2020 (1) TMI 490 - AT - Income Tax

Disallowance u/s 14A - investment made out of own funds - HELD THAT - We note that where the assessee was having a common fund consisting of both own funds and borrowed funds and in case the own funds are sufficient to invest in non-business activities, a presumption is drawn that the said investment is made out of own funds. We note that in the assessee s case under consideration, the assessment year involved is A.Y.2008-09 hence, Rule 8D of the Income Tax Rules read with section 14A of the Act are applicable to the assessee and the AO may compute the disallowance by applying Rule 8D of the Income tax Rules. So far Rule 8D(2)(i) is concerned, the assessee has not disallowed suo-moto any amount, therefore no any addition under this Rule can be made by assessing officer. Coming to Rule 8D(2) (ii) of the Rules,the own funds of the assessee is far more than the investments and hence it can be safely presumed that the investments were made only out of own funds. Therefore, the AO is directed to delete the addition under rule 8D(2) (ii) of the Rules. Coming to Rule 8D(2) (iii) of the Rules, we note that addition may be made @ 0.50% of the dividend bearing securities as per the law laid down by the Coordinate Bench in the case of REI Agro Ltd 2013 (9) TMI 156 - ITAT KOLKATA disallowance in such respect should be restricted to the amount only to the extent of the exempt income following the principles decided on the aforesaid matters by various Hon ble High Courts. Therefore, we restrict the disallowance to ₹ 23,35,776/-, being amount of exempt dividend income earned during the year and hence we direct the AO for both the assessment years, that is A.Y.2008-09 and A.Y.2011-12 to restrict the disallowance to the extent of exempt dividend income earned during the year. Therefore, we dismiss the appeals filed by the Revenue as well as appeals filed by the assessee. Disallowance of provision for Non- Performing Assets (NPA) - HELD THAT - We agree with the view taken by the Coordinate Bench in it s earlier order 2019 (2) TMI 1721 - ITAT KOLKATA . Thus, the issue is squarely covered against the assessee by the decision of Apex Court in Southern Technologies Ltd. 2010 (1) TMI 5 - SUPREME COURT . Respectfully, following the decision of Apex Court in Southern Technologies Ltd. (Supra), we dismiss the ground raised by the assessee. Provision for leave Encashment in the computation of total income under the normal provisions of the Act - HELD THAT - We find that though the Hon ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT had struck down the provisions of section 43B(f) of the Act as unconstitutional, the revenue had carried the matter further to the Hon ble Supreme Court 2008 (9) TMI 921 - SC ORDER - Hence from the aforesaid Supreme Court judgement, it could be inferred that the Hon ble Supreme Court had not stayed the judgement of the Calcutta High Court during Leave proceedings. But the Hon ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to remand this issue to the file of the ld AO to pass orders based on the outcome of the main appeal on merits Addition of profit on sale of fixed assets/investments in computing Book Profits under section 115JB - HELD THAT - As the issue is squarely covered in favour of the revenue by the decision of Special Bench in case of Rain Commodities 2010 (7) TMI 794 - ITAT HYDERABAD wherein held in the absence of any provision for exclusion of exempted capital gain in the computation of book profit u/s 115JB, the assessee is not entitled to the exclusion claimed and there is no change in facts and law and the ld Counsel is unable to produce any material to controvert the above said findings of the special Bench. Therefore, respectfully following the decision of Special Bench (supra) we dismiss the ground of appeal raised by the assessee. Addition of provision for non-performing assets (NPA) of ₹ 13,71,00,000/- in computing the book profit under section 115JB - HELD THAT - We note that provision for NPA is made as per Direction 9 of RBI prudential norms and disclosed separately as liabilities in the balance sheet as per Direction 10 of the said prudential norms. The Non- Performing Assets, against which the provision is made remains intact without any reduction. Based on the above factual and legal position, we are of the view that provision for Non-performing assets cannot be said to be provision for diminution in value of assets to attract disallowance as per clause (i) of Explanation 1 to sec. 115JB(2) of the Act. In other words, by making a provision for NPA, there will be no reduction in NPA. Hence, clause (i) of Explanation to Sec. 115JB(2) does not apply since there is no reduction in value of asset. Accordingly, this ground of the assessee is allowed and Assessing Officer is directed to delete addition made in computing book profit u/s 115JB of the Act. These grounds of assessee are allowed. Education Cess as an allowable expenditure u/s 37(1) - HELD THAT - We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court M/S. CHAMBAL FERTILIZERS AND CHEMICALS LTD., GADEPAN, DISTT. KOTA. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. MAT Applicability - whether Assessee company prepares books of accounts as per RBI Rules. Section 115JB of the Act is not applicable to the assessee company, as it does not prepare books of accounts as per part II and part III of Schedule VI of the Companies Act,1956? - HELD THAT - . Even though the assessee has prepared its accounts following the RBI guidelines and the accounts so prepared is strictly not in accordance with provisions of Part II Part III of Schedule VI of the Companies Act, 1956, yet it cannot be said that provisions of Sec 115JB would not be applicable to the assessee company. The assessee company has incorporated under the Companies Act and prepared its accounts in accordance with provisions of Part II Part III of Schedule VI of the Companies Act, 1956. Since there is no such observations by the Auditors also in their Audit Report, we do not agree with ld AR for the assessee and therefore, we confirm the earlier order passed by this Tribunal dated 27-02-2019. Accordingly, this ground of the assessee is dismissed as devoid of merit. Amount transferred to Special Reserve in compliance with the provisions of Section 45IC of the Reserve Bank of India Act, 1934 to be excluded in computing total income under the normal provisions of the Act - HELD THAT - A transfer to a specific reserve cannot be charge on profit. It is not expenditure. It is appropriation of profit. Respectfully following the Judgment of the Hon ble Delhi High Court 2015 (2) TMI 545 - DELHI HIGH COURT in assessee s own case, we dismiss the ground raised by the assessee. Addition on account of the amount transferred to special reserve , (out of statutory compulsion in accordance with section 45-IC of RBI Act) while computing book profit u/s 115JB - HELD THAT - Tribunal in its earlier order 2019 (2) TMI 1721 - ITAT KOLKATA had disallowed the ground relying on the decision of Delhi High Court in assessee s own case for A.Y 2006-07 2007-0 2015 (2) TMI 545 - DELHI HIGH COURT . In the absence of any other judgment pointed out by the A.R in favour of the assessee, we agree with the view of the earlier bench and accordingly the ground is decided in favour of the revenue Addition of interest paid on loans which were advanced interest free to subsidiaries of the Assessee Company - HELD THAT - Assessee advanced interest free loans to its wholly owned subsidiaries out of commercial expediency for the purpose of utilizing the same in the business of the subsidiaries is a allowable deduction in terms of the decision of Hon ble Apex Court in the case of S.A Builders Ltd. -vs.- CIT(Appeals) Another 2006 (12) TMI 82 - SUPREME COURT . The said stand has been further affirmed by the Jurisdictional High court in the case of Dalmia Cement 2001 (9) TMI 48 - DELHI HIGH COURT Bharti Televenture Ltd 2011 (1) TMI 326 - DELHI HIGH COURT relying on the decision of the Apex Court. From perusal of the Balance Sheet and the Audited accounts of the company, it leaves beyond doubt, the fact that the assessee had sufficient own funds for advancing such funds to its subsidiary company. Thus, based on the above factual as well as judicial pronouncements, the AO is directed to delete the disallowance made. Addition on account of disallowance u/s 14A while computing book profit u/s 115JB - HELD THAT - The provisions of section 115JB relating to computation of book profit are amply clear and unambiguous. These provisions do not leave any room for adjustment by the assessing officer other than those mentioned in Explanation 1 to section 115JB to the net profit reflected in the accounts of any assessee and adjustment by way of disallowance u/s 14A is not included in the said explanation. This issue is also covered by the judgment of the Special Bench of Tribunal in the case of ACIT Vs. Vireet Investments (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI . Therefore, such upward revision in the sum of ₹ 26,53,10,000/-to the book-profit by making disallowance section 14A read with rule 8D is not permitted that being so, we decline to interfere with the order of Id. CIT (A) deleting the aforesaid addition. His order on this issue is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Interest u/s 234C of the Act should be charged on the tax due on returned income. Therefore, we direct the assessing officer to charge interest u/s 234C of the Act on the tax due on returned income. Admitting debentures redemption reserve as allowable expenses u/s 115JB - HELD THAT - We are of the view that the DRR is ascertained liability and not a reserve. Accordingly, the revenue s ground is dismissed.

Summary

Issues Involved:
1. Disallowance under section 14A read with Rule 8D.
2. Disallowance of provision for Non-Performing Assets (NPA).
3. Disallowance of provision for leave encashment.
4. Addition of profit on sale of fixed assets/investments in computing Book Profits under section 115JB.
5. Addition of provision for NPA in computing book profit under section 115JB.
6. Education Cess as an allowable expenditure under section 37(1).
7. Applicability of section 115JB for a company preparing books as per RBI Rules.
8. Exclusion of amount transferred to Special Reserve under section 45IC of the RBI Act in computing total income.
9. Deletion of addition made by AO on account of the amount transferred to special reserve while computing book profit under section 115JB.
10. Deletion of disallowance of interest paid on loans advanced interest-free to subsidiaries.
11. Deletion of addition of disallowance under section 14A while computing book profit under section 115JB.
12. Treatment of interest charge under section 234C.
13. Admitting debentures redemption reserve as allowable expenses under section 115JB.

Detailed Analysis:

1. Disallowance under section 14A read with Rule 8D:
The AO computed the disallowance at ?26.53 Crores, which was reduced by CIT(A) to ?23,35,776, the amount of exempt dividend income. The Tribunal confirmed the CIT(A)'s order, referencing the Delhi High Court in Cheminvest Ltd. v. CIT and ITAT Kolkata in REI Agro Ltd. v. DCIT, which state that disallowance under section 14A should not exceed the exempt income. The Tribunal directed the AO to restrict the disallowance to ?23,35,776 for both assessment years.

2. Disallowance of provision for Non-Performing Assets (NPA):
The provision for NPA of ?13,71,00,000 was disallowed based on the Supreme Court decision in Southern Technologies Ltd. v. JCIT, which held that such provisions are not deductible under section 36(1)(vii) or section 37(1). The Tribunal upheld this disallowance.

3. Disallowance of provision for leave encashment:
The Tribunal noted that the Supreme Court had not stayed the Calcutta High Court's judgment in Exide Industries Ltd. v. Union of India, which struck down section 43B(f). The issue was remanded to the AO to pass orders based on the Supreme Court's final decision.

4. Addition of profit on sale of fixed assets/investments in computing Book Profits under section 115JB:
The Tribunal followed the Special Bench decision in Rain Commodities Ltd., which held that exempt income cannot be excluded from book profits under section 115JB. The addition of ?81,43,970 was upheld.

5. Addition of provision for NPA in computing book profit under section 115JB:
The Tribunal initially upheld the addition based on the retrospective insertion of Explanation 1(i) to section 115JB. However, upon reconsideration, it was determined that the provision for NPA does not reduce the value of assets and thus should not be added back under section 115JB. The AO was directed to delete the addition of ?13,71,00,000.

6. Education Cess as an allowable expenditure under section 37(1):
The Tribunal allowed the deduction of education cess, referencing the CBDT Circular No. 91/58/66 and the Rajasthan High Court decision in Chambal Fertilizers and Chemicals Ltd. v. JCIT. The AO was directed to allow the claim.

7. Applicability of section 115JB for a company preparing books as per RBI Rules:
The Tribunal dismissed the assessee's claim that section 115JB does not apply, noting that the company's accounts were prepared in accordance with the Companies Act and there were no auditor qualifications. The earlier order was confirmed.

8. Exclusion of amount transferred to Special Reserve under section 45IC of the RBI Act in computing total income:
The Tribunal dismissed the ground, following the Delhi High Court's decision in the assessee's own case, which held that such transfers are appropriations of profit and not deductible.

9. Deletion of addition made by AO on account of the amount transferred to special reserve while computing book profit under section 115JB:
The Tribunal upheld the addition, relying on the Delhi High Court's decision in the assessee's own case.

10. Deletion of disallowance of interest paid on loans advanced interest-free to subsidiaries:
The CIT(A) deleted the disallowance, noting that the assessee had sufficient own funds to cover the interest-free loans and referencing the Supreme Court decision in Munjal Sales Corporation v. CIT. The Tribunal confirmed this decision.

11. Deletion of addition of disallowance under section 14A while computing book profit under section 115JB:
The Tribunal held that section 14A disallowances cannot be added back to book profits under section 115JB, referencing the Special Bench decision in ACIT v. Vireet Investments (P) Ltd. The deletion of ?26,53,10,000 was upheld.

12. Treatment of interest charge under section 234C:
The Tribunal directed the AO to charge interest under section 234C on the tax due on returned income.

13. Admitting debentures redemption reserve as allowable expenses under section 115JB:
The Tribunal upheld the CIT(A)'s decision that Debenture Redemption Reserve is an ascertained liability and not a reserve, referencing several judgments in favor of the assessee. The ground raised by the revenue was dismissed.

Conclusion:
The appeals filed by the assessee and the revenue were allowed to the extent indicated above. The Tribunal provided detailed reasoning and referenced relevant case laws to support its decisions on each issue.