2015 (3) TMI 926 - AT - Income Tax

Contribution under U.P. Sheera Niyantran Adhiniyam - whether is required to be added for the purposes of computing 'Book Profit' under section 115JB of the Act as the same is in the nature of reserve not specified under section 33AC of the Act? - whether the assessee has no right over the amount transferred to Molasses Reserve Fund due to overriding title - Held that - The assessee company has transferred impugned amount to a reserve which has not been specified u/s 33AC of the Act, therefore, as per Explanation 1 attached to provisions of section 115JB of the Act, the book profit is required to be increased by the amount carried to any reserve account. We also note that the AO has rightly relied on the decision of Hon ble Apex Court in the case of State Bank of Patiala reported as (1996 (3) TMI 128 - SUPREME Court) wherein it was clearly held that the issue of what construes reserve and provision and the ratio laid down in these decisions clearly enlighten us that to constitute a reserve, a particular amount set aside out of the profit and other surpluses, should be such as not designated to meet a liability, contingency, commitment or diminution in the value of assets known to at the date of balance sheet. Hence, the reserve can be set aside out of the profits and surpluses and the same cannot be claimed as deduction because it is not an expense laid out for the purpose of business. Coming to the facts of the present case, the contribution to the Molasses reserve fund can be viewed as a provision in nature and it is not an actual liability and the provision created for additional storage facility is obviously in the nature of provision for contingent liability, therefore, the impugned amount being contingent in nature deserves to be added back while computing income u/s 115JB of the Act. Finally, we reach to a conclusion that the action of the AO as well as order of the CIT(A) is well founded and justified and we are unable to see any perversity, infirmity or any other valid reason to interfere with the same on this issue. - Decided against assessee. Addition of capital subsidy to the book profits while computing income under the section 115JB of the Act - Held that - t has already been accepted by the Hon ble High Court in assessee s own case for AY 1990-91 that the subsidy received by the assessee is in the nature of capital subsidy, hence, the same cannot be treated as revenue and thus, the income approach of accounting for capital subsidy received as government grant is not applicable in this case as per AS-12 where in para 5.2 it has been made clear that the capital approach is to be followed in respect of government grants and it is inappropriate to recognise government grants in profit and loss statements because they are not earned to represent an incentive provided by the government. Accordingly, conclusion of the CIT(A) on this issue is not found to be sustainable and we demolish the same by directing the AO that the amount of capital subsidy to the book profits while computing the income u/s 115JB of the Act is not an appropriation of profits and there is no such debit to the profit and loss account for the alleged appropriation and, therefore, the same cannot be added while computing the income u/s 115JB of the Act - Decided in favour of assessee. Depreciation disallowed - Held that - As relying on CIT vs Yamaha Motor India Pvt. Ltd. 2009 (8) TMI 27 - DELHI HIGH COURT we are inclined to hold that the AO was not justified in disallowing the depreciation to the assessee on the assets which were discarded and transferred to the stores and spares during the financial year under consideration. The CIT(A) was not correct in confirming the order of the AO on this issue and thus, we dismiss the same and direct the AO to allow the depreciation to the assessee on discarded assets in the light of our foregoing discussion on this issue - Decided in favour of assessee. Disallowance of miscellaneous receipts - Held that - CIT(A) enhanced the addition without issuing any notice and affording due opportunity of hearing for the assessee, therefore, the order of enhancement is not sustainable as per provisions of the Act and well-accepted principles of jurisprudence. In this situation, we are of the considered view that the ends of justice would be met if the issue is restored to the file of the CIT(A) for a fresh adjudication after affording due opportunity of hearing for the assessee for this limited purpose only. - Decided in favour of assessee for statistical purposes .

Summary

Issues Involved:
1. Addition of amount contributed under U.P. Sheera Niyantran Adhiniyam to 'Book Profit' under section 115JB.
2. Addition of capital subsidy to book profits under section 115JB.
3. Disallowance of depreciation claimed on discarded assets.
4. Treatment of miscellaneous receipts under the head income from other sources and eligibility for deduction under section 80 IC.

Issue-wise Detailed Analysis:

Ground No. 2: Addition of Amount Contributed under U.P. Sheera Niyantran Adhiniyam to 'Book Profit' under Section 115JB

The assessee contended that the amount contributed under U.P. Sheera Niyantran Adhiniyam should not be added to the 'Book Profit' as it is an allowable expenditure and the assessee has no right over the amount transferred due to overriding title. The respondent argued that the contribution is a contingent provision and does not represent a diversion of income due to overriding obligation. The Tribunal upheld the CIT(A)'s decision, noting that the amount was transferred to a reserve not specified under section 33AC, thus requiring an increase in book profit as per Explanation 1 to section 115JB. The Tribunal also referenced the Supreme Court's decision in State Bank of Patiala, emphasizing that the reserve is not an expense laid out for business purposes and is contingent in nature. Therefore, the addition was justified, and the ground was dismissed.

Ground No. 3: Addition of Capital Subsidy to Book Profits under Section 115JB

The assessee argued that the capital subsidy should not be added to book profits as it is not an appropriation of profits. The Tribunal observed that the subsidy was treated as capital in nature by the ITAT and upheld by the High Court in the assessee's earlier case. The Tribunal emphasized that the AO must accept the authenticity of accounts maintained as per the Companies Act, certified by auditors, and approved by the company in its AGM. The Tribunal cited the Supreme Court decisions in CIT vs HCL Comnet Systems & Services Ltd. and Apollo Tyres Ltd. to support this view. The Tribunal concluded that the capital subsidy should not be added to book profits, allowing the assessee's ground.

Ground No. 4: Disallowance of Depreciation Claimed on Discarded Assets

The assessee claimed depreciation on discarded assets, which was denied by the AO and upheld by the CIT(A), arguing that the assets were not used for business purposes. The Tribunal referred to the Delhi High Court's decisions in CIT vs Oswal Agro Mills Ltd. and CIT vs Yamaha Motor India Pvt. Ltd., which recognized passive use of assets for business purposes. The Tribunal concluded that the AO was not justified in disallowing depreciation on discarded assets, allowing the assessee's ground.

Ground No. 5: Treatment of Miscellaneous Receipts under the Head Income from Other Sources and Eligibility for Deduction under Section 80 IC

The assessee contended that the CIT(A) enhanced the addition of miscellaneous receipts without issuing a notice or providing an opportunity for hearing, violating principles of natural justice. The Tribunal noted that the CIT(A) disallowed the entire amount as income from other sources without due process. The Tribunal restored the issue to the CIT(A) for fresh adjudication, ensuring due opportunity for the assessee. This ground was allowed for statistical purposes.

Summary:

The appeal was partly allowed. Ground No. 2 was dismissed, Ground Nos. 3 and 4 were allowed, and Ground No. 5 was allowed for statistical purposes, requiring fresh adjudication by the CIT(A). The Tribunal emphasized adherence to legal provisions and principles of natural justice.