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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Rachana Finance & Investment Income Tax Officer P. Ltd. Ward 9(3)(4) Repute Properties P. Ltd. New WD 13(3)(1) A Wing, 2nd Floor, Hatre Pen Aayakar Bhavan, M.K. RD Vs. Bldg,Senapati Bapat Marg, Mumbai-400 020 Dadar West, Mumbai-400 028 PAN No. AAACR4930M PAN No. AAACR4929A Appellant .. Respondent Assessee by .. Shri Naresh Jain & Prateek Jain, ARs’ Revenue by .. Shri K. Ravikiran, DR Date of hearing .. 18-05-2017 Date of pronouncement .. 31-05-2017 O R D E R PER MAHAVIR SINGH, JM:
These appeals by two different assessees’ are arising out of the different orders of CIT(A)-21, Mumbai, in appeal No. CIT(A)-21/ITO-13(3)(1)/IT-299& 300/2014-15 even date 30-11-2015. The Assessments were framed by ITO Ward- 9(3)-4, Mumbai for the A.Y. 2012-13 vide orders dated 10-11-2014 u/s 143(3)(ii) of the Income Tax Act, 1961 (hereinafter ‘the Act’)..
The only common issue in both the appeals of assessees’ is as regards to the order of CIT(A) confirming addition made by AO of the amount of Debt Redemption Reserve while computing the book profit under section 115JB of the Act. The facts and circumstances are exactly identical in both the cases as admitted above and the grounds raised are identically worded accept the quantum. Hence, we will take the facts and grounds as raised in and will decide the issue. The relevant ground read as under: -
“1. On the facts and circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) has & 5816/Mum/2015 Rachana Finance & Investment P. Ltd. Repute Properties P. Ltd. (A.Y:2012-13) erred in confirming the addition made of Rs. 78,05,403/- being the amount of Debt Redemption Reserve for computing the book profit under section 115JB of the I.T. Act, 1961.”
Briefly stated facts are that the assessee filed original return on 28-09- 2012 declaring a total income at Rs. 4,07,950/- and book profit was declared under section 115JB of the Act at Rs. 54,40,223/-. Subsequently, the assessee revised its return of income on 24-11-2011 declaring the same as total income but the book profit was declared at Rs. 23,66,118/- under section 115JB of the Act and this reduction was on account of inadvertent mistake as the net profit was taken before considering the Debt Redemption Reserve. The AO during the course of assessment proceedings require the assessee to explain as to why Debt Redemption Reserve should not be added back to the income of the assessee while computing the book profit. The assessee replied but the AO while computing book profit under section 115JB of the Act added a sum of Rs. 78,06,403/- on account of Debt Redemption Reserve in the net profit as per the profit and loss account. Aggrieved, assessee preferred the appeal before CIT(A), who after considering the facts of the case confirmed the action of the AO vide Para 4.5 to 4.8 as under: -
“4.5 Perusal of the audited accounts for FY 2011-12 relevant to AY 2012-13 shows that during the year, net profit on sale of shares is shown at Rs 67 lakhs apart from dividend income of Rs 4.3 lakhs. Against profits of Rs 58.7 lakhs, debt redemption reserve of Rs 78.1 lakhs is claimed. No such debt redemption reserve was created in earlier years. There are no term loans and secured loans. The unsecured loans is Rs 813.4 lakhs as against Rs 698.7 lakhs in the preceding year. The subsequent year audited accounts shows the unsecured loans at Rs 715.2 & 5816/Mum/2015 Rachana Finance & Investment P. Ltd. Repute Properties P. Ltd. (A.Y:2012-13) lakhs. There is addition to debt redemption reser of RO1akhsduring FY 12-13 but no utilization for any repayments. The position of this debt redemption reserve remains the same in FY 2013-14 at Rs 75.10 lakhs also and there are no addition or withdrawal from the reserves and even though the unsecured loans is shown lower at Rs 717.46 lakhs showing repayments. It is also noted that the profits in FY 2012-13 was only Rs 9.28 lakhs and in FY 201314 it was only Rs 1.47 lakhs. In FY 2010-11, it was only Ps 1.0 lakh. In contrast the profit in the current year is Rs. 58.7 lakhs. Thus, the unmistakable conclusion that can be drawn is that the reserve was created only to reduce the tax liability u/s 115JB in the current year.
4.6 Based on the facts that is narrated in the previous paragraphs, it is clear that there is no basis for the claim of debt redemption reserve claimed by the appellant.
4.7 As regards the case laws cited, it is noted that in those cases there were secured loans taken such as debenture and loan from government. In none of the cases, unsecured loans was involved. Further, in the present case basic details of the unsecured loans is not given, nor any contemporaneous records furnished to show the basis for claim of debt redemption reserve. Further, even when unsecured loans were repaid in subsequent years, the debt redemption reserve remained intact.
& 5816/Mum/2015 Rachana Finance & Investment P. Ltd. Repute Properties P. Ltd. (A.Y:2012-13) 4.8 Based on the facts and reasons discussed earlier, I see no reason to interfere with the order of the assessing officer. The ground of appeal no 1 is dismissed.”
Aggrieved, now assessee is in second appeal before Tribunal.
Before us, the assessee claim that the adjustment has rightly been made for the amount of Debt Redemption Reserve created by the company of Rs.78,06,403/- while working out the amount of book profit u/s. 115JB of the Act. It is submitted that the said amount is not required to be added back to the net profit u/s. 115JB of the Act as no adjustment is provided in the provision enumerated in the Explanation to this section. In this regard the learned counsel for the assessee placed reliance on the decision of Hon’ble Bombay High Court in the case of CIT vs. Raymonds Ltd. (2012) 21 Taxman.com 60 (Bom). It was explained by the learned Counsel that the facts before Hon’ble Bombay High Court was that the company debited the amount under the head Debenture Redemption Reserve in the profit and loss account and no adjustment was made while computing the book profit. The Hon'ble High Court has accepted the contention of the assessee. It was claimed by the learned Counsel that the Debt Redemption Reserve is akin to the Debenture Redemption Reserve and therefore, following the ratio of the above decision, no adjustment is to be made while computing book profit u/s 115JB of the Act.
The learned Counsel for the assessee also taken us through the accounts of the assessee, wherein in the balance sheet ‘non-current borrowings’ as on 31- 03-2011 is at Rs. 69.87 millions, whereas as on 31-03-2012 it is 81.34 millions. He further, drew our attention to P & L Account for the year ended 31-03-2012, wherein in the Profit and Loss Account Debt Redemption Reserve is Rs. 7.81 millions as on 31-03-2012. Further, the learned Counsel for the assessee also assailed the order of CIT(A) on the ground that the CIT(A) has gone into the accounts of the assessee which is not within his purview while adjudicating the matter on computation of income u/s 115JB of the Act. In view of the decision of Page 4 of 8 & 5816/Mum/2015 Rachana Finance & Investment P. Ltd. Repute Properties P. Ltd. (A.Y:2012-13) Hon’ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT (2002) 255 ITR 0273 (SC). On the other hand, the learned Sr. DR relied on the decision of Hon’ble Delhi High Court in the case of Seri Infrastructure Finance Ltd. Vs. ACIT (2015) taxman.com 254 (Delhi).
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee is adjusted the amount of Debt Redemption Reserve created by the company for an amount of Rs. 78, 06,403/- while working out the amount of book profit u/s 115JB of the Act. We find that similar issue is dealt by the Hon’ble Bombay High Court in the case of Raymond Ltd. (supra) wherein it is held as under: -
“3. The nature of a Debenture Redemption Reserve (DRR) has been considered by the judgment of the Supreme Court in National Rayon Corpn. Ltd. v. CIT [1997] 227 ITR 764/ 93 Taxman 754 . The Supreme Court after adverting to the provisions of Clause 7 of Part III to Schedule VI of the Companies Act, 1956 held that "the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve". Where a company issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as monies set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of a company as a liability. Being monies set apart to meet a known liability, a Debenture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. In National Rayon Corpn. Ltd. (supra) the Supreme Page 5 of 8 & 5816/Mum/2015 Rachana Finance & Investment P. Ltd. Repute Properties P. Ltd. (A.Y:2012-13) Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 /7 Taxman 28, in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of that concept would have to be gathered from the meaning attached in the Companies Act itself. The following observations of the Supreme Court are of significance:
"The debentures were nothing but secured loans. Merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist. It was redeemable or repayable at a future date. But it was a known liability. In the form of balance-sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading "liabilities". Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries, and (4) other loans and advances. The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be "reserve". The interpretation clause of the balance-sheet in Schedule VI of the Companies Act specifically lays down that reserves shall not include any amount written off or retained by way of providing for a known liability." Page 6 of 8 & 5816/Mum/2015 Rachana Finance & Investment P. Ltd. Repute Properties P. Ltd. (A.Y:2012-13) 4. The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA of the Income Tax Act, 1961. No substantial question of law would, therefore, arise.”
In the similar case ITAT Ahmedabad Bench in the case of ACIT vs. Genus Electrotech Ltd. (2016) (161 ITD 644 (Ahd – Trib) has held that the adjustment claimed by the assessee for Debt Redemption Fund was declined with a short observation that Debt Redemption Fund was an appropriation for the purpose of creating a reserve and was a below line adjustment and it did not fall in any category of adjustments provided u/s 115JB of the Act. Respectfully following the Hon’ble Bombay High Court in the case of Raymond Ltd. (supra), we allow the claim of the assessee. The orders of the lower authorities are reversed and deduction is allowed.
As regards to the in the case of Repute Properties Pvt. Ltd., Similar are the facts and hence taking a consistent view we allow this appeal also.
In the result, both the appeals of assessees’ are allowed. Order pronounced in the open court on 31-05-2017.