WADINAR POWER COMPANY LTD,MUMBAI vs. ADDL CIT 5(3), MUMBAI

The facts of the case, briefly, are as under: - 2.1 The assessee-company, engaged in the business of power generation, filed its return of income for A.Y. 2010-11 on 30.09.2010 declaring total income of `4,27,77,222/- under the normal provisions of the Income Tax Act, 1961 (in short 'the Act') and ‘book profits’ at `71,27,23,926/- under section 115JB of the Act. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was concluded under section 143(3) of the Act vide order dated 29.03.2013, wherein the income of the assessee was accepted as returned at `4,27,77,222/- under normal provisions of the Act. The Assessing Officer (AO) computed the ‘book profit’ under section 115JB of the Act at `73,76,84,930/- in view of the following additions thereto: - M/s. Vadinar Power Company Ltd. ` 99,93,000/- (i) Interest income (ii) Profit on sale of units of Mutual Funds `1,49,68,000/- In coming to this view, the AO placed reliance on the decisions of the Hon'ble Bombay High Court in the case of Veekaylal Investment Company Pvt. Ltd. reported in 249 ITR 597 and of the Coordinate Bench of this Tribunal in the case of Kopran Pharmaceuticals Ltd. (119 ITD 355) (ITAT, Mumbai) to hold that these two items (supra) are to be considered while computing the ‘book profits’ under section 115JB of the Act as they had not been routed through the Profit & Loss Account as per the provisions of Parts II & III of the Schedule-VI of the Companies Act, 1956. 2.2 Aggrieved by the order of assessment dated 29.03.2013 for A.Y. 2010-11, the assessee preferred an appeal before the CIT(A)-9, Mumbai. The learned CIT(A) dismissed the assessee’s appeal vide the impugned order dated 12.11.2014 and upheld the AO’s order following the same judicial pronouncements, as relied on by the AO, i.e. Veekaylal Investment Company Pvt. Ltd. (supra) and Kopran Pharmaceuticals Ltd. (supra). 3.1 Aggrieved by the order of the CIT(A)-9, Mumbai dated 12.11.2014 for A.Y. 2010-11, the assessee has preferred this appeal raising the following grounds: - “1) The learned Commissioner of Income-tax (Appeals) -9, Mumbai hereinafter referred as ‘CIT(A)’, erred in confirming the action of Assessing Officer while added back interest income and income from sale of unit of Mutual Fund originally reduced from capital work in progress in computation of Book Profit u/s 115JB. 2) The Appellant requests that it may be permitted to alter or withdraw any of the above grounds and to add any other ground at the time of appeal.” 3.2.1 The contention of the assessee in the ground raised (supra) is that the learned CIT(A) erred in confirming the action of the AO that interest income and income from sale of units of Mutual Funds, which were originally reduced from capital W.I.P, was to be included while computing book profits under section 115JB of the Act. According to the learned A.R. for the assessee, in the period under consideration, the assessee-company was in the process of expansion of its power generating plant and all M/s. Vadinar Power Company Ltd. expenditure incurred n the pre-commencement stage was reflected under the head Capital Work-in-Progress (WIP) and preoperative expenses in the books of account, as the project was under construction and for this purpose bank loans were taken. In this period of construction, the assessee-company had invested idle funds which were to be used in future procurement of plant and machinery and construction, were utilised/invested resulting in generation of interest income and income from sale of Mutual Funds. It is submitted that accordingly the assessee- company has offered both the interest income of `99.93 lakhs and income on sale of Mutual Funds of `149.68 lakhs under the head ‘income from other sources’, under the normal provisions of the Act since the interest earned is clearly revenue in nature. 3.2.2 The learned A.R. submits that the accounting treatment for interest income and income from sale of Mutual Funds has been done in accordance with AS-16 and Accounting Standard on Accounting for Fixed Assets. As per point No. 11 - Borrowing Cost of AS-16, financing arrangements for a qualifying asset may result in an enterprise obtaining borrowed funds. In some circumstances, during the setting up of the qualifying asset concerned, idle funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during the said period, any income earned on temporary investment of those idle borrowings, is to be deducted from borrowing costs incurred. The learned A.R. contends that as these items; i.e. interest income and income on sale of Mutual Funds, have been correctly considered in Capital WIP, they do not form part of the Profit & Loss Account and consequently do not fall for consideration under MAT, which is also in keeping with the provisions of section 211(3A) of the Companies Act. It is further submitted that ‘Book Profits’ under section 115JB has to be computed as per the net profit as per the Profit & Loss Account prepared under the provisions of Part-II and Part-III of Schedule VI of the Companies Act. The learned A.R. contends that once the accounts have been prepared as per the provisions of Companies Act, referred to above, and are adopted by the AGM of the M/s. Vadinar Power Company Ltd. company, the net profit disclosed in such accounts cannot be tinkered with by the AO while computing the ‘book profits’, except for adjustments specified as per Explanation-I to section 115JB(2) of the Act. It is also submitted that Form No. 29B has been issued certifying that the assessee’s Profit & Loss Account has been maintained in accordance with the provisions of Parts II & III of Schedule VI of the Companies Act, 1956. 3.2.3 The learned A.R. for the assessee argued that the judicial pronouncements relied on by the authorities below, i.e. Veekaylal Investment Company Pvt. Ltd. reported in 249 ITR 597 (Bom) and Kopran Pharmaceuticals Ltd. (119 ITD 355) (Mumbai ITAT) are factually different and do not apply to the assessee’s case. It is argued that the decision of the Hon'ble Apex Court in the case of Apollo Tyres Ltd. (2002) (255 ITR 273) (SC) supports the assessee in the case on hand and has laid down the basic principle that while computing book profits under section 115JB of the Act, the AO has only the power of examining whether the books of accounts are certified by the concerned authorities, as having been properly maintained in accordance with the Companies Act and thereafter he has the limited power of making increases and reductions only as provided in the Explanation to Section 115JB(2) of the Act. It is contended that the decision of the Hon'ble Bombay High Court in the case of Veekaylal Investments Company Pvt. Ltd. (supra), no longer holds the ground as it has been negatived/reversed by the Hon'ble Bombay High Court in a subsequent judgment in the case of Akshay Textiles Trading and Agencies P. Ltd. (2008) 304 ITR 401 (Bom) on the similar issue, by following the decision of the Hon'ble Apex Court in Apollo Tyres Ltd. (supra). It is submitted that a similar finding has also been rendered by the Hon'ble Bombay High Court in the case of Adbhut Trading Co. P. Ltd. (2011) 338 ITR 94 (Bom). It was further submitted that a Coordinate Bench of this Tribunal in the case of Forever Diamonds Pvt. Ltd. (ITA No. 5720/Mum/2011) dated 23.01.2013), following the decisions of the Hon'ble Apex Court in the case of the Apollo Tyres Ltd. and of the Hon'ble Bombay High Court in the case of Akshay Textiles Trading and Agencies (supra) and Adbhut Trading Co. Pvt. Ltd. (supra), has held that the reliance placed by Revenue on the decision of the M/s. Vadinar Power Company Ltd. Hon'ble Bombay High Court in the case of Veekaylal Investment Company Pvt. Ltd. is misplaced. This decision of the Coordinate Bench has been upheld by the Hon'ble Bombay High Court in of 2013 dated 12.08.2015. The learned A.R. prayed that in the factual and legal matrix of the case on hand, the assessee’s appeal be allowed in view of the decisions. 3.3 Per contra, the learned D.R. for Revenue placed strong reliance on the orders of the authorities below. 3.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited. The facts of the matter as emanate from the record before us are that in the period under consideration the assessee-company was in the process of expanding its power generating plant and all expenditure incurred in this pre-commencement stage was reflected under the head Capital WIP and pre-operative expenses in its books of account. For the purpose of investment in the expansion of its power generation plant, the assessee had availed of bank loans from future procuring of plant and machinery and those funds that remained idle temporarily during the period under consideration were invested by it resulting in the generation of interest income and income from sale of Mutual Funds. Admittedly, these amounts so earned were offered to tax under the head ‘income from other sources’ under the normal provisions of the Act since the interest earned was revenue in nature. The same incomes were, however, not part of the ‘book profits’, computed by the assessee under section 115JB of the Act, as the assessee was of the view that the treatment for interest income and income from sale of Mutual Funds being accounted for in accordance with AS-16 have been correctly considered Capital WIP and not forming a part of the Profit & Loss Account prepared under the provisions of Part-II and Part- III of Schedule VI of the Companies Act, 1956 and consequently would not fall for consideration under MAT provisions. It is also a matter of record that the assessee has filed a copy of Form No. 29B issued certifying that the assessee’s accounts have been maintained in accordance with the provisions of Part-II and Part-II of Schedule VI of the Companies Act.