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TMI Blog2015 (2) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... der dated 10th April, 2013, reads as under:- "Whether Income Tax Appellate Tribunal has erred in law in reminding the issue of claim of depreciation at the higher rate of 30% to the Assessing Officer in respect of motor vehicles given on lease?‖ 2. The Tribunal in the impugned order has referred to the decision of the Delhi High Court in CIT Vs. MGF (India) Ltd. (2006) 285 ITR 142 (Delhi) and CIT Vs. Bansal Credits Ltd. (2003) 259 ITR 69 (Del). Tribunal in the impugned order reproduced paragraph 23 of the judgment in the case of Bansal Credit Ltd. (supra), which reads as follows:- "Before we close, we may point out that in some of the cases before us (ITAs No.64/99, 65/99, 73/99 & 74/99), the Tribunal has remanded the matters back to the AOs to examine whether the leased out vehicles had been actually used by the lessee in the business of hire. In the light of the view taken by us, we do not find any infirmity in such a direction. As a matter of fact, wherever there is a doubt it must be examined whether the leased out vehicles are actually being used in the business of hiring. Only in such a situation depreciation at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract of bailment with no element of sale therein. The Supreme Court observed that the Tribunal had rightly held that the lease agreements in fact were transactions of ―hire‖. The Supreme Court also observed that the lease rentals received were treated as ―business income‖ in the hands of the assessee and as deductible revenue expenditure in the hands of the payer/lessee. It was accordingly held as under:- "Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement (CIT v. A. M. Constructions [1999] 238 ITR 775 (AP) ; CIT v. Bansal Credits Ltd. [2003] 259 ITR 69 (Delhi) ; CIT v. M. G. F. (India) Ltd. [2006] 285 ITR 142 (Delhi) ; CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451 (Mad)). In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. We are in complete agreement with these decisions on the said point.‖ 5. On the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of Rs. 9,80,00,000/- transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934 under Clause (b) of the Explanation to Section 115JB?‖ (Assessment year 2007-08) "(1) Whether on the facts and in the circumstances of the case the Tribunal in computing book profit under Section 115JB was justified in confirming the additions of :- (a) Rs. 16,00,00,000/- transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934; and (b) Rs. 18,66,00,000/- transferred to the debt redemption reserve, both under Clause (b) of the Explanation to Section 115JB?‖ 8. Facts in brief may be noted. 9. The appellant is a non-banking financial company engaged, inter alia, in the business of leasing of commercial vehicles, infrastructure construction machinery/equipment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any title over the reserve and, therefore, it is a case of diversion of income at source. Reliance is placed upon several decisions relating to Molasses Storage Fund, namely, DCM Ltd. Vs. Commissioner of Income Tax [2004] 192 CTR 0408, Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285, Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690, Somaiya Orgeno-Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291. On the issue of Debt Redemption Reserve, again reliance is placed upon decision in National Rayon Corporation (supra) to the effect that the amount was neither a reserve nor a provision for unascertained liability so as to attract clause (b) or (c) of Explanation 1 to Section 115JB(2) of the Act. Revenue has contested and argued to the contrary. Decision of the Supreme Court in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, [2010] 320 ITR 577 (SC), was referred. 12. In order to appreciate the controversy, we would like to reproduce the provisions of Section 115JB of the Act as applicable to the assessment year 2007-08 reads:- [Special provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a ) the amount of income-tax paid or payable, and the provision therefor; or (b ) the amounts carried to any reserves, by whatever name called 24 [, other than a reserve specified under section 33AC]; or (c ) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d ) the amount by way of provision for losses of subsidiary companies; or (e ) the amount or amounts of dividends paid or proposed ; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chever is less as per books of account. Explanation.-For the purposes of this clause, (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] (iv ) the amount of profits eligible for deduction under section 80HHC , computed under clause (a) or clause (b) or clause (c ) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (v ) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (vi ) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section; or & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i ) of sub-section (1) of section 142. (5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.] (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.‖ 13. As noticed by this Court in Commissioner of Income Tax (Central-II) Vs. Goetze (India) Limited [2014] 361 ITR 505 (Del), Sub-section (1) to Section 115JB of the Act begins with a non obstante expression, which gives an overriding effect to the said section. Sub-section (2) states that every assessee being a company shall prepare a Profit and Loss account for the previous year in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. Explanation to the said section in the first part refers to increase in book profit by amounts specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent line of argument relying upon the decision of the Supreme Court in the case of National Rayon Corporation (supra) and Vazir Sultan Tobacco Company Ltd. (supra) and argued that the amounts ―appropriated‖ under Section 45-IC of the Reserve Bank of India Act, 1934 are not a reserve. We record and express our inability to agree with the said contention for the reasons set out below. 16. In Vazir Sultan Tobacco Company Ltd. (supra), the Supreme Court was concerned with the Companies (Profits) Surtax Act, 1964 and it was observed that the terms ―provision‖ and ―reserve‖ were not defined in the said Act, but are well-known terms in commercial accountancy and are used in the Companies Act with reference to preparation of balance sheets and Profit and Loss account. It was held that if a sum of money had not been set apart for certain purpose, it would not be a ―provision‖ but it did not follow that it would be a ―reserve‖. Referring to Part I and II of the Schedule VI, it was observed that the expression ―provision‖ has been defined positively and meant any amount written off or retained by way of providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is expected to result in an outflow from the enterprise of resources embodying economic benefits.‖ 'Present obligation' -an obligation is a present obligation if, based on the evidence available, its existence at the Balance Sheet date is considered probable, i.e., more likely than not.‖ 18. Thereafter, the Guidance Note under different headings describes capital reserve, capital redemption reserve, securities premium reserve, debenture redemption reserve, revaluation reserve, share options outstanding account and other reserves. 19. Similarly, in the Guidance Note on the Terms Used in Financial Statements GN(A) 5 issued in 1983, the terms ―reserve‖ and ―provision‖ were explained as under:- 14.04 Reserve The portion of earnings, receipts or other surplus of any enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types: capital reserves and revenue reserves. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve was created. Nothing has been shown or pointed out to us to show why the said reserve was created. The reply dated 9th March, 2009 quoted in the assessment order refers to definition of the term ―provision or reserve‖ and various decisions and in the end it is stated that the amounts set apart for provision of the Debt Redemption Reserve to meet any known liability cannot be termed as ―reserve‖ as the same was essentially a ―provision‖ for meeting ascertained liability and, therefore, cannot be added to the book profit either under clause (b) or clause (c) to Explanation 1. Why and for what reasons the amount of Rs. 18,66,00,000/- represented an ascertained and known liability, is not indicated or stated. The nature and character of debt is not mentioned and adverted to. The Assessing Officer also noticed that in the earlier years, the Debt Redemption Reserve was offered or added by the assessee himself for computation of book profit. The assessment order records that the assessee had created a ―reserve‖ for meeting any kind of debt without specifying its details or particulars. 23. It is noticeable that under clause (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein belongs to a third party and was not income of the assessed. Similar question arose before the Supreme Court in Associated Power Co. Ltd Vs. CIT (1996) 218 ITR 195. In that case, the assessed was a company engaged in the business of generation of electricity and distribution thereof to consumers. The companies were governed by the Electricity (Supply) Act, 1948. By reason of the provisions of the said Act and the VI Schedule thereto, the assessed appropriated certain sums out of its revenue to the contingency reserve account and claimed deduction of the same in the computation of its total income for the purposes of the Act. The Income-tax Officer rejected the claim of the assessee. However, on appeal, the Appellate Assistant Commissioner allowed the assessee's claim. On appeal by the Revenue, the Tribunal set aside the order of the Appellate Assistant Commissioner and referred the question regarding deductibility of the amount transferred to the contingency reserve fund account in arriving at the taxable business income of the assessee-company directly to the Supreme Court under Section 257 of the Act. The Supreme Court on consideration of the facts and circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve fund shall be made by the non-banking financial company except for the purpose as may be specified by the Bank from time to time and every such appropriation shall be reported to the Bank within twenty-one days from the date of such withdrawal: Provided that the Bank may, in any particular case and for sufficient cause being shown, extend the period of twenty-one days by such further period as it thinks fit or condone any delay in making such report. (3) Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Bank and having regard to the adequacy of the paid-up capital and reserves of a non-banking financial company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not be applicable to the non-banking financial company for such period as may be specified in the order: Provided that no such order shall be made unless the amount in the reserve fund under sub-section (1) together with the amount in the share premium account is not less than the paid-up capital of the non-banking financial company.‖ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 30. Accounts in case of a company are prepared as a going concern assuming that the business will continue in the foreseeable future. To ascertain the ‗net profit' of each year, not only the current liabilities and the contingencies but future contingencies should also be considered. Thus, Chapter VI of the Companies Act in Part II and III provides for ‗Provision' and ‗Reserves' which relate to future payments, future needs and contingencies for which a part of the current earning is set aside. 31. The underlying purposes of financial accounts may not necessarily be the same as those of taxing accounts which are maintained and computed in accordance with the provisions of the taxing statute, i.e. the Income Tax Act, 1961. Notwithstanding clear commonalities such as matching of income with expenses, in the case of financial accounts there is greater emphasis on ensuring that the profits are not overstated, in contrast in the tax accounts the emphasis is on ensuring that the profits are not understated. 32. As noticed above, provision' and reserves' are different accounting terms. A provision created to meet a known liability is a charge against th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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