2016 (3) TMI 873 - AT - Income Tax

Addition u/s 14A - Held that - AO without appreciating the various contentions raised by the assessee had mechanically applied the provisions of Rule 8D(2)(ii) of the IT Rules without recording his satisfaction in terms of Rule 8D(1) of IT Rules as to why the disallowance made voluntarily by the assessee u/s 14A of the Act is incorrect. It is not in dispute that the assessee had voluntarily disallowed a sum of ₹ 1,37,12,550/- u/s 14A of the Act towards 0.5% of average value of investments applying the third limb of Rule 8D(2) of the IT Rules. The language of Rule 8D(1) is very clear in this regard. Thus addition u/s 14A of the Act deleted by the Learned CITA does not require any interference - Decided in favour of assessee Entitelment for reduction being the lower of unabsorbed depreciation or business loss as per books of accounts from the computation of book profits u/s 115JB - Held that - We are in agreement with the arguments of the Learned AR that the losses ( both cash loss and depreciation loss) would continue to remain in the books of accounts till it is wiped off by earning profits by the assessee company and accordingly the same would be available for reduction from book profits u/s 115JB of the Act. We hold that the least of the cash loss or depreciation loss once adjusted / reduced from book profits in earlier assessment years, do not vanish out of the books until it is wiped out by profits in subsequent years. Till such time, the losses would only continue to remain in the books. We hold that for the purpose of computation of book profits u/s 115JB of the Act, every year the situation of least of cash loss and depreciation loss needs to be worked out and reviewed and accordingly the understanding of the Learned AO that such loss once adjusted in earlier year is no longer available for set off is misconceived - Decided in favour of assessee Forfeiture of share warrants being a capital receipt - whether would be liable for taxation u/s 115JB just because it has been credited in the profit and loss account as an extraordinary item? - Held that - The assessee has duly disclosed the fact of forfeiture of share warrants in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence respectfully following the aforesaid decision of the Mumbai Tribunal, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon ble Apex Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in (2011 (1) TMI 1 - Supreme Court of India), adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment , should be considered for the purpose of computation of book profits u/s 115JB of the Act and thereafter, the Learned AO has to make adjustments for additions / deletions contemplated in Explanation to section 115JB of the Act. - Decided in favour of assessee

Issues Involved:

1. Addition under Section 14A of the Income Tax Act.
2. Reduction of unabsorbed depreciation or business loss from book profits under Section 115JB.
3. Taxability of forfeiture of share warrants under Section 115JB.

Issue-wise Detailed Analysis:

1. Addition under Section 14A of the Income Tax Act:

The primary issue was whether an addition of Rs. 4,69,87,450 under Section 14A was justified. The assessee had initially filed a return disclosing book profits under Section 115JB and later revised it, including an extraordinary item of Rs. 12,65,75,000 for forfeiture of share warrants. The assessee voluntarily disallowed Rs. 1,37,12,550 under Section 14A. The Assessing Officer (AO) applied Rule 8D(ii) and (iii) to disallow the amount without providing cogent reasons. The CIT(A) deleted the disallowance, citing that the investments were made from own funds and were strategic investments in subsidiaries, not intended for earning exempt income. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not establish a nexus between borrowed funds and investments and did not record satisfaction as required by Rule 8D(1).

2. Reduction of unabsorbed depreciation or business loss from book profits under Section 115JB:

The second issue was whether the assessee was entitled to reduce Rs. 2,18,09,000 from book profits under Section 115JB. The AO held no loss was available for reduction, but the CIT(A) allowed it. The Tribunal agreed with the CIT(A), stating that losses would continue in the books until wiped out by profits. The least of the cash loss or depreciation loss should be reviewed annually for reduction from book profits. The AO's understanding that once adjusted, the loss is no longer available was deemed misconceived.

3. Taxability of forfeiture of share warrants under Section 115JB:

The final issue was whether the forfeiture of share warrants amounting to Rs. 12,65,75,000, a capital receipt, should be taxed under Section 115JB. The AO included this amount in book profits, but the CIT(A) directed the AO to start the computation as per the original return, excluding the forfeiture amount. The Tribunal supported the CIT(A), noting that the forfeiture of share warrants is a capital receipt and not taxable under normal provisions. The Tribunal emphasized that capital receipts not chargeable to tax should not be included in book profits under Section 115JB, aligning with the principle of purposive construction and ensuring the real profit of the company is reflected.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all three issues. The addition under Section 14A was not justified, the reduction of unabsorbed depreciation or business loss was allowed, and the forfeiture of share warrants was excluded from book profits under Section 115JB.

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