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Facts
The assessee filed an appeal against the order of the CIT(A) which confirmed the reassessment proceedings initiated under section 147 and the addition of Rs. 83,74,399/- to the book profits. The reassessment was initiated for AY 2012-13 based on an audit objection regarding the write-off of an advance for a capital commitment, which was not added back for MAT computation. The assessee's primary contentions were that the reassessment was illegal as it was based on a change of opinion, lacked proper sanction, and that the write-off was an actual loss and not a provision for diminution in value, thus not attracting Section 115JB(2)(i).
Held
The Tribunal condoned the delay of 42 days in filing the appeal due to the director's health issues. On merits, the Tribunal noted that the write-off of the advance was an actual loss of an asset that could not be recovered, not a provision for diminution in value. Relying on various High Court and Supreme Court decisions, it was held that such a write-off, even if termed as a provision, is not to be added back for MAT computation under Section 115JB(2)(i) when it represents an actual loss. The reassessment proceedings were challenged on technical grounds (change of opinion, borrowed satisfaction) but were not decided as the appeal was decided on merits.
Key Issues
1. Legality of reassessment proceedings under Section 147 and subsequent addition to book profit under Section 115JB. 2. Whether the write-off of an advance for capital commitment should be added back to book profit under Section 115JB(2)(i) as a provision for diminution in value.
Sections Cited
147, 143(3), 148, 151, 115JB(2)(i), 271(1)(c)
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”B” JAIPUR
Before: DR. S. SEETHALAKSHMI, JM & SHRI RATHOD KAMLESH JAYANTBHAI, vk;dj vihy la-@ITA No. 681/JP/2023
disputed that order before the ld. CIT(A), whereby MAT liability of the assessee was increased based on the re-opening of the case. The appeal of the assessee was dismissed by the ld. CIT(A) sustaining the re-opening and calculation of book profit on merits of the dispute.
Before us the ld. AR of the assessee while arguing the ground no. 3 raised by the assessee submitted that the assessee has debited an amount of Rs. 83,74,399/- on account of advance against purchase of land and the said amount was since 2003 appearing in the balance sheet of the assessee as advance against purchase of assets. Since then that amount was lying as amount invested but did not get materialized as assets or not that investment get realised in terms of money. Thus, that amount has added back the said amount while preparing the computation of income without considering the provision of MAT. Whereas on perusal of computation of book profit MAT u/s 115JB of the Act, it has been observed that the assessee didn't add back of amount Rs. 83,74,399/- in the book, profit while calculating computation of MAT for the year under consideration. As subsequent to that the amount was shown as capital- work-in-progress as on 31.03.2011 as noted from the balance sheet of the assessee. The said amount was carried out with same amount since 2003.
The issue of giving advance by the assessee was examined in the assessment proceeding for A. Y. 2001-02 [ paper book page 38-39 ] wherein the assessee in detailed explain the circumstances under which the said money was paid and since then due to the dispute the said deal could not materialized and finally the assessee decided to write off that investment carried over by them since 2003. Thus, is so far as writing off this advance amount paid by the assessee is concerned it was shown as Loans and advance since, then that advances were never materialized as asset or amount invested did not get realised. Therefore, the investment amount so made by the assessee lying as it is since then the same was considered as investment amount as write off. This amount so paid was not and the same was also shown as loans and advances since then. Even the issue has in depth examined by the revenue and the disclosure of loan and advance was accepted in the assessment proceeding for A. Y. 2001-02 [ page 38 of the paper book ]. Thus, even in the year under consideration the assessee has written off this advance amount by way of specific disclosure in the accounts. Thus, the amount which is write off by the assessee in absence of any right on any assets cannot be considered as capital assets as contended by the lower authority. But in fact it was an advance for the investment of land to be made by the assessee and therefore, the write cannot be added to the book profit under section 115JB(2)(i) of the Act. We get support of this view from the decision of the Gujarat High Court in the case of PCIT Vs. Torrent (P) Ltd. [ 108 taxmann.com 375 (Gujarat) ]. This view is also affirmed by the Calcutta High Court in the case PCIT Vs.
Balmer Lawrie and Company Ltd. [ 149 taxmann.com 286(Calcutta) ] wherein the high court has held that; 6. The next issue is with regard to the provision for diminution in the value of investments. In the return of income, the assessee claimed Rs. 11,82,37,000/- as provision for diminution in the value of investments. The assessing officer held that by no such imagination can provisions be treated as allowable expenditure and the claim of the assessee is absurd and accordingly disallowed the same. The assessee carried the matter on appeal before the CIT(A) and after referring to the Memorandum of Articles of Association of company with which one of the objects of the assessee was to lend money to such persons and on such terms as to expedite and in particular to customers and others having dealing with the Paris Elysees India Pvt. Ltd. vs. DCIT company and to guarantee overdraft and loans, it was contended that in the course of carrying on that business the assessee from time to time lends money to its subsidiary and group concerns against payment of interest and such interest income has all along been assessed as the assessee's business income. It was stated that during October 1990, the assessee promoted a new company called Indian Container Leasing Company Limited and held 40% of its equity shares capital and the remaining shares were held by financial institutions. During 1996, the leading multinational company in container leasing came in as an investor and the new company issued fresh equity shares to the said multinational company which amounted to 27.26% of its share capital and as a result of the said issue, the assessee shareholding in the new company came down to 29.09% and that of the financial institutions also came down to 43.65%. In 2003, the multinational company exited from the new company and its shareholding was acquired by the financial institutions whose aggregate shareholding went up to 70.91% and remaining 29.09% being held by the assessee. By virtue of rights issued in 2009, the assessee shareholding went up to 34.78%.In the year 2009 financial institutions wanted to exit from the new company and their holdings were partly acquired by the assessee and partly by one of its joint ventures and consequent to such acquisition the assessee's shareholding in the new company increased to 50% and the balance 50% being held by the assessee's Joint Venture Company. Further the assessee contended that apart from the manufacturing operations, the assessee is engaged in the business of container freight station etc. and in the year 2006, the assessee gave its specialty container division to the new company for running it on leave and license basis and subsequently the division was sold by the assessee to the new company as going on concern with effect from 1-4-2007. During 2008, the assessee extended the inter corporate loan of Rs. 3 crores at interest rate of 9.51% per annum to the new company and in December 2008, the assessee gave its freight container repair and refurbishment division to the new company under the license to operate for and behalf of the assessee. The new company obtained a loan of Rs. 7.11 crores from financial institutions and subsequently the financial institutions sought for repayment of the said loan and they approach the assessee for inter corporate loan of Rs. 7.3 crores on similar terms as the earlier loan of Rs. 3 lakhs in order to pay to the financial institutions. The assessee thus gave an interest-bearing loan of Rs. 7.3 crores to the new company (Transafe Services Limited) in April 2009. During 2009, the financial irregularities were deducted in transafe leading to its liquidity position being adversely affected and it was unable to service its debt obligations and approached the lenders for restructuring its debt. The corporate debt restructuring cell in its decision dated November 18, 2010 stipulated that the assessee as the promoters should infuse fresh contribution of Rs. 7.8 crores of which Rs. 6 crores would be converted into 0.001% optionally convertible cumulative redeemable preference shares and the remaining Rs. 1.8 crores would remain as unsecured interest bearing loans. The existing interest bearing loan of Rs. 7.30 crores given by the assessee was also to be converted into preference shares. Thus, the total amount of Rs. 13.30 crores was converted into Paris Elysees India Pvt. Ltd. vs. DCIT preference shares because of the decision of the corporate debt restructuring cell. During the financial year 2011-2012, it was found that the net worth of the transferee was substantially eroded and stood of Rs. 5.55 crores as against the share capital of Rs. 49.99 crores because of losses of Rs. 44.44 crores. Accordingly, the book value of each preference shares of the face value of Rs. 10 held by the assessee amounted to Rs. 1.11 per share. Thus, out of the sum of Rs. 13.30 crores advanced by the assessee, the erosion had taken place to the extent of Rs. 11.82 crores. Therefore, the Board of Directors of the assessee resolved to make a provision of Rs. 11.82 crores in the account of the assessee for the financial year ended March 31, 2012. In its account, the said sum of Rs. 11.82 crores was debited to the profit and loss account for the year ended March 31, 2012 and the identical amount was reduced from the investment value of preference shares of Rs. 13.30 crores thereby reducing the amount to Rs. 1.48 crores. During July 2013, the transferee made reference to the BIFR which was registered on November 25, 2013. Thus, the assessee contended that what the assessee had advanced was actually an interest bearing loan and it was compelled to accept its conversion into preference shares because of the direction of the RBI corporate debt restructuring cell. The assessee placed reliance on the decision of the Hon'ble Supreme Court in Vijaya Bank v. CIT[2010] 190 Taxman 257/323 ITR 166 (SC) where similar accounting as made by the assessee was held as amounting to writing off of the debt. In support of the claim under section 28/37 of the Act as business laws, reliance was placed on the decision of the Hon'ble Supreme Court in Badridas Daga v. CIT[1958] 34 ITR 10 Thus, the assessee contended that the sum of Rs. 11.82 crores is allowable both in the normal computation as well as in computing book profit under section 115JB of the Act. The CIT(A) after considering the above factual details pointed out that the assessee case revolves around the fact that out of its loan of Rs. 13.00 crores advanced for the purpose of its business, Rs. 11.82 crores had turned bad and though investment was initially propelled by business expediency and was subsequently thrust on the assessee by reason of the RBI's corporate debt restructuring cell's decision. Further CIT(A) pointed out that additional material which was referred to the assessing officer has not elucidated any rebuttal in the remand report dated 7-3-2017. Taking note of the factual position and following the decision in Vijaya Bank and Badridas Daga (supra) the assessee's appeal was allowed and the disallowance of Rs. 11,82,37,000/- was directed to be deleted by the assessing officer both in the normal computation and in the computation of the book profit. Aggrieved by such decision, the revenue carried the matter on appeal to the tribunal. The tribunal noted that the primary contention raised by the revenue is on the premise that the assessee's claim was not permissible because in its profit and loss account the amount was charged by way of "provision" and therefore it should not be construed to be in the nature of crystallized loss permissible as deduction in arriving at taxable income of the relevant year. The tribunal notes that such contention raised by the revenue was negated by the Hon'ble Supreme Court in Rotork Controla India (P.) Ltd. v. CIT[2009] 180 Taxman 422/314 ITR 62 and allowed claim for provisions for warrantees by observing that the provision is Paris Elysees India Pvt. Ltd. vs. DCIT allowable item if the liability is measured using a substantial degree of estimation. In the said decision, three contingencies were pointed out as to when the provision is recognized namely (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an out of flow of resource will be required to settle the obligation; (c) a reliable estimate can be made of the amount of the obligations. The Hon'ble Supreme Court held that if all these conditions are not made, then no provision can be recognized. Bearing the said legal principle in mind, the tribunal tested the facts of the assessee's case and found that the principle transaction leading to the claim was one of the granting loan to subsidiary to promote assessee's own business of freight containers. Further the tribunal noted that in order to diversify its business, the assessee had co-promoted the subsidiary to which the assessee had advanced interest bearing loans and the interest when charge was assessed as "business income" and therefore the tribunal found that the transaction was in the course and for the purpose of the promoting the assessee's business. The tribunal also noted that consequent to granting of loans due to extraordinary and compelling circumstances, (direction of the RBI corporate debt restructuring cell) the loan was converted into preference shares but such fact by itself did not change or alter the basic character of the transactions. More importantly, the tribunal on facts found that the preference shares in transferee were not acquired by the assessee for the purpose of earning dividend and capital appreciation but the preference shares were acquired as per the directions of the CBR cell of RBI which was binding on the assessee being the promoter of the subsidiary. Furthermore, that the assessee had recognized the loss incurred in its books only after it was found that almost the entire net worth of the subsidiary was eroded. The contention of the revenue before us is that whatever direction was given by the CDR cell cannot be construed to be a dictate but it is more in the nature of a conciliatory direction. We are unable to persuade ourselves to agree with the said submission because the directive is from the corporate debt restructuring cell of the Reserve Bank of India and binding upon the assessee more so it being a public sector undertaking. Furthermore, the tribunal found that since the provision was for ascertaining loss in note No. 10 of the audited account the value of the investment in transafe was disclosed at Rs. 147.63 lakhs that is after knitting off the loss provided in the profit and loss account of the relevant year. Thus applying the decision of the Hon'ble Supreme Court in Vijaya Bank it was held that there is no infirmity in the order passed by the CIT(A).The tribunal also referred to the decision of the coordinate bench of the tribunal in the case of DCIT v. West Bengal Electronics Industry Development Corpn. Ltd. in [IT Appeal No. 1945 (Kol.) of 2013, dated 24-8-2018] we find that in the said order passed by the coordinate bench of the Tribunal, reliance has been placed on the decision of the High Court of Madras in the case of CIT v. Tamilnadu Industrial Investment Corpn. Ltd.[2017] 88 taxmann.com 528/394 ITR 225 wherein one of the substantial questions of law was whether the tribunal had enough material to hold and was it right in holding that the loans to the company in liquidation had become bad debts and ought to be written off. In the said case the assessee Tamilnadu Industrial Paris Elysees India Pvt. Ltd. vs. DCIT Investment Corpn. Ltd. (supra) was a state government undertaking and had made certain investment in shares of industrial companies and lend money to those companies and it sought to write off the advances given and value of investment in those industrial companies and claim the same as deduction in its returns wherein it was held as follows:- Question Nos 1 and 3 challenge the conclusions of the tribunal relating to facts and would have to be tested on the touchstone of perversity. The tribunal has noted that valuation of the shares is effected in order to ensure a prepare deplication of the value of the asset in the balance sheet. A note prepared for the consideration of the Board in TIIC B.No. 13587-88 dated 21-7-1987 has been placed before us. A detailed analysis has been undertaken therein with respect to various items identified and sought to be written off in view of the doubtful character of recovery of loans and investments. Investments in the shares of six industrial companies were undertaken by way of underwriting of issue of shares. Upon finding that the net worth was negative, it was proposed to write off 100% of such investment in five cases. In the matter relating to one defaulter, M/s. Southern Brick Works Limited, the recommendations for write-off was only 50% of the investment, in view of a proposal for take of the entity by M/s. Vinichem Private Limited. The note also proposes the write off of an amount of Rs. 33.82 lakhs being 90% of the advances made to two companies, M/s. Upper India Bearings Limited and M/s. Nedumbalam Samiappa Annapoorani Mills Limited, where creditors had approached the High Court seeking their winding up and receivers had been appointed. The need for an criteria adopted for the valuation of the shares as well as the efforts taken and measures adopted by the assessee company for recovery of the advances have been duly noted by the tribunal. The erosion of capital leading to a fall in value of shares has been established. We are thus of the view that the conclusion of the tribunal in this regard are well founded and are not vitiated by perversity. Question Nos 1 and 3 are answered against the Department and in favour of the assessee.
The learned tribunal after considering the aforementioned decision found that the facts of the assessee's case are more or less similar. Since transferee was a subsidiary promoted for furtherance of the assessee's freight container business and in furtherance of such business the loan were advanced from which interest income was earned and such interest income was assessed under the head "business". Further under compelling circumstances as by the direction of the RBI such loans were converted into preference shares which consequently eroded in value because of the law sustained by the subsidiary. Therefore, the tribunal held that merely because loss was debited under the nomenclature "provision" did not alter the basic character of the transaction and the loss incurred due to non recoverability of the amount advanced in the ordinary course of business could not have been disallowed by the assessing officer. With regard to the objection raised by the revenue to the relief granted by the CIT(A) while computation of book profit under section 115JB, the tribunal rejected such objection raised by the revenue by rightly placing reliance on the Paris Elysees India Pvt. Ltd. vs. DCIT decision of the High Court of Gujarat in Pr. CIT v. Torrent (P.) Ltd.[2019] 108taxmann.com 375/266 Taxman 151 wherein it was held as follows:- In terms of the accounting standards, in view of the decline in the value of the provisions created in the current year (as shown at page 57 of the paper book) the carrying amount of such investments has been reduced and in case of provisions where there was a rise in the value, the provisions are written back and the net amount of provision has been debited to the profit and loss account. Thus, in so far as the provision for diminution of value of investment to the extent of Rs. 13.85 crores is concerned, the same has actually been reduced from the asset side of the balance sheet and therefore is in the nature of the write off. Under the circumstances, the amount of Rs. 13.85 crores though bearing the nomenclature of provision for diminution of value of investment, having been actually written off, cannot be added to the book profit under section 115JB(2)(i) of the Act.
Thus, the tribunal rightly took note of the decision of the Gujarat High Court and after re-appreciating the factual position, affirmed the orders passed by the CIT(A) and therefore we are of the view that no substantial question of law arises for consideration on the said issue.
In the result, the appeal filed by the revenue is dismissed on the ground that no substantial question of law arises for consideration.
Thus, when the amount advanced by the assessee somewhere in 1998 shown as loans and advances for the investment opportunity which could not got materialized. The amount invested were written off in the accounts as no realizable cannot be held to be a capital asset.
Respectfully following the two decision of the High Court we are of the considered view that the amount of advance of Rs. 83,74,399/- though bearing the nomenclature of provision of diminution of value of investment having been actually written off, cannot be added to the book profit under section 115JB of the Act. Based on these observation ground no. 3 raised by the assessee is allowed. ground no. 1 & 2 raised by the assessee on technical glitches become educative in nature and the same are not decided.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 19/09/2024.
Sd/- Sd/- ¼ Mk0 ,l- lhrky{eh ½ ¼ jkBksM deys'k t;UrHkkbZ ½ (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 19/09/2024 *Ganesh Kumar, Sr. PS आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- Paris Elysees India Pvt. Ltd., Jaipur izR;FkhZ@ The Respondent- DCIT, Circle-07, Jaipur 2. vk;dj vk;qDr@ The ld CIT 3. 4. vk;dj vk;qDr¼vihy½@The ld CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File (ITA No. 681/JP/2023) vkns'kkuqlkj@ By order,
सहायक पंजीकार@Aेेज. त्महपेजतंत