2010 (11) TMI 392 - AT - Income Tax

Addition - Debenture redemption reserve - whether the amount of Rs.50 lakhs transferred by the assessee from the P and L a/c to the debenture redemption reserve is to be allowed as a deduction while computing the book profit for the purpose of s. 115J of the Act - Held that the amounts set apart to redeem debentures are to be treated as an amount set apart to meet a known liability and as such the debenture redemption reserve cannot be considered to be a reserve - Accordingly the sum of Rs.50 lakhs as appropriated by the assessee in the P and L a/c of the relevant previous year cannot be held to be a reserve within the meaning of cl. (b) or the amount set apart to meet unascertained liabilities within the meaning of cl. (c) of the Explanation to s. 115J(1) of the Act and as such the said amount was not to be added to the net profit as computed by the assessee to arrive at the book profit for the purpose of s. 115J - Decided in favour of assessee. Adjustment on account of debenture redemption reserves - As per the the Tribunal judgment of Hon ble Supreme Court in case of National Rayon Corporation Ltd. 1997 -TMI - 40205 - SUPREME Court the Tribunal held that no adjustment could be made by the authorities on account of debenture redemption reserves - Decided in favour of assessee. Whether a sum appropriated by the assessee in the profit and loss account towards debenture redemption reserve could be held to be reserve within the meaning of clause (b) be set apart unascertained liability within the meaning of clause (c) of Explanation to section 115J(1) while computing book profit u/s 115J - Held that - the Bench had applied the decision of the Hon ble Supreme Court in the case of National Rayon Corporation Ltd. vs. CIT 1997 -TMI - 40205 - SUPREME Court and held that such an amount was not to be added to the net profits as computed by the assessee to arrive at the book profit for the purpose of section 115J - The learned departmental representative could not bring any Contrary decisions - Decided in favour of assessee. Penalty - Since the addition on the basis of which the present penalty has been levied by the Assessing Officer has already been deleted vide aforesaid referred to order therefore in view of the ratio laid down in the aforesaid case of K. C. Builders and Another vs. CIT 2004 -TMI - 6137 - SUPREME Court the penalty is not leviable - Therefore delete the penalty.

Issues Involved:
1. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act, 1961 for the assessment years 1999-2000 and 2000-2001.
2. Disallowance of Debenture Redemption Reserve for computing book profit under Section 115JA of the Income Tax Act, 1961.

Issue 1: Confirmation of Penalty under Section 271(1)(c) for Assessment Year 1999-2000

The assessee declared an income of Rs. 39,38,40,360/- under Section 115JA of the Income Tax Act, 1961. However, the assessment was completed at an income of Rs. 1,52,27,80,870/-. The CIT (A) deleted certain additions but did not allow the provision of Rs. 51,25,00,000/- for Debenture Redemption Reserve for computing book profit under Section 115JA. Subsequently, the Assessing Officer levied a penalty of Rs. 6,00,00,000/- under Section 271(1)(c) of the Act.

The CIT (A) confirmed the penalty, observing that the assessee's claim for Debenture Redemption Reserve was disallowed and added by the Assessing Officer, a decision upheld in appeal by the CIT (A).

The assessee argued that the addition on which the penalty was based had been deleted by the ITAT, Lucknow Bench 'B', in I.T.A. No. 749/Luc/04 for the assessment year 1999-2000. The CIT, D.R., supported the CIT (A)'s order but could not counter the assessee's contention.

Analysis:
The ITAT noted that the addition on which the penalty was levied had been deleted in the assessee's own case for the assessment year 1999-2000. The Tribunal referred to its own earlier decision and various other ITAT decisions, including the case of IOL Ltd. vs. Dy. CIT, where it was held that the Debenture Redemption Reserve is not a reserve within the meaning of clause (b) or an unascertained liability within the meaning of clause (c) of the Explanation to Section 115J of the Act.

The Tribunal also referenced the Supreme Court's decision in K.C. Builders and Another vs. ACIT, which held that if the additions in the assessment order on which the penalty is based are deleted, the penalty cannot survive.

Conclusion:
Since the addition was deleted, the penalty under Section 271(1)(c) was not leviable. The Tribunal deleted the penalty for the assessment year 1999-2000.

Issue 2: Confirmation of Penalty under Section 271(1)(c) for Assessment Year 2000-2001

The facts for the assessment year 2000-2001 were identical to those for the assessment year 1999-2000. The assessee's grievance related to the penalty of Rs. 6,00,00,000/- levied by the Assessing Officer and confirmed by the CIT (A).

Analysis:
The Tribunal noted that the rival contentions and facts were similar to those of the previous assessment year. Since the addition of Rs. 51,25,000/- was deleted in the appeal for the assessment year 2000-2001, the findings for the assessment year 1999-2000 applied mutatis mutandis.

Conclusion:
The Tribunal deleted the penalty levied under Section 271(1)(c) for the assessment year 2000-2001.

Final Judgment:
The appeals for both assessment years 1999-2000 and 2000-2001 were allowed, and the penalties levied under Section 271(1)(c) were deleted. The order was pronounced in the open court on 8.11.2010.

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