9911796707
TMI Blog2012 (8) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of BMIL and was liable to be taxed u/s.28(i) read with Sec.2(24) of the Act; Whether claim of depreciation is mandatory in nature – AO noticed from the schedule of depreciation furnished by the assessee that depreciation was being claimed on the WDV without adjusting for depreciation allowable for A.Y.s 1995-96 & 1996-97 in the hands of erstwhile BMIL - BMIL did not opt to claim depreciation for the assessment years 1995-96 & 1996-97 although assets have been used in the business carried on by BMIL during those years – Held that:– Making of a claim and the furnishing of particulars – have to be read as cumulative conditions. If either of the two conditions are not fulfilled the AO cannot force the depreciation allowance on the assessee - in the absence of a claim by the assessee the allowance cannot be thrust upon him even if the particulars are available to the AO. Therefore, the mere fact that the assessee did not make a claim for depreciation places a fetter upon the powers of the AO to allow depreciation Whether software development product expenses is allowable as revenue expenditure u/s. 37(1) – expenditure for acquiring and implementing software programme known as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the scheme of amalgamation approved by the Hon ble Bombay High Court. As per the scheme the appointed date was 1.4.1996. The effective date for amalgamation was 24.7.97. Boeheringer Mannheim India Ltd. (BMIL) had received a payment of ₹ 29.26 crores from Boeheringer Mannheim GmbH, Germany (BMG) in November, 1996. This amount was credited to the capital reserve in the books of the assessee company. Note No.6 forming part of the accounts states as under: An unconditional grant of ₹ 2926.17 lakhs received by the erstwhile BMIL after the appointed date from Boeheringer Mannheim GmbH, Germany has been credited to the Capital Reserve. After the merger, certain non-recurring expenses aggregating to ₹ 18.61 crores are determined by the new management as pertaining to the period prior of the effective take-over of the company by the new management or are on account of the Comsat incident and accordingly an equivalent amount has been drawn from Capital Grant Reserve during the year and reduced from Other expenses. In a note appended to the computation of income, the aforesaid amount received from BMG was claimed by the Assessee to be a capital receipt and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht vesting with BMIL to receive the payment was not conclusive that the same is not chargeable to tax. He held that the amount in question was received by virtue of business connection and therefore taxable and further was of the view that the character of the receipt has to be viewed from the point of the recipient and not the giver. In this regard the AO referred to the decision of the Hon ble Supreme Court in the case of P. Krishna Menon Vs. ITO 35 ITR 48 (SC) wherein it was laid down that the test is from the stand point of the recipient as to whether he receives it by virtue of his occupation and not whether it is voluntary or otherwise in the hands of the giver. The AO further held that Assessee s statement that BMIL has been making persistent losses and as a 64% stakeholder BMG wanted to reimburse the losses was also factually incorrect. In this regard the AO referred to the fact that BMIL in their letter dated 14/11/1996 addressed to BMIL had clearly stated the purpose for which the payment was made by them to BMIL as under: We refer to our discussions from time to time about the actions being taken by Boehringer Mannheim India Ltd. to establish, protect and enhance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f benevolence or compassion. The receipt was an unconditional grant which does not relate to any particular source of income and therefore was a revenue receipt not chargeable to tax. The CIT(A) accepted the contention of the Assessee and he held as follows: After considering the facts and circumstances of the case and the rival arguments I am of the view that there is no material to hold the receipt in question was income taxable. under any provisions of the Income-tax Act. From the point of view of the assesses it was gratuitous payment made by the Parent Company without any legal obligation to do so and with no legal right for the assessee to receive it. The receipt was not related to any business services rendered or goods supplied by the assessee to the German Company. Thus the amount was not received by virtue of the business carried on by the assesses company. As the German Company clarified in its letter dated 14/11/1996 addressed to the assessee, quoted by the A.O. in page 4 of the assessment order, it was an unconditional grant given by it. It was an amount given voluntarily without being solicited by the assesses. If the German Company chose not to pay the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that originally the sum in question was brought to be taxed u/s.28(iv) of the Act, which lays down that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is taxable under the head income from business or profession, whereas the revised ground seeks to bring the sum in question to tax u/s.28(i) of the Act which lays down that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year is chargeable to tax under the head income from business or profession. 9. The learned DR submitted that the payment in question was for services rendered viz., promoting image of the German company in India and Comsat incident. It was submitted that BMG and BMIL are closely connected. There was therefore a business connection between the two. He submitted that the definition of the word Income u/s.2(24) of the Act is a inclusive definition and has very wide connection. He reiterated the case of the AO by relying on the decision of the Hon ble Supreme Court in the case of Krishna Menon (supra). His submission was that one has to see the reason as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat of the word income in entry 82 of List I of Schedule VII to the Constitution of India (ii) that the definition of income in section 2(24) was inclusive, the purpose of the definition was not to limit the meaning of income but to widen its net, and the several clauses therein were not exhaustive of the meaning of income; even if a receipt did not fall within the ambit of any of those clauses, it might still be income if it partook of the nature of income. (iii) that the rally was a contest, if not a race and the respondent entered the contest to win it. What he got was a return for his skill and endurance. It was income construed in its widest sense. Though, it was casual in nature, it was nevertheless (iv) The word income is of the widest amplitude and it must be given its natural and grammatical meaning. 10. Our attention was drawn to the decision of the Hon ble Calcutta High Court in the case of Susil C.Sen In re 9 ITR 261(Cal) . The facts of the case were that the assessee, an Attorney and Advocate, acting for one K who was a shareholder in a company, interviewed the Managing Agents of the company, attended a meeting of the shareholders under a proxy f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered as income of the Assessee. His submission was that the stand of the Assessee before the Revenue authorities that BMIL was in losses and the payment in question was made to recoup such losses is far from truth and was contrary to the material on record. He highlighted the fact that BMG and its associates held 64% of the share capital in BMIL. BMIL was using the brand image of BMG, making use of the technical know-how of the parent company and was also acting as the marketing agent for BMG for sale of diagnostic products, BIO chemicals and Bio catalysts. In view of the above relationship and also in the light of the help rendered by BMIL in terms of protecting and promoting the interests of BMG in the wake of COMSAT incident, the payment in question was made by BMG and was therefore a payment connected with the business of BMIL and was liable to be taxed u/s.28(i) read with Sec.2(24) of the Act. 12. The learned counsel for the Assessee submitted that the Assessee had no legal right to receive the money from the parent company. It was argued that the payment was made out of benevolence or compassion. The receipt was an unconditional grant which does not relate to any particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d up share capital in the assessee in June, 1962. For the assessment years 1964-65 and 1965-66, the assessee incurred losses which were reimbursed by the STC. The question was whether for the purposes of income-tax the losses could be said to be wiped off as a result of the reimbursement by the STC. The Appellate Tribunal held that the amounts reimbursed by the STC could not be taken into account as part of the assessee's trading receipts or for that matter as a part of its total income, because the holding company and the subsidiary were distinct entities and what had happened was that the assessee's capital was eroded by the losses and that erosion was rectified by a contribution from the holding company and this was analogous to a sole proprietor introducing additional capital in a business which had been losing or to a holding company diverting some of its surplus funds to the subsidiary to enable it to tide over the loss of capital. On a reference, the Hon ble Delhi High Court upheld the decision of the Tribunal observing that the receipt was analogous to the case of a person agreeing to meet the losses incurred by another person in carrying on a business and to discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude the said amount of ₹ 22.5 lakhs as a receipt under any head of income and claimed that the said amount was not taxable. The Income-tax Officer held that the said amount of ₹ 22.5 lakhs was taxable as a revenue receipt as the said amount had been agreed to be paid to the assessee by the U.K. company to compensate the assessee for the loss sustained by it. The Tribunal, however, held that the said amount did not have the character of income. On a reference, the Hon ble Calcutta High Court held that the material on record showed that there had been no business transaction between the assessee and the U.K. company after the assessee was converted into a public limited company on June 8, 1965. In the income-tax return filed by the U.K. company in the U.K., the payments made to the assessee were not claimed to be the business expenses of the U.K. company. The said amount of ₹ 22.5 lakhs was paid without any claim from the assessee. There was no evidence that the said payment by the U.K. company to the assessee was attributable to any legal obligation or custom or past practice. It was, therefore, clear that there was no obligation, contractual or statutory, to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the profits or losses of these companies for the purpose of income-tax, a subvention payment should be treated as a trading receipt in the hands of the payee-company and as an allowable deduction to the paying-company. Under sub-s. (2), in order that a payment made by one company to the other could be treated as a subvention payment, it was necessary that there should be an agreement providing for the paying-company to bear or share in the losses of the payee-company. Under the provisions of s. 20(2) of the U.K. Act, TMM entered into an agreement dated February 22, 1957, with its subsidiary companies including PB for the making of subvention payments. During the assessment year 1966-67, PB made a provision of 3,30,000 for bad and doubtful debts which was a permissible deduction under the law in the U.K. On the allowance of this deduction PB's results turned into a loss. Thereupon pursuant to the agreement dated February 22, 1957, the other associated companies contributed 3,00,000 to PB as subvention payment. The income in India of the assessee-company as agents of PB for the assessment year 1966-67 had admittedly to be determined under the provisions of s. 9 of the I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be satisfied, viz., that the receipt should be casual and nonrecurring and that it should not arise by way of business income, salary income or capital gains chargeable under section 45. In other words, business income, salary income and capital gains chargeable under section 45 stand outside section 10(3) because salary income, business income and such capital gains are chargeable and computable under a different set of sections. Therefore, when the source of a receipt has a link with business income or salary income or capital gains chargeable under section 45 then section 10(3) will not apply. 19. In CIT Vs. D.P.Sandhu Bros.Chembur P.Ltd. 273 ITR 1 (SC) , the aforesaid principle laid down by the Hon ble Bombay High Court was reiterated. In the case of Padmaraji R.Kadam Bande vs. CIT 195 ITR 877 the assessee was entitled to monthly payment under orders of ruler native state. The native later merged with Bombay State and the payment was apportion on such merging. The statute abolishing such payment provided for compassionate payment at the discretion of the State Government. The assessee received payment from the State Government on compassionate ground. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iagnostic products, BIO chemicals and Bio catalysts. It is only because of such relationship and also in the light of the help rendered by BMIL in terms of protecting and promoting the interests of BMG in the wake of COMSAT incident, the payment in question was made by BMG and was therefore a payment connected with the business of BMIL and was liable to be taxed u/s.28(i) read with Sec.2(24) of the Act. We are of the view that the decision of the Hon ble Supreme Court in the case of G.R.Karthikeyan would be clearly applicable in the present case. We are of the view that the CIT(A) erred in coming to the conclusion that receipt was not in the nature of income. In fact we find that the CIT(A) has given contradictory finding. On the one hand the CIT(A) says that the assessee was in the business of manufacture and sale of drugs and not in the business of public relation or image building. Thus it is an admitted position that the payment was made for protecting and enhancing the goodwill and image of BMG in India. The CIT(A) contrary to the above finding has come to the conclusion that there was no quid pro quo for the payment. As held in the decision of the Hon ble Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes. It was further held that: what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year u/s. 32(2) of the Act. In other words, an assessee who des not claim deduction for the depreciation allowable to him u/s. 32 of the Act in the particular year loses it once for all. Accordingly, the WDV in respect of the assets belonging to erstwhile BMIL was adjusted (by reduction of the WDV) for the foregon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the AO has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars are not, if there is no claim for depreciation, it cannot be allowed by the AO. The debate, therefore, as to whether the omission of s. 34(1) and (2) and r. 5AA of the IT Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The following observations of the Supreme Court in this regard clinch the issue in favour of the position that despite the omission of the above sub-sections of s. 34 and the rule, still depreciation allowance cannot be thrust upon the assessee in the absence of a claim: The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the revenue that after the omission of sub-sec. (1) and (2) of s. 34 and r. 5AA w.e.f. 1st April, 1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Expln. 5 to 32 was introduced by the Finance Act, 2002 w.e.f 1-4-02 and it provides as follows: Explanation 5. - For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; Thus, it can be safely said that omission of section 34 has not affected the assessee s choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Explanation 5 in section 32 with effect from 1st April, 2002, from assessment year 2002-03 onwards. In CIT Vs. Sree Senhavalli Textiles (P) Ltd., 259 ITR 77 (Mad) , the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were as follows: Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972-73? As is evident from the question, the controversy related to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The assessee had substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year's profit in the respective years and thereafter if any profit is left, the unabsorbed depreciation should be adjusted. According to the Income-tax Officer, under the scheme of the Act, the unabsorbed depreciation had to be adjusted first and then only, if any profits are left, the unabsorbed development rebate can be adjusted. Thus, the question was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WDV of the assets in the hands of SPCL. The depreciation allowed on these assets by the AO was less than what the assessee claimed. For the A.Y 1997-98 under appeal now, the assessee claimed depreciation of ₹ 8,97,04,377/- on the WDV of the assets of the BDD as on 31/3/1996. This claim was made taking into account the market value of the assets as fixed by Valuation Report at figures higher than the WDV in the books of account of SPCL. The A.O, however allowed the depreciation of ₹ 2,41,21,753/- taking into account the WDV of the assets in the books of SPCL as on 31/3/1995 and the depreciation allowed for the A.Y 1996-97. 31. On appeal by the Assessee, the CIT(A) noticed that similar issue came up for consideration in the appeal filed by the assessee for the A.Y 1996-97 and for the elaborated reasons discussed in the appellate order for the A.Y 1996-97, it was held that depreciation should be allowed on the assets of the BDD taken over from SPCL taking into account the market value of the assets as determined in the valuation report, as per the scheme of arrangement, which was approved by the High Court of Andhra Pradesh and Mumbai. Following that decision the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company claimed depreciation on the revalued figures of depreciable assets instead of the corresponding figures of the written down value in the books of SPCL as on 31-3-95. The AO asked the assessee company to explain as to how the depreciation under the Income Tax Act is allowable on the revalued figures. The assessee company submitted that all the assets and liabilities of SPCL have been taken over as per the scheme of arrangement approved by the Hon ble High Courts of Andhra Pradesh and Bombay and as per clause-10 of the scheme, the company was required to record the assets taken over at their estimated market value and accordingly the valuation report of M/s Sabnis Co., dated 20-12-95 was obtained and the assets have been revalued and the depreciation is accordingly claimed on the revalued figures. It was also submitted that the written down va1ue of the assets in the hands of SPCL has no relevance to the cost of the same in the assessee company s hands for the purpose of depredation allowance u/s.32 of the Act. it was stated that cost for the purpose of depreciation allowance should relate to the person who owns it and not with respect to his predecessor. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A} and reiterated the submissions made before the authorities below. He submitted that the assessee company is in no way related to SPCL and therefore the market value of the assets as approved by the Hon ble High Courts of Andhra Pradesh and Bombay, being at arm s length has to be adopted for the purpose of claiming depreciation thereof. 7. Having heard both the parties and having considered their rival contentions, we find that sec.32 of the Income Tax Act provides for depreciation on tangible and intangible assets. It is also provided that in the case of block of assets, depreciation shall be allowed on the written down value thereof as may be prescribed. Explanation 2 to sub-sec.[1] of sec.32 provides that for the purpose of this sub section, written down value of the block of assets shall have the same meaning as in clause [c] of sub-section [6] of section 43. Sub-section [6] of section 43 defines written down value to mean. a) In the case of assets acquired in the previous year, the actual cost to the assesse; b) In the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actual cost to the assessee. In the case before us the bulk drugs unit of SPCL was taken over by the assessee company. It is not the case of the revenue that it is the transfer of assets by a holding company to a subsidiary or by a subsidiary to the holding company or that it is a case of amalgamation. The AO has observed that the facts of the assessee s case are in a sense akin to a case of full fledged amalgamation and that the scheme of arrangement has been designed in such a manner so as to escape the definition of amalgamation but the substantial conditions have been fulfilled. He also observed that it is obvious from the scheme that the shareholders of SPCL holding not less than 9/10th in value of shares have to be shareholders of MPIL and that all fixed depreciable assets are secured loans and unsecured loans and most of the current assets and liabilities have been taken over and what is left behind is only a husk of the corporate entity. He has held that a miniscule portion of the assets and liabilities are retained by SPCL and therefore the scheme is nothing but the amalgamation though it does not cover the definition of amalgamation u/s.2[B] of the Act. This observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring and implementing software programme known as known as ERP package MFG Pro-version 7.4 f. The assessee claimed it to be a revenue expenditure whereas A.O treated it as capital expenditure resulting in enduring benefit to the assessee. The A.O also observed that the recent amendment made in the I.T.Act providing for one time exception with regard to expenditure towards Y2K compliance makes it clear that the intention of law is to treat software expenditure to be capital in nature. The assesse contended before CIT(A) that because of very high degree of obsolescence of computer software it cannot be said that anybody gets enduring benefit by acquiring the software programme. The Assessee relied on print-out taken from the official web site of QAD, the original developers of MFG Pro software, in which it was clearly mentioned that MFG Provision 7.4 is currently in a retirement phase and urges its customers to upgrade this software in view of the fact that this version of the software is no longer being sold and it can be provided limited standard support on a best effort basis. It was submitted that the assessee company had to migrate from version 7.4 of the ERP software MFG Pro to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /9/2011 followed the decision in the case of Asahi India Safety Glass Ltd (supra) and held that expenditure incurred on purchase of MS Office software, Antivirus software, lotus notes software and message exchange application were revenue expenditure. 37. We have considered the rival submissions. In our view the nature of the software and the purpose that the software will serve in the business of the assessee are important criteria laid down by the Special Bench of ITAT to decide whether expenditure on purchase of computer software is capital or revenue expenditure. Therefore, the nature of the software and its role in business of the assessee have to be considered. The decision relied upon by the ld. counsel for the assessee were rendered in the context where there was no dispute that the software were used for the better running of the business of the assessee. We are, therefore, of the view that it would be appropriate to set aside the order of the CIT(A) on this issue and remand the same to the AO for fresh consideration in the light of the principles laid down by the Special Bench in the case of Amway India Enterprises (supra). 38. Ground No.5 raised by the assessee rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we state that the account gives a true and fair view of the profit of NIPL (after incorporating the income and expenses of B.D. Division for the period from 1/4/96 to 18/6/96) for the year ended 31/3/1997 . 40. On perusal of the above, the AO was of the view that the assessee has adopted different accounting practices when it came to furnishing of the financial results for the year to Income tax. In this regard the AO referred to the fact that in the notes to the published accounts the losses of bulk drug division which is acquired w.e.f 1/4/1995 (appointed date) have been set off against time revaluation reserve in the annual accounts put before the annual general meeting and submitted to all the other authorities. When it came to submission of the accounts to Income tax, the accounting policy itself has been changed and the loss of the BDD of SPCL between the appointed date and the effective date had been incorporated in the profit and loss account and thus the profit as per profit and loss account stood reduced. According to the AO, doing so was not in accordance with the provisions of Sec.115JA of the Act. Therefore, the AO called upon the assesee to explain the basis for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the losses directly from the general reserve account as factually incorrect. He held that the losses of BDD of SPCL between the appointed date and effective date have not been recognized in the corporate accounts. Such losses have been set off against the revaluation reserve created during the take over of the BDD from SPCL. He held that revaluation reserve created was a mere book entry and withdrawal from the said reserve for crediting it to the P L Account does not arise for consideration at all. He was of the view that the Assessee was attempting to frustrate the intention of law. He held that the corporate accounting should he in accordance with the provisions of part II and III of Schedule VI to the companies act and the assessee is bound to adopt the same. He further held that the object of the legislation was only to find out the book profits according to the system adopted by the asessee. That can be achieved only if the profit and loss account is prepared in accordance with the method adopted by the assessee for corporate accounting. If the other method is permitted then the object of the act would be frustrated. 43. Before CIT(A) the assessee submitted that under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es with respect to Sec.I1SJA also. In any case the decision in Sudarshan Chemicals Ltd, was based on a concession by counsel for the appellants in that case and hence cannot be applied in other cases. 19, In the light of what is discussed above, the assessee was justified in claiming the loss of is. 5,70,29,630/- in the computation of book profit u/s. ll5JA, even-though the same adjusted against the General reserve in the published accounts represented before the share holders. The A.O. is directed to compute the book profit u/s.115JA accordingly. 45. Aggrieved by the order of the CIT(A) the revenue has appreciated Ground No.5 before the Tribunal. 46. The ld. D.R strongly placed reliance on the decision of the Hon ble Supreme Court in the case of Apollo Tyres, 255 ITR 217 (SC) and submitted that the P L Account prepared for the purpose of the approval of the AGM of a company is conclusive for determining book profits under section 115JA of the Act. The ld. Counsel for the assessee on the other hand submitted that section 115JA (2) clearly lays down that every assessee being a company shall for the purposes of section 115JA prepare its P L Account for the relevant pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Marshall Sons Company (India) Ltd. vs. ITO, 223 ITR 809 (SC) , wherein the Hon ble Supreme Court held that when a scheme of amalgamation is sanctioned by Court the effective date from the amalgamation shall take place is specified. Where such date is not specified but the scheme is sanctioned by the Court the date of amalgamation is the date specified in the scheme as date of transfer. The ld. Counsel for the assessee submitted that the date of transfer in this case was 1/4/1997 but the effective date from which the business was actually transferred was 19/6/1997. Therefore, for the period from 1/4/1997 to 18/6/1997 the losses of the amalgamated company namely M/s. Sumitra Pharmaceuticals Chemicals Ltd. (SCPL) ought to be treated as losses of the assesee and this was correctly given effect to in the P L Account filed by the assessee for the purpose of section 115JA of the Act. Our attention was also brought to the fact that such P L Account was duly certified as true by the auditors. 47. The ld. Counsel for the assessee drew our attention to the decision of the Hon ble Gujarat High Court in the case of DCIT vs. Arvind Mills, 314 ITR 251(Guj) , wherein the Hon ble Gujar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has to be in conformity with the method adopted under Companies Act. There is however, departure in section 115JB(2) of the Act which provides that the accounting policies and accounting standards adopted while preparing P L Account for section 115JB of the Act should correspond to the one adopted for the purpose of Companies Act 1956. In that view of the matter we are of the view that the order of the CIT(A) has to be upheld. Accordingly Ground No.5 raised by the revenue is dismissed. 49. Ground No.6 raised by the revenue reads as follows: Erred in directing to reduce an amount of ₹ 98.35 lakhs transferred to the reserves while computing profits u/s. 115JA ignoring the computation made by the assessee as per Company s Act. 50. In computing the book profit the assessee had reduced an amount of ₹ 98,50,000/- from profit as per Profit and Loss Account. This sum was shown as transfer to reserve in the Profit and Loss Appropriation Account. It was the claim of the Assessee that this sum was transferred to the Reserve Account to meet liability on account of redemption of debentures issued by the Assessee. According to the AO since the said amount was appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of providing for any known liability, that amount shall not be treated as reserve . Assessee also cited the decision of Supreme Court in the case of National Rayon Corporation Ltd. Vs. CIT (227 ITR 764) . 52. The AO however did not agree with the above submissions of the Assessee. He was of the view that the sum in question was transferred to reserve as part of the appropriation account. He did not agree with the contention of the Assessee that the debenture redemption reserve is not a reserve as per the definition under part III of schedule VI of the Company s Act. He held that Part Ill of Schedule VI to the Companies Act, 1956 provides the definitions for the purpose of interpretation of part I and Part II of the said schedule. He referred to Part III of Schedule VI to the Companies Act, 1956 wherein it was stated as under: 7(1) For the purpose of part I II of this Schedule, unless the context otherwise requires: (b) The expression reserve shall not, subject as aforesaid, include any an: amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures in future. He was of the view that liability on account of redemption of debentures was known liability of the assesse. Therefore the amount of ₹ 98.35 lacs cannot be characterized as reserve within the meaning of Part-III of Schedule- VI of the Companies Act. He also held that Part- II of the Schedule, quoted by the A.O. in the assessment order, deals with what should be disclosed in P L Account and does not say what constitute a reserve. He also agreed with the submission of the Assessee that the amount transferred to DRR represented the provision made for meeting an ascertained liability, namely the debentures. He was of the view that the decision of the Supreme Court in the case of National Rayon Corporation Ltd. Vs. CIT (227 ITR 764) supported the claim of the Assessee. He held that the basic principle laid down in that case was that liability on account of redemption of debentures was a known liability and that any amount retained by way of providing for such known liability will not be reserve . That principle applies would apply to the case of the Assessee and if the liability on account of redemption of debentures in question are treated as ascertained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion during the F.Y 93-94 relevant to the A.Y 94-95. The details of these lease transactions were as under:- a) Cost of the assets leased ₹ 1,04,48,708/- b) Date of purchase 25/9/93 c) Outstanding security deposit in respect of the lease during F.Y. 1996-97 (A.Y.1997-98) ₹ 44,06,615/- d) Depreciation claimed 50% in A.Y 1994-95 50% in A.Y 1995-96 60. Treating the lease transaction to be not genuine the A.O disallowed depreciation on the leased assets for the A.Y. 94-95 which was confirmed by the CIT(A). However, availing of the KVSS Scheme, 1998 for the A.Y 1994-95 and VDIS Scheme, 1997 for A.Y 1995-96, the assessee offered for assessment the amount of depreciation claimed on the asset in question. In other words, the assessee withdrew the claim of depreciation mentioned above for these two assessment years. Consequent to that the assessee terminated the lease agreement during the A.Y. 96-97 and forfeited the outstanding security deposit of ₹ 44,06,615/- as on the date of termination of the lease agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee paid taxes by withdrawing the claim for depreciation on the assets. The AO was, therefore, directed to exclude Short term capital gain of ₹ 44,06,615/- from the total income assessee. 63. Aggrieved by the order of the CIT(A), the Revenue has raised Gr.No.7 before the Tribunal. 64. Provision for Leave Encashment on Computation of Book Profit u/s. 115JA: The claim of the Assessee was that the liability on account of provision for leave encashment was a known and ascertained liability in view of the Supreme Court decision in the case of Bharat Earth Movers Ltd., vs. CIT 243 ITR 428 (SC) , and provision for leave encashment cannot be treated as contingent liability. The CIT(A) agreed with the stand of the Assessee and held that the said liability should be treated as allowable deduction from the profits of the assesse and consequently in computing the book profit u/s. 115JA also it should be treated as allowable deduction and hence should be excluded from the book profit. The AO was directed to allow deduction of ₹ 19,02,200/- in computing the book profit for purpose of 115JA. 65. Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.8 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed to be revenue in nature should be proved to have been incurred for purpose of the business. But no evidence has been let by the assessee to show that the amounts of ₹ 44.94 lacs and ₹ 12.74 lacs were expenses incidental to the business of the Bulk Drugs and Pharmaceuticals formulations and hence they were rightly treated as capital expenses. He also held that travelling expenses to Vietnam have also not been proved to have been incurred for purpose of the assessee s business. The disallowances of the these expenses were therefore, confirmed. 71. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.1 in C.O. We are of the view that the assessee had not given enough information on the nature of expenses. Admittedly fees were in respect of new project and its relevance to the existing business of the assessee could not be established by the assessee. We, therefore, do not find any ground to interfere in the order of the CIT(A). Ground No.1 raised in the cross objection is dismissed. 72. Ground No.II of the Cross Objection reads as under: 1. The CIT(Appeals) erred in upholding the disallowance of ₹ 8.19,005/- claimed as Machinery shif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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