M/S. C D EQUIFINANCE PVT. LTD.,KOLKATA vs. DCIT, CIR-7(1), KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘B’, KOLKATA [Before Shri P.M. Jagtap, AM and Shri Aby. T. Varkey, JM] I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd................................………………………………….....Appellant 37, Shakespeare Sarani, Kolkata – 700 017 [PAN : AACCP 7333 A] D.C.I.T CIR – 7(1)..………………………………………………………….........................Respondent Aayakar Bhawan, Kolkata. Appearances by: Shri D.S. Damle, FCA appearing on behalf of the Assessee. Md. Usman, Addl. CIT (DR) appearing on behalf of the Revenue. Date of concluding the hearing : February 07, 2018 Date of pronouncing the order : February 09, 2018 ORDER Per P.M. Jagtap, AM This appeal filed by the assessee is directed against the order of Ld. CIT(A) – 16, Kolkata dated 30.03.2016. 2. Ground No. 1 to 8 raised by the assessee in this appeal involve a common issue relating to the addition of Rs. 18,91,12,786/- made by the A.O. and confirmed by the Ld. CIT(A) on account of the assessee’s share of loss in the partnership firm while computing the book profit under section 115JB of the Income Tax Act, 1961. 3. The assessee in the present case is a non-banking finance company which is engaged in the business of trading of investment in shares and securities as well as rendering financial consultancy services. The return of income for the year under consideration was

2 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. originally filed by it on 27.09.2012 declaring a total income of Rs. 11,77,96,429/-. Thereafter a revised return was filed by the assessee on 28.03.2015 declaring its total income under the normal provisions of the Act at Rs. 12,27,63,780/- and book profit under section 115JB of the Act at Rs. 20,48,42,669/-. The assessee company during the year under consideration was a partner in the partnership firm of M/s. C.D. Investments having share of profit of 97.50%. The said partnership had incurred a loss of Rs. 19,39,61,832/- for the year ended on 31.03.2012 and its share in the said loss amounting to Rs. 18,91,12,786/- was debited by the assessee company to its profit & loss for the year under consideration. While computing the book profit u/s 115JB of the Act, the amount of such loss however was not added back by the assessee company by relying on the decision of Mumbai Bench of the ITAT in the case of DCIT vs Metro Exporters Ltd. 10 SOT 647 wherein it was held that the case of the assessee was not being the case of share of profit from partnership firm in the hands of the assessee credited to the profit and loss account, no addition for the purpose of computation of total income of the assessee u/s 115JA could be made with regard to the share of loss from the partnership firm. This stand of the assessee was not found acceptable by the A.O. By relying on the decision of Hon’ble Kolkata High Court in the case of Eastern Aviation & Industries Ltd. vs CIT 208 ITR 1023, he held that the general rule is that the ‘income includes loss’ and by applying the said rule, he held that the share of its loss in the partnership firm amounting to Rs. 18,91,12,786/- was liable to be added back while computing the book profit of the assessee company under section 115JB of the Act as per clause (ii) of Explanation (1) to section 115JB(2). He accordingly added the said amount while computing the

3 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. book profit of the assessee company in the assessment completed under section 143(3) vide an order dated 30.03.2015. 4. Against the order passed by the A.O. under section 143(3), an appeal was preferred by the assessee before the Ld. CIT(A) and a detailed submission was made on behalf of the assessee before the Ld. CIT(A) in support of its case that the addition made by the A.O. on account of its share of loss in the partnership firm while computing the book profit under section 115JB was not sustainable. The Ld. CIT(A) however did not find merit in the said submission and proceeded to confirm the addition made by the A.O. on this issue for the following reasons given in paragraph no 6 of his impugned order: “I have carefully examined the A/R’s submissions and also the observations and findings recorded by the A.O. in the assessment order. I have also perused the judicial decisions cited both by the assessee as well as the Assessing Officer. The A.O. added back the share of loss from partnership firm by invoking clause (ii) of Explanation (1) to Section 115JB of the Act. In AO’s view, since the share of profit from the partnership firm is excluded under clause (ii) of Explanation (1) to Section 115JB of the Act, then by same analogy the loss from partnership firm deserves to be added back to the Net Profit as disclosed in the Profit & Loss Profit & Loss Account so as to arrive at the 'book profit'. In my considered opinion the term 'income' as used in clause (ii) includes negative income or 'loss' as well. The assessee has however claimed that the provisions of Section 115JB are deeming in nature and therefore should be strictly construed. The A/R of the assessee submitted that the clause (ii) refers to "income" which is "credited" in P& L A/c which has to be "reduced" from the Net Profit. According to the assessee the clause (ii) cannot be interpreted so as to add to the net profit "loss" which is debited in Profit & Loss Account while computing book profit u/s 115JB of the Act. Strong reliance in this regard was placed by the assessee on the decision of ITAT, Mumbai in the case of Dy. CIT vs Metro Exporters Ltd (10 SOT 647). I however do not find merit in the assessee's claim. The Supreme Court in the case of CIT Vs J.H. Gotla (156 ITR 323) has specifically held that the term "income" used in the Income-tax Act, 1961 includes "loss". Even the Calcutta High Court in the case of Eastern Aviation & Industries

4 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. Limited (208 ITR 103) held that the loss is 'negative income'. Accordingly the contention of the assessee that the term 'income' as employed in clause (ii) of Explanation to Section 115JB cannot be said to include 'loss' is untenable. I therefore hold that the AO had rightly added back the share of loss of Rs.189,112,786/- from the partnership firm under clause (ii) of Explanation (1) to Section 115JB of the Act. Ground Nos. 1 to 3 are therefore dismissed. 5. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly contended by the learned counsel for the assessee, the decision of Hon’ble Supreme Court in the case of J.H. Gotla (supra) and that of Hon’ble Kolkata High Court in the case of Eastern Aviation & Industries Ltd. (supra) propounding that the term ‘income’ includes ‘loss’ was rendered in different context and not in the context of application of clause (ii) of Explanation (1) to Section 115JB of the Act, which is the bone of contention in the present case. Even the learned DR has not raised any contention to dispute this position. On the other hand, the decision of Mumbai Bench of this Tribunal in the case of Metro Exporters Ltd. (supra) cited on behalf of the assessee before the authorities below as well as before us was rendered on a similar issue wherein it was held that the case of the assessee not being the case of share of profit from a partnership firm in the hands of the assessee credited to the profit and loss account, no addition for the purpose of computation of total income of the assessee under section 115JA could be made with regard to the share of loss from the partnership firm. The relevant observations recorded by the Tribunal while coming to this conclusion in paragraph no 4 of its order are reproduced hereunder: “We have considered the rival submissions and have perused the orders of the Assessing Officer and the CIT(A). We find that the assessee has debited

5 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. its share of loss from a registered firm to its profit and loss account and Assessing Officer has made the addition of the same to the net profit while computing the total income of the assessee as per provisions of section 115JA of the Act on the plea that share of profit of the assessee from a partnership firm is exempt from tax as per Chapter III under section 10(2)(a) of the Act. We find that the provisions of Chapter XII-B of the Act is a special provision relating to assessment of certain companies whereby the income of certain companies chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. These, being special provisions applicable to certain companies have to be strictly applied and income of the assessee has to be computed in accordance with "Book Profit" of the assessee and the working of the "book profit" has to be made as per the provisions of Chapter XII-B of the Act. The proposition that the word "income" includes "loss" is not applicable while computing the "book profit" in accordance with the provision of Chapter XII-B of the Act. We find that the provision of sub-clause (f) to Explanation to section 115JA of the Act relates to the amounts of "Expenditure" relatable to any income to which any of the provisions of Chapter III applies and therefore the “loss share” from a registered firm cannot be said to be synonymous to the word expenditure mentioned in the relevant sub-clause (f) to Explanation to section 115JA of the Act. In sub-clause (ii) Explanation to section 115JA provides for any amount of income to which any of the provisions of Chapter III applies, if such amount is credited to the profit and loss account of the assessee. In this case, the share of the assessee from a registered firm is a “loss” figure and therefore is debited to the profit and loss account of the assessee and cannot be credited to the profit and loss account of the assessee. In these facts of the case, we find that the CIT(A) has rightly observed that if any share of profit from the firm had been credited to profit and loss account the same would have to be reduced from the net profit for the purpose of computation of income under section 115JA by virtue of sub-clause (ii) to Explanation to section 115JA of the Act. This being not a case of share of profit from a firm in the hands of the assessee credited to the profit and loss account, we hold that no addition for the purpose of computation of total income of the assessee under section 115JA of the Act can be made with regard to share of loss from a registered firm of the assessee and accordingly we uphold the order of the CIT(A) that even on merits the addition made is not in accordance with law and the ground of appeal No. 2 of the revenue is dismissed.”

6 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. 6. Although the decision of Metro Exporters Ltd. (supra) was rendered by the Tribunal in the context of the provisions of section 115JA, we find ourselves in agreement with the contention of the learned counsel for the assessee that the ratio of the same can be applied to decide the issue in the context of section 115JB, the provisions of which are analogous to the provisions of section 115JA. The Ld. CIT(DR), has also not raised any contention in this regard and simply relied on the order of the Assessing Officer. We, therefore, respectfully follow the decision of Mumbai Bench of this Tribunal in the case of Metro Exporters Ltd. (supra) and delete the addition made by the A.O. and confirmed by the Ld. CIT(A) on account of share of assessee’s loss in the partnership firm while computing the book profit under section 115JB of the Act. Ground No. 1 to 8 of the assessee’s appeal are accordingly allowed. 7. The issue raised in ground no 9 of the assessee’s appeal relates to the addition of Rs. 75,75,430/- made by the A.O. and confirmed by the Ld. CIT(A) on account of expenditure disallowed under section 14A read with rule 8D while computing the book profit of the assessee company under section 115JB of the Act. 8. During the year under consideration, the assessee company had earned a dividend income of Rs. 9,01,03,832/- which was claimed to be exempt from tax under section 10(34) of the Act. In the computation of total income as per the normal provisions of the Act, the expenditure incurred in relation to the said exempt income as worked out at Rs. 75,75,430/- was disallowed and added back by the assessee company as per the provisions of section 14A of the Act.

7 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. While computing the book profit under section 115JB of the Act, the said amount on account of expenditure disallowed under section 14A was not added back by the assessee company. By relying inter alia on the decision of Mumbai Bench of this Tribunal in the case of Esquire Pvt. Ltd. vs DCIT (ITA No. 5688/Mum/2011), the Assessing Officer held that an amount disallowed under section 14A on account of expenditure incurred in relation to the exempt income was liable to be added back while computing the book profit of the assessee company under section 115JB of the Act. He accordingly made the addition of Rs. 75,75,430/- on account of disallowance under section 14A while computing the book profit of the assessee company. On appeal, the Ld. CIT(A) confirmed the said addition made by the A.O. by relying on the decision of Hon’ble Delhi High Court in the case of CIT vs Goetze (India) Ltd. 361 ITR 505. 9. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar issue relating to addition on account of expenditure disallowed under section 14A while computing book profit under section 115JB of the Act has been decided by the Special Bench of this Tribunal at Delhi in the case of ACIT vs Vireet Investment Pvt. Ltd. (ITA No. 502/Del/2012 dated 16.06.2017) wherein it was held, after taking into consideration the decision of Delhi High Court in the case of Goetze (India) Ltd. (supra), that the expenditure incurred to earn exempt income computed under section 14A of the Act could not be added while computing book profit under section 115JB of the Act. In the case of CIT vs Jayshree Tea Industries Ltd. (ITAT No. 47 of 2014 dated 19.11.2014), Hon’ble Kolkata High Court has also expressed a

8 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. similar view by holding that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act. Hon’ble Kolkata High Court has further held that the computation of the amount of expenditure relatable to exempt income of the assessee must be made independently by applying clause (f) of Explanation (1) under section 115JB of the Act where the assessee has not claimed such expenditure to be nil. Respectfully following the said decision of the Hon’ble Jurisdictional High Court in the case of Jayshree Tea Industries Ltd. (supra), we set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for computing the amount of expenditure relatable to the exempted income of the assessee independently by applying clause (f) of Explanation (1) under section 115JB of the Act without resorting to section 14A or Rule 8D. Ground No. 9 of the assessee’s appeal is thus partly allowed. 10. In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 9th February, 2018. Sd/- Sd/- (Aby.T. Varkey) (P.M. Jagtap) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 09/02/2018 Biswajit, Sr. PS Copy of order forwarded to: 1. M/s. CD Equifinance Pvt. Ltd., 37, Shakespeare Sarani, Kolkata – 700 017. 2. DCIT, CIR – 7(1), Aayakar Bhawan, Kolkata.

9 I.T.A. No. 577/Kol/2016 Assessment Year: 2012-13 M/s. CD Equifinance Pvt. Ltd. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata