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TMI Blog2016 (3) TMI 873X X X X Extracts X X X X X X X X Extracts X X X X ..... off by earning profits by the assessee company and accordingly the same would be available for reduction from book profits u/s 115JB of the Act. We hold that the least of the cash loss or depreciation loss once adjusted / reduced from book profits in earlier assessment years, do not vanish out of the books until it is wiped out by profits in subsequent years. Till such time, the losses would only continue to remain in the books. We hold that for the purpose of computation of book profits u/s 115JB of the Act, every year the situation of least of cash loss and depreciation loss needs to be worked out and reviewed and accordingly the understanding of the Learned AO that such loss once adjusted in earlier year is no longer available for set off is misconceived - Decided in favour of assessee Forfeiture of share warrants being a capital receipt - whether would be liable for taxation u/s 115JB just because it has been credited in the profit and loss account as an extraordinary item? - Held that:- The assessee has duly disclosed the fact of forfeiture of share warrants in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to disallow a sum of ₹ 1,37,12,550/- towards section 14A voluntarily under the normal provisions of the Act in the revised return filed by it on 31.3.2011. Admittedly, this revised return was filed within the prescribed time limit u/s 139(5) of the Act. Before the Learned AO, the submissions of the assessee were as under:- a) That only the third limb of Rule 8D(ii) would be applicable viz. 0.5% of average value of investments for the purpose of disallowance u/s 14A of the Act and accordingly worked out the disallowance at ₹ 1,37,12,550/- and disallowed the same under the normal provisions of the Act in the revised return filed. b) That since the investments were made by the assessee since 1997-98 onwards out of own funds in the form of share capital , free reserves and internal accruals , the second limb of Rule 8D(ii) would not come into operation for the purpose of making disallowance u/s 14A of the Act. c) That no disallowance u/s 14A of the Act was made by the revenue prior to Asst Year 2009-10 on the subject mentioned investments. d) That the major investments in question are the investments made by the assessee in its subsidiary companies like Binan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted in 313 ITR 340 (Bom) for the proposition that the Learned AO having failed to establish that borrowed funds were utilized for the purpose of acquiring the shares and in view of availability of own funds with the assessee, no expenditure ought to have been disallowed u/s 14A of the Act read with Rule 8D of IT Rules. The Learned CIT(A) duly appreciated all the contentions of the assessee and deleted the disallowance made u/s 14A of the Act both under normal provisions of the act as well as for the computation of book profits u/s 115JB of the Act. Aggrieved, the revenue is in appeal before us on the following ground:- (i) That the Ld. CIT(A) has erred in Law as well as in facts and circumstances of the case in deleting the disallowance of ₹ 4,69,87,450/- made u/s 14A of the Income-tax Act, 1961 read with Rule 8D(2)(ii) of the Income-tax Rules, 1962, 2.2. The Learned DR vehemently supported the order of the Learned AO. 2.3. We have heard the rival submissions and perused the materials available on record. We find that the entire investments were made long back by the assessee. We hold that the assessee was having sufficient own funds to make those investments in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The third category is of equity shares the value of which is ₹ 14.88 lakhs and the last category is investment in units of mutual funds amounting to ₹ 10.15 crores. These facts and figures are verifiable from paper book page 204A. As regards the first category of shares in the form of investment into subsidiary companies we find that investment into this category of shares had increased from ₹ 78.17 lakhs to ₹ 101.74 crores which is due to increase in investment in preference shares and other equity shares. During this period, the interest bearing funds had decreased from ₹ 1.49 crores to ₹ 87,30 lakhs as is apparent from paper book page 203 and further most of the interest bearing loans are for vehicle loans as mentioned in paper book page 203. During this year under consideration, the assessee has earned a cash profit of ₹ 11 crores. The cash flow statement at paper book page 200 reflects cash from operating activities including cash profits of ₹ 49.28 crores. The assessee has also raised an amount of ₹ 50.80 crores by issue of fresh preference shares as is apparent from paper book page 200. In view of the above facts and fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form part of total income, it's associated or related expenditure would also not be permitted to be debited against other taxable income. 25. We are of the view that the expression in relation to appearing in Section 14 A of the said act cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows:- For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act. That is certainly not the purport of the said provision. The expression in relation to does not have any embedded object. It simply means in connection with or pertaining to . If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (supra), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59 are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as appearing in the balance sheet as on the first day and in the last day of the previous year . The Assessing Officer was wrong in taking into consideration the investment of ₹ 103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus,. It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term average of the value of investment is used to take care of cases where there is the issue of dividend striping. iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is percentage of the numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, which may or may not arise on incurring expenditure, and again with no certainty as to its quantum, cannot by itself form the basis of either incurring or allocation of expenditure. So however, we consider the Revenue s reading of r.8D as equally misplaced. The estimate per r. 8D(2) is only qua expenditure relatable to tax exempt income/s. The expenditure claimed stands debited in the assessee s accounts, which could be inquired into as to their purpose. For all we know, the assessee may be managing his investments in instruments yielding tax exempt incomes, which are at a healthy sum of ₹ 21.71 cr. i.e on an average for the year, on his own, or could also be assisted by personnel, who stand remunerated. No inquiry in this regard stands made, while the assessee has maintained proper accounts, duly audited and, further, bases his claim of having incurred a lower expenditure than that per the statutory prescription of r. 8D, thereon. The expenditure observed as relatable to the income not forming part of the total income by the Revenue are : salary (Rs. 3.54 lacs); printing and stationery (Rs. 0.11 lacs); and bank charges (Rs. 0.10 lacs), without specifying the rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of ₹ 1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with rule 8D. A perusal of the provisions of rule 8D also talks of satisfaction in sub-rule (1). Rule 8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here and therefore, we do not go into it in this case. In second sub-part i.e.(ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is ₹ 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., ₹ 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case . In view of the aforesaid facts and circumstances and respectfully following the various judicial precedents relied upon hereinabove, we hold that the addition u/s 14A of the Act deleted by the Learned CITA does not require any interference. Accordingly, the ground no.1 raised by the revenue is dismissed. 3. The second issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of book profits u/s 115JB of the Act, every year the situation of least of cash loss and depreciation loss needs to be worked out and reviewed and accordingly the understanding of the Learned AO that such loss once adjusted in earlier year is no longer available for set off is misconceived. Hence we do not find any infirmity in the order of the Learned CIT(A) in this regard. The Ground No.2 raised by the revenue is dismissed. 4. The last issue to be decided in this appeal is as to whether, the forfeiture of share warrants amounting to ₹ 12,65,75,000/-, being a capital receipt, would be liable for taxation u/s 115JB of the Act just because it has been credited in the profit and loss account as an extraordinary item, in the facts and circumstances of the case. 4.1. The brief facts of this issue are that the assessee filed its original return of income on 30.9.2009 disclosing total income at Rs Nil under normal provisions of the Act and declaring book profits u/s 115JB of the Act at ₹ 21,24,72,340/-. Later the assessee filed revised return of income on 31.3.2011 disclosing total income at Rs. Nil under normal provisions of the act and declaring book profits u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits computation as per original return of income filed by the assessee. Aggrieved, the revenue is in appeal before us on the following ground :- (iii) That the Ld. CIT(A) has erred in Law as well as in the facts and circumstances of the case in directing to treat the net profit at ₹ 21 ,24,72,340/- for the purpose of computation of Book Profit instead of ₹ 33,90,47,340/- offered by the assessee in its revised return of income; 4.2. We have heard the rival submissions and perused the materials available on record including the detailed paper book containing the audited financial statements together with notes on accounts thereon for the year ended 31.3.2009, copy of return acknowledgements (both original and revised returns), among others. At the outset, we find from Note No. 6 to Schedule 11 of the Financial Statements for the year ended 31.3.2009, the assessee had stated as below:- 6. As per Resolution passed by the members at the Extra Ordinary General Meeting held on 15th February, 2008, the Company had allotted 50,00,000 warrants on 18th March , 2008 to M/s K.B.Vyapar Pvt ltd ., a Promoter Group Company, convertible into equal number of Equity Shares w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (2) provides that determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years will have to be made unaffected by the provisions in sub-section(1) of section 115J. The very object of the provisions of section 115J is to tax such companies which are making huge profits and also declaring substantial dividends, but are managing their affairs in such a way as to avoid payment of income tax, as a result of various tax concessions and incentives and for that purpose, the taxable income is determined under sub-section (1) of section 115J. An assessee is enabled to claim carry forward and set off of losses , unabsorbed allowance in view of the specific provisions of the Income Tax Act enabling an assessee to claim them. But because of this provision a company will have to pay tax on at least 30 percent of its book profit. Therefore, what is taxed is not fictional or hypothetical income. Under law, thought it is permissible to bring to tax hypothetical income, what is really done under section 115J is not exactly bringing to tax hypothetical income. What is really done is to limit or restrict or curtail deduction, carry for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in the case of Vasundhara LPG (P) Ltd vs ITO reported in (2005) 146 Taxman 23 (Delhi) (Mag.) dated 8.4.2004 wherein it was held that : It is an elementary principle of interpretation of statutes that statute should be given what has come to be known as purposive construction , i.e., the Court should identify the mischief which existed before passing of the statute and then proceeded to interpret the statute so as to suppress the mischief and advance the remedy. There is no doubting the view that subtle inventions and devices resorted to by any person for continuance of the mischief should be suppressed. However, the proposition cannot be extended beyond the intended purpose and object of the law makers and cause hardship, serious inconvenience, injustice and absurdity. Reference was also made to the decision of the Hon ble Calcutta High Court in the case of SAIL DSP VR Employees Association 1998 vs Union of India and Others reported in 262 ITR 638 (Cal), wherein the Hon ble Calcutta High Court after placing reliance on the two apex court decisions in (1988) 170 ITR 137 (SC) and (1981) 131 ITR 597 (SC) had held that :- If a plain literal interpretation of statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... former category and accordingly not liable to be taxed u/s 115JB of the Act. He also made reference to the provisions of section 115JB (5) of the Act which is reproduced herein below:- 115JB(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. Applying the aforesaid provision to the facts of the instant case, according to him, it could be safely concluded that when the forfeiture of share warrants is not taxable under any other provisions of this Act, then the same would not be taxable under book profits u/s 115JB of the Act. 4.4.1. The Learned AR also referred to the decision of the Special Bench of Calcutta Tribunal in the case of Sutlej Cotton Mills Ltd vs ACIT reported in (1993) 45 ITD 22 (Cal) (SB) dated 26.10.1992 wherein it was held that a particular receipt which is admittedly not an income cannot be brought to tax under the deeming provisions of section 115J of the Act as it defies the basic intention behind introduction of provisions of section 115J of the Act. Further it was held that the Rule of Purposive Construction should be invoked to decide the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t mentioned receipt of forfeiture of share warrants outside the ambit of book profits tax u/s 115JB of the Act. 4.6. We have given a very careful consideration to th rival submissions. We find the following decisions in support of our proposition that a capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB of the Act which was rendered after considering the decisions of Hyderabad Special Bench in Rain Commodities (supra) and the decision of Hon ble Apex Court in Apollo Tyres (supra) :- (a) Decision of Lucknow Tribunal in the case of ACIT vs L.H.Sugar Factory Ltd and vice versa in ITA Nos. 417 , 418 339/LKW/2013 dated 9.2.2016 , wherein it was held that :- 49. We have considered the rival submissions. We find that this aspect has been already decided by us as to whether receipt on account of transfer of carbon credit is a capital receipt not liable to tax or not. Now, in the light of this factual position, we examine the applicability of this Tribunal s order rendered in the case of ACIT vs M/s Shree Cement Ltd for Assessment Year 2004-05 to 2006-07. The relevant paras of this Tribunal s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all chargeable under the I.T.Act. A receipt which is neither Profit nor Income and which does not have any element thereof embedded therein, cannot be part of Profit as per Profit Loss Account prepared in terms of Part II of Schedule VI to Companies Act. 13.3. As far as the decisions relied upon by the Ld D/R are concerned, we are unable to follow the same in the present case, as the facts of the said decisions are clearly different from the facts in the present case. It is a settled principle of law as laid down by the Hon ble Apex Court in the case of Padmasundra Rao (Decd) vs State of Tamil Nadu (2002) 255 ITR 147 (SC) that Courts should not place reliance on the decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. 13.4. From perusal of the decisions of Rain Commodities (supra) and Growth Avenues (supra) , we notice that both the decision dealt with the issue of taxability of capital gains in computing Book Profit u/s 115JB of the Act. These capital gains were otherwise income u/s 2(24) of the Act and exclusion was claimed in computing Book Profit u/s 115JB on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... III of Schedule VI to the Companies Act, 1956 (1 of 1956) . 13.7. On consideration of the above, it is apparent that for the purpose of computing book profit u/s 115JB Profit and Loss a/c shall be prepared as per part II and III of Schedule VI to the Companies Act. Part II of Schedule VI prescribes the requirements as to Profit and Loss A/c. Clause 2(a) of Part II clearly spells that the profit and loss a/c shall be so made out as clearly to disclose the result of the working of the company during the period covered by the accounts. Hence, in our view, P L Accounts do not reflect the true result of the working of the company for the year, it cannot be said to be as per Schedule VI, Part II III of the Companies Act and it would necessitate corrective adjustment in that situation so as to comply with Schedule VI , Part II III. 13.8. With the above discussions, the only issue left to be considered is whether exclusion of the above capital receipt is in line with the principles as laid down by Hon ble Apex Court in the case of Apollo Tyres (supra). In the case of Apollo Tyres (supra), the question before the Apex Court was whether an AO can, while assessing a company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid, the additional Ground filed by the Department is rejected and we hold that capital receipt in the form of Sales Tax incentive needs to be excluded from profit as per P L Account for the year in computing Book Profit u/s 115JB of the Act. This Ground of the Department is thus dismissed. 50. From the above paras, we find that the Tribunal has duly considered the judgement of the Hon ble Apex Court rendered in the case of Apollo Tyres Ltd (Supra) and thereafter, it was noted by the Tribunal in this case that as per the decision of Special Bench of the Tribunal rendered in the case of Rain Commodities Ltd vs DCIT, 41 DTR 449, if profit and loss account is not in accordance with Part II Part III of Schedule VI to the Companies Act, 1956 because it is prerequisite for Section 115JB of the Act. The Tribunal in this case also considered two another Tribunal s orders rendered in the case of DCIT vs Bombay Diamond Company Ltd (33 DTR 59) and Syndicate Bank vs ACIT , 7 SOT 51 Bangalore, where it was held by the Tribunal after considering the decision of Hon ble Apex Court rendered in the case of Apollo Tyres Ltd (Supra), and after explaining the same that adjustment of profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 find merit in the submissions made by the assessee on this legal point. 27. A careful perusal of the decision rendered by the Special bench in the case of Rain Commodities Ltd. (supra) would show that the above said legal contentions were not considered by the Special bench. We notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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. In the instant case, the assessee also has duly disclosed the fact of forfeiture of share warrants amounting to ₹ 12,65,75,000/- in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence respectfully following the aforesaid decision of the Mumbai Tribunal, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon ble Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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