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Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: Sh. Saktijit DeyDr. B. R. R. Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘A’, NEW DELHI Before Sh. Saktijit Dey, Vice President Dr. B. R. R. Kumar, Accountant Member ITA No. 5118/Del/2015 : Asstt. Year: 2010-11 ITA No. 3568/Del/2016 : Asstt. Year: 2011-12 ITA No. 2741/Del/2017 : Asstt. Year: 2012-13 Bharat Aluminium Company Ltd., Vs. DCIT, Core-6, Scope Office Complex, Circle-4(2), Lodhi Road, New Delhi-110003 New Delhi (APPELLANT) (RESPONDENT) PAN No. AAACB1290N Assessee by : Sh. Kanchan Kaushal, FCA Revenue by : Sh. P. Praveen Sidharth, CIT DR Date of Hearing: 27.04.2023 Date of Pronouncement: 17.07.2023
ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeals have been filed by the assessee against the orders of ld. CIT(A)-2, New Delhi dated 07.04.2015, 03.03.2016 and the order of ld. CIT(A)-35 dated 15.03.2017.
In ITA No. 5118/Del/2015, following grounds have been raised by the assessee:
“1. DISALLOWANCE OF OTHER INCOME FOR THE COMPUTATION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT Rs.2,44,94,806 On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in confirming the disallowance on account of understanding the provision contained in section 80IA of the Act regarding consideration of "Other Income" for the
2 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. purpose of Computation of Profit eligible for deduction u/s 80IA of the Act and has wrongly disallowed the same which should be considered for the purpose of Computation of Profit.. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION OF PROFIT FROM SALE OF FIXED ASSETS - RS.68,95,58,090 On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in adding back the said sales consideration as profit on sale of fixed assets which has already been considered in the turn-over by the company. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 3. Claim of Debenture Redemption Reserve (DRR') created during the year for Rs. 100 Crores On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in not allowing the Reserve created as per requirement of the statute towards redemption of debentures issued by the company as a deductible item for the purpose of working the tax liability u/s 115JB of the Act. The Ld. CIT(A) erred by holding that the DRR created is not in nature of a provision for ascertained liability in absence of specific provision under the Act.” 3. In ITA No. 3568/Del/2016, following grounds have been raised by the assessee:
“1. DISALLOWANCE OF OTHER INCOME FOR THE COMPUTATION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT Rs.30,948,594 On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in confirming the disallowance on account of understanding the provision contained in section 80IA of the Act
3 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. regarding consideration of "Other Income" for the purpose of Computation of Profit eligible for deduction u/s 80IA of the Act and has wrongly disallowed the same which should be considered for the purpose of Computation of Profit. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION OF PROFIT FROM SALE OF FIXED ASSETS - RS.253,582,351 On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in adding back the said sales consideration as profit on sale of fixed assets which has already been considered in the turn-over by the company. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 3. Claim of Debenture Redemption Reserve (‘DRR') created during the year for Rs. 100 Crores On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in not allowing the Reserve created as per requirement of the statute towards redemption of debentures issued by the company as a deductible item for the purpose of working the tax liability u/s 115JB of the Act. The Ld. CIT(A) erred by holding that the DRR created is not in nature of a provision for ascertained liability in absence of specific provision under the Act.” 4. In ITA No. 2741/Del/2017, following grounds have been raised by the assessee:
“1. DISALLOWANCE OF OTHER INCOME FOR THE COMPUTATION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT- Rs.24,955,769 On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in confirming the
4 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. disallowance on account of understanding the provision contained in section 80IA of the Act regarding consideration of "Other Income" for the purpose of Computation of Profit eligible for deduction u/s 80IA of the Act and has wrongly disallowed the same which should be considered for the purpose of Computation of Profit. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION U/S 41 ALLEGING CESSATION OF LIABILITY ON BASIS OF SOME INFORMATION RECEIVED – Rs.1,609,565 The Dy. Commissioner of Income Tax has erred in adding back the said amount u/s 41 since the same has not been actually done by us in books of accounts.” Section 80IA – Income from Other Sources: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 ITA No. 2741/Del/2017 : A.Y. 2012-13 Sale of Fixed Assets: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 5. Before us, the assessee submitted additional evidences under Rule 29 of the Income Tax (AT) Rules, 1963. It was submitted that the additional evidences could not be submitted before the authorities below and are of seminal importance. The plea of the assessee is found to be acceptable. Since, the revenue did not get the opportunity of owing to the evidences, in the interest of justice, we remand the matter to the file of the AO to consider the additional evidences and pass an order in accordance with the Income Tax Act.
5 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. Claim of Debenture Redemption Reserve: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 6. The a company had, during the financial year 2008-09 i.e. the immediately preceding year issued 5000 secured redeemable non-convertible debentures of Rs.10 lacs each, aggregating to Rs.500 crores redeemable at par in three equal installments in the years 2013, 2014 and 2015.
During the previous year, relevant to the Assessment Year under consideration, the assessee in accordance with the mandatory provisions of the Companies Act, 1956 accounted Rs. 100 crores towards Debenture Redemption Reserve by way of appropriation in the audited profit & loss account prepared in accordance with the Schedule-VI of the Companies Act, 1956.
The issue to be decided in the additional ground raised is about the deduction from the book profits of the appellant company computed as per section 115JB, the Debenture Redemption Reserve of Rs.100 crores created during the year, for the purpose of redemption of debentures worth Rs.500 crores during the years 2013, 2014 & 2015. As per section 115JB of the I.T. Act, if in the case of a corporate assessee, the income tax payable on the total income as computed in accordance with the provisions of the Act is less than 10% of its book profit, then such book profit will be deemed to be the total income of the assessee and the tax will be payable on this book profit @10%. Further, explanation-1 to section 115JB explains the meaning of book profit to be the net profit as per the profit
6 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. and loss account as increased by certain amounts including the amounts carried to any reserves, by whatever name called, other than a reserve specified u/s 33AC [clause (b) to explanation-1 of section 115JB] and as reduced by amounts listed out in clauses (i) to (viii) of the explanation.
A perusal of the bare provisions of the section, including the explanation-1 thereto, makes it unambiguously clear that other than reserves created u/s 33AC of the I.T. Act, amounts carried to any other reserve are to be added back for the purpose of computation of book profit as per section 115JB.
The judgment in the case of National Rayon Corpn. Ltd. vs. Commissioner of Income-tax [1997] 93 Taxman 754 (SC), relied upon by the appellant actually pertains to the computation of capital for the purpose of surtax assessment as per the provisions of the Surtax Act, 1964 and not the computation of book profit u/s 115JB of the I.T. Act. Without prejudice to the aforesaid, even in this judgment the Hon'ble Court observed that an amount which is in excess of what is reasonably necessary for meeting a known liability shall be treated as reserve and not provision.
The assessee has placed reliance on section 117C of the Companies Act to emphasize the fact that transfer of Rs.100 crores during the year to the Debenture Redemption Reserve was mandatory for the appellant, as per the requirement of law. Section 117C of the Companies Act is reproduced below:-
7 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. "Where a company issues debentures after the commencement of this Act, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, from out of its profits every year until such debentures are redeemed."
The question as to what amount is adequate for meeting the liability for redemption of debentures has been clarified by the Ministry of Corporate Affairs vide their circular no.04/2013 dated 11.02.2013 issued vide F. No. 11/02/2012-CL-V (A), which reads as follows:-
"The requirements with regard to adequacy' of Debenture Redemption Reserve (DRP) have been clarified by this Ministry vide General Circular No. 9/2002 dated 18.04.2002.
The matter with regard to need for review of limits indicated in such Circular has been examined by this Ministry in consultation with various stakeholders including relevant regulators. Keeping in view such consultations and the need for development of corporate bonds/debentures, it has been decided to clarify on adequacy of DRR and other related matters as under:
(i) No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. For other Financial button (FIs) within the meaning of section 4A of the Companies Act, 1956 DRR will be as applicable to NBFCs registered with RBI. (ii) For NBFCs registered with the RBI under section 45-1A of the RBI (Amendment) Act, 1997, the adequacy of DRR will
8 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. be 25% of the value of debenture through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debenture. (iii) For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25% of the value of debentures. (iv) Every company required to create/maintain DRR shall before the 30 day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending on the 31st day of March next following in any one or more of the following methods, namely:- (a) in deposits with any scheduled bank free from charge or lien; (b) in unencumbered securities of the Central Government or of any State Government; (c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 2o of the Indian Trusts Act, 1882; (d) in unencumbered bonds issued by any other company which is notified under cause (f) of section 20 of the Indian Trusts Act, 1882
(v) The amount deposited or invested as the case may be, above shall not utilized for any purpose other than for the repayment of debentures maturing during the year
9 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. referred to above, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below 15 percent of the amount of debentures maturing during the 31 day of March of that year.
Thus in the case of the assessee company, creation of a Debenture Redemption Reserve to the extent of 25% of the amount of debentures issued i.e. 25% of Rs.500 crores or Rs.125 crores only in all, would have been adequate to meet the requirement of the Companies Act, including section 117C on which the appellant has been vehemently placing reliance.
In other words, contrary to the claim of the appellant in its submissions before me, it was not mandatory for the appellant, to set apart Rs. 100 crores every year for 5 consecutive years beginning from F.Y. 2008-09 in order to provide for the redemption of the debentures in the years 2013, 2014 & 2015, because as per the circular no.04/2013 dated 11.02.2013 of the Ministry of Corporate Affairs, what was required to be credited to this reserve was only Rs.125 crores whereas the appellant has been transferring Rs.100 crores to this reserve every year beginning with F.Y. 2008-09.
In fact circular no. 9/2002 dated 18.04.2002 of the Ministry of Corporate Affairs issued vide F. No. 6/3/2001-CL.V on the issue goes as far as to clarify that,
"Since the Section requires that the amount to be credited as DRR will be carved out of profits of the company only, there is no
10 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. obligation on the part of the company to create DRR if there is no profit for the particular year.”
Not only this, the Hon'ble Jurisdictional High Court in the case of Srei Infrastructure Finance Ltd vs. Additional Commissioner of Income Tax have vide their judgement dated 13.02.2015, after duly discussing the judgements of the Hon'ble Apex Court in the cases of National Rayon Corporation and Vazir Sultan Tobacco Co. Ltd. (both of which in any case had dealt with the issue of surtax and not book profits u/s 115JB) observed as follows:
“10. In the assessment year 2007-08, the assessee had filed return declaring loss of Rs.37,94,15,570/- under normal provisions and book profit of Rs.47,54,42,043/-. Assessee had created a special reserve of Rs.16 crores under Section 45-IC of the Reserve Bank of India Act, 1934. The Assessing Officer by his assessment order applied clause (b) to Explanation 1 to Section 115JB (2) of the Act and added back the said amount to Book profit. For the same reason, the Assessing Officer also made adjustment of Rs.18,66,00,000/-, which were treated by the assessee as Debt Redemption Reserve. The Commissioner of Income Tax (Appeals) and the Tribunal have affirmed the said findings of the Assessing Officer.
The contention of the appellant-assessee is two-fold. Firstly, the reserve created as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934, is in fact a liability and not a reserve. Reliance is placed upon decision of the Supreme Court in National Rayon Corporation Vs. Commissioner of Income Tax (1997) 227 ITR 764 (SC), and Vazir Sultan Tobacco Company Ltd. Vs. CIT (1981) 132 ITR 559 (SC). Secondly, it is submitted that in terms of Section 45-IC of the Reserve Bank of India Act, 1934, the appellant-assessee
11 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. does not have any title over the reserve and, therefore, it is a case of diversion of income at source. Reliance is placed upon several decisions relating to Molasses Storage Fund, namely, DCM Ltd. Vs. Commissioner of Income Tax [2004] 192 CTR 0408, Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285, Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690, Somaiya Orgeno- Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291. On the issue of Debt Redemption Reserve, again reliance is placed upon decision in National Rayon Corporation (supra) to the effect that the amount was neither a reserve nor a provision for unascertained liability so as to attract clause (b) or (c) of Explanation 1 to Section 115JB(2) of the Act. Revenue has contested and argued to the contrary. Decision of the Supreme Court in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, [2010] 320 ITR 577 (SC), was referred.
In order to appreciate the controversy, we would like to reproduce the provisions of Section 115JB of the Act as applicable to the assessment year 2007-08 reads:-
[Special provision for payment of tax by certain companies.
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].
12 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. (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 provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) :
Provided that while preparing the annual accounts including profit and loss account,--
(i ) the accounting policies; (ii ) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) :
Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,--
(i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year.
13 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. 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 24 [, 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 which 25[ section 10 (other than the provisions contained in clause (38) thereof) or 26[***] section 11 or section 12 apply; or [( g) the amount of depreciation,] [( h) the amount of deferred tax and the provision therefor, [(i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a ) to (i) is debited to the profit and loss account, and as reduced by,--]] [( i) the amount withdrawn from any reserve 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:
Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below
14 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. the second proviso to section 115JA, as the case may be; or] (ii ) the amount of income to which any of the provisions of [ section 10 (other than the provisions contained in clause (38) thereof)] or 31[***] section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or [(iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or] [( iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.
Explanation.--For the purposes of this clause,--
(a) the loss shall not include depreciation;
(b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] (iv) the amount of profits eligible for deduction under section 80HHC , computed under clause (a) or clause (b) or clause (c ) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (v ) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section; or
(vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become
15 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation.--For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 35 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or ( viii) the amount of deferred tax, if any such amount is credited to the profit and loss account.] Explanation 2.-- For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include—
(i) any tax on distributed profits under section 115-O or on distributed income under section 115R;
(ii) any interest charged under this Act;
(iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v ) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.] (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub- section (2) of section 32 or sub-section (3) of section 32A or clause.
(ii) of sub-section (1) of section 72 or section 73 or section 74 or sub- section (3) of section 74A.
(4) Every company to which this section applies, shall furnish a report in the prescribed form 37 from an accountant as defined in
16 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. the Explanation below sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub- section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i ) of sub-section (1) of section 142.
(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.] (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.”
As noticed by this Court in Commissioner of Income Tax (Central- II) Vs. Goetze (India) Limited [2014] 361 ITR 505 (Del), Sub-section (1) to Section 115JB of the Act begins with a non obstante expression, which gives an overriding effect to the said section. Sub-section (2) states that every assessee being a company shall prepare a Profit and Loss account for the previous year in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. Explanation to the said section in the first part refers to increase in book profit by amounts specified in sub paragraphs (a) to (g). Explanation in the second part states that the book profit shall be reduced under clause (i) to (iii). Thus, the book profits of the previous years preferred in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, have to be decreased or increased as per the express mandate of the Explanation 1 to Section 115JB (2) of the Act.
In the present case, we are concerned with clause (b) to Explanation 1 which states that book profit prepared in accordance
17 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount carried to any reserve by whatever name called, other than a reserve specified under Section 33AC of the Act. The legislature in express, lucid and categorical terms has stipulated that the book profit shall be increased by the amounts carried to any reserve. The word ―any‖, it is obvious, refers to all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression ―reserve by whatever name called‖. There could not have been more clarity and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i.e. book profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under Section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded. Guidance Note on revised Schedule VI to the Companies Act, 1956 by the Institute of Chartered Accountants of India would indicate that reserves and surplus are generally classified as; (a) capital reserve; (b) capital redemption reserve; (c) securities premium reserve; (d) debenture redemption reserve; and, (e) revaluation reserve or other reserves. In addition, there can be share options outstanding account and surplus, i.e. the balance in the statement of profit and loss disclosing allocations and appropriations such as dividend, bonus shares and transferred to/from reserves, etc.
In view of the aforesaid legal position and language of clause (b) to Explanation (1) to Section 115JB of the Act, the appellant- assessee had adopted a different line of argument relying upon the decision of the Supreme Court in the case of National Rayon Corporation (supra) and Vazir Sultan Tobacco Company Ltd. (supra) and argued that the amounts ―appropriated‖ under Section 45-IC of
18 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. the Reserve Bank of India Act, 1934 are not a reserve. We record and express our inability to agree with the said contention for the reasons set out below.
In Vazir Sultan Tobacco Company Ltd. (supra), the Supreme Court was concerned with the Companies (Profits) Surtax Act, 1964 and it was observed that the terms ―provision and ―reserve were not defined in the said Act, but are well-known terms in commercial accountancy and are used in the Companies Act with reference to preparation of balance sheets and Profit and Loss account. It was held that if a sum of money had not been set apart for certain purpose, it would not be a ―provision but it did not follow that it would be a ―reserve. Referring to Part I and II of the Schedule VI, it was observed that the expression ―provision has been defined positively and meant any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which, the amount cannot be determined with substantial accuracy. However, the expression ―reserve has been defined in a negative manner, and would exclude, i.e., not include, any amount written off retained by way of providing for depreciation, renewal or diminution in value of assets, or retained by way of providing for any known liability. Therefore, an amount retained in excess of the amount retained for any known liability was not necessarily a reserve. A provision, it was held, is a charge against profits and therefore to be taken into account against gross receipts in the Profit and Loss account. The ―reserve, on the other hand, is appropriation of profits, the assets by which it is represented being retained to form a part of the capital employed in business. Whether an amount was a ―reserve‖ or ―provision, it was observed, must be determined with reference to the nature and character of sum retained and substance of the
19 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. matter. The balance-sheet contains separate heads for ―reserve and surplus and ―current liabilities and provisions.
The aforesaid position still holds good when we refer to the Guidance Note issued by the Institute of Chartered Accountants of India on revised Schedule VI to the Companies Act, 1956 (December, 2011 Edition) in which it has been observed:-
8.1.2.1. Reserve:
The Guidance Note on Terms Used in Financial Statements defines the term Reserve' as ―the portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. Reserves' should be distinguished from provisions'. For this purpose, reference may be made to the definition of the expression `provision' in AS-29 Provisions, Contingent Liabilities and Contingent Assets.
As per AS-29, a `provision' is ―a liability which can be measured only by using a substantial degree of estimation. A liability' is ―a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 'Present obligation' - an obligation is a present obligation if, based on the evidence available, its existence at the Balance Sheet date is considered probable, i.e., more likely than not.
Thereafter, the Guidance Note under different headings describes capital reserve, capital redemption reserve, securities premium reserve, debenture redemption reserve, revaluation reserve, share options outstanding account and other reserves.
20 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. 19. Similarly, in the Guidance Note on the Terms Used in Financial Statements GN(A) 5 issued in 1983, the terms ―reserve and ―provision were explained as under:-
―14.04 Reserve The portion of earnings, receipts or other surplus of any enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types: capital reserves and revenue reserves. 13.14 Provision - an amount written off or retained by way of providing for depreciation or diminution in value of assets or retained by way of providing for any known liability the amount of which cannot be determined with substantial accuracy.
In the case of National Rayon Corporation (supra), the assessee company had issued secured redeemable mortgage debentures against the security of land, building and machinery and a floating charge on the undertaking. The High Court held that this was merely a ―provision to enable it to redeem debentures when they became due for redemption. The aggregate amount of the debentures was higher than the amount of Debenture Redemption Reserve. The High Court on the aforesaid reasoning held that the amount set aside to meet the future liability, which was certain to come into existence was a ―provision and not a ―reserve. The Supreme Court, therefore, disagreed with the said reasoning observing that the High Court itself had come to the conclusion that the Debenture Redemption Reserve was less than the company's liability on this account. Further, the liability had arisen the moment money was borrowed, which would be repayable. The obligation or liability to repay would not cease just because the fact that the date of repayment was deferred by an agreement, as the obligation was an ascertained
21 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. liability. Therefore, the money set apart for redemption of debentures must be treated as money set apart to meet a known liability and the amount should be shown as a liability. In these circumstances, it was held that the amount set apart was not a ―reserve. Reference was made to Batliboi's Advanced Accountancy with reference to nature of sinking funds and it was held that redemption of debenture would not be a ―reserve, though it was shown as ―reserve in the balance-sheet. An amount shown as a reserve is in the nature of allocation of profits and not a charge against them. The Debenture Redemption Reserve, it was held, was in the nature of charge against profits and not appropriation of profits.
We do not see how this decision can help and assist the appellant- assessee.
In respect of Debt Redemption Reserve of Rs.18,66,00,000/-, no specific explanation was given; on what account and why the said reserve was created. Nothing has been shown or pointed out to us to show why the said reserve was created. The reply dated 9th March, 2009 quoted in the assessment order refers to definition of the term ―provision or reserve and various decisions and in the end it is stated that the amounts set apart for provision of the Debt Redemption Reserve to meet any known liability cannot be termed as ―reserve as the same was essentially a ―provision for meeting ascertained liability and, therefore, cannot be added to the book profit either under clause (b) or clause (c) to Explanation 1. Why and for what reasons the amount of Rs.18,66,00,000/- represented an ascertained and known liability, is not indicated or stated. The nature and character of debt is not mentioned and adverted to. The Assessing Officer also noticed that in the earlier years, the Debt Redemption Reserve was offered or added by the assessee himself
22 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. for computation of book profit. The assessment order records that the assessee had created a ―reserve for meeting any kind of debt without specifying its details or particulars.
It is noticeable that under clause (c) of Explanation (1) to Section 115JB of the Act, amount set aside to provisions made for meeting liabilities, other than ascertained liabilities, have to be added back while computing book profit. Thus, provisions for ascertained liabilities would be excluded and are not to be added to the book profit under Explanation (1) to Section 115JB of the Act. Unascertained provisions have to be added and included. It was for the appellant-assessee to explain and show that what was treated as a Debt Redemption Reserve was in fact a provision and that too for an ascertained liability. This explanation is missing and absent. 24. The term provision' differs from liability' because liability is certain and definite amount whereas a provision is an amount which is estimated (See Note 3 of Schedule III of the Companies Act, 2013, with reference to the term ―current liabilities). Reserves fall on the other end/side for they are associated with equity. Transfer of such reserves is appropriation of retained earnings rather than expenses. Contingent liability, however, is not a provision or liability. It is less certain than a provision as the possible obligation has not yet been confirmed and the assessed does not have control whether or when it will be confirmed or the amount cannot be measured with sufficient reliability. The potential obligation is so uncertain that it should not be recognized in the accounts. A provision, therefore, is somewhat between accrual and the contingent liability.
The argument in respect of Section 45-IC of the Reserve Bank of India Act, 1934 and diversion of income at source is misconceived. The decisions of different courts including the Supreme Court and the Delhi High Court in the case of Molasses Storage Fund are
23 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. inapplicable. Diversion of income at source by way of overriding title as a principle is applicable when under a statutory or contractual obligation or under the provisions of Memorandum and Articles of Association, the earning is divested and the assessed has no title over a particular receipt. When such charge exists, the amount or income so charged must be excluded from income of the assessed as income never reaches his hands and in fact belongs to a third person. Thus, the income stands diverted at source. Diversion of income at source implies that income or the amount mentioned therein belongs to a third party and was not income of the assessed. Similar question arose before the Supreme Court in Associated Power Co. Ltd Vs. CIT (1996) 218 ITR 195. In that case, the assessed was a company engaged in the business of generation of electricity and distribution thereof to consumers. The companies were governed by the Electricity (Supply) Act, 1948. By reason of the provisions of the said Act and the VI Schedule thereto, the assessed appropriated certain sums out of its revenue to the contingency reserve account and claimed deduction of the same in the computation of its total income for the purposes of the Act. The Income-tax Officer rejected the claim of the assessee. However, on appeal, the Appellate Assistant Commissioner allowed the assessee's claim. On appeal by the Revenue, the Tribunal set aside the order of the Appellate Assistant Commissioner and referred the question regarding deductibility of the amount transferred to the contingency reserve fund account in arriving at the taxable business income of the assessee-company directly to the Supreme Court under Section 257 of the Act. The Supreme Court on consideration of the facts and circumstances of the case and the scheme of the Electricity (Supply) Act, 1948, observed that the monies in the contingencies reserve belonged to the electricity company. The Supreme Court, therefore, repelled the claim of the assessed that there was a diversion of
24 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. income by overriding title. While doing so, the Supreme Court observed:-
―The application of the doctrine of diversion of income by reason of an overriding title is quite inapposite. The doctrine applies when, by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. Applying the above principle to the facts of the case before it, the Supreme Court observed (page 207) :
― In the present case, the statute requires the electricity company to create certain reserve if its clear profit exceeds a reasonable return (clause II, Sixth Schedule). Again, the contingencies reserve is to be created from existing reserves or from the revenues of the undertaking'. This clearly indicates that the monies which have to be put into the contingencies reserve, reach the electricity company and are not diverted away from it. The Supreme Court further observed:
― It is the electricity company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position. The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and, it being a taxable receipt/earning, it must be taken into account.
Section 45-IC of the Reserve Bank of India Act, 1934 reads as under:-
45-IC. Reserve fund.--(1) Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than
25 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared.
(2) No appropriation of any sum from the reserve fund shall be made by the non-banking financial company except for the purpose as may be specified by the Bank from time to time and every such appropriation shall be reported to the Bank within twenty-one days from the date of such withdrawal:
Provided that the Bank may, in any particular case and for sufficient cause being shown, extend the period of twenty-one days by such further period as it thinks fit or condone any delay in making such report.
(3) Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Bank and having regard to the adequacy of the paid-up capital and reserves of a non- banking financial company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not be applicable to the non-banking financial company for such period as may be specified in the order:
Provided that no such order shall be made unless the amount in the reserve fund under sub-section (1) together with the amount in the share premium account is not less than the paid-up capital of the non- banking financial company.
The reserve, which is required to be created under Section 45- IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions
26 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. from the Central Government subject to proviso to sub-section (3) of the said Section.
The special reserve under Section 40IC of the Reserve Bank of India Act, 1934 of Rs.9,80,00,000/- and Rs.16,00,000/- relating to Assessment Years 2006-07 and 2007-09, respectively was not on account of specific or known liability to repay. It is not the case of charge on profits. It was only appropriation of profits after they had been earned. It is not an expense.
During the course of argument it was ascertained and accepted on behalf of appellant assessee that the reserve under Section 45- IC of the Reserve Bank of India Act, 1934 and debt redemption reserve were below the line allocations, after computing the financial profit and were not treated and regarded as expenditure/liability for the for the purpose of the profit and loss account in the accounts. The amount treated as reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 was not regarded as diversion of income at source by the statutory auditors.
Indeed, the reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 can neither be diversion of income at source nor constitute an expenditure or liability. Reserve under Section 45-IC of the Reserve Bank of India Act, 1934 of not less than 20% of net profit every year can only be computed after net profit is calculated and computed. Reserve, so created is not a liability known or ascertained, even estimated. Section 45- IC ensures that a Non- Banking Finance Company does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. No separate bank account is required to be maintained. It is an added measure of protection created by the statute, to prevent defaults by the Non Banking Financial Companies. Section 45-IC of
27 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. the Reserve Bank of India Act, 1934 also permits appropriation but in restricted or controlled manner by a Non Banking Financial Company.
Accounts in case of a company are prepared as a going concern assuming that the business will continue in the foreseeable future. To ascertain the net profit of each year, not only the current liabilities and the contingencies but future contingencies should also be considered. Thus, Chapter VI of the Companies Act in Part II and III provides for ‘Provision' and ‘Reserves' which relate to future payments, future needs and contingencies for which a part of the current earning is set aside.”
After going through the entire issue, the ld. CIT(A) held as under:
“Thus, in the appellant's case, as in the case of Srei Infrastructure Finance Ltd, the appellant failed to establish that the amount carried to the Debenture Redemption Reserve was what was required as per the Companies Act. Even in the case of M/s. National Rayon Corporation, on which the appellant is placing reliance, the Hon'ble Apex Court had inter- alia remarked that the amount kept in the Debenture Redemption Reserve was in the nature of allocation of profits and not a charge against them, which in other words means that the amount transferred to the Debenture Redemption Reserve is an appropriation out of profits of a company. Since a provision is defined as an amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which, the amount cannot be determined with substantial accuracy, the amount set apart for transfer to Debenture Redemption Reserve cannot be a provision, as the liability to redeem debentures is known and
28 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. accurate. Therefore, this has to fall within the definition of reserve which is defined negatively as excluding any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which, the amount cannot be determined with substantial accuracy, Section 115JB does not give any discretion to the Assessing Officer or to an appellate authority not to add to its profit as per P&L account the amount carried to any reserve, other than reserve specified in section 33AC for the purpose of computation of book profit. In view of the above discussion, it is clear that the amount of Rs.100 crores transferred by the appellant to the Debenture Redemption Reserve during the year under appeal had to be added back for the purpose of computation of book profits u/s 115JB.”
Having gone through the facts of the case that the assessee has been claiming Rs.100 Cr. as Debenture Redemption Reserve for the purpose of redemption of debenture worth Rs.500 Cr. and after going through the judgment of Hon’ble Jurisdictional High Court in the case of Srei Infrastructure Finance Ltd. vs. Additional Commissioner Of Income Tax vide order 13 February, 2015 in ITA No. 371/2012 wherein the judgments of Hon’ble Apex Court in the case National Rayon Corporation Vs. CIT, Vazir Sultan Tobacco Company (supra), Molasses Storage Fund DCM Ltd. Vs. Commissioner of Income Tax [2004] 192 CTR 0408, Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285, Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690, Somaiya Orgeno- Chemicals Ltd. Vs. Commissioner of
29 ITA No. 5118/Del/2015 ITA No. 3568/Del/2016 ITA No. 2741/Del/2017 Bharat Aluminium Company Ltd. Income-tax (1995) 216 ITR 291, we hold that the provisions of Section 115JB(b) are applicable to the facts of the instant case.
Addition u/s 41: ITA No. 2741/Del/2017 : A.Y. 2012-13
During the assessment proceedings, the AO received information from his counterpart DCIT, Circle-7(1)(2), Bangalore that the assessee M/s Wevin India Pvt. Ltd. has irrecoverably written off the amount of Rs.16.09 lacs receivables from the assessee. The assessee continued to claim the same as sundry creditors in their books of accounts. The facts proves that the assessee is absolved of their liability of Rs.16.09 lacs and hence, we hold that the ld. CIT(A) has rightly confirmed the addition made by the AO.
In the result, all the appeals of the assessee are partly allowed for statistical purpose. Order Pronounced in the Open Court on 17/07/2023. Sd/- Sd/- (Saktijit Dey) (Dr. B. R. R. Kumar) Vice President Accountant Member Dated: 17/07/2023 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR