2016 (7) TMI 576 - AT - Income Tax

MAT calculation u/s 115JB - revaluation reserve - whether any taxable income arising on account of revaluation, no adjustment could be made to the profit and loss account for the purpose of book profits u/s 115JB - Held that - At the initial stage, the arguments of the Ld AR that the only real gains and only realized gains can be considered for the purpose of taxation seems to be attractive, but the same cannot be accepted in the light of the totality of the facts listed hereinabove and in the light of the detailed order of Ld CIT(A) and more so when the assessee in the garb of issue of bonus shares has distributed the unrelaised gains. Further, before us Assessee has also not placed any material on record to demonstrate that the finding of the Ld CIT(A) are factually incorrect with respect to Assessee s going ahead with the passing of resolution for issue of bonus shares even before the receipt of the report of Chartered Accountant, which the basis of the revaluation, issuance of bonus shares to its shareholders even though it was not permissible as per the Guidance note issued by the Institute of Chartered Accountants of India and the Circular issued by Department of Company affairs, Ministry of Law, Justice and Company affairs. Further, it is also not the case of the assessee that the revaluation reserve which has been created is not a mere book adjustment entry but on the contrary has resulted into actual cash inflow and that it represents realized gains. Before us, in support of its claim, Ld AR had relied on various decisions but however we find that the ratio of decisions relied upon by the assessee in its support are not applicable to the present facts of the case because in none of the cases relied upon by the Ld AR, the revaluation reserve was used for the purpose of issuing bonus shares. In view of the aforesaid facts, we find no reason to interfere with the order of Ld CIT(A) and we therefore dismiss the ground of Assessee.

Summary

Issues Involved:

1. Adjustment of 'book profit' under section 115JB of the Income Tax Act.
2. Levy of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Adjustment of 'Book Profit' under Section 115JB:

The primary issue in this case was whether the revaluation of investments and the subsequent creation of a revaluation reserve should be included in the book profits for the purpose of Minimum Alternate Tax (MAT) under section 115JB of the Income Tax Act. The Assessee had revalued its investment in its subsidiary, NSI Infinium Global Pvt Ltd, from ?1 lakh to ?20.01 crores, creating a revaluation reserve of ?20 crores. Out of this reserve, ?19,52,64,900 was used to issue bonus shares to its shareholders. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the revaluation reserve should have been routed through the Profit and Loss Account instead of directly crediting it to the Reserves and Surplus account in the Balance Sheet. The AO recast the Profit and Loss account by including the revaluation reserve to the profits for determining book profits under section 115JB, resulting in book profits of ?19,99,79,887.

The CIT(A) upheld the AO's decision, stating that the revaluation reserve was not in line with Accounting Standard 11 issued by the Institute of Chartered Accountants of India (ICAI) and the circular issued by the Department of Company Affairs. The CIT(A) emphasized that the revaluation reserve should have been included in the Profit and Loss account as per the Companies Act and Accounting Standards. The CIT(A) also noted that the revaluation reserve was used for issuing bonus shares, indicating that the Assessee treated it as a free reserve, which was not permissible.

The Tribunal agreed with the CIT(A) and AO, stating that the Assessee's act of issuing bonus shares out of the revaluation reserve indicated that the reserve was considered as available for distribution, contradicting the Assessee's claim that it was not a real profit. The Tribunal dismissed the Assessee's argument that only realized gains should be considered for taxation, highlighting that the Assessee's actions suggested otherwise.

2. Levy of Interest under Sections 234A, 234B, 234C, and 234D:

The Assessee contested the levy of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act. However, the Tribunal did not adjudicate this issue separately, as the primary issue regarding the adjustment of book profits was considered crucial and determinative. The Tribunal's decision to uphold the adjustment of book profits implicitly validated the levy of interest under these sections.

3. Initiation of Penalty Proceedings under Section 271(1)(c):

The Assessee also raised the issue of the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. However, the Tribunal did not specifically address this issue, as it was considered consequential to the primary issue of the adjustment of book profits. The Tribunal's decision to uphold the adjustment of book profits implied that the initiation of penalty proceedings was justified.

Conclusion:

The Tribunal dismissed the Assessee's appeal, upholding the AO's and CIT(A)'s decision to include the revaluation reserve in the book profits for the purpose of MAT under section 115JB. The Tribunal emphasized that the Assessee's actions of issuing bonus shares out of the revaluation reserve indicated that the reserve was considered available for distribution, contradicting the Assessee's claim that it was not a real profit. Consequently, the Tribunal also upheld the levy of interest under sections 234A, 234B, 234C, and 234D, and the initiation of penalty proceedings under section 271(1)(c).