towards provision for non performing assets (NPA) as per the Prudential Norms of the Reserve Bank of India (RBI). The said provision has been claimed as deduction in computing the total income. The Supreme Court in a recent case of Southern Technologies Ltd. vs. JCIT (320 ITR 577- SC) has held that “Provision for NPA” made in terms of the RBI directions does not constitute expense for purposes of section 36(1)(vii) and thus the same is not allowable. Further, the Supreme Court has also ruled that deduction can also not be claimed u/s 37(1) of the Act. In view of the aforesaid decision of the Supreme Court, provision for NPA of Rs. 1,371 lakhs was added back by AO in the computation of total income.
10 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
We note that Ground No.2 of the assessee’s appeal and question no. (iii) of High Court’s order is in relation to disallowance of Provision for Non-performing assets (NPA) of Rs. 13,71,00,000/- made in accordance with the prudential norms of the RBI in computation of income under the normal provisions of the Act. In the return of income, the assessee had not added back Provision for NPA while computing its total income under normal provisions of the Act. The Assessing Officer, relying on the decision of Apex Court in Southern Technologies Ltd. - vs.- JCIT (2010) 320 ITR 577 (SC) disallowed the same. On appeal, the CIT(A) affirmed the decision of the Assessing Officer. On further appeal, the ITAT in its earlier order dated 27-02-2019 relying on the decision of Southern Technologies Ltd. (Supra) dismissed the appeal of the assessee. On appeal, before the Hon’ble Calcutta High Court, Question No. (iii) which deals with the issue under consideration was remanded back to this Tribunal for fresh consideration. Accordingly, the issue is before us for reconsideration.
Before us, the ld Counsel of the assessee submitted that the assessee being a non-banking finance company is required to create provision for non-performing assets in accordance with Direction 9 of the Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 issued by the RBI pursuant to power conferred by Sec. 45JA(Ch. IIIB) of the RBI Act, 1949. Further, Sec. 45Q of the RBI Act provides that, provision of Ch. IIIB has an overriding effect on any other statutory enactment.
Ld DR for the Revenue has primarily reiterated the stand taken by the assessing officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. We agree with the view taken by the Coordinate Bench in it’s earlier order dated 27-02-2019. Thus, the issue is squarely covered against the assessee by the decision of Apex Court in Southern Technologies Ltd. (Supra). Respectfully, following the decision of Apex Court in Southern Technologies Ltd. (Supra), we dismiss the ground raised by the
11 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
assessee.
Concise and summarized ground No.3 is reproduced below for ready reference:
(3). Ld. CIT(A) erred in confirming the disallowance of provision for leave Encashment of Rs.57,30,833/- in the computation of total income under the normal provisions of the Act. (This covers ground No. 3 raised by the assessee in ITA No.1318/Del/12 for A.Y.08- 09, Ground No. 2 raised by the assessee in ITA No.1821/Kol/16, for A.Y.11-12)
We have heard the rival submissions. We find that though the Hon’ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal) had struck down the provisions of section 43B(f) of the Act as unconstitutional, the revenue had carried the matter further to the Hon’ble Supreme Court which initially in Special Leave to Appeal (Civil) CC 12060 / 2008 dated 8.9.2008 had held as under:-
“The petition was called on for hearing today. Upon hearing counsel the court made the following Order. Issue Notice. In the meantime, there shall be stay of the impugned judgement, until further orders.”
Later, the Hon’ble Supreme Court in Special Leave to Appeal (Civil) No(s). CC 22889 / 2008 dated 8.5.2009 had held as under:-
“The petition was called on for hearing today. Upon hearing counsel the court made the following Order Delay condoned. Leave granted.
Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the department to recover that amount in case Civil Appeal of the department is allowed.
We further make it clear that the assessee would, during the pendency of this Civil Appeal , pay tax as if Section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns.”
12 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
Hence from the aforesaid Supreme Court judgement, it could be inferred that the Hon’ble Supreme Court had not stayed the judgement of the Calcutta High Court during Leave proceedings. But the Hon’ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to remand this issue to the file of the ld AO to pass orders based on the outcome of the main appeal on merits by the Hon’ble Supreme Court as stated (supra).
Concise and summarized ground No.4 is reproduced below for ready reference:
(4). Ld. CIT(A) erred in confirming the addition of profit on sale of fixed assets/investments of Rs.81,43,970/- in computing Book Profits under section 115JB of the Act. (This covers ground No. 4 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09) [ Hon`ble High Court Question No. (vii)].
When this issue was called out for hearing, the ld. Counsel for the assessee invited our attention to the order dated 02.07.2010, passed by the Special Bench of ITAT, Hyderabad in the case of Rain Commodities Ltd 41 DTR 449 (Hyb- SB), whereby the issue has been discussed and adjudicated in favour of the Revenue. The ld. DR also submitted that the present issue is squarely covered in favour of Revenue by the above said order of the Tribunal, a copy of which is also placed before the Bench.
We see no reason to take any other view of the matter then the view so taken by the special bench of ITAT, Hyderabad in Rain Commodities Ltd. The findings of the Special Bench are given below:
“The assessee credited its P&L A/c with an amount of Rs. 149.77 crores being the profit on sale of assets to its wholly owned subsidiary. As the said profits were not chargeable to tax u/s 47(iv), the assessee took the view that the same had also to be reduced from the “book profits” u/s 115JB. The Special Bench had to consider whether exempt income could be excluded from the computation of “book profits” u/s 115JB. HELD deciding against the assessee:
13 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
(i) The AO can alter the “book profit” only in two circumstances (a) if the P&L A/c is not drawn up in accordance with Parts II & III of Schedule VI to the Companies Act or (b) If accounting policies & standards, method & rate of depreciation have been incorrectly adopted for preparation of the P & L A/c. Except for the said two cases, the AO has no power to alter the net profit shown in the P&L A/c. Under (a), the AO cannot disturb the Net Profit shown by the assessee where there are no allegations of fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the P&L A/c or Balance sheet; (ii) Parts II & III of Schedule VI to the Companies Act do not permit the exclusion of capital gain from the P & L A/c. The P & L A/c is required to disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature including capital profits (Veekaylal Investments 249 ITR 597 (Bom) followed). Items referred to in the Notes are a part of the P&L A/c (Sain Processing 221 CTR 493 (Del) followed; (iii) The assessee had included the said capital gains in the P & L A/c and it was not its’ case that same was not includible. The fact that the capital gains was exempt u/s 47(iv) does not mean it can be excluded from the “book profit” because no such exclusion was permitted under the Explanation to s. 115JB. The taxability of capital gain is relevant only for the purpose of computation of income under the normal provisions and has nothing to do with the computation of “book profits”. {N.J. Jose & Co 217 CTR 479 (Ker) (capital gains exempt u/s 54E) followed}; (iv) The argument that as s. 115JB (4) provides that “save as otherwise provided in this section all other provisions of the Act shall apply” does not mean that the exemption provisions of s. 47(iv) can be read into s. 115JB. This only means that while the computation has to be as per s. 115JB, anything over and above that will be subject to other provisions of the Act. Frig Sales 4 SOT 376 (Mum) overruled); (v) Accordingly, in the absence of any provision for exclusion of exempted capital gain in the computation of book profit u/s 115JB, the assessee is not entitled to the exclusion claimed.”
As the issue is squarely covered in favour of the revenue by the decision of Special Bench in case of Rain Commodities (supra) and there is no change in facts and law and the ld Counsel is unable to produce any material to controvert the above said findings of the special Bench. Therefore, respectfully following the decision of Special Bench (supra) we dismiss the ground of appeal raised by the assessee.
Concise and summarized ground No.5 is reproduced below for ready reference:
(5). Ld.CIT(A) erred in confirming the addition of provision for non-performing assets (NPA) of Rs.13,71,00,000/- in computing the book profit under section 115JB of the Act,
14 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
in terms of Explanation 1(i) to section 115JB(2) of the Income Tax Act 1961. (This covers ground No. 5 raised by the assessee in ITA No.1318/Del/12 for A.Y.08-09, Ground No. 4 raised by the assessee in ITA No.1821/Kol/16, for A.Y.11-12). [ Hon`ble High Court Question No. (viii)].
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 addition of Provision for NPA in computing Book Profit was confirmed by this Tribunal, vide ITAT order dated 27-02-2019 on the contention that provision for NPA is provision for diminution in value of assets and covered by retrospective insertion of Explanation 1(i) to Section 115JB of the I.T. Act. [Refer Para 15 at Pg 11-12 of Tribunal Order dated 27.02.2019].
Ld Counsel for the assessee submitted before us that the Assessee, in its return of income has not added back Provision for NPA in computing Book Profits u/s 115JB of the Act. The Assessing Officer, in view of retrospective insertion of clause (i) to Explanation 1 of Sec. 115JB(2) of the Act added back the same in computing Book Profit. The CIT(A) confirmed the addition made by the Assessing Officer. On further appeal, the ITAT in its earlier order dated 27-02- 2019 concurred with the view of Assessing Officer and CIT(A) and dismissed the appeal of the assessee. On subsequent appeal before High Court, the issue dealt in question (viii) of the High Court Order has been remanded back to this Tribunal from fresh consideration. The Ld. AR of the assessee submitted before us that provision for nonperforming assets is made as per Direction 9 of the Non- Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 issued by RBI pursuant to power conferred by Sec. 45JA (Ch. IIIB) of the RBI Act. Further, Sec. 45Q of the RBI Act provides that, provision of Ch. IIIB has an overriding effect on any other statutory enactment. The AR further contended that as per Direction 10 of the RBI prudential norms, the assessee has to specifically disclose the provision for
15 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
NPA separately without netting it against the value of assets. Hence, in the absence of any reduction in the value of asset, it cannot be treated as a provision for diminution in the value of asset. Provision for non-performing asset is not provision for diminution in value of asset as there is no diminution in value of non-performing asset. The value of asset remains intact without any reduction. Provision for NPA appears separately in the liability side of the balance sheet. The Ld. AR of the assessee brought attention of this bench to the decision of Hon’ble Apex Court in Southern Technologies Ltd. vs. JCIT (2010) 320 ITR 577 (SC), wherein the Hon’ble Supreme Court has held that “ Reduction in NPA takes place in two ways, namely by recoveries and by write off. However, by making a provision for NPA, there will be no reduction in NPA.” On the basis of the aforesaid findings of the Apex Court, the Ld. AR argued that by creating provision for non-performing asset there was no reduction in value of asset and hence clause (i) to Explanation 1 to Sec. 115JB(2) is not applicable as held by the Hon’ble Apex Court. Further the AR also relied on the decision of Jurisdictional ITAT in DCIT -vs.- National Insurance Co. Ltd. [2016] 72 taxmann.com 116 (Kolkata - Trib.). In the said case, the ITAT held that "Reserve for Unexpired Risk" created in accordance with the relevant provisions of the Insurance Act, 1938 being statutory in nature is not required to be added in MAT computation. Relevant extract of the decision is reproduced as under:-
“11. Addition towards Reserve created for Unexpired risk u/s 115JB of the Act The brief facts of this issue is that while computing the Book Profit u/s. 115JB of the Act for the purpose of MAT, the Id AO considered a sum of Rs. 169,45,00,000/- being the Reserve for Unexpired Risk created as per the requirement of law, as allegedly required to be added back. The Id AO added back the aforesaid sum of Rs. 169,45,00,000/- in computing the Book profit. The assessee submitted that as per the Insurance Act, 1938, in case of an Insurance Company carrying on General Insurance business, Premium is recognised as income over the contract period or the period of risk, whichever is appropriate. Premium received in advance which represents Premium Income not relating to that particular accounting period in which the said Premium has been received, is separately disclosed in the Financial Statements of an Insurance Company. That part of income which is attributable to the succeeding accounting period or periods is reduced from the total Premiums received during an accounting period by way of creation of a Reserve for Unexpired Risk in accordance with Section 64V(l)(ii)(b) of the Insurance Act, 1938. The aforesaid Reserve is to be created for a minimum amount as
16 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
prescribed under the above mentioned section. Appreciating the special nature of the Insurance Business, the Lawmakers prescribed special procedure for Computation of Total Income of an Insurance Company carrying on Business of Insurance other than Life Insurance which are to be found in Rule 5 of the First Schedule to the Income- tax Act, 1961, read with Rule 6E, of the Income-tax Rules, 1962. This particular procedure has to be mandatorily complied with in making the assessment for Income-tax purposes. Every year adjustments are made to the existing Reserve for Unexpired Risk by way of crediting or debiting by the amount of difference between the Reserve created in the immediate preceding year and the Reserve required to be credited during the current accounting year. This cannot be considered as any alleged "Amount carried to any Reserve" debited to the Profit & Loss Account, but it should be appreciated that this Reserve represents that part of Premium Income which does not relate to the current accounting period. It must be appreciated that as per the Mercantile System of accounting, it is only that Income/Expenditure which relate to the current accounting period, should find places in 'the Revenue/Profit & Loss Account of the year. Hence it was submitted that in case of an Insurance Company (carrying on General Insurance Business), the creation of "Reserve for Unexpired Risk" cannot be considered to be similar to those "Reserves" which have been referred to in Clause (b) of Explanation (1) to Section 1I5JB(2). It may also be appreciated that the "Reserve for Unexpired Risk" can, in any case, not be considered as any provision made for meeting liabilities, other than ascertained liabilities as referred to in Clause(c) of Explanation (1) to Section 115JB(2). On the basis of the above facts it may kindly be appreciated that there has not been any requirement to add back any sum in relation to the "Reserve for Unexpired Risk" while computing "Book Profit" u/s115JB(2) for the Assessment Year 2008-09. Accordingly, the assessee submitted that the "Reserve for Unexpired Risks" not being of the nature as specified in clause (b) of Explanation 1 to section 115JB(2), the action of the Id AO in making an addition of such Reserve should be held as unjustified. Hence, the assessee submitted that the Id AO may kindly be directed to delete the addition of Rs.l69,45,00,000/-made by him in computing the Book profit u/s 115JB of the Act. 11.1 The Id CIT(A) observed that the provisions contained in Rule 6E of the Income-tax Rules, 1962 has also been considered. Section 115JB(2)- Explanation (l)(b) requires increasing "the amounts carried to any reserve, by whatever name called, other than a reserve specified u/s 33AC" if such amount is debited to the Profit & Loss Account. It is held that the Reserve for Unexpired Risk has not been debited in the Profit & Loss account at any point of time, therefore Explanation 1 to sub-section 2 of section 115JB is not applicable in the peculiar facts of the general insurance business carried out by the assessee. In the assessee's case, firstly the concerned reserve for Unexpired Risk has not been created through any debit entry made in the Profit & Loss Account. The reserve has been created in accordance with the relevant provisions of the Insurance Act, 1938, by way of debiting the premium received for adjusting the amount of premium that may be related to future year or years. It is noted that Rule 5 of the First Schedule of the Income-tax Act, 1961, which specifies the procedure to be followed for computing the business income of a General Insurance business, specifically allows deduction for reserve carried over for Unexpired Risk and Rule 6E of the Income-tax Rules, 1962 provides that such deduction will be allowed to the maximum extent of 50% of the net premium received during the relevant year. Hence, this creation of reserve out of the premium received during the year, is a statutory requirement and the same is duly recognised by the Income-tax Act/Rules. As already mentioned hereinabove, this
17 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
particular reserve does not fall in the category of those reserves which have been specified in Explanation 1 (b) to section 115JB(2). Therefore, this reserve viz., the reserve for Unexpired Risk in the case of a General Insurance business, should not be added back for the purpose of computation of Book Profit u/s. 115JB(2) for MAT purposes. On the basis of this observation, it was held that the Id AO's action in adding back a sum of Rs. 169,45,00,000/- being reserve created for Unexpired Risk, was not in accordance with the relevant provisions of the Income-tax Act, 1961 and accordingly deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:— "4. The CIT(A) erred on the facts of the case and in law in holding the sum of Rs. 1694500000 being the reserve created for unexpired risk should be considered as reserve for computing the Book Profit under section 115JB of the Income-tax Act."Id DR vehemently relied on the order of the Id AO. In response to this, the Id AR vehemently relied on the order of the Id CITA. 11.4. We have heard the rival submissions. We find that the Id CITA had dealt this issue very elaborately and had given proper finding that the reserve created for unexpired risk need not be added back for the purpose of computation of book profits u/s 115JB of the Act. The revenue was not able to controvert the findings of the Id CITA before us. Hence we find no infirmity in the order passed by the Id CITA in this regard. Accordingly, the Ground No. 4 raised by the revenue for Asst Year 2008-09 is dismissed.”
The Ld. AR also relied on the decision of Hon’ble Delhi High Court in CIT - vs.- MGF India Ltd. (2018) Taxmann.com 405 (Del) which allowed Provision for NPA in computing book profits. Ld. Departmental Representative relied on the CIT(A)’s order and earlier order of ITAT dated 27-02-2019 which we have already discussed in our earlier paras and the same is not being repeated for the sake of brevity. We note that provision for NPA is made as per Direction 9 of RBI prudential norms and disclosed separately as liabilities in the balance sheet as per Direction 10 of the said prudential norms. The Non- Performing Assets, against which the provision is made remains intact without any reduction. Based on the above factual and legal position, we are of the view that provision for Non- performing assets cannot be said to be provision for diminution in value of assets to attract disallowance as per clause (i) of Explanation 1 to sec. 115JB(2) of the Act. In other words, by making a provision for NPA, there will be no reduction in NPA. Hence, clause (i) of Explanation to Sec. 115JB(2) does not apply since there is no reduction in value of asset. Accordingly, this ground of the assessee is
18 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
allowed and Assessing Officer is directed to delete addition made of Rs. 13,71,00,000/- in computing book profit u/s 115JB of the Act. These grounds of assessee are allowed.
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
19 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
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 ”
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.”
20 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
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. ” 38. 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 IT AT 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
21 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
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. 12. 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 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.
Concise and summarized ground No.7 is reproduced below for ready reference: (7). Assessee company prepares books of accounts as per RBI Rules. Section 115JB of the Act is not applicable to the assessee company, as it does not prepare books of accounts as per part II and part III of Schedule VI of the Companies Act,1956. (Additional ground raised by assessee in ITA No.1318/Del/2012, for A.Y.2008-09). [ Hon`ble High Court Question No. (vi)].
We have heard both the parties and perused the material available on record. We note that in earlier order of the Tribunal dated 27-02-2019, the Tribunal did not admit the additional ground contending it to be against the facts on record.
22 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
The Tribunal held that as there was no qualification or comment by the statutory auditors, the plea of the assessee that the accounts of the assessee is not prepared as per Part II of Schedule VI of the Companies Act, 1956 is factually incorrect. Before us, the Ld. AR contended that the assessee had duly prepared it accounts in accordance with Companies Act along with RBI guidelines wherever applicable. Section 616 of the Companies Act permits the assessee to follow provisions of RBI Act. Accordingly, no qualification or comment of the auditors was warranted. Considering the submissions of the Ld. AR, we are of the view that this issue is purely legal and hence admitted and decided on merits of the case.
On merits, the Ld. AR contended that the assessee being a Non- banking finance company, governed by the provisions of RBI Act, is not preparing its profit and loss account strictly as per Part II and Part III of Schedule VI of Companies Act, 1956 and hence provisions of Sec. 115JB are not applicable to the assessee. To substantiate its claim, the assessee submitted a table of deviations between the accounts of the assessee and accounts as per companies Act and accounting standard. The same is reproduced below:-
23 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
24 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
25 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
26 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
Ld. AR further relied on the decision of Hon’ble Bangalore ITAT in ITO -vs.- Atria Hydel Power Ltd. (ITA No. 534 to 536/Bang/2018) wherein it was held that the provisions of Sec. 115JB are not applicable to the assessee company which prepared its accounts under the Companies Act along-with the provisions of Electricity Act and Rules, wherever applicable. Decisions of Kolkata ITAT in DPSC -vs.- DCIT (ITA no. 890/Kol/2013 and Mumbai ITAT in Reliance Energy Ltd. -vs.- ACIT (ITA No. 218/Mum/05) were also referred.
On the other hand, Ld. DR relied on the earlier order of this Tribunal, in assessee`s own case dated 27-02-2019, wherein the said claim had been dismissed.
Having heard both the parties, we are of the view that there is merit in the earlier order of this Tribunal in assessee`s case, dated 27-02-2019. Even though the assessee has prepared its accounts following the RBI guidelines and the accounts so prepared is strictly not in accordance with provisions of Part II & Part III of Schedule VI of the Companies Act, 1956, yet it cannot be said that provisions of Sec 115JB would not be applicable to the assessee company. The assessee company has incorporated under the Companies Act and prepared its accounts in accordance with provisions of Part II & Part III of Schedule VI of the Companies Act, 1956. Since there is no such observations by the Auditors also in their Audit Report, we do not agree with ld AR for the assessee and therefore, we confirm the earlier order passed by this Tribunal dated 27-02-2019. Accordingly,
27 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
this ground of the assessee is dismissed as devoid of merit.
36 Concise and summarized ground No.8 is reproduced below for ready reference:
(8).Amount transferred to Special Reserve in compliance with the provisions of Section 45IC of the Reserve Bank of India Act, 1934, during the year under consideration of Rs. 22,00,00,0000/- be excluded in computing total income under the normal provisions of the Act. (Additional ground raised by assessee in ITA No.1318/Del/2012, for A.Y.2008- 09, Ground No.5 raised by the assessee in ITA No.1821/Kol/16 for A.Y.2011-12 ). [ Hon`ble High Court Question No. ( (iv)].
We note that Ld AR for the assessee at the outset itself has fairly agreed that this issue has been adjudicated against the assessee, in the assessee’s own case, by the Hon’ble Delhi High Court in ITA No.371/2012 & 372/2012. This is more specifically dealt in Para 12.3 of this order. A transfer to a specific reserve cannot be charge on profit. It is not expenditure. It is appropriation of profit. Respectfully following the Judgment of the Hon’ble Delhi High Court in ITA No.371/2012 & 372/2012, in assessee`s own case, we dismiss the ground raised by the assessee.
Concise and summarized ground No.9 is reproduced below for ready reference:
(9). The ld CIT(A) erred in deleting the addition of Rs.22,00,00,000/- made by the AO on account of the amount transferred to special reserve, ( out of statutory compulsion in accordance with section 45-IC of RBI Act) while computing book profit u/s 115JB of the Act. (Ground No.3 raised by Revenue in ITA No. 1302/Del/12 for A.Y.2008-09). [ Hon`ble High Court Question No. (ix)].
28 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
We note that this Tribunal in its earlier order dated 27.02.2019 had disallowed the ground relying on the decision of Delhi High Court in assessee’s own case for A.Y 2006-07 & 2007-08 (ITA No. 372/Del/2012). In the absence of any other judgment pointed out by the A.R in favour of the assessee, we agree with the view of the earlier bench and accordingly the ground is decided in favour of the revenue. Thus ground raised by the Revenue is allowed.
Concise and summarized ground No.10 is reproduced below for ready reference:
(10).Ld CIT(A) erred in deleting the disallowance of Rs.57,72,000/- made by AO on account of interest paid on loans which were advanced interest free to subsidiaries of the Assessee Company. (Ground No.1 raised by Revenue in ITA No. 1302/Del/12 for A.Y.2008-09).
Brief facts qua the issue are that the during the assessment year under consideration, from the details filed by the assessee it was noticed by AO that the assessee has given Rs. 481 lakhs as interest free loans to its subsidiaries. In the course of the assessment proceedings the assessee was asked to submit as to why proportionate interest relatable to extending interest free loan to sister concerned should not be disallowed as it has borrowed substantial funds for which substantial amount of interest had been paid.
In response, the assessee, Vide letter dated 24.02.2010, has furnished written submissions, which is reproduced below :
"1 During the previous year relevant to the assessment year under consideration, the assessee had given interest free loan to its subsidiaries amounting to Rs. 481 lakhs. In this regard, your goodself has asked us to submit as to why notional interest on the said loan should not be disallowed as the assessee borrowed substantial funds for which substantial amount of interest had been paid during the previous year relevant to the assessment year under consideration. 2 At the outset, it is submitted that the assessee had sufficient internal funds in the form of Reserves & Surplus to fund the interest free loans. As per the audited
29 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
accounts of the assessee as at 31 March 2008, it can be seen that the opening balance of Reserves and Surplus stood at Rs. 36,794 lakhs and the closing balance was Rs. 52,399 lakhs. Further, the assessee earned profit after tax of Rs. 10,796 lakhs during the AY under consideration. Hence, it is amply clear that these internal accruals of the assessee far exceeded the amount of interest free loan of Rs. 481 lakhs advanced to subsidiaries. Accordingly, it is submitted that the interest free advances were not made out of interest bearing borrowed funds.
However, the AO rejected the contention of the assessee and noted that since the assessee company has paid substantial interest on borrowed funds, therefore deduction of interest on borrowed funds can be allowed only if such funds are used only for the purpose of business. If the payment is not for the purpose of business it puts extra burden on the company by way of excess avoidable interest expenditure. In view of the above discussion, the proportionate interest @ 12% (average cost of borrowings for the assessee) was worked out by AO to the tune Rs. 57,72,000/- and was disallowed, being attributable to diversion of business funds for non-business purposes.
On appeal, the ld. CIT(A) deleted the addition made by AO observing the following:
4.2 The AR of the assessee submitted that it had sufficient internal funds in the form of Reserve & Surplus to fund the interest free loans. The assessee also submitted audited accounts as at 31st March 2008, wherein opening & closing balance of Reserves and Surplus stood at Rs. 36,794 lacs and Rs. 52,399 lacs respectively. Further, the assessee submitted that it had earned profit after tax of Rs. 10,796 lacs for the assessment year under consideration as per its Profit & loss account which were sufficient to finance interest free loan of Rs. 481 lacs to the sister concerns. Thus, it was stated that the interest free loans were made out of the internally generated funds and not from the interest bearing borrowed funds. In this context the AR of the assessee relied, inter-alia, on the principles laid down by the decision of Mon’ble Apex Court in the case of Munjal Sales Corporation -vs- CIT and Anr. (2008) 298 ITR 298 (SC) wherein the Hon’ble Apex Court has held that since the opening balance of own funds as on 01-04-94 was Rs.1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lacs, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lacs and hence is entitled to claim deduction u/s 36(l)(iii). 4.13 I have perused the facts stated in the assessment order as well as those submitted by the assessee written and oral;
30 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
I am in agreement with the assessee that the facts of the assessee is squarely covered by the decision of the Apex court in the case of Munjal Sales (supra). The assessee had owned funds of Rs. 65,808 lacs as on 31 -03-2008 and during the year profit of Rs. 10,796 lacs (PAT) has been earned which is sufficient to finance the interest free loan of Rs. 481 lacs to the sister concerns. Thus, applying the principle as laid down by the Hon’ble Apex Court, it cannot be presumed that the subsidiaries were paid out of the borrowed fund by the assessee. The decision of Abhishek Industries Ltd.(Supra) as relied by the A.O. has been overruled by the Apex Court in the case of Munjal Sales (Supra) which is in favour of the assessee. Besides above, advanced interest free loans to its wholly owned subsidiaries out of commercial expediency for the purpose of utilizing the same in the business of the subsidiaries is a allowable deduction in terms of the decision of Hon’ble Apex Court in the case of S.A Builders Ltd. -vs.- CIT(Appeals) & Another (2006) 288 ITR 1 (SC). The said stand has been further affirmed by the Jurisdictional High court in the case of Dalmia Cement (Supra.) & Bharti Televenture Ltd (Supra.) relying on the decision of the Apex Court. Further, from perusal of the Balance Sheet and the Audited accounts of the company, it leaves beyond doubt, the fact that the assessee had sufficient own funds for advancing such funds to its subsidiary company. Thus, based on the above factual as well as judicial pronouncements, the AO is directed to delete the disallowance made. This ground is thus allowed.”
We have heard ld DR for the Revenue and also gone through the findings of ld CIT(A). The conclusions/findings arrived at by the CIT(A) are correct and admit no interference by us. We, approve and confirm the order of the CIT(A).
Concise and summarized ground No.11 is reproduced below for ready reference: (11). Ld CIT(A) erred in deleting the addition of Rs.26,53,10,000/- made by AO on account of disallowance u/s 14A, while computing book profit u/s 115JB of the I.T. Act. (Ground No.4 raised by Revenue in ITA No. 1302/Del/12 for A.Y.2008-09, Ground No.3 raised by Revenue in ITA No.2003/Kol/16, for A.Y.2011-12 ).
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
31 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
CIT(A) and other materials available on record. We note that the provisions relating to adjustments by way of increase and decrease to the net profit shown by the assessee in Profit & Loss Account, are very explicit in section 115JB of the Act. The items which are to be added to the net profit have been listed out in Explanation 1 to that section. The learned AO should adhere to that list and cannot travel beyond these items. Since there is no mention of Section 14A in the said Explanation 1 to Section 115JB, the same cannot be added to re-determine the quantum of "Book Profit". The provisions of section 115JB relating to computation of book profit are amply clear and unambiguous. These provisions do not leave any room for adjustment by the assessing officer other than those mentioned in Explanation 1 to section 115JB to the net profit reflected in the accounts of any assessee and adjustment by way of disallowance u/s 14A is not included in the said explanation. This issue is also covered by the judgment of the Special Bench of Tribunal in the case of ACIT Vs. Vireet Investments (P) Ltd, in ITA No.502/Del/2012. Therefore, such upward revision in the sum of Rs. 26,53,10,000/-to the book-profit by making disallowance section 14A read with rule 8D is not permitted that being so, we decline to interfere with the order of Id. CIT (A) deleting the aforesaid addition. His order on this issue is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.
Concise and summarized ground No.12 is reproduced below for ready reference: (12). Ld CIT(A) erred in treating the charge of interest u/s 234C as consequential in nature and not directing the AO to compute interest u/s 234C on the tax due on returned income.
It is a settled position of law that interest u/s 234C of the Act should be charged on the tax due on returned income. Therefore, we direct the assessing officer to charge interest u/s 234C of the Act on the tax due on returned income.
32 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
Concise and summarized ground No.13 is reproduced below for ready reference:
(13). Ld CIT(A) erred in admitting debentures redemption reserve as allowable expenses u/s115JB of the Act. (Ground No.3 raised by Revenue in ITA No. 2003/Kol/16, for A.Y.2011-12)
We have heard both the parties. We note that the ground 13 noted above is with regard to addition of amount transferred to Debenture Redemption Reserve (DRR) in computing Book Profit u/s 115JB of the Act. The assessee had not added amount transferred to DRR of Rs. 22,28,00,000/- as DRR is neither reserve nor unascertained provision to attract addition under clause (b) or clause (i) of Explanation 1 to sec. 115JB (2) of the Act. Without considering the above, Assessing Officer added DRR in computing books profits. On appeal, ld. CIT(A) deleted the disallowance on the basis of principles laid in the decision of Apex Court in National Ravon Corporation Ltd. vs. CIT (1997) 227 ITR 764 (SC). Aggrieved the revenue is in appeal before us. The ld. D.R did not produce any decision against the assessee. Whereas the assessee filed computation of DRR with the paper book showing that it is an ascertained liability and not a reserve. The ld A.R. also relied on a catena of judgments squarely covering the issue in favour of the assessee:-
• IOl Ltd. vs. DCIT (2003) 81 TTJ 525 (Cal) • LMJ International Ltd. vs. DCIT (ITA No. 230/Kol/2013) • DCIT vs. M/s Exide Industries Ltd. (ITA No. 2518/Kol/2004) • ACIT vs. Usha Martin Ltd. (ITA No. 112/Kol/2006).
In view of the above, we are of the view that the DRR is ascertained liability and not a reserve. Accordingly, the revenue’s ground is dismissed.
33 ITA No.1821/Kol/2016, ITA No.1318/Del/2012, ITA No.1302/Del/2012 & ITA No.2003/Kol/2016 SREI Infrastructure Finance Ltd.
In the result, the appeal filed by the assessee and Revenue are allowed to the extent indicated above.
Order pronounced in the open court on this 31 /12/2019.
Sd/- Sd/- (A. T. VARKEY) (A. L. SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; Dated: 31/12/2019 (SB, Sr. Ps) आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :
अपीलाथ� / The Assessee - SREI Infrastructure Finance Ltd. 2. ��यथ� / The Revenue- (i) DCIT, Circle-11(2), Kolkata (ii) Addl. CIT, Range-9, New Delhi 3. आयकर आयु त(अपील) / The CIT(A), 4. आयकर आयु त / CIT !वभागीय �$त$न%ध, आयकर अपील�य अ%धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड( फाईल / Guard file.
//True Copy// By Order
Assistant Registrar, I.T.A.T, Kolkata Benches, Kolkata.