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TMI Blog2016 (3) TMI 1056X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2000-2001 in section 115JA computation in order to avoid double disallowance of genuine expenditure incurred by the assessee. AO does not have the jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in Explanation to Section 115JA of the Act. Disallowance of u/s 14A - Held that:- Provisions of Clause (f) of Explanation to Section 115JA of the Act cannot be invoked in the facts of the present case. We hold that unless an item is debited in the profit and loss account, the same cannot be the subject matter of addition to book profits under clause (f) of Explanation to section 115JA of the Act. The disallowance made u/s 14A of the Act read with Rule 8D is only artificial disallowance and obviously the same is not debited in the profit and loss account and the same cannot be imported into clause (f) of Explanation to Section 115JA of the Act.Thus we hold that no disallowance u/s 14A of the Act could be made for the purpose of computing book profits u/s 115JA of the Act. - ITA No. 1928/Kol/2008, ITA No.1815/Kol/2008 - - - Dated:- 3-2-2016 - N. V. Vasudevan, JM And M. Balaganesh, AM For the Appellant : Shri S Sri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of the case and in law, the order dated 14 November, 2007 passed by the Learned Assessing Officer ('the AO') under section 115JA/254/147 of the Income tax Act, 1961('the Act') is bad in law and void-ab-initio since no addition has been made by the AO in the said order on the two specific items mentioned in the reasons for initiating the proceedings under section 147 of the Act, and accordingly, the additions made to book profit under section 115JA of the Act by the learned AO should be deleted. These additional grounds are hereby admitted for adjudication as they go into the root of the matter and does not require any fresh examination of facts in that regard, in the light of the decision of the Hon'ble Apex Court in the case of NTPC Ltd reported in 229 ITR 383 (SC). 3. The brief facts of the case are that the assessee is engaged in the business of manufacture and sale of electronic and electrical goods. The assessee filed its return of income by declaring income both under normal provisions of the Act and as well as under book profits computed u/s 115JA of the Act. The Learned AO found that the book profits computed u/s 115JA of the Act is more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and the revenue. 4.1 Validity of re-opening of assessment u/s 147 of the Act (Additional Ground No. 1 dated 12.6.2012 raised by the assessee) The assessee has raised the following additional ground on 12.6.2012 :- 1. That on the facts and in the circumstances of the case and in law, the order dated 14 November, 2007 passed by the Learned Assessing Officer ('the AO') under section 115JA/254/147 of the Income tax Act, 1961('the Act') is bad in law and void-ab-initio since no addition has been made by the AO in the said order on the two specific items mentioned in the reasons for initiating the proceedings under section 147 of the Act, and accordingly, the additions made to book profit under section 115JA of the Act by the learned AO should be deleted. We find that the assessee had questioned the validity of reopening the assessment u/s 147 of the Act in view of the fact that the assessment was reopened to make additions towards sales tax surcharge of ₹ 8,19,15,000/- and write off of undepreciated value of fixed assets to the tune of ₹ 1,13,69,000/-. The Learned AO found that the auditor in the note given in the financial statements had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and advances - ₹ 5,35,63,000/- (Ground No. 1 2 raised by the revenue and additional ground no.2 dated 22.7.2011 raised by the assessee) The revenue had raised the following grounds before us:- 1. That the Ld CIT(A) erred in facts as well as law in not considering the provisions of section 115JA whereby provisions made for meeting liabilities, other than ascertained liabilities are to be added back to the net profit. 2. That the Ld CIT(A) erred in facts as well as law by holding that provision for doubtful debts./ and advances amounting to ₹ 5,35,63,000/- is allowable as a deduction under MAT when it is an unascertained liability and was correctly added back as such to arrive at book profit. The assessee had raised the following additional ground in this regard before us on 22.7.2011:- 1. That on facts and in the circumstances of the case, in computing book profit under the provisions of Section 115JA, the appellant is entitled to a deduction of ₹ 2,53,87,000/- as per clause (i) of the Explanation below second proviso to Section 115JA being amount withdrawn from provision for bad and doubtful debts and advances for utilization against debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tistical purposes. 4.3. Provision for wages - ₹ 14,78,000/- (Ground No. 1.1 1.2 raised by the assessee) The assessee had raised the following grounds before us:- 1.1. On the facts and in the circumstances of the case, the Learned CIT (A) erred in holding that the provision for wages provided by the assesse company is in nature of provisions for unascertained liability, 1.2. The CIT (A) failed to consider that certainty of liability is sufficient for considering the same as 'provision for ascertained liability' for the purpose of computing Book Profit u/s 115JA of the Income Tax Act. The Learned AO found that the assessee had made provision for incremental wages in its books of accounts by debiting the profit and loss account amounting to ₹ 14,78,000/- . This provision for incremental wages offered for the employees would get crystallized subject to successful negotiation with the labour union. The assessee felt that the same is an ascertained liability. On the contrary, the Learned AO felt that since the incremental wages would be payable only on successful negotiation with the labour union, it only remains as an unascertained liability on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e service conditions of its workmen, it was done in the manner of a prudent businessman who knew that the service conditions would have to be bettered. The provision itself would have been allowable as a deduction whereas the assessee had claimed only the quantified liability which were discharged. The expenditure as such was incurred for the purpose of earning the income of the previous year and was, therefore, deductible. Provision for additional remuneration payable to employees on account of negotiated settlement with employees provided for allowable as business expenditure. Hence we hold that the provision made for incremental wages remains an ascertained liability and not a contingent liability in the facts and circumstances of this case and accordingly does not requires to be added back as per Clause (c) of Explanation to Section 115JA(2) of the Act. Accordingly, the ground nos. 1.1 1.2 raised by the assessee are allowed. 4.4. Addition in respect of adjustment of purchase of materials - ₹ 2,86,10,000/- (Ground Nos. 2.1 2.2 of assessee and additional ground no. 1 raised by the assessee on 22.7.2011) The assessee has raised the following grounds in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remain undisputed are not reiterated herein for the sake of brevity. The Learned AR relied on the decision of the Hon'ble Apex Court in the case of K.J.Francis vs CIT reported in (1999) 236 ITR 308 (SC) in support of his contentions that the said claim of purchases are to be allowed as deduction. We find that the case law relied upon by the Learned AR does not apply to the facts of the instant case as the issue before us is with regard to computation of book profits u/s 115JA of the Act and hence we hold that the impugned issue is governed by the decision of the Hon'ble Apex Court in the case of Apollo Tyres Ltd reported in 255 ITR 273 (SC). We hold that since the purchases were not debited in the profit and loss account for the financial year 1998-99 relevant to Asst Year 1999- 2000, the same is not eligible for deduction from computation of book profits u/s 115JA of the Act. However, we hold that the same is liable to be granted deduction in Asst Year 2000-2001 , being the year in which the purchases were debited by the assessee, while computing book profits u/s 115JA of the Act. The Learned AO is directed to grant relief for the same in Asst Year 2000-2001 in section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a going concern for a lump sum consideration which was subject to obtaining approvals/permissions from various regulatory authorities and the decision of the Hon'ble High Court. The Learned AR argued that pursuant to entering of above such agreement, since the assessee was already aware of the expected sale consideration realizable on sale of its unit, the loss arising on account of difference between the net worth of the factory and the expected realizable value was worked out at ₹ 6,84,79,000/- and the same was charged to profit and loss account and claimed as deduction in the return of income. The Learned AO did not agree with the view of the assessee on the contention that the assessee was awaiting the orders of the Hon'ble Calcutta High Court for sale of salt lake factory unit as a going concern as on the date of preparation of balance sheet and accordingly the provision for loss on proposed restructuring was not a provision for ascertained liability and hence added back the same to the book profits computed u/s 115JA of the Act in terms of Clause(c) of Explanation. On first appeal, relief was granted by the Learned CIT(A) to the assessee. 4.5.1. We have h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extent provided in Explanation to Section 115JA of the Act. Accordingly, the ground nos. 3 to 5 raised by the revenue are dismissed. 4.6. Disallowance u/s 14A of the Act in computing book profits u/s 115JA of the Act - ₹ 17,71,201/- (Ground Nos. 3.1 to 3.4 raised by the assessee) The assessee has raised the following grounds in this regard:- 3.1. The enhancement of the assessed income by ₹ 17,71,201/- u/s 14A read with rule 8D is arbitrary and bad in law. 3.2. The CIT (A) failed to consider the proviso to section 14A which is restricting the assessing officer for enhancement of assessed income u s 147 or 154 of the Income tax Act, 1961 for the cases pertaining to any assessment year beginning on or before the 1 S1 day of April, 2001.. 3.3. The CIT(A) failed to appreciate that no expenditure in relation to exempt income has been incurred and claimed by the assesse. 3.4. On the facts and circumstances of the case, the Ld. CIT(A) erred in not providing the adequate opportunity to the appellant. The Learned AO while completing the assessment u/s 115JA/254/147 dated 14.11.2007 did not make any disallowance u/s 14A of the Act. In respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Central Board of Direct Taxes relating to the provisions of Finance Act, 2001 reported in 252 ITR (St.) 65 on the issue of section 14A of the Act as under:- 25. No deduction for expenditure incurred in respect of exempt income against taxable income 25.1. Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income, is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e gross income, minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. 25.2. Through Finance Act, 2001, a new section 14A has been inserted so as to clarify the intention of the Legislature since the inception of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was only incidental income derived by the assessee. He placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs Rajeeva Lachan Kanoria reported in (1994) 208 ITR 616 (Cal) in this regard. These facts argued by the Learned AR are not controverted by the revenue before us. The next argument advanced by the Learned AR is that the said disallowance u/s 14A of the Act amounting to ₹ 17,71,201/- was not debited by the assessee in its profit and loss account, hence the provisions of Clause (f) of Explanation to Section 115JA of the Act cannot be invoked in the facts of the present case. We hold that unless an item is debited in the profit and loss account, the same cannot be the subject matter of addition to book profits under clause (f) of Explanation to section 115JA of the Act. The disallowance made u/s 14A of the Act read with Rule 8D is only artificial disallowance and obviously the same is not debited in the profit and loss account and the same cannot be imported into clause (f) of Explanation to Section 115JA of the Act. Reliance in this regard is placed on the following decisions:- a) Decision of Delhi Tribunal in the case of Q ..... X X X X Extracts X X X X X X X X Extracts X X X X
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