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1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 4TH DAY OF NOVEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.356 OF 2014 BETWEEN: M/S. KILARA POWER PVT. LTD., NO.204C, 6TH MAIN 27TH CROSS, III BLOCK JAYANAGAR BANGALORE-560011. ... APPELLANT (BY SRI. ASHOK A. KULAKARNI, ADV.,) AND: THE INCOME TAX OFFICER WARD 11 (2), No.14/3 R.P. BUILDING, 5TH FLOOR NRUPATHUNGA ROAD BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 11.04.2014 PASSED IN ITA NO.589/BANG/2013 FOR THE ASSESSMENT YEAR 2007-08, PRAYING TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (II) ALLOW THE APPEAL BY SETTING ASIDE THE ORDER OF THE ITAT IN ITA NO.589/BANG/2013 DATED 11-04-2014 ORDER
2 OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 26- 02-2013 AND ASSESSMENT ORDER DATED 29-12-2009 AND SUITABLY MODIFY IT AS SOUGHT IN THE APPEAL. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court vide order dated 14.11.2014 on the following substantial question of law: (i) Whether on the facts and in the circumstances of the case for this assessment year while applying 115 JB to the case of the Appellant Rs.3,59,58,370/- is to be reduced from the book profit in full? (ii) In the alternative and without prejudice in the event that the answer to the above question is in the negative, whether on the facts and in the
3 circumstances while applying u/s 115JB to the case of the Appellant at least a sum of Rs.1.08 Crores being the amount of interest debited to the Profit & Loss Account for the accounting year ending 31-03-2002 should have been deducted? 2. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of generation of power. According to the assessee, it continuously ran into losses since its inception and borrowed an amount from Indian Renewable Energy Development Agency (IREDA). However, the assessee neither repaid the principle nor the interest. The total interest, which was payable in the Assessment Year 2007-08 was Rs.3.59 Crores. For the year ending 31.03.2007, the assessee entered into One Time Settlement (OTS) with IREDA under which entire interest as well as a part of principle amount was also waived by the IREDA. The total amount of interest waived by the IREDA under the One Time Settlement for
4 the year ending 31.03.2007 was Rs.3,59,58,370/-. The assessee in the profit and loss account for the Assessment Year 2007-08 credited a sum of Rs.3,59,58,370/- being the amount of interest waived by IREDA. However, while preparing the return of income, the assessee excluded the amount as no part of such interest had even been allowed in any prior Assessment Year and provisions of Section 41(1) of the Act were not attracted. The Assessing Officer by an order dated 29.12.2009 inter alia included an amount of Rs.3,59,58,370/- in the book profits for levying tax under Section 115JB of the Act and negatived the plea of the assessee that the sum was deductible in full under Explanation to Section 115JB(2) of the Act.
The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 26.02.2013 affirmed by the order passed by the Assessing Officer. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal
5 (hereinafter referred to as 'the tribunal' for short). The tribunal by order dated 11.04.2014 inter alia held that no provision can be made for an ascertained liability and therefore no provision was made by the assessee for interest payable and waiver of interest by IREDA cannot be considered as withdrawal of the provision and cannot be reduced from the book profit as contended by the assessee. However, it was held that only a sum of Rs.1.08 Crores should be considered as waiver of interest and part of book profit as interest payable for pre-commencement period was capitalized, the aforesaid contention needs examination, therefore, the matter was remitted to the Assessing Officer. Accordingly, the appeal was partly allowed. In the aforesaid factual background, the assessee has filed this appeal.
Learned counsel for the assessee submitted that finding recorded by the tribunal that the assessee has been debiting interest payable to profit and loss account of it is erroneous. It is submitted that the
6 assessee had not claimed any reduction towards interest and a sum of Rs.1,08,58,828/- was actually debited to profit and loss account for the year ending 31.03.2002 i.e., Assessment Year 2002-03. However, in the computation of income filed with the return of income, the aforesaid amount was added back. It is further submitted that when no reduction was claimed or allowed in Previous Years, the condition of proviso stands fulfilled and accordingly waiver of outstanding interest ought to have been held eligible for reduction under sub-clause (i) of Explanation 1 to Section 115JB of the Act. It is also pointed out that the assessee is bound to follow the Accounting Standard-29 issued by a Standard of Chartered Accountants in order to arrive at book profit. Our attention has also been invited to para 10.1 of aforesaid Accounting Standard, which provides that a provision is a liability which can be measured only by using a substantial degree of estimation. It is also argued that the different between liability and provision
7 is essentially only the basis of estimation / qualification and not on the basis of recognition. It is also pointed out that since the assessee had computed interest on accrual basis in accordance with the terms of the loan granted by IREDA and was unable to service the principle amount as well as the amount of interest. Therefore, the conclusion of tribunal that interest was a liability and not a provision is misplaced. In support of aforesaid submissions, reliance has been placed on decisions in 'CIT VS. INDUSTRIAL CREDIT AND DEVELOPMENT SYNDICATE LTD.', 285 ITR (ST) 310 (KAR) @ 317, 318, 'INDO RAMA SYNTHETICS (I) LTD. VS. COMMISSIONER OF INCOME TAX', 330 ITR 363 (SC) @ 372, ' CIT VS. SHYAM CENTURY FERROUS LTD.', 386 ITR 477 (CAL) @ 479 AND CBDT CIRCULAR NO.495 DATED 22.09.1987.
On the other hand, learned counsel for the revenue submitted that even though assessee has claimed that the entire amount was claimed as
8 expenditure on accrual basis, however, no provision was created and therefore, no adjustment was made in view of Clause (c) to Explanation 1 to Section 115JB of the Act. It is also argued that unless Clause (c) is attracted, Clause (i) for reduction also cannot be applied. It is further submitted that the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have recorded findings of fact that the assessee has not created any provision as required under Clause (c) of Explanation 1 to Section 115JB of the Act and the same is not disputed by the assessee. It is also argued that unless clause (c) of Explanation 1 to Section 115JKB of the Act is attracted, the reduction under clause (i) cannot be applied. In support of aforesaid submissions, reliance has been placed on APOLLO TYRES LTD. VS. COMMISSIONER OF INCOME-TAX, 255 ITR 273 (SC), and 'INDO RAMA SYNTHETICS (I) LTD. VS. COMMISSIONER OF INCOME-TAX', 330 ITR 363.
We have considered the submissions made by learned counsel for the parties and have perused the record. The relevant extract of Section 115JB, which deals with special provisions for payment of tax by certain companies as it was in existence at the relevant time, reads as under: 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2007, is less than ten per cent of its book profit, 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 the amount of income-tax at the rate of ten per cent.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the
10 provisions of Parts II and III of Schedule VII to the Companies Act, 1956 (1 of 1956) Explanation 1.—For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to
11 which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (g) the amount of depreciation. If any amount referred to in clauses (a) to (g) is debited to the profit and loss account, and as reduced by- (i) the amount withdrawn from any reserves or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account.
Thus, it is evident that for the purposes of Section 115JB, the expression book profit needs amount set aside to provisions made for meeting liabilities other than ascertained liabilities. The Assessing Officer on perusal of the balance sheet of the assessee as on 31.03.2006 and 31.03.2007 as well as schedules appended to the balance sheet has held that the amount
12 of Rs.3,59,58,370/- has neither been shown as reserve nor provision anywhere but has only been shown as liability in Schedule C. By taking into account Section 115JB of the Act, it has been held that amount withdrawn from reserves credited or provision made in a Previous Year shall not be reduced from the book profit unless book profit of such year has been increased by those reserves or provision. Thus, it has been held that in the absence of any provision created or provision made, the question of reduction from book profit does not arise.
The Commissioner of Income Tax (Appeals) has held that profit and loss account of the assessee as on 31.03.2007, was prepared in accordance with the Companies Act, 1956 and the assessee showed the outstanding interest as credit to profit and loss account because of waiver of interest on account of One Time Settlement. It was further held that the outstanding interest amount was not shown as either as reserve or
13 provision and it was shown as liability and even the corresponding debits in the earlier years were not added back. It has further been held that the assessee's contention may be correct that there are no profits chargeable to tax under Section 115JB of the Act but the conditions stipulated in the proviso were not fulfilled. The tribunal has held that the Assessing Officer on perusal of the balance sheets as on 31.03.2006 and 31.03.2007 has held that amount of interest has neither been shown as reserve nor provision anywhere but the same has been shown in Schedule C as a liability. It was further held that no provision can be made for ascertained liability and therefore, no provision has been made by the assessee for interest payable and therefore, waiver of interest by IREDA cannot be considered as withdrawal of provision and cannot be reduced from the book profit. However, it was held that the contention of the assessee that a sum of Rs.1.08 Cores should be considered as waiver of interest and part of book profit
14 as interest payable for pre commencement period, needs examination and therefore, the matter was remitted for adjudication in accordance with law. The aforesaid findings by all the authorities under the Act are based on meticulous appreciation of evidence on record and does not suffer from any perversity warranting interference of this court in this appeal.
In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the assessee and in favour of the revenue. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss