2023 (2) TMI 562 - AT - Income Tax

MAT computation - Disallowance of Debenture Redemption Reserve DRR while computing Book Profit u/s 115JB - Whether the said DRR is ascertained liability - Whether computation of book profits by the Appellant is not as per the provisions of Section 115JB as the reduction of Net Profits by the Debenture Redemption Reserve is not one of the prescribed adjustments and therefore not permissible? - CIT-A confirming the disallowance - HELD THAT - As in the facts of the present case it is not the Assessing Officer who has increased the amount of Net Profits, on the contrary it is the Appellant who had reduced the Net Profits as shown in the audited Profit Loss Account prepared as per the provisions of the Companies Act by the amount of Debenture Redemption Reserve created during the relevant previous year. Even if the Debenture Redemption Reserve is taken to be in the nature of a provision, the action of the Appellant was contrary to the law laid down by the Hon ble Supreme Court in the case of Apollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT whereas the orders passed by the authorities below are in conformity with the aforesaid judgment of the Hon ble Supreme Court. Thus, we do not find any infirmity in the order passed by the CIT(A) which deserves to be upheld on this ground alone though the CIT(A) has given further reasoning in support of his decision to confirm the order passed by the Assessing Officer. The Appellant has failed to controvert the above findings/observations of the CIT(A) which are also in conformity with the decision of the Bangalore Bench of the Tribunal in the case of D.R. Ranka Charitable Trust v. Director of Income-tax (Exemptions) 2010 (2) TMI 983 - ITAT BANGALORE In the result, the present appeal is dismissed.

Summary

Issues:
Challenge to order of Ld. Commissioner of Income Tax (Appeals)-53, Mumbai for Assessment Year 2014-15 regarding disallowance of Debenture Redemption Reserve while computing Book Profit under Section 115JB of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance of Debenture Redemption Reserve

The Appellant contested the disallowance of Debenture Redemption Reserve amounting to Rs. 11,00,00,000/- for the computation of Book Profits under Section 115JB of the Income Tax Act, 1961. The Appellant argued that the Debenture Redemption Reserve is an ascertained liability and not a reserve, hence should not have been added back. The Revenue, on the other hand, maintained that the Net Profits before Tax as per audited accounts were INR 1519.86 Crores, and reducing this amount by the Debenture Redemption Reserve was contrary to the Act and judicial precedents. The Appellant's computation of Book Profits included this reduction, which the Revenue and lower authorities found impermissible.

Issue 2: Judicial Interpretation and Precedents

The Appellant relied on the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT, emphasizing the reduction of Net Profits by the Debenture Redemption Reserve. However, the Supreme Court's ruling supported the Revenue's stance, stating that the Assessing Officer's power is limited to adjustments provided in the Act and does not extend to reducing Net Profits except as specified. In this case, the Debenture Redemption Reserve was seen as an appropriation of profits, not a trading liability affecting profit determination.

Issue 3: CIT(A) Decision and Observations

The CIT(A) upheld the Assessing Officer's order, emphasizing that the Appellant's computation of Book Profits did not align with Section 115JB of the Act. The CIT(A) noted that the Debenture Redemption Reserve, though for an ascertained liability, did not impact trading profits but was related to capital liability through profit appropriation. The CIT(A) distinguished the Appellant's reliance on a Bombay High Court judgment, stating it was not applicable due to factual differences. Additionally, the CIT(A) referred to a Tribunal decision supporting the dismissal of the appeal.

In conclusion, the Appellate Tribunal affirmed the CIT(A)'s decision, highlighting that the reduction of Net Profits by the Debenture Redemption Reserve was not permissible under Section 115JB. The Tribunal concurred with the lower authorities' interpretation, emphasizing that the Reserve's creation was an appropriation of profits, not a charge on profits. The appeal was dismissed based on the above analysis and in line with relevant legal provisions and precedents.

This detailed analysis covers the issues raised in the judgment regarding the disallowance of Debenture Redemption Reserve and the legal interpretations and precedents considered by the authorities in reaching their decision.