2011 (8) TMI 780 - AT - Income Tax

MAT - Deduction of brought forward losses for computation of book profit u/s. 115JB - losses have been liquidated by adjusting debit balance against share premium and revaluation reserve pursuant to scheme of compromise sanctioned by Hon ble High Courts of Orissa and Gujarat - Held That - Section 391 is a complete code in itself and any scheme sanctioned under this section will have over riding effect. - in computing the book profit for the assessment years 2006-07 and 2007-08, the assessee was entitled to deduction in terms of clause (iii) of the Explanation to section 115JB(2) of the Act the adjustment of debit balance in the Profit and Loss Account with share Premium Account and Revaluation Reserve made on September 30, 2000, which is required to be excluded from consideration and accordingly, AO is required to determine amount of loss brought forward or unabsorbed depreciation for each of years without taking said adjustment into consideration and allow deduction in respect of lesser of two amounts. Decided in favour of assessee. Expenditure on account for running school and other facilities - Addition u/s 40A(9) - assessee has failed to specify its business interest by making said donations - Revenue assessee intended to diverse its profit by making such donation - no details of students of school, school running expenses, number of employees - Held That - The assessee will produce details as required by Assessing Officer and Assessing Officer after considering the details, whether actually the assessee has incurred expenditure on school and club, will consider the claim. This issue of revenue s appeals for both Assessment Years is allowed for statistical purposes. Notional interest - non charging of interest from sister concern - held that - the proceedings of winding up as well as BIFR were going on against both the parties in different forum. Despite order by the High Court, the principal amount itself was not paid to the assessee, what to say of the interest. - assessee was justified in not declaring interest income in the assessment year in question having regard to principle of real income. - Decided in favor of assessee. Deduction u/s 35 - donation made to Pushpawati Singhania Research Institute (PSRI). - held that - There is no requirement that once the Notification is issued by the CBDT the said Institute has to be approved by any other authority. Once Notification is issued donor is qualified for weighted deduction referred in Sec.35 of the Act. - the CIT(A) has rightly deleted the disallowance as made by Assessing Officer. - Decided in favor of assessee.

Summary

Issues Involved:
1. Computation of income under Section 115JB of the Income Tax Act for AY 2006-07 and 2007-08.
2. Disallowance under Section 40A(9) of the Act for expenditure incurred for running school and other facilities.
3. Addition of notional interest.
4. Adoption of opening WDV for the purpose of depreciation.
5. Charging of interest under Section 234B and 234D.
6. Credit available for earlier years under Section 115JAA.
7. Deduction under Section 35(1)(ii) for donation made to Pushpawati Singhania Research Institute.

Detailed Analysis:

1. Computation of Income under Section 115JB:
The primary issue was whether the assessee could adjust the debit balance in the Profit and Loss Account against the Share Premium Account and Revaluation Reserve, which was sanctioned by the High Courts of Orissa and Gujarat. The AO did not allow such adjustments, arguing that they were not in line with generally accepted accounting practices and the provisions of the Companies Act. The CIT(A) for AY 2006-07 allowed the adjustment, while for AY 2007-08, the CIT(A) upheld the AO's decision. The Tribunal concluded that the assessee was entitled to the deduction of brought forward losses for computing book profit under Section 115JB, excluding the adjustments made under the High Court scheme, as these adjustments were not in accordance with accounting standards and the Companies Act.

2. Disallowance under Section 40A(9):
The AO disallowed expenses incurred for running a school and other facilities, arguing they fell under the mischief of Section 40A(9). The CIT(A) allowed the claim based on the ITAT's order for AY 1999-2000, which was upheld by the Tribunal. However, the Tribunal directed the AO to re-examine the details of the expenditure to ensure they were genuinely incurred for the school and club.

3. Addition of Notional Interest:
The AO added notional interest on deposits made with Oswal Food Limited and HMG Financial Services Limited, which were under legal dispute. The CIT(A) upheld the addition. The Tribunal, following its earlier decisions, deleted the addition, noting that the principal amounts were doubtful of recovery, and hence, no real income by way of interest could be said to have accrued.

4. Adoption of Opening WDV for Depreciation:
The AO did not allow depreciation based on the opening WDV as computed in earlier years. The Tribunal directed the AO to recompute the depreciation for AY 2006-07 by adopting the opening WDV as on 01.04.2005, which included capitalized interest expenditure from earlier years.

5. Charging of Interest under Section 234B and 234D:
The CIT(A) upheld the AO's decision to charge interest under Sections 234B and 234D. The Tribunal confirmed this, citing the Supreme Court's decision in JCIT vs. Rolta India Ltd., which held that interest under Section 234B applies to MAT companies as well.

6. Credit Available for Earlier Years under Section 115JAA:
The CIT(A) dismissed the issue of MAT credit quantification. The Tribunal directed the AO to quantify the MAT credit as per the provisions of Section 115JAA and carry it forward accordingly.

7. Deduction under Section 35(1)(ii):
The AO disallowed the deduction for donations made to Pushpawati Singhania Research Institute, arguing that it required approval from the appropriate authority. The CIT(A) allowed the deduction, noting that the institute was notified under Section 35(1)(ii). The Tribunal upheld the CIT(A)'s decision, confirming that the notification was sufficient for the deduction.

Conclusion:
The Tribunal provided a comprehensive analysis, addressing each issue with detailed reasoning, ensuring that the assessments were in line with the provisions of the Income Tax Act and relevant judicial precedents. The appeals and cross-objections were partly allowed for statistical purposes, directing the AO to re-examine certain aspects and recompute figures as per the Tribunal's findings.