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TMI Blog2015 (8) TMI 979X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue and direct the AO to exclude the above said profit from the computation of “Book Profit” for the reasons discussed above. - Decided in favour of assessee. Disallowance made u/s 14A - Held that:- A perusal of the orders of the tax authorities would show that they have not considered the submission about the availability of interest free funds. Before us, the ld A. R has contended that the interest free funds available with the assessee is sufficient to cover the value of investments and it was further submitted that the interest bearing funds were used for specific purposes. Accordingly, it was contended that there was not requirement of making any disallowance out of interest expenditure. Since this aspect has not been examined, we are of the view that this issue requires fresh examination. Thus restore the issue to the file of the AO with the direction to examine this issue afresh by duly considering all the contentions of the assessee, including the contention with regard to the availability of interest free funds and the average value of investments - Decided in favour of assessee for statistical purposes. - I. T. A. No.2008/Mum/2012 - - - Dated:- 19-8-2015 - SH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 45 of the Act while computing total income under normal provisions of the Act, i. E., the above said amount of ₹ 300.68 crores did not enter the computation of total income. 4. Since the assessee is a company, the provisions of sec. 115JB are applicable to it. The assessee did not offer the above said amount of ₹ 300.68 crores while computing the book profit u/s 115JB of the Act by attaching following Notes to its accounts:- During the year the company has derived a surplus over cost of acquisition of assets held by it as CWIP amounting ₹ 300.24 crores. In view of the fact that it is a capital receipt and a transaction is not regarded as a transfer under the Income-Tax Act, the company interprets that since it is not being in the nature of income it does not came within purview of Section 115JB. The company interpretation on the matter of applicability to minimum alternative tax on such book profits is also supported by opinion of the experts which were taken on the issue. The AO did not agree with the contentions of the assessee and accordingly, he included the above said amount as part of net profit for the purpose of computing the book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee prepared under the Companies Act. As per the audited accounts of the assessee, the statutory auditors have reported that amongst others, that in their opinion, the profit and loss account and the balance sheet are in compliance with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, and further reported that the balance sheet and profit and loss account read together with the notes thereon, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted. As per audited profit and loss account, the assessee has included long term capital gain. In the notes on accounts, it is nowhere mentioned and clarified that though the long term capital gain is included in the profit and loss account but it is not to be includible in the net profit in terms of provisions of Part II and Part III of Schedule VI to the Companies Act or the accounting principles accepted under the Companies Act .. 25. It is to be noted that the assessee has not made any claim of deduction of long term capital gain from the book profit, which goes to show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (Delhi) b) K.K. Nag Ltd. V/s Additional Commissioner of Income-tax [2012] 52 SOT 381 (Pune). 9. The Ld A. R next raised a legal contention, i. E., he submitted that transfer of a capital asset by a holding company to its wholly owned indian subsidiary company is not regarded as transfer under sec. 47 of the Act and hence the profits or gains arising from such transfer is not chargeable to tax under the head Capital gains in terms of provisions of sec. 45. Hence the profits or gains so generated shall not fall within the definition of income at all as per the definition of the term Income given in sec. 2(24) of the Act. In view of the above said provisions, such profit is not includible in computing the total income under the normal provisions of the Act. Since the profits arising on transfer of a capital asset to a wholly owned Indian subsidiary company is not treated as income at all under the provisions of the Act, the Ld A. R submitted that the same falls outside the computation provisions of the Income tax Act and hence such profit should not be included while computing Book Profit under sec. 115JB of the Act also. Accordingly he submitted that such kind of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an assessee, being a company, is less than the prescribed percentage of book profit . The expression Book Profit is defined under Explanation 1 to sec. 115JB of the Act. According to this Explanation book profit means the net profit shown in the profit and loss account for the relevant previous year prepared under sub-section (2) (i. E., prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956..), as increased/reduced by the items listed out in the Explanation. In the instant year, the provisions of sec. 115JB come into operation for the assessee, since the tax payable by the assessee under the normal provisions of the Act is less than the amount of tax prescribed u/s 115JB of the Act. 13. Though the assessee has credited the profit and loss account with the profits arising on transfer of a capital asset to its subsidiary company, yet it has excluded the same from the net profit while computing book profit in terms of sec. 115JB of the Act. Admittedly, the said profit is not an item of exclusion prescribed under the Explanation 1 to sec. 115JB of the Act. The contentions advanced by the assessee in support of its action are twofol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given and/or allowed to be given in the form of notes or documents by the Companies Act. As already noted it is obligatory under clause 3(iv) of Part II to Schedule VI to the Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears. According to us, once this information is disclosed in the notes to the accounts it would clearly fall within the ambit of the Explanation to section 115J of the Act which defines book profit to mean net profit as shown in the profit and loss account for the relevant assessment year . To our minds, as long as the depreciation which is not charged to the profit and loss account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression shown in the profit and loss account, as notes to accounts form part of the profit and loss account by virtue of subsection (6) of section 211 of the Companies Act, 1956. This is quite evident if the provisions of sub-section (6) of section 211 of the Companies Act, are read in conjunction with sub section (1A) as well as the Explanation to section 115J of the Act . 15. The decision rendered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Companies Act are relevant here. We have noticed that the starting point for computation of book profit is the Net profit as shown in the Profit and Loss account . In the above said three decisions, it has been held that the items disclosed in the Notes to accounts are required to be adjusted to the Net profit disclosed in the Profit and loss account. In order to understand the significance of Notes to accounts or Notes forming part of accounts , we may refer to the provisions of sec. 211(6) of the Companies Act, which read as under:- (6) For the purpose of this section, except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto giving information required by this Act and allowed by this Act to be given in the form of such notes or documents. Hence, in the case of Sain Processing Mills (P) Ltd (supra), the Hon ble Delhi High Court observed as under, after considering the provisions of Companies Act:- (extracted below again at the cost of repetition) According to us, once this information is disclosed in the notes to the accounts it would clearly fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e source level. 18. In the case of Sain Processing Mills (P) Ltd (supra) and other two decisions rendered by the Tribunal (supra), the items not disclosed in the Profit and Loss account, but disclosed in the Notes forming part of accounts was held to be adjusted while arriving at Net profit. However, in the instant case, the assessee has disclosed an item of income in the Profit and Loss account, but claims that the same should be excluded by referring to the Notes to accounts. However, in our view, the principle that the profit and loss account should be read along with Notes of account should be applied uniformly in all kind of situations and hence due adjustment needs to be done for the effect of items disclosed in the Notes to accounts. 19. In view of the foregoing discussions, we are of the view that the ratio of the decisions rendered in the case of Sain Processing Mills (P) Ltd (supra) and other two decisions rendered by the Tribunal (supra) should be applied in the instant case also. This factual aspect distinguishes the instant case against the facts available in the case of Rain commodities Ltd, which was decided by the Special bench. Accordingly, we are of the view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t credited to the Profit and Loss account. The said method of accounting was approved in the Annual General Meeting. The AO sought to bring the above said Capital gain within the ambit of Book Profit , since it was not credited to the Profit and Loss account. The Tribunal rejected the said action of the AO. The Hon ble Bombay High Court also upheld the order of the Tribunal in its order reported in (2008)(304 ITR 401). The said decision was later followed by the Tribunal in a group of cases, viz., DCIT Vs. M/s Arundhati Traders Pvt Ltd and others (ITA No.6293/Mum/2006 and others dated 02-12-2009). In all these cases, there is no mention about the notes, if any, given in the Notes to accounts with regard to the method of accounting followed by these assessees. Hence, the assessing officer was held to be not justified in including the income that was directly credited to Capital reserve account in the Book Profits. The Tribunal, in the case of M/s Arundhati Traders Pvt Ltd and others (supra) concluded as under:- 19. In view of the ratio laid down by the Hon ble Supreme Court in Appollo Tyres Ltd Vs. CIT (supra) and by the jurisdictional High Court in CIT Vs. M/s Akshay Textiles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viz., (a) There is a capital asset. (b) There is a transfer of the above said Capital asset. (c) The said transfer results in any Profits or gains. If all the above said three conditions are satisfied, then the profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head Capital gains and the same is included in the definition of income u/s 2(45) of the Act. 24. The expression transfer is defined in sec. 2(47) of the Act. We have earlier noticed that the profits and gains arising from the transfer of a capital asset shall be chargeable to tax u/s 45 of the Act. Hence the expression transfer is defined in sec. 2(47) of the Act, which, inter alia, includes the sale, exchange or relinquishment of the asset. Hence the sale of a Capital asset by the assessee to its subsidiary company should normally fall under the definition of transfer given in sec. 2(47) of the Act. However, the provisions of sec. 47 of the Act provides certain exceptions by holding that certain transactions shall not be regarded as transfer , meaning thereby, even if a transaction falls under the definition of transfer as per the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incomes not included in total income for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of income , are excluded for the purpose of computing Book Profit , since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of total income and book profit , in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of income at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in book profit u/s 115JB of the Act. Hence, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net profit., i. E., the Net profit disclosed in the Profit and Loss account should be reduced by the amount of profit arising on transfer of capital asset and the amount so arrived at shall be taken as Net profit as shown in the profit and loss account for the purpose of computation of book profit under Explanation 1 to sec. 115JB of the Act. Alternatively, since the said profit does not fall under the definition of income at all and since it does not enter into the computation provisions at all, there is no question of including the same in the Book Profit as per the scheme of the provisions of sec. 115JB of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to exclude the above said profit from the computation of Book Profit for the reasons discussed above. 29. The next issue urged by the assessee relates to the disallowance made u/s 14A of the Act. The assessee had earned dividend income of ₹ 3,49,66,452/- and claimed the same as exempt. It also disallowed a sum of ₹ 60,01,613/- as per the provisions of sec. 14A of the Act. The AO noticed that the disallowance worked out by the assessee is not in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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