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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
and a consolidated order is being passed for the sake of convenience and brevity.
First, we shall take-up the appeals preferred by the assessee which pertain to Assessment Years 2012-13, 2013-14 & 2014-15 and since the substantive issue involved is common, appeal for Assessment Year 2012-13 is taken-up as the lead case. This appeal is directed against the order of CIT(A)-49, Mumbai dated 25.07.2016, pertaining to the Assessment Year 2012-13, which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 01.04.2015 under section 143(3) r.w.s. 153A of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, the assessee has raised the following Grounds of appeal:-
“1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in making disallowance of reduction on account of the provision made for premium on redemption of preference shares of Rs.2,42,15,414/- while computing the book profits u/s 115JB of the Act, without appreciating the fact that it is an ascertained liability and hence liable to be reduced while computing book profit u/s 115JB of the Act.
2. On the fact and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in confirming the action of Assessing Officer in treating the interest income from FDR as income not derived from the business and accordingly not eligible for deduction u/s 80IB of the Income Tax Act, 1961 without considering the facts & circumstances of the case.”
3 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016
At the time of hearing, the learned representative for the assessee has not pressed Ground of appeal no. 2, which is hereby dismissed as not pressed. Thus, the only Ground surviving in this appeal is by way of Ground of appeal no. 1, which relates to determining the tax liability in terms of Sec. 115JB of the Act. Pertinently, Sec. 115JB of the Act is a special provision for payment of tax by certain corporate assessees, and it prescribes that where the income-tax payable on the total income as computed under the Act in respect of the relevant assessment year is less than 18½ % of its book profit, then, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be @ 18½ %. Thus, what is of importance for the purposes of Sec. 115JB of the Act is the computation of book profit. For the present, it would suffice for us to observe that as per Sec. 115JB of the Act, book profit means net profit as shown in the Profit & Loss Account for the relevant previous year prepared in accordance with the provisions of Part-II of Schedule-VI of the Companies Act, 1956 and increased or decreased by the items contained in Explanation- I below Sub-section (2) of Sec. 115JB of the Act.
5. In the course of assessment proceedings, the Assessing Officer noted that while determining the book profit for the purposes of calculating the tax liability u/s 115JB of the Act, assessee has reduced an amount of Rs.2,42,15,414/- which comprised of (i) Provision for Preference Share Redemption Reserve – Rs.43,07,000/-; and (ii) 3% return – Rs.1,99,08,414/-. The Assessing Officer show-caused the assessee as to why the Provision for Preference Share should not be added back as the same was not revenue in nature. Assessee made submissions pointing out the issuance of redeemable preference shares and the fact that in addition to the 4 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 redemption of face value and premium, an annual return of 3% was also provided as per the terms of the issue. It was explained by the assessee that it was providing for such cost of premium as well as 3% return per annum as a Provision on a year-to-year basis. Since it was to meet an ascertained liability, it was deductible while computing the book profit u/s 115JB of the Act. The Assessing Officer has made a short discussion in para 5.4 of his order and rejected the claim of assessee. Firstly, as per the Assessing Officer, redemption of Preference shares amounts to reduction of Capital and, therefore, it cannot be taken as an ascertained liability. Secondly, the Assessing Officer observed that assessee had reduced the amount of Reserves used for redemption of Preference shares from the Profit & Loss Account, which is not allowable since assessee had not credited the amount of Reserves to the Profit & Loss Account. Accordingly, the Assessing Officer disallowed a sum of Rs. 2,42,15,414/-.
6. Before the CIT(A), assessee made detailed submissions, which have been elaborately brought out by the CIT(A) in his order, and which we may briefly note hereinafter. Assessee explained that as per the terms of the issue of Preference shares, the same are redeemable at the option of the assessee-company or at the option of the investors at the value of investment including premium. In addition to the redemption of the face value and premium, an annual return of 3% is provided on the total investment every year on a compounding basis. On a year-to-year basis, assessee-company has been providing for premium as well as 3% per annum return on investment by debiting the Profit & Loss Appropriation account. So far as the year under consideration is concerned, assessee explained that it had credited the Provision for Premium (to be paid back on redemption) as 5 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 well as the additional Premium/annual return of 3% prescribed. Assessee pointed to the CIT(A) that while computing the book profit u/s 115JB of the Act, assessee-company started its computation with the ‘net profit before appropriation’ and then reduced the Provision for Premium on redemption as well as Provision for cumulative return on redemption of Preference shares to arrive at the book profit for the purposes of Sec. 115JB of the Act. The assessee explained that as the liability to pay the premium as well as the annualised 3% return on Preference shares was an ascertained liability, it was deductible for the purpose of arriving at the book profit for the purposes of Sec. 115JB of the Act. Assessee factually emphasised that the only claim made towards the reduction from the book profit was the premium and the additional premium/return of 3% and not the principal amount or the face value of the redemption of Preference shares. The claim of the assessee was that for the purpose of arriving at the book profit, all the known and ascertained liabilities/Provisions are allowable to be reduced and, in this context, referred to the specific provision contained in clause (c) of Explanation-1 to Sec. 115JB(2) of the Act.
7. Assessee also referred to the relevant provisions of the Companies Act, 1956, namely, Sec. 80 to emphasise that the premium payable on redemption of Preference shares was a charge against the profits of the company. Alternatively, it was pointed out that clause (c) of Sec. 80(1) permits charging of premium on redemption of Preference shares against the Share/Securities Premium account also. Assessee argued that it has opted for providing the premium on redemption of Preference shares against the profits of the assessee-company and, therefore, the Provision in question was in line with the mandate of Companies Act, 1956. Assessee
6 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 also justified debiting of such Provision in the Profit & Loss Appropriation account on the ground that it was an extraordinary item and, in any case, it was to be understood as a charge against the profits of the company.
The CIT(A) considered the submissions put forth by the assessee- company. On the point of law, CIT(A) referred to the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT, 255 ITR 273 (SC) to point out that it was impermissible for the assessee to make an adjustment to the net profit as per Profit & Loss Account other than the adjustments permitted in Explanation-1 to Sec. 115JB(2) of the Act. According to the CIT(A), the impugned adjustment made by the assessee to the net profit shown in the Profit & Loss Account prepared under the Companies Act, 1956 was not permissible as per Explanation-1 to Sec. 115JB(2) of the Act.
Further, the CIT(A) differed with the assessee on the nature of the impugned Provision to be an ‘ascertained liability’. As per the CIT(A), the redeemable Preference shares in question were not in the nature of ‘debt’ and, therefore, any liability thereof could not be considered to be an ‘ascertained liability’. The CIT(A) noted that it was not certain as to when the Preference shares would be converted into Equity shares. The CIT(A) has summed-up his stand in para 7.6 of his order, which reads as under :-
“7.6 From above discussion it is clear that the basic issue in respect of this ground is whether the net profit, as per the statement of profit and loss account prepared in accordance with provisions of part-II of Schedule VI to the companies Act, 1956, is to be further reduced by the amount of preference share redemption reserve appropriated from the surplus in the 7 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 statement of profit and loss account to arrive at the book profit as per section 115JB of the I.T. Act. As already held in para 7.4.4 above, that the appellant has not credited the profit and loss account by the said amount of addition to reserves of Rs.242,15,414/-, so any reduction from the net profit was not required as per Explanation (i). The appellant has not claimed the said amount in the statement of profit and loss account as an expense/liability, so its claim to reduce the net profit by the said amount could not be allowed. Further, as held in para 7.4.7 above, the amount of Rs.242,15,414/- is in the nature of reserve and not provision/liability. Therefore, the said amount was not to be excluded from the net profit to arrive at the book profit u/s 115JB of the Act. Accordingly, the addition of Rs.242,15,414/- is upheld and ground No. 4 & 5 are dismissed.”
Against such a decision of CIT(A), assessee is in further appeal before us.
Before us, the learned representative for the assessee, at the outset, submitted that a similar controversy has been considered by the Tribunal in assessee’s own case as well as in the case of another sister concern, M/s. Wellknown Synthetics Pvt. Ltd. for Assessment Year 2010-11 vide & 2692/Mum/2015 dated 22.11.2016, wherein similar addition made while computing the book profit u/s 115JB of the Act has been deleted. In this context, we have perused the decision of the Tribunal dated 22.11.2016 (supra) and find that the issue raised therein is very much similar to the controversy which is raised before us. Although the Tribunal has discussed the issue in a detailed manner in the context of assessee’s sister concern, M/s. Wellknown Synthetics Pvt. Ltd., it has thereafter decided the issue in assessee’s own case for Assessment Year 2010-11 also in the same order by following its reasoning elaborated in the case of assessee’s sister concern. Be that as it may, we are tempted to reproduce hereinafter the relevant
8 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 portion of order of the Tribunal which would help in appreciating the reasoning weighing with the Tribunal in upholding the stand of the assessee.
“11. We have carefully considered the entire gamut of facts, rival contentions made by the parties and the relevant finding given in the impugned orders. The main dispute for our adjudication is, whether the provision for additional premium payable on redemption of preference shares amounting to Rs.39,82,140/- which was payable at a stipulated rate of 3% per annum can be allowed to be reduced while calculating the book profit under section 115JB or not. From the perusal of the profit and loss account, it is seen that the assessee had started its computation with the net profit above the line and thereafter has reduced the provision for additional premium on the preference share to arrive at the book profit for the purpose of 115JB. The relevant entries and the manner in which entries have been made in financial accounts in this regard are as under: -
(Figures are in Rs. Lakhs as on 31.03.2010)
Here the assessee has debited Preference Share Redemption Reserve of Rs.39.82 lakhs to the Profit & Loss account and that is why the amount
9 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 available for appropriation at Rs. 591.77 lakhs has been reduced to Rs. 429.41 lakhs. The appropriation is part of profit & loss account and the items debited cannot be ignored while calculating the book profit u/s 115JB. This working of Reserves and Surplus has again been given in Schedule B, which is as under:-
Finally the figure of Rs. 2167.90 lakhs has been shown under the head “Reserves and Surplus”.
10 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016
12. The Ld. CIT(A) has upheld the action of the Assessing Officer denying the claim of such reduction from the book profit inter alia on the ground that, firstly, at the time of issue of such shares, the premium received by the assessee has not been credited to the profit and loss account hence, it is in the nature of provision for premium payable on redemption of such shares which cannot be debited to the profit and loss account; secondly, the assessee should have provided the premium from the share premium account in accordance with the section 80 of the Companies Act; and lastly, the shares are optionally convertible in equity shares so in future the share cannot be redeemed and cannot be converted into equity shares and it will further amount to redemption of capital, hence it is in the nature of unascertained liability. From the perusal of the impugned order of the CIT(A) as well as Ld. Assessing Officer, first of all it is seen that nowhere these authorities have held that either the assessee’s account has not been prepared as per Schedule -VI of the Companies Act or the assessee has not followed proper Accounting Policies or Accounting Standards, which has been accepted and adopted at the annual general meeting in accordance with provisions of Section 210 of the Companies Act, then there is no scope for the Assessing Officer to tinker with such accounts except for as provided under Explanation 1. So far as first contention of Ld. CIT(A) the same cannot be accepted, because the primary requirement of 115 JB is that account drawn by the assessee should be in accordance with schedule VI of the Companies Act. The receipt of securities premium account is a Balance Sheet item and hence, it is always credited under the head “Reserves & Surplus” in the Balance sheet and is not a part of profit & loss account. This is as per the requirement of Part II & III of Schedule VI. Thus, the question of credit to the profit and loss account of receipt of share premium does not arise. Accounting treatment of the said amount on account of preference share redemption reserve has already been 11 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016
explained by the Ld. Counsel which has summarized by us in the foregoing paragraphs. The accounting treatment by the assessee is in fact in compliance and in consonance with section 80 of the Companies Act, which reads as under:-
"80. POWER TO ISSUE REDEEMABLE PREFERENCE SHARES (1) Subject to the provisions of this section, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed: Provided that - (a) no such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption; (b) no such shares shall be redeemed unless they are fully paid; (c) the premium, if any, payable on redemption shall have been provided for out of the profits of the company or out of the company's security premium account before the shares are redeemed; (d) where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called the capital redemption reserve account, a sum equal to the nominal amount of the shares redeemed ; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the capital redemption reserve account were paid-up share capital of the company."
Thus, from the above provision especially from reading of clause (c), it is ostensibly clear that, a company has an option to provide for premium on preference share either from the profits of the company or through the share premium account. Here in this case, as discussed in foregoing paragraphs, the assessee has made the provision of premium account through profit and loss account. While calculating the book profit the assessee has not added back the provision of premium payable on 12 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 redemption of preference shares, that is, it is not claiming the provision in terms of Explanation 1 of section 115JB, albeit it has adjusted against the book profits on the ground that it is in nature of ascertained liability directly routed through profit and loss account and not under any of the clauses of Explanation 1 to section 115JB. Another objection of the revenue is that, redemption of preference share is reduction of capital and such capital amount cannot be allowed from the book profit. Such a contention of the revenue is not supported by any provisions of law either under the Companies Act or by any judicial precedence. The question whether the premium amount is capital or revenue is not relevant for the purpose of book profit. One has to debit or credit the items of income or expense as per the accounting principles and Section 80 of the Companies Act mandates the company to provide the premium on redemption either through profit & loss account or through share premium account. Once the company has opted for providing for share premium through profits & loss account it has to debit the same in the profit and loss account and same cannot be disallowed on the ground that it is in the nature of capital.
13. Now coming to the observation of the revenue authorities that the said additional premium is in the nature of reserves, therefore, cannot be allowed to be reduced from the book profit. We are unable to subscribe to this contention, because premium and additional premium on preference shares will constitute a ‘liability’ or a ‘provision’ and clause (c) of Section 80 of the Companies Act categorically provides that the company needs to provide for the payment of premium on preference shares and the same has to be reckoned in the either in the nature of ‘provision’ or a ‘liability’. The concept of “Reserve” as defined in Accounting Standards 29, is that portion of earning/ receipts or other surplus of an enterprise, whether capital or revenue, is appropriated by the management for a general or specific purpose other than provision for depreciation or diminution in the value of assets or for known liability. On the other hand, “Liability” has been defined as a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an out flow from the enterprise of resources embodying economic benefits; and “Provision” is a liability which can be measured only by using substantial degree of estimation. Thus, the revenue’s contention it is in the nature of the “reserve” is sans any merits and hence deserves to be rejected. Moreover,
13 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 the Hon’ble jurisdictional High Court in the case of CIT vs Raymond Ltd. (supra) while deciding the issue of debenture reserve observed and held as under:- “The nature of a Debenture Redemption Reserve (DRR) has been considered by the judgment of the Supreme Court in National Rayon Corporation Ltd. Vs. Commissioner of Income Tax [(1997) 227 ITR 764]. 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 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 Corporation, the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. Vs. CIT [[1981] 132 ITR 559], 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 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”.
Here the preference shares is akin to debentures for the reason that, both are repayable and hence in the nature of debt.
14. During the course of hearing it was also argued by Ld. DR that impugned amount debited in profit & loss account by the assessee of 14 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016
Rs.39.82 lacs under the head ‘Preference Shares Redemption Reserve’ is of the nature of ‘appropriation’ of profit, since the same has been shown by the assessee ‘below the line’ and has been deducted from the amount shown in the P & L A/c as ‘Amount available for appropriation’. Thus, it was liable to be added to the book profits for computing book profit u/s 115JB.
We have considered this aspect of the argument also. But, we do not find force in his contention of Ld. DR. It is well settled law that under the income tax law, taxability of an amount or otherwise is determined on the basis of intrinsic nature of a transaction and not necessarily on the basis of its nomenclature or the manner in which same is reflected in its accounts by an assessee. As discussed in detail above, the impugned amount has been debited in the Profit & Loss account of the assessee because of mandate of law. As discussed above in detail, section 80 of the Companies Act, 1956, stipulate that premium payable on the redemption on preference shares is to be provided for out of the ‘profits’ of the company or out of Company’s Security Premium account. Thus, if this amount is not provided for from the security premium account, then, it has to be compulsorily provided for out of the ‘profits’ of the company. Under these circumstances, if this amount is debited in the P & L A/c, then it partakes the character akin to a ‘charge’ on the profits. Thus, the impugned amount debited in the profit and loss account is a ‘charge’ on the profits and cannot be said to ‘appropriation’ out of profits. Hence in order to arrive at and compute the book profit u/s 115JB, this amount has also to be adjusted from the profits of the year which has been rightly done by the assessee. Further, if an amount is actually of the nature of a ‘charge’, it shall not become an item of ‘appropriation’, merely because it has been inadvertently shown by the assessee in its P & L A/c along with the other amounts of ‘appropriation’. Thus, the AO could not have denied the benefit of this amount of ‘charge’ by notionally adding this amount to the amount of profits of the year for the purpose of computing book profit u/s 115JB.
17. Accordingly, we hold that the reasons assigned by the authorities below for making addition for book profit of Rs.39,82,190/- on account of preference share redemption reserve cannot be upheld and Assessing Officer is directed to allow the same and the amount should be reduced
15 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 from the working of the book profit u/s 115JB. Accordingly, ground No.1 as raised by the assessee is allowed.”
In this background, the ld. CIT-DR appearing for the Revenue has supported the orders of the authorities below. Though the ld. CIT-DR did not contest that the controversy in question has indeed been considered by the Tribunal in the case of assessee itself in the order dated 22.11.2016 (supra), so however, she has sought to make out a case that the earlier bench has decided the issue inadequately inasmuch as the same has not taken into consideration the issue in its proper perspective and/or that the same has been decided by not considering the correct position of law and facts. In this background, the ld. CIT-DR has made elaborate submissions in support of the addition made by the Assessing Officer while computing the book profit u/s 115JB of the Act. Firstly, the ld. CIT-DR has referred to the copy of return of income filed by the assessee. According to her, the ‘book profit’ as per Sec. 115JB of the Act disclosed in the ITR-6 to the return of income has been further reduced by the impugned amount, which is claimed to be on account of withdrawal from Reserves or Provision, if credited to the Profit & Loss Account. It is sought to be pointed out by the ld. CIT-DR that the figure of book profit for Sec. 115JB can be adjusted only as per the increase or reduction specified in Explanation-1, clauses (a) to (f) and (i) to (vii) respectively whereas in its claim before the Assessing Officer, the defence put-up by the assessee was that the Provision for Preference Share Redemption Reserve is an ascertained liability which is sought to be reduced from the book profit as per Explanation-1(c) to Sec. 115JB of the Act. The aforesaid factual matrix has been brought out by the ld. CIT-DR to point out the contradiction in the stand of the assessee inasmuch as while filing the 16 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 return of income in ITR-6, assessee claimed the said amount as a deduction against the column described as “amount withdrawn from Reserves or Provision if credited to Profit & Loss Account” which was distinct from the claim made before the Assessing Officer of the impugned sum being an ascertained liability.
It is further emphasised that the Assessing Officer does not dispute the net profit as disclosed in the Profit & Loss Account prepared by the assessee but has only disagreed with the assessee on the adjustment claimed by it towards the Provision for Preference Share Redemption Reserve inasmuch as the same does not satisfy the requirements prescribed in Sec. 115JB of the Act itself. It was, therefore, contended that the net profit reflected in the Profit & Loss Account prepared in terms of Schedule-VI of the Companies Act, 1956 has to be adopted as such for the purpose of computing the book profit u/s 115JB of the Act subject, of course, to the adjustments prescribed therein and since the impugned claim is not as per the adjustments prescribed, the Assessing Officer was justified in rejecting the same. At this point, reference has been made to the decision of Mumbai Bench of the Tribunal in the case of Rishiroop Rubber International Ltd., & 471/Mum/2010 dated 20.01.2012 wherein the Tribunal upheld the basic principle that the Assessing Officer cannot tinker with the profit arrived at in the Profit & Loss Account prepared as per Schedule-VI of the Companies Act, 1956 but where there was an apparent and total departure from the Accounting Standards as per the provisions of the Companies Act, 1956 while preparing the accounts including the Profit & Loss Account, then, the same is amenable to examination by the Assessing Officer while determining the book profit u/s 115JB of the Act. The ld. CIT-DR emphasised
17 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 that such principle also operates against the assessee in as much as the assessee has made an adjustment to the book profit arrived at as per the Profit & Loss Account prepared under the Companies Act, 1956, which is not expressly provided in Sec. 115JB of the Act itself.
The aforesaid aspect has been emphasised even in the context of the findings of the Tribunal in assessee’s own case for the earlier assessment years to the effect that the Provision in question is a charge against the profit and is not an appropriation towards a Reserve. It is pointed out that in applying the aforesaid principle, the then Bench in its order dated 22.11.2016 (supra) did not consider the fact that the net profit disclosed in the Profit & Loss Account prepared as per Schedule-VI of the Companies Act, 1956 cannot be tinkered with except as per the adjustments permissible in Sec. 115JB of the Act. Further, the ld. CIT-DR relied upon the judgment of the Hon'ble Delhi High Court in the case of SREI Infrastructure Finance Ltd., [2015] 54 taxmann.com 254 (Delhi) to point out that even a Reserve created by debiting the Profit & Loss Account on account of statutory requirements cannot take the status of a ‘Provision’ or a ‘charge against the profits’ for the purposes of Sec. 115JB of the Act. It was contended that the impugned Provision was a Reserve and, therefore, clause (b) of Explanation-1 is attracted and the amount transferred to the Provision for Redemption of Preference Shares is includible in the ‘book profit’ as understood for the purpose of Sec. 115JB of the Act.
Apart from the aforesaid, the ld. CIT-DR also argued that in view of the judgment of Hon'ble Delhi High Court in the case of SREI Infrastructure Finance Ltd. (supra), the said amount could not be treated as a Provision as 18 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 distinct from a Reserve. In the context of the reliance placed by the Tribunal in its order dated 22.11.2016 (supra) for Assessment Year 2010-11 on the judgment of the Hon'ble Bombay High Court in the case of CIT vs Raymond Ltd., [2012] 209 Taxman 65 (Bombay) to arrive at the conclusion that the impugned Provision for Redemption of Preference Shares was not a Reserve, it has been argued by the ld. CIT-DR that the judgment in the case of Raymond Ltd. (supra) has been rendered in different circumstances; as the same was in the context of Sec. 115JA of the Act whereas the applicable provision in the case of the assessee is Sec. 115JB of the Act.
15. In the course of arguments, reliance has also been placed on the decision of the Mumbai Bench of the Tribunal in the case of Duke Offshore Ltd. vs DCIT, [2011] 45 SOT 399 for the proposition that the starting point of the Profit & Loss Account for Sec. 115JB of the Act is the figure after the appropriations and extraordinary items including prior period expenses, and not the profit figure arrived at above line.
In nutshell, the sum and substance of the stand taken by the ld. CIT- DR is that the adjustments sought to be made to the book profit by the assessee on account of the impugned Provision is impermissible in terms of Explanation-1 to Sec. 115JB(2) of the Act and, therefore, the decision of the Tribunal in assessee’s own case dated 22.11.2016 (supra) be departed from and the impugned orders of the lower authorities be upheld.
In the above background, we have considered the rival stands. Before proceeding to adjudicate the specific point raised in the appeal, a brief observation with regard to the provisions of Sec. 115JB of the Act is relevant.
19 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 Sec. 115JB of the Act has been inserted by the Finance Act, 2000 w.e.f. 01.04.2001 and seeks to prescribe that the companies are liable to pay minimum tax if they have book profit under the Companies Act, 1956. Prior to this, the concept of companies being required to pay a minimum tax was initially introduced in 1996 by way of Sec. 115J of the Act. Thereafter, from Assessment Year 1997-98, Sec. 115JA of the Act was inserted which has yielded place to the present Sec. 115JB of the Act w.e.f. 01.04.2011. As we have noted earlier, Sec. 115JB of the Act prescribes that where the income tax payable on the total income as computed under the provisions of the Act in respect of any year is less than 18 ½ % of the book profit under the Companies Act, 1956, then, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be at the rate of 18 ½ %. In all its manifestations, may it be Sec. 115J or 115JA or the present Sec. 115JB of the Act, what is of importance is the ‘book profit’ under the Companies Act, 1956. In fact, Explanation-1 to Sec. 115JB(2) of the Act seeks to explain the expression “book profit” to be the net profit as shown in the Profit & Loss Account of the relevant previous year prepared in accordance with the provisions of Part-II and Part-III of Schedule-VI of the Companies Act, 1956, subject to certain adjustments prescribed therein which would either increase or decrease such net profit. In fact, the prescription in Sec. 115JB of the Act to make adjustment in order to arrive at the ‘book profit’ was also similarly placed in the erstwhile Sec. 115J as well as Sec. 115JA of the Act. In the context of Sec. 115J of the Act, a question arose as to whether the correctness of the Profit & Loss Account prepared by an assessee-company and certified by the statutory Auditors of the company as having been prepared in accordance with the requirements of Part-II and Part-III of Schedule-VI of the Act the Companies Act, 1956
20 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 could be questioned by the Assessing Officer. This controversy was addressed by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra). Before the Hon'ble Supreme Court, a pertinent point raised by the Revenue was on the basis of Sub-section (1A) of Sec. 115J of the Act which, in the perception of the Revenue, empowered the Assessing Officer to independently inquire into the computation of ‘book profit’ under the Companies Act, 1956. The Hon'ble Supreme Court negated the stand of the Revenue inasmuch as the provisions of Sub-section (1A) of Sec. 115J of the Act were understood as mandating the assessee-companies to maintain their accounts in accordance with the requirements of the Companies Act, 1956. It was also observed by the Hon'ble Supreme Court that the requirement of maintaining its accounts in accordance with the Companies Act, 1956 was a mandate which was bodily lifted from the Companies Act, 1956 into the Income Tax Act, 1961 for the limited purpose of making the accounts maintained as a basis for computing an assessee-company’s income for levy of income tax under special circumstances. It was, therefore, held by the Hon'ble Supreme Court that the Assessing Officer under the Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, 1956 as the same was scrutinised and certified by the statutory Auditors and is approved by the company in its General meeting and thereafter it is filed before the Registrar of Companies, who also has a statutory obligation to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act, 1956. By pointing out the aforesaid, we are only trying to emphasise that the intrinsic soul of Sec. 115JB of the Act is the computation of ‘book profit’ under the Companies Act, 1956. Ostensibly, the observations of the Hon'ble Supreme Court are apt even in the context of examining and 21 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 understanding the basic structure of Sec. 115JB of the Act because there cannot be two set of income computations; one for the purpose of Companies Act, 1956 and another for the purpose of Income Tax Act, 1961 while both are being maintained under the same Act, i.e. the Companies Act, 1956.
Coming back to the provisions of Sec. 115JB of the Act, ‘book profit’ refers to the net profit shown in the Profit & Loss Account subject to adjustments which increase or reduce the book profit and such adjustments are prescribed in Explanation-1 thereto. Therefore, the first step for arriving at the ‘book profit’ is adoption of the net profit as shown in the Profit & Loss Account for the relevant previous year prepared u/s 115JB(2) of the Act and as increased by the amounts stated in clauses (a) to (i) of Explanation-1, if such amounts are debited to the Profit & Loss Account; it also prescribes decrease of ‘book profit’ by clauses (i) to (viii) if the same is credited to the Profit & Loss Account. In the instant case, the short controversy revolves around the Provision for Premium payable on redemption of Preference shares, which has been sought to be reduced so as to determine the ‘book profit’ to arrive at the tax liability u/s 115JB of the Act. The assessee set-up its claim in terms of clause (c) of Explanation-1 which prescribes for increase in the book profit by the amount or amounts set-aside to Provision made for meeting liabilities other than ascertained liabilities. The claim of assessee is that the said Provision is an ascertained liability. It is also sought to be explained that the said Provision has been charged to the Profit & Loss Account by means of an appropriation and carried to the Balance-sheet. We have also observed earlier that the said stand of the assessee has been upheld by the Tribunal in assessee’s own case for earlier year. Be that as it
22 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 may, the ld. CIT-DR has relied upon the judgment of the Hon'ble Delhi High Court in the case of SREI Infrastructure Finance Ltd. (supra) to point out that such a Provision does not represent a defined liability but has to be understood as a ‘Reserve’ and, therefore, in terms of clause (b) of Explanation-1, the amount carried to any Reserve would go to increase the net profit shown in the Profit & Loss Account in order to arrive at the ‘book profit’ for the purposes of Sec. 115JB of the Act. The factual aspect about the nature of the impugned Provision has already been noted by us in the earlier part of this order and is not being repeated for the sake of brevity. In order to understand whether the claim of assessee is to be understood as a Provision, which is a charge against the profits, or a mere ‘Reserve’ which is to the contrary, we may refer to the Companies Act, 1956 because what we are required to rely on is the manner of computing the ‘book profit’ under the Companies Act, 1956. It is in this context one has to appreciate the claim made by the assessee consistently before the lower authorities, and which have found favour with our co-ordinate Bench in the earlier year, which is to the effect that Sec. 80 of the Companies Act, 1956 permits a company to consider the Premium payable on redemption of Preference shares as a charge against the profits. This has been countered by the ld. CIT-DR on the strength of the judgment of the Hon'ble Delhi High Court in the case of SREI Infrastructure Finance Ltd. (supra) to say that even the creation of a statutory mandated ‘Reserve’ would not impart it the status of a ‘Provision’ or ‘a charge against the profits’ for the purposes of Sec. 115JB of the Act. In this context, we have perused the judgment of the Hon'ble Delhi High Court. The Hon'ble Delhi High Court was dealing with a controversy relating to computation of book profit u/s 115JB of the Act in relation to an amount transferred to a Special Reserve pursuant to Sec. 45-IC
23 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 of the Reserve Bank of India Act, 1934 in the context of clause (b) of Explanation to Sec. 115JB of the Act. Notably, clause (b) of the Explanation to Sec. 115JB of the Act prescribes for increasing the net profit by the amount carried to any Reserve. The assessee contended that the Reserve created in terms of the mandate of Sec. 45-IC of the Reserve Bank of India Act, 1934 was not in fact a Reserve contemplated in clause (b) of Explanation-1 to Sec. 115JB of the Act, but was in the nature of a liability. The second point canvassed was that in terms of Sec. 45-IC of the Reserve Bank of India Act, 1934, transfer of a Reserve implied that the assessee does not have any title over such Reserve and it was a case of diversion of income at source. Both these arguments were negated by the Hon'ble Delhi High Court and it was held that clause (b) of Explanation to Sec. 115JB of the Act was attracted and such a Reserve would go to increase the net profit shown in the Profit & Loss Account in order to compute the ‘book profit’ u/s 115JB of the Act. Insofar as the first argument raised before the Hon'ble Delhi High Court was concerned, the Hon’ble Court noted that the expression “Reserve” in clause (b) of Explanation-1 was preceded by the word “any” and, therefore, it was inferred that the expression would include all types and categories of Reserves without exception. It also underlined the expression “Reserve by whatever name called” used in clause (b) of Explanation-1 to negate the plea of the assessee. Therefore, the ratio of the judgment of the Hon'ble Delhi High Court cannot be imported in the instant facts inasmuch as it is not the case of the assessee that the impugned amount was a Reserve in the nature of a Provision. Moreover, Sec. 80 of the Companies Act, 1956 has been pressed into service by the assessee to point out that the Premium payable on redemption of Preference shares was a charge against the profits and, in that context, it has been argued that the 24 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 instant Provision is to be understood as a charge against the profits so as to be an ascertained liability from the standpoint of the Companies Act, 1956. Pertinently, we may again reiterate here that the flavour of the ‘book profit’ for the purposes of Sec. 115JB of the Act has to be appreciated from the relevant statute, i.e. Companies Act, 1956, subject of course to the adjustments prescribed in Explanation-1 to Sec. 115JB(2) of the Act. Therefore, the impugned claim cannot be seen as a Reserve, as sought to be made out by the ld. CIT-DR.
In fact, another aspect which was before the Hon'ble Delhi High Court was in relation to the transfer of an amount to Debt Redemption Reserve for which also it negated the stand of the assessee and held it to be a Reserve falling within the scope of clause (b) of Explanation-1 to Sec. 115JB of the Act. In coming to such a decision, in paras 22 and 23, the Hon'ble High Court specifically noted that the assessee therein had failed to explain the nature and character of the debt and went on to hold that in the absence of such explanation, the said sum would not be liable to be accepted as an ‘ascertained liability’ in terms of clause (c) of Explanation-1 to Sec. 115JB of the Act. In fact, in the case before us, and which has also been noted in detail by our co-ordinate Bench in the earlier year, the Provision is for Premium payable on redemption of Preference shares and the additional Premium/return payable on such redemption. There is a complete explanation which reflects the nature and character of the Provision and it clearly underlines the obligation or the liability to pay over and above the face value of the Preference shares at the time of redemption. Therefore, in our view, no fault can be found with the conclusion that the impugned Provision was indeed an ‘ascertained liability’ of the nature referred to in 25 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 clause (c) of Explanation-1 to Sec. 115JB of the Act. We may also add here that there is nothing to distract from applying the ratio of the judgment of the Hon'ble Bombay High Court in the case of Raymond Ltd. (supra) to conclude that the impugned amount is to be understood as a known liability and not as a Reserve.
Now, we may take-up the plea raised by the ld. CIT-DR that there was a contradiction in the stand of assessee in justifying the amount claimed inasmuch in the return of income, assessee canvassed it to be an amount withdrawn from Reserve or Provision, which is liable to be reduced if credited to Profit & Loss Account vis-a-vis the claim made before the Assessing Officer that the impugned sum was an ascertained liability in terms of clause (c) of Explanation-1 to Sec. 115JB of the Act. In our considered opinion, it is a well-settled proposition of law that in order to address a legal point, what is of relevance is the applicable legal position as emerging from the statutory provisions and the attendant jurisprudence and not merely the stand taken by the parties at a particular point of time. Thus, we are not going into the efficacy of the contradiction that is sought to be pointed out by the ld. CIT-DR as, in our view, the same is not germane to decide the controversy before us.
Another aspect which has been emphasised by the ld. CIT-DR is that the adjustment sought to be made by the assessee is not in terms of the prescription in Explanation-1 to Sec. 115JB of the Act. We have already examined the said plea and in the context of our aforesaid discussion, find that the claim of assessee of the impugned Provision being in the nature of an ascertained liability is justified on facts as well as on point of law. In any 26 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 case, this aspect of the matter has also been examined in detail by our co- ordinate Bench in the earlier year with which we concur. Thus, we conclude by holding that the impugned Provision is in the nature of an ascertained liability and in terms of clause (c) of Explanation-1 to Sec. 115JB of the Act, ‘book profit’ for the purpose of Sec. 115JB of the Act has to be determined net-off of such Provision.
Before parting, we may also say that the Revenue had, inter-alia, moved a petition to constitute a larger Bench ostensibly with the object of reviewing the earlier order of the Tribunal dated 22.11.2016 (supra). Both the sides did make respective pleas on this aspect, but in our view, no justifiable reasons exist, for the present, to set-up a Special Bench to review the earlier decision of the Tribunal dated 22.11.2016 (supra). In fact, the arguments on merits advanced by the ld. CIT-DR were also an attempt to persuade us to depart from the view adopted by the Tribunal earlier in its order dated 22.11.2016 (supra) and/or set-up a larger Bench. In our considered opinion, judicial discipline implores us to follow the precedent, especially where it has been rendered in assessee’s own case and under identical set of facts. At this stage, we may hasten to add that we are in complete concurrence with the observations of our co-ordinate Bench in the case of Shri Homi K. Bhabha vs ITO, dated 28.09.2011 that to follow an earlier precedent of the co-ordinate Bench or to make a reference to a larger Bench is dependent on the satisfaction of the Bench about the correctness or otherwise of the precedent and not the view of the aggrieved party. As we have indicated earlier, even after examining the pleas set-up by the ld. CIT-DR, we find ourselves unable to disagree with the precedent dated 22.11.2016 (supra) rendered in assessee’s own case.
27 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 Thus, we find no justifiable reasons for recommending constitution of a Special Bench. Needless to say at this juncture, the aggrieved party is not left without remedy inasmuch as the statute provides for appeal to the Hon'ble High Court against the order. Therefore, the said view of the Department is also negated.
In the result, we hereby allow the stand of the assessee following the precedent in assessee’s own case dated 22.11.2016 (supra).
In the result, so far as the appeal of the assessee for Assessment Year 2012-13 is concerned, the same is partly allowed.
So far as the appeals of the assessee for Assessment Years 2013-14 and 2014-15 are concerned, though the amounts vary but the issues involved are identical to those considered by us in the appeal of the assessee for Assessment Year 2012-13 in the earlier paras. Therefore, our decision in appeal for Assessment Year 2012-13 shall apply mutatis mutandis to these appeals also.
Now, we may take-up the appeals of the Revenue for Assessment Years 2008-09, 2009-10 and 2010-11 which involve a common issue. In fact, the three appeals arise from a common order passed by the CIT(A) for the three assessment years. It was a common point between the parties that the facts and circumstances relating to the dispute in appeal are identical for all the three assessment years and, therefore, the appeal of the Revenue for Assessment Year 2008-09 is taken as the lead case. This appeal is directed against the order of CIT(A)-49, Mumbai dated 28.06.2016, pertaining to the Assessment Year 2008-09, which in turn has arisen from the order passed by 28 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 the Assessing Officer, Mumbai dated 01.04.2015 under section 143(3) r.w.s. 153A of the Act.
In this appeal, Revenue has raised the following Grounds of appeal :-
“1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the additions made in the assessment order passed u/s.153A r.w.s. 143(3) of the Act on issues not based on any incriminating material found during the course of search following the ratio of decision of Hon'ble Bombay High Court in the case of All Cargo Logistics Ltd, without appreciting the fact that the department has not accpeted the order passed by the Hon'ble High Court in said case, and preferred to file Special Leave Petition before the Hon'ble Supreme Court.
2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 29,95,036/- made u/s. 14A read with rule 8D of Income Tax Rules 1962, on the ground that addition / disallowance was not based on any incriminating material , without appreciting the fact that the department has not accepted the order passed by the Hon'ble High Court in the case of All Cargo Logistics Ltd., and preferred to file Special Leave Petition before the Hon'ble Supreme Court.
3. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the adhoc disallowance u/s. 14A read with rule 8D of Income Tax Rules 1962 while computing the book profit u/s. 115JB of the Act, on the ground that addition / disallowance was not based on any incriminating material , without appreciting the fact that the department has not accpeted the order passed by the Hon'ble High Court in the case of All Cargo Logistics Ltd., and preferred to file Special Leave Petition before the Hon'ble Supreme Court.
4. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of deduction on account of the provision made for redemption of prefrence shares of Rs.9,68,70,966/-, on the ground that addition / disallowance was not based on any incriminating material while computing the book profit u/s. 115JB of the Act without appreciting the fact that the department has not accpeted the order passed by the Hon'ble High Court in the case of All Cargo Logistics Ltd., and preferred to file Special Leave Petition before the Hon'ble Supreme Court.
29 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016
On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance made on account of interest received as excluded from, the claim of deduction u/s.80IB of Rs.34,15,121/-, on the ground that addition / disallowance was not based on any incriminating material , without appreciating the fact that the department has not accpeted the order passed by the Hon'ble High Court in the case of All Cargo Logistics Ltd., and preferred to file Special Leave Petition before the Hon'ble Supreme Court.”
As a perusal of the Grounds of appeal reveal, the pertinent dispute revolves around the scope and ambit of an assessment envisaged u/s 153A r.w.s. 143(3) of the Act. The principal point involved arises from the decision of CIT(A) to hold that in the case of an assessment u/s 153A of the Act where the original assessment does not abate in terms of the second proviso to Sec. 153A(1) of the Act, the additions permissible are only those which are based on the incriminating material found in the course of search relating to such additions. The CIT(A) arrived at such a premise based on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Continental Warehousing Corporation (Nhava Sheva Ltd), 374 ITR 645 (Bom.). On the basis of such a legal proposition, CIT(A) deleted the additions made by the Assessing Officer which were found not made on the basis of any incriminating material found in the course of search. The relevant discussion by the CIT(A) in this regard is as under :-
“5.1 The original return of income was filed u/s 139(1) of the Income Tax Act, 1961 on 29.9.2008 declaring total income of Rs.850,42,851/-. The assessment u/s.143(3) was completed vide order dated 28.12.2010 assessing the total income at Rs.852,36,513/-by making an addition of Rs.193,662/- u/s.14A of the Act. The appellant did not prefer appeal against the said assessment order and the same became final. The appellant had computed book profit u/s.115JB at Rs.180,488,095/-and the A.O. has not disturbed the book profit in the assessment made u/s.143(3)
30 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 of the Act. The appellant has shown book profit in the return u/s.153A at rs.18,06,81,757/- after making an addition of Rs. 193,662/- u/s.14A of the Act. Total income as per normal provisions has been declared u/s 153A at Rs.955,12,960/-.
5.1.1. In view of the above facts, the assessment for A.Y. 2008-09 had reached finality and no assessment was pending as on the date of search u/s. 132 of the I.T. Act i.e on 23.5.2013. Thus, it is a case where the assessment for A.Y.2008-09 were completed u/s. 143(3) and no assessment was pending that could abate as per second proviso to sub- section (1) of section 153A, on the date of the search.
5.1.2. As per the decision of the special bench of ITAT, Mumbai in the case of All Cargo Global Logistics Ltd., assessment in the case which had not abated has to be made in the following manner : "In addition to the income that has already been assessed the assessment u/s.153A will be made on the basis of incriminating material, which in the context of relevant provisions means books of account, other documents, found in the course of search, but not produced in the course of original assessment, and undisclosed income or property disclosed in the course of search." This decision of the ITAT Special bench, Mumbai has been approved by the Hon'ble High Court of Mumbai in the case of All cargo Global Logistics Ltd 374 ITR 645(BOM).
5.2. The A.O. while making the assessment order u/s. 143(3) r.w.s 153A of the Act has discussed the addition of Rs.29,95,036/- on account of disallowance u/s.14A r.w. Rule 8D of the I.T. Act in para 4 of the assessment order. This addition includes Rs.2995036/- under Rule 8D(2)(ii) with respect to disallowance of interest and Rs.193662/- under Rule 8D(2)(iii) on account of expenses @0.5% of average value of investment. In the original assessment the addition of Rs.193662/- was only made. From the perusal of the above said para 4, it is evident that there is no reference to incriminating document or undisclosed income emanating from the search dated 23.5.2013. Thus, it is clear that the A.O. has made a further disallowance of Rs.29,95,036/- which is not on the basis of any incriminating material found in the course of search, but on the basis of information and material available in the return of income. Therefore,
31 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 relying on the decision of All Cargo Global Logistics Ltd., it is held that the addition of Rs.29,95,036/- for A.Y 2008-09 is without jurisdiction. Accordingly, this addition is directed to be deleted.
5.2.1. Similarly, the A.O has made disallowance of Rs.34,15,121/- on account of interest received excluded from deduction u/s.80IB (3) as per para 6 of the assessment order which is not based on any incriminating material and is found to be without jurisdiction This addition has been made twice in the computation of total income by the A.O, once as addition to business income and secondly reducing the deduction u/s 80IB by the said amount. Accordingly, both these additions are directed to be deleted.
5.2.2. The A.O. has made an addition of Rs.968,70,966/- on account of disallowance of provision created for redemption for preference shares and an amount of Rs.29,95,036/- on account of disallowance u/s.14A to the book profit shown by the appellant in return filed u/s.153A at Rs. 18,06,81,757/-, These additions are found to be without jurisdiction as the same is not based on any incriminating material found in the course of search. The A.O. is directed to delete these additions and recompute the book profit u/s.115JB of the Act accordingly.”
Now, in the above background, we may turn to the grievance of the Revenue as manifested in the aforestated Grounds of appeal. Pertinently, the Revenue has sought to assail the order of CIT(A) on a singular footing that the judgment of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva Ltd), which has been relied upon by the CIT(A), has not been accepted by the Department and a SLP has been preferred before the Hon'ble Supreme Court which pending. Ostensibly, the said argument of the Revenue does not distract from the fact that the ratio laid down by the Hon'ble Bombay High Court in the aforesaid case clearly continues to subsist and, therefore, the CIT(A) made no mistake in following the same.
32 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016
Before concluding, we may also examine the fact-situation as noted by the CIT(A) in applying the ratio of the judgment of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva Ltd) (supra). In this connection, the relevant facts are that a search action u/s 132(1) of the Act was carried out in Well Known group of concerns on 23.05.2013 in consequence to which, a notice u/s 153A(1) of the Act was issued to the assessee-company calling for a return of income for Assessment Year 2008-09. In response, assessee filed a return of income on 22.07.2014 declaring an income of Rs.9,55,12,959/- as per the normal provisions of the Act and book profit u/s 115JB of the Act was returned at Rs.18,06,81,757/-. This was against an income of Rs.8,50,42,851/- declared as per the normal provisions of the Act in the return originally filed u/s 139(1) of the Act on 29.09.2008 wherein the book profit u/s 115JB of the Act was computed at Rs.18,04,88,095/-. Notably, assessment u/s 143(3) of the Act was completed on 28.12.2010 determining the total income at Rs.8,52,36,513/- under the normal provisions of the Act which, inter-alia, contained an addition of Rs.1,93,662/- u/s 14A of the Act; and, so far as the computation of book profit u/s 115JB of the Act is concerned, the Assessing Officer did not disturb the computation made by the assessee at Rs.18,04,88,095/-. The return of income filed by the assessee u/s 153A of the Act was taken up for assessment whereby the total income has been assessed at Rs.10,53,38,240/- as per the normal provisions of the Act and the book profit u/s 115JB of the Act has been calculated at Rs.28,05,47,760/-. Notably, in the assessment finalised u/s 143(3) r.w.s. 153A of the Act, the Assessing Officer made three additions which are relevant for our purpose. Firstly, he disallowed a sum of Rs.29,95,036/- u/s 33 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 14A of the Act by applying Rule 8D(2)(ii) of the Rules, which was in addition to the disallowance of Rs.1,93,662/- made in the original assessment by applying Rule 8D(2)(iii) of the Rules. Secondly, the Assessing Officer disallowed a sum of Rs.34,15,121/- by excluding such interest income from deduction u/s 80IB(3) of the Act. Pertinently, this addition has been made twice by the Assessing Officer, as correctly noted by the CIT(A) – firstly, as addition to ‘business income’; and, secondly, by reducing the claim of deduction u/s 80IB of the Act. Thirdly, while computing the book profit u/s 115JB of the Act, the Assessing Officer made two adjustments – (i) Rs.9,68,70,996/- on account of Provision for redemption of preference shares; and, (ii) Rs.29,95,036/- representing disallowance computed u/s 14A of the Act. With respect to the aforesaid additions, CIT(A) has noted that the same are not based on any incriminating material found in the course of search, and therefore he proceeded to apply the ratio of the judgment of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva Ltd) (supra).
Pertinently, on the date of search, i.e. 23.05.2013, the assessment for Assessment Year 2008-09 was not pending and, therefore, in view of the second proviso to Sec. 153A(1) of the Act, such assessment did not abate. Clearly, in such a situation, the additions that are permissible in an assessment u/s 153A of the Act are only those which are based on incriminating material found in the course of search relating to such additions. The Assessing Officer is denuded from making additions on matters which have attained finality in the original assessment without there being any incriminating material found in the course of search. The aforesaid proposition is fully supported by the judgment of the Hon'ble
34 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva Ltd) (supra).
The fact-situation brought out by the CIT(A) is clearly borne out of record inasmuch as a perusal of the assessment order itself reveals that qua the aforesaid additions, there is no reference to any incriminating material found in the course of search. Therefore, we find no reasons to interfere with the factual findings arrived at by the CIT(A) and, in that background, no fault can be found with the CIT(A) for having applied the ratio of the judgment of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva Ltd) (supra) in order to delete the aforesaid additions. Thus, on facts as well as on point of law, we find no reasons to interfere with the decision of the CIT(A), which we hereby affirm.
In the result, appeal of the Revenue for Assessment Year 2008-09 is dismissed.
Before parting, we may refer to the argument set-up by the ld. CIT-DR based on the decision of the Hon'ble Delhi High Court in the case of Smt. Dayawanti vs CIT, 390 ITR 496 (Delhi). Explaining the relevance of the said decision in the present context, the ld. CIT-DR contended that in the present case during the course of search, assessee group was found to have indulged in effecting bogus purchases, which were otherwise capitalised in the account books. Assessee had claimed depreciation on such purchases on capital account, and such claim of depreciation was otherwise surrendered as a result of the search action. It was, therefore, contended that such surrender made in the course of search constituted an incriminating material
35 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 and that there was no further requirement that incriminating material qua each of the instant additions needed to exist so as to bring such additions within the scope of the impugned assessment u/s 153A of the Act. We have perused the judgment of the Hon'ble Delhi High Court in the case of Smt. Dayawanti (supra) and find that the same does not advance the cause of the Revenue in the instant case. Firstly, as we have seen earlier, the judgment of the jurisdictional High Court in the case of Continental Warehousing Corporation (Nhava Sheva Ltd) (supra) clearly brings out that the impugned additions would not fall within the scope of the instant assessment order u/s 153A of the Act given the fact-situation that the original assessment did not abate and there was no incriminating material found in the course of search qua such additions. Secondly, so far as the facts in the case of Smt. Dayawanti (supra) are concerned, the additions sought to be made in the assessment u/s 153A of the Act was a direct fall-out of the admission made in the course of search. Notably, in the course of search in that case, assessee had offered additional income on the ground that certain business was carried outside the books of account. In the subsequent assessment, the Assessing Officer rejected the book results and made addition by estimating the profits. It is in this context that the Hon'ble High Court appreciated that the books were correctly rejected and estimation of income resorted to and that the statements recorded could be taken into consideration in arriving at such a conclusion to justify rejection of the books. So far as the instant case is concerned, there is no scope for inferring that the surrender made by the assessee on account of depreciation claim is any way co-related to the impugned additions and, therefore, the ratio of the judgment of the Hon'ble Delhi High Court is inapplicable to the facts of the instant case. Considering these aspects, we find that the CIT(A) made no 36 M/s. Wellknown Polyester Ltd. to 5850 & 5496 to 5498/Mum/2016 mistake in deleting the impugned additions as being beyond the scope and ambit of an assessment u/s 153A of the Act in the absence of any incriminating material relatable to such additions.
Thus, the appeal of the Revenue for Assessment Year 2008-09 is dismissed.
So far as the appeals of the Revenue for Assessment Years 2009-10 and 2010-11 are concerned, though the amounts vary but the issues involved are identical to those considered by us in the appeal of the Revenue for Assessment Year 2008-09 in the earlier paras. Therefore, our decision in appeal for Assessment Year 2008-09 shall apply mutatis mutandis to these appeals also.
Resultantly, all the appeals of the Revenue are dismissed and the appeals of the assessee are partly allowed.
Order pronounced in the open court on 13th June, 2018.