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TMI Blog2017 (1) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... he mind of the court. Reliance in this regard can be had to the decision in the case of Karamchari Union v. UOI (2000 (2) TMI 11 - SUPREME Court ). Therefore, in our considered opinion, the findings of the CIT(A) are in accordance with settled principles of law and we do not find any reason to interfere with the order of the CIT(A). The amount of disallowance under section 14A should be added back to book profits for the purpose of computing tax liability. However, we make it clear that the amount of addition should be restricted to the actual disallowance made under section 14A read with rule 8D of the IT Rules, 1962. Therefore, we do not find any reason to interfere with the finding of the CIT(A) that this amount is required to be added to the book profits for the purpose of computing tax liability under section 115JB of the Act. Ground No.2(b) is dismissed. Computing the tax liability u/s 115JB - whether amount of capital exempt u/s 10(38) should alone be considered? - Held that:- We hold that the amount of profit eligible u/s 10(38) should alone be considered for the purpose of tax liability u/s 115JB of the Act. The assessee-company is entitled to the benefit of indexation whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Karnataka. Return Of income for the assessment year 2008-09 was filed on 30/9/2008 declaring 'nil' income under normal provisions of the Income-tax Act, 1961 ['the Act' for short]. The assessee-company also claimed carry forward long term capital loss ₹ 1,19,39,267/-. However, the assessee-company returned income of ₹ 34.49,26,560/- under the provisions of section 115JB of the Act. 3. Against said return of income, assessment was completed by the Deputy Commissioner of Income-tax (ACIT), Circle-11(5), [hereinafter referred to as the AO] at total income of ₹ 1,22,64,378/- under normal provisions and at total income of ₹ 46,42,36,471/- under the provisions of section 115JB of the Act. While doing so, the AO made disallowance of under section 14A of ₹ 1,02,74,566/- to the book profits and provision for gratuity of ₹ 11,60,422/-, provision for leave encashment of ₹ 10,58,562/- to the book profits and also denied the claim of the assessee-company for deduction of the indexed cost of acquisition while computing capital gains exempt under the provisions of section 10(38) of the Act and also denied set off of brought forward to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment under rule 8D(3) of the Income-tax Rules. The CIT(A) however, granted relief on account of provision of gratuity and leave encashment. As regards addition of long term capital gains exempt under section 10(38), the CIT (A) concurred with the view of the AO that the amount of capital gains computed would be liable to tax under section 115JB without taking into consideration the benefit of indexation of the cost of acquisition of asset sold. As regards the claim of set off of brought forward loss or depreciation whichever is lower for the purpose of computing tax liability under section 115JB, the CIT(A) directed the AO to verify details of the claim and allow benefit as per law. Thus the appeal was partly allowed by the CIT(A). 7. Being aggrieved by that part of the order which is against the assessee-company, the assessee-company is in appeal in ITA No.1659/Bang/2013 for the assessment year 2008-09 raising the following grounds of appeal: The Appellant objects to the order of the Commissioner of Income Tax (Appeals) -I, Bangalore, on the following grounds: 1. That the order of the Learned Commissioner of Income tax (Appeals)-I insofar as it is prejudicial to the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal to consider the petition in the light of principles of justice and cancel the additions made by the Assessing Officer. towards earning any income to which section 10 (other than the provisions contained in clause [38] applies shall be added. 8. Ground Nos.1, 3 and 4 are general in nature and do not require any adjudication. 9. Ground No.2 challenges the computation of tax liability under section 115JB of the Act. Ground No.2(a) challenges the order of the CIT(A) holding that the assessee-company was not entitled for deduction from book profits on account of provision for bad and doubtful debts written back and credited to profit and loss account in the current year. 10. Brief facts leading to the addition on this issue are as under: During the previous year relevant to assessment year under consideration, the assessee-company had credited the profit & toss account [P&L A/c] by a sum of ₹ 16,11,65,105/-being the provision for bad and doubtful debts written back. The assessee-company claimed that the amount of provision was created from the year ending on 31/3/1995 onwards. It was claimed that the amount of provision created for bad and doubtful debts in the respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g tax liability u/s 115JB of the Act, the Act provides that certain adjustments are required to be made to net profit as shown in the P&L A/c. One of such adjustments is that net profit shall be reduced by the amount withdrawn from any reserve, if any such amount is credited to P&L A/c. But such deduction is permissible only if such provision had gone to increase book profits in the year creation of reserve. It was specifically provided vide clause (i) of Explanation 1 to section 115JB(2) of the Act. In the present case, it is not the case of the assessee-company that provision has been added back to book profits in the year of creation. The only case of the assessee-company is that the provision was not required to be added back in view of law laid down by the Hon'ble Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra) an identical issue was considered by the Hon'ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. v. CIT (330 ITR 363) wherein it was held as follows: "24. The matter could be examined from another angle. To recapitulate the facts, the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed..................." Further, we notice that even the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (255 ITR 273) had categorically held that the provisions of 115JB are separate code by itself. The AO can disturb book profits only in the circumstances mentioned in the said section. In other words, addition to book profits is permissible only in the situation envisaged therein. In the present case, clause (i) of Explanation to 115JB(2) permits amount of deduction by the amount withdrawn if any such amount is credited to the P&L A/c only. Proviso to said clause (i) further provides that such reduction is possible only in case the amount of provision is added back to book profits in the year of creation of reserve. It is undisputed fact that this condition is not satisfied by the assessee-company. It is settled principle of interpretation of fiscal law that taxing statute should be construed strictly. When the provision is free from doubt or ambiguity, there is no need to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956)14 is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:] Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 21014 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956)15, which is different from the previous year under this Act, - (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss ..... 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(38) of the Act, is liable to be added back to net profit shown in Profit and Loss Account if the amount referred to therein is debited to Profit and Loss Account Now, we refer to Section 14A of the Act which reads as under: "Expenditure incurred in relation to income not includible in total income 87. 87a14A[(i) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred89 by the assessee in relation to33 income which does not form part of the total income89 under this Act.] 88[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed90, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act read with Rule 8D of Income Tax Rules, 1962 shall have no reference to the amount debited to the Profit and Loss Account and there cannot be any disallowance u/s 14A of the Act unless the expenditure is debited to Profit and Loss Account and hence disallowance u/s 14A is always a part of expenditure debited to the Profit and Loss Account. In the instant case under appeal, the AO has disallowed the expenditure of ₹ 73,07,018 computed u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 for computing normal taxable income which is upheld by the CIT(A) in the first appeal and the same amount of expenditure of ₹ 73,07,018/- is added to compute book profit u/s 115JB of the Act which is computed u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962. Our view is fortified by the following decisions : 1. RBK Share Broking (P.) Ltd. (Supra) 2. JSW Energy Ltd. (Supra) 3. Dabur India Ltd. (Supra) 4. Godrej Consumer Products Ltd. (Supra) The assessee-company has relied upon on the decision of Mumbai Tribunal in Reliance Industrial Infrastructure Ltd. (Supra) whereby the Mumbai Tribunal held that reasonable disallowance it to be made u/s 14A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in accordance with the requirement of sub-section (1A) of section 115J and in that process if he finds that the accounts of the company are not in accordance with the provisions of the Companies Act, he could make the necessary changes before proceeding to assess the company for tax under the Explanation to section 115J of the Income-tax Act.' The relevant part of section 115J of the Income-tax Act read as follows : 115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1988 but before the 1-4-1991 (hereafter in this section referred to as the "relevant previous year"), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount is credited to the profit and loss account; or (ii) the amounts (as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under section 80HHC or section 80HHD; so, however, that such amounts are computed in the manner specified in sub- section (3) or sub- section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be ; or (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956), are applicable. (2) Nothing contained in sub- section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub- section (2) of section 32 or sub- section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J of the Income Tax Act in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry In regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required to be added to the book profits for the purpose of computing tax liability under section 115JB of the Act. Ground No.2(b) is dismissed. 15. In ground No.2(c) the assessee-company contends that while computing the tax liability u/s 115JB, amount of capital exempt u/s 10(38) should alone be considered. It is the contention of the assessee-company that the amount of capital gain computed u/s the IT Act is exempt, though such amount is exempt from tax u/s 10(38) of the Act. In short, it is the contention of the assessee-company that long term capital gain arrived at by reducing indexed cost of acquisition from sale proceeds of the assets sold should be considered for the purpose of computing tax liability u/s 115JB whereas the AO was of opinion that long term capital gain without indexing the cost of acquisition are to be considered for the purpose of computing tax liability u/s 115JB of the Act. 16. Clause (ii) to Explanation to section 115JB lays down that the amount of income to which provisions of section 10, other than provisions of sub-section (38) of section 10 or sections 11 and 12 if any such amount is credited to P&L A/c shall be reduced from the book profits for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Supreme Court, in the case of Ajantha Pharma v. CIT (327 ITR 305) in the context of deciding whether amount eligible profits u/s 80HHC or the amount of deduction u/s 80HHC to be deducted from book profits for the purpose of computing u/s 115JB held that it is only the amount of eligible profits which are eligible as deduction from the book profits. The relevant part of the judgment is extracted: "10. One of the contentions raised on behalf of the Department was that if clause (iv) of Explanation to Section 115JB is read in entirety including the last line thereof (which reads as "subject to the conditions specified in that section"), it becomes clear that the amount of profits eligible for deduction under Section 80HHC, computed under clause (a) or clause (b) or clause (c) of subsection (3) or sub-section (3A)f as the case may be, is subject to the conditions specified in that Section, According to the Department, the assessee herein is trying to read the various provisions of Section 80HHC in isolation whereas as per clause (iv) of Explanation to Section 115JB, it is clear that book profit shall be reduced by the amount of profits eligible for deduction unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of computing tax liability u/s 115JB of the Act. This ground of appeal viz. 2(b)is allowed. 17. In the result, appeal filed by the assessee is partly allowed for statistical purposes. ITA No.l660/Bang/2013: (AY 2010-11): 18. The assessee-company raised the following grounds of appeal: The Appellant objects to the order of the Commissioner of income Tax (Appeals] -I, Bangalore, on the grounds: 1. That the order of the Learned Commissioner of Income tax (Appeals)-] insofar as it Is prejudicial to the interests of the appellant is opposed to law and facts of the case. 2. That the order of the Learned Commissioner of income tax (Appeals) failed to appreciate expenditure of 'Donation to CM Relief Fund' was incurred wholly and exclusively in the ordinary course of the business of the Appellant and as such is deductible u/s 37 of the Income Tax Act. 3. That the Learned Commissioner of Income tax (Appeals) erred in confirming the computation of Book Profits under section 115JB made by the Assessing Officer and in doing so: (A) IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS WRITTEN BACK: (a) The Ld CIT [A] failed to appreciate that as per the Scheme envisage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company is to provide Finance to Industries in the State of Karnataka and participating in the Infrastructure Development in the state of Karnataka. In the process of Infrastructure Development the company has to incur expenditure as directed by the only shareholder viz., Government of Karnataka. Accordingly any expenditure which results in Infrastructure Development (and which is not capital in nature) is an expenditure incurred wholly and exclusively for the purpose of business of the company. During the AY 2010-2011 the company made a contribution of ₹ 500 Lakhs to Chief Minister Relief Fund to benefit citizens living in flood affected areas of the state for the purpose of improving infrastructure development in these areas. A sum of ₹ 0.87 Lakhs was recovered from the employees and the balance was written off in the Profit and Loss Account and claimed as revenue expenditure expended wholly and exclusively for the purpose of business. Accordingly the company claimed the expenditure which was- routed through the Chief Minister's Relief Fund as allowable expenditure u/s 37 of the Act.. , The Learned AO has disallowed the claim on the following grounds: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved, the assessee-company is in appeal before us. 24. We heard rival submissions and perused material on record. The assessee-company made a contribution of ₹ 4,49,13,000/- towards CM Relief Fund towards development and reconstructing infrastructure facility in parts of Northern Karnataka. It is matter of record that the assessee-company was set up for development of infrastructure. Therefore, the contribution was made pursuant to the objectives for which the company was set up. The fact that the amount of contribution is eligible for deduction u/s 80G cannot take away the right of the assessee-company to claim it as a deduction u/s 37 of the Act. Furthermore, since the assessee-company is a Government of Karnataka undertaking, the contribution made to the CM Relief Fund cannot be held to be inadmissible. The Hon'ble Supreme Court in the case of Sri Venkata Satyanarayana Rice MillContractors Co. v. CIT (223 ITR 101) held that any contribution made by an assessee to public welfare found (Andhra Pradesh Welfare Fund) which is directly connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee's business ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer be restored. 5. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 28. The revenue is aggrieved by the direction of the CIT(A) wherein the CIT(A) held that in absence of nexus of borrowed funds to investment, no disallowance u/s 14A is called for. The relevant part of the CIT(A)'s order is as under: 3.4 It may be seen from the above that the appellant has sufficient funds to make these tax free investments. The investments made during the period relevant to the A.Y. 2010-11 are only to the extent of Rs,101,51,99,189/- Crores. The appellant: sufficiently explained the sources about these investments. The investments made in the earlier period are to the extent of ₹ 101,53,71,936/- Crores. The closing value of investments as on 31/93/2908 after making the provision ₹ 124 Crores. There is no material on record to prove the nexus between the borrowed funds and tax-free investments. The investments are made out of the mixed pool of funds and it is difficult to attribute the same to any tax-free investments directly. The A.O. himself estimated that 3.9% of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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