2017 (5) TMI 1819 - AT - Income Tax

MAT Addition - amount of Debt Redemption Reserve for computing the book profit u/s 115JB - HELD THAT - We find that the assessee is adjusted the amount of Debt Redemption Reserve created by the company while working out the amount of book profit u/s 115JB of the Act. We find that similar issue is dealt in the case of Raymond Ltd. 2012 (4) TMI 127 - BOMBAY HIGH COURT as held that mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA In the similar case ITAT Ahmedabad Bench in the case of ACIT vs. Genus Electrotech Ltd 2016 (5) TMI 1136 - ITAT AHMEDABAD has held that the adjustment claimed by the assessee for Debt Redemption Fund was declined with a short observation that Debt Redemption Fund was an appropriation for the purpose of creating a reserve and was a below line adjustment and it did not fall in any category of adjustments provided u/s 115JB of the Act. Respectfully following the Hon ble Bombay High Court in the case of Raymond Ltd. 2012 (4) TMI 127 - BOMBAY HIGH COURT we allow the claim of the assessee. The orders of the lower authorities are reversed and deduction is allowed.

Summary

Issues:
Appeals arising from CIT(A)'s orders regarding addition of Debt Redemption Reserve while computing book profit under section 115JB of the Income Tax Act, 1961.

Analysis:
1. The appeals by two assessees challenge the CIT(A)'s confirmation of the addition made by the AO for the Debt Redemption Reserve while computing book profit under section 115JB of the Act. The facts and grounds in both cases are identical, focusing on the same issue. The CIT(A) confirmed the AO's action, emphasizing the creation of the reserve solely to reduce tax liability under section 115JB. The CIT(A) dismissed the appeal, highlighting the lack of basis for the claim of the Debt Redemption Reserve, especially in the absence of details on unsecured loans and contemporaneous records.

2. The assessees argued that the Debt Redemption Reserve should not be added back to the net profit under section 115JB, citing the Bombay High Court's decision in CIT vs. Raymonds Ltd. The counsel contended that the Debt Redemption Reserve is similar to the Debenture Redemption Reserve, and no adjustment is mandated under the Act. The assessee's counsel also challenged the CIT(A)'s jurisdiction to delve into the accounts while deciding on the income computation under section 115JB, invoking the Supreme Court's ruling in Apollo Tyres Ltd. vs. CIT.

3. The Tribunal examined the issue in light of the Bombay High Court's decision in Raymond Ltd., emphasizing that a Debt Redemption Reserve is not a reserve in the true sense when created to meet a known liability. Citing a similar case, the Tribunal allowed the claim of the assessee, reversing the lower authorities' orders. The Tribunal's decision aligned with the Bombay High Court's interpretation, leading to the allowance of the appeals for both assessees.

4. The judgment highlights the importance of distinguishing between reserves and provisions, emphasizing that amounts set apart for known liabilities do not qualify as reserves. By following precedent and legal principles, the Tribunal allowed the appeals, providing relief to the assessees regarding the treatment of the Debt Redemption Reserve in computing book profit under section 115JB.

5. Ultimately, the Tribunal's decision on both appeals favored the assessees, setting aside the CIT(A)'s orders and allowing the deduction related to the Debt Redemption Reserve. The consistent view taken by the Tribunal, based on legal interpretations and precedents, resulted in the allowance of both appeals.

Order pronounced in the open court on 31-05-2017.