9911796707
TMI Blog2023 (1) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... er, in view of the decision of the Hon ble Karnataka High Court in the case of CIT vs Rudra Industrial Corporation [ 2011 (1) TMI 1172 - KARNATAKA HIGH COURT] we feel it appropriate to restore this issue to the file of the Ld.AO for computing the long term capital gain on conversion of capital asset into stock in trade in accordance with law. The ground No.1 of the appeal of the assessee is accordingly allowed for statistical purpose. Addition u/s 14A read with rule 8D to the book profit u/s 115JB in respect of expenditure incurred in relation to exempt income - HELD THAT:- Identical issue has been adjudicated in the assessee s own case for A.Y. 2012-13 wherein Tribunal has followed the decision of Vireet Investments (P) Ltd [ 2017 (6) TMI 1124 - ITAT DELHI] clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB - Respectfully following the finding of the Tribunal, we restore this issue to the file of the AO with the direction to follow the finding of the Tribunal in earlier and in accorence of law. The ground No.2 of the appeal of the assessee is accordingly allowed for statistical purpose. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -IN-TRADE BY CONSIDERING COST INFLATION INDEX CCIT) OF THE YEAR OF CONVERSION INSTEAD OF CII OF YEAR OF SALE OF FLATS; On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in taxing the incremental long term capital gains on account of conversion of land being capital asset into stock in trade by considering the CII of the year of conversion instead of CII of the year of actual sale of flats by the Appellant. The Appellant prays that the impugned addition of incremental long term capital gains of Rs. 36,30,53,2577- be deleted. ROUND NO. 2 - ADDITION OF RS. 27.97,9357- TO BOOK PROFITS U/S. 115JB IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S. 14A RWR 8D: On the facts and the circumstances of the case and in law, CIT (Appeal) has erred by not holding that addition to book profit under section 115JB of the Act cannot be made with reference to provisions of section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 ("the Rules"). GROUND NO. 3 - SHORT CREDIT OF TDS; Rs. 1,44,21,9757-: 1. On the facts and the circumstances of the case and in law, the ClT'(Appeal) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961 (in short, 'the Act') and book profit of ₹44,41,08,237/- under section 115JB of the Act. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Act were issued and complied with. In the assessment completed under section 143(3) of the Act, the Assessing Officer made certain additions / disallowances and assessed total income under normal provisions of the Act at ₹354,42,01,379/- and computed book profit of ₹40,69,06,175/-. As the income determined under section 115JB was of the Act was less than the income computed under the normal provisions of the Act, the Assessing Officer took the total income at ₹354,42,01,379/-.On appeal, the Ld.CIT(A) allowed part relief. Aggrieved, both the assessee and the Income-tax Department are in appeals before the ITAT, raising the grounds as reproduced above. 5. The Ground No.1 of the appeal of the assessee relates to computation of long term capital gain on sale of land which was converted from 'capital asset' into 'stock in trade'. The Ground No.3 of the appeal of the Revenue is also connected with ground No.1 of the appeal of the assessee. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurs during the relevant assessment year the long term capital gain corresponding to the area sold will have to be offered for tax in the very same assessment year. Accordingly the contention of the assessee that the long term capital gain are to be taxed based on percentage of completion method cannot be accepted and the differential long term capital gain as worked out below is required to be brought to tax. FMV@ 1981(cost) Index Indexed Conversion LTCG %com pletion Capital gain already offered FY Descrip Area sold @Rs.92/sq.ft. factor cost Price 2013- 14 One ICC 169,178 15,64,376 939 146,149,491 2,188,772,167 2,042,622.677 43.26% 883638569.9 (As per ROI Two ICC 198.799 18,289,508 939 171,738,480 2,610,218,660 2,438,480.180 367,977.00 33,853,884 317,887,971 4,798,990,828 4,481,102,857 2,060,936.801 2013- 14 One ICC- Scal 143, 038 143,038 13,159,496 785 103,302.044 2,585,123,073 2,481,821,029 (As per new worki ng) Two ICC-Scal 49,337 4,539,004 711 32,373,318 677,189,263 644,916.945 Two ICCScal 143,220 13,176,782 785 103,437,739 1,965,888.396 1,862,450.658 Onc e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty proceedings u/s 271(l)(c) of the Act is initiated separately." 5.2 On appeal, the Ld.CIT(A) on the first issue of taxing entire capital gain on account of conversion of capital asset being land into stock in trade in the year in which it was converted into stock in trade by the Assessing officer and not as per percentage completion method, followed the finding of the ITAT for the A.Y. 2012-13 and directed to tax the capital gain following the percentage completion method. 5.3 On the second issue of applying cost of indexation on the cost of acquisition, the assessee referred to the decision of the Hon'ble Karnataka High Court in the case of CIT vs Rudra Industrial Corporation 244 CTR 304 (Kar) and submitted that for indexation for the cost of asset, the capital gain index for the year of the sale should be applied. The Ld.CIT(A), however, in view of the clear provisions of section 45(2) of the Act for indexed cost of the acquisition in the year in which asset was converted, rejected the request of the assessee following CIT vs Rudra Industrial Corporation (supra). The relevant finding of the Ld.CIT(A) is reproduced as under:- "8.6 From perusal of Para 9 of the judgement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is evident that transfer taken place in the year in which asset is converted into stock-in-trade and law is very clear about indexation cost is to be applied for the year in which transfer has taken place. In view of the above discussion, the ground raised by the Appellant on this regard is, dismissed." 6. Before us, the assessee has filed a paper book containing pages 1 to 249 and also a supplementary paper book containing pages 250 to 256. 7. We have heard rival submissions of the parties on the issues in dispute and perused the relevant materials on record. In ground 3, the Revenue has challenged the finding of the Ld.CIT(A) for applying percentage completion method instead of taxing capital gains under section 45(2). We find that the Ld.CIT(A) has followed the binding precedent on the issue in dispute in the case of assessee itself. The relevant finding of the ITAT in A.Y. 2012-13 is as under:- "54. In accordance with the aforesaid policies, in the year in which the company converts Fixed Assets being Land to Stock-in-trade the unrealized appreciation i.e. the difference between the market value of land on the date of conversion into stock in trade and the cost of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made disclosure by way of a note at serial no. 31 in Notes to Financial Statement in relation to the Revaluation Reserve andamount released from the revaluation reserve on credited to profit and loss account and which is read as under: "31. The Company has during the year ended March 31, 2012 converted a part of the freehold land under real estate development from Fixed Assets to Stock in trade at market value and the difference between the market value and cost amounting to Rs. 764.30 crores (2010-11 Rs. 853.96 crores) has been credited to Revaluation Reserve. An amount of Rs. 165.27 crores (2010-11 Rs. 70.57 crores) has been ' released from revaluation reserve to Statement of Profit and Loss in proportion of revenue recognized on the area sold in accordance with the accounting Policy." 56. We find from records that lower authorities proceeded on total misreading of the relevant provision of the Act and have brought to tax the whole of the capital gain on the conversion of the land (fixed asset) to stock intrade in the year in which only part sale of stock in trade iseffected and assessee has offered theproportionate capital gain in the year under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of the purchaser of the flats in the financial year 1992-93. At that stage, for the purpose of calculating capital gains instead of taking the cost inflation index, they took the index as prevailing in 1988, the date on which the immovable property was converted into stockin-trade and consequently entered into contract for development of the property. In this regard, the question that arises for consideration is, which is the relevant date to be taken into consideration for the purpose of assessing the capital gains. 10. Sec. 45(2) which is relevant reads as under : "45. Capital gains.--(1) ............. (2) Notwithstanding anything contained in sub-s. (1) the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of s. 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such conversion for the purpose of full value of the consideration received or acquiring as a result of transfer of the capital asset and also cost of acquisition to be indexed till the date of such conversion, however, in view of the decision of the Hon'ble Karnataka High Court in the case of CIT vs Rudra Industrial Corporation (supra), we feel it appropriate to restore this issue to the file of the Ld.AO for computing the long term capital gain on conversion of capital asset into stock in trade in accordance with law. The ground No.1 of the appeal of the assessee is accordingly allowed for statistical purpose. 12. In ground No.2, the assessee has challenged addition of ₹27,97,935/- under section 14A read with rule 8D of Income-tax Rules, 1962 to the book profit under section 115JBin respect of expenditure incurred in relation to exempt income. 13. Before us, the Ld.Counsel of the assessee submitted that this issue was raised before the Ld.CIT(A) by way of an additional ground. However, the same has not been adjudicated by the Ld.CIT(A). He further submitted that identical issue has been adjudicated in the assessee's own case for A.Y. 2012-13 wherein Tribunal has followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld.CIT(A). As this claim of TDS is a matter of verification, therefore, we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding in accordance to law . The ground No.3 is allowed for statistical purpose. 16. In ground No.1, the Revenue has challenged deletion of income added on account of subsidy under Package Scheme of Incentives (PSI), 2007 as capital receipt not chargeable to tax amounting to ₹26,07,02,254/-. 17. Before us, the Ld. Counsel of the assessee submitted that issue in dispute is squarely covered by the order of the co-ordinate bench of the Tribunal in assessee's own case for A.Y. 2012-13 (ITA No.1716/Mum/2017. The relevant finding of the Tribunal is reproduced as under:- "28. We have gone through facts and circumstances of the case and noted the facts that the State Government of Maharashtra with a view to encourage the dispersal of industries to the less developed areas of the State of Maharashtra announced "The Package Scheme of Incentives, 2007" w.e.f. 01.04.2007. The PSI was applicable based on the level of Fixed Capital Investment or Employment Generation. Assessee Company is eligible for getting subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount but if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit (or to expand the existing unit then the receipt would be on 'capital' account. Further, it was held that the point of time at which the subsidy is >aid is not relevant, the source is irrelevant and the form of subsidy is irrelevant. Attention is also invited to a recent decision of the Hon'ble Jammu & Kashmir High Court in Shri Balaji Alloys vs. CIT (2011) 333 ITR 385 (J&K), wherein, considering Ponni Sugar (supra) and Sahney Steel (supra) it is held that the excise duty refund, interest subsidy and insurance subsidy received under a State Scheme are of 'capita!' in nature. In arriving at its decision, the High Court noted that the foregoing incentives were given to achieve dual objectives, viz. acceleration of industrial development and generation of employment in the State and that such incentives designed to achieve a public purpose, could not- be construed as production or operational incentives for the benefit of the assessee alone. Similarly, the Hon'ble Calcutta High Court in CIT v. Rasoi Limited (201.1) 335 ITR 438 (Cal), following the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CITA) following the finding of the Tribunal for A.Y. 2012-13 wherein decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd vs CIT in ITA No.749 of 2014 has been followed, deleted the addition. 21. In view of above facts and circumstances, we do not find any error in the order of the Ld.CIT(A) in following binding precedence on the issue in dispute. Ground No.2 of the Revenue is accordingly dismissed. 22. Ground No.4 of the appeal of the Revenue relates to exclusion of subsidy received under Package Scheme of Incentives (PSI), 2007 while computing book profit under section 115JB of the Act. 23. This ground was raised by the assessee before the Ld.CIT(A) by way of additional ground and it was claimed that issue was covered in favour of the assessee by way of the co-ordinate bench of the Tribunal decision in the case of Alok Industries (ITA No.1017/Mum/2017). The assessee further relied on the decision of the co-ordinate bench of the Tribunal in the case of Deegee Orchards Pvt. Ltd (ITA No.4613/Mum/2016). The assessee further relied on the decision of the Tribunal and Hon'ble Rajasthan High Court in the case of Shree Cement Ltd (supra). In view of the above decisions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ground of appeal of the Revenue is accordingly dismissed. 26. Now we take up the cross appeal for A.Y. 2015-16. The ground raised by the assessee are reproduced as under: 1. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in not adjudicating the ground of short credit of TDS amounting to ₹5,12,579/-. 2. Without prejudice to the above, the appellants, prays that the AO be directed to grant the credit of TDS of Rs.5,12,579/- as per law. 26.1 The grounds raised by the Revenue are reproduced as under: 1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the receipt of Rs. 15,66,26,347 / - as subsidy from the Government of Maharashtra under The Package Scheme of Incentive (PSI) 2007' as 'capital receipt' where as there is no obligation cast on the assessee as to applying the subsidy for any particular purpose?" 2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that no disallowance can be made if there is no exempt income while CBDT circular no. 5/2014 dtd 11.02.2014 clearly specified that eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mo, 5 : Vide this ground, Appellant has agitated against addition to Book Profit u/s 115JB towards alleged creation of revaluation reserve by debiting P & L Account for an amount of ₹ 112,67,62,5067-. Appellant stated that similar addition was made in assessee's own case in A.Yr 2012-13. During the year A.Yr 2012-13 assessee filed an appeal against the assessment order passed u/s 143(3) r.w.s. 144 C(13) before Hon'ble ITAT. The Hon'bie ITAT had decided the appeal of the assessee for A.Yr 2012-13. Relevant para of Hon'ble ITAT order is reproduced as under: "41. After hearing rival contentions, we find that facts that the Assessee in its business of real estate, had during the year under consideration converted certain portion of land lying in the fixed asset into stock-in trade. Such conversion was done at the market value of the land. Consequently, certain Revaluation Reserve got created in its books, being the excess of the market value of the Land over the carrying costs in the books of account. In computing the "book profits'" for the purposes of section 115JB of the Act, the AO has added the entire amount of Revaluation Reserve create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvances.' It is evident that this is not a case where the Revaluation Reserve is created out of profits for the year. Having recorded the stock-in-trade at its fair value at the time of conversion, the entire value of such stock in trade becomes tha cost for the real estate division. Consequently, this entire cost amounting to Rs. 768.18 Crs (i.e.Rs. 377.85 Crs + 390.33 Crs) is recorded as 'Land cost on conversion off free hold land from fixed assets to stock in trade' under the head 'Construction Expenses' as an item of debit to P&L account. Needless to say, to the extent the land is lying in 'Stock-in-Trade' of construction business, it is once again recognised as part of closing inventory by crediting the P&L account and debiting Asset Account. From this it is clear that this debit of Rs. 768.18 Crs. to the Profit and Loss Account reflects the cost of the Stock-in-Trade to the real estate business and that it does not reflect any amount carried to reserves. 42. During the year, the Assessee incurred certain further expenses towards these two projects which were debited directly to the P&L account and in computing the profits of the real estate segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the stock-in-trade transferred to the P&L account (Debit side) is, at the end of the year, based on the matching principles, either recognized as revenue corresponding to the revenues recognized based on percentage completion method (Credit side or reflected as part of the Closing work-in-progress (debit side) carried forward to Balance Sheet. The profits of the assessee as shown in its P&L account duly considers the profits based on Percentage Completion Method on the portions sold during the year and hence there is no warrant for again adding the revaluation. Reser\fe to such declared profits. The addition, made by the AO leads to not merely double accounting of the book profits actually earned by the assessee but also leads to accounting for profits not yet earned by the assessee in respect of the portion of the project not yet completed and not yet sold and which is carried forward as part of closing work-in-progress. ' 44. We have gone through the provision of Clause (b) of Explanation to section 115JB(2) of the Act, which applies only in case of Appropriation of profitsJ. Clause (b) of Explanation I to section 115JB(2) requires the bookprofits to be increased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 1 to section 115JB or not. In this context, the Supreme Court has explained the true interpretation ofclause(b) on page 376, 377 in the following words: "....9. We quote herein below Explanation I tosection 115JB of the 1961 Act which reads asunder: "Explanation I. For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous yearprepared under subsection ('2), as increased by,) * (a/***** -• (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33A C; or if any, amount referred to in clauses (a) to (li) is debited to the profit and loss account, and as reduced by.." 10. We find merit in this civil appeal. On reading explanation L quoted above, it is clear that to make an addition under clause (b) two conditions must be jointly satisfied: (a) There must be a debit of the amount to the profit and loss account. (b) The amount so debited must be carried to the reserve. Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account The amount did not enter the stream of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 956 and the said Directors Report is duly filed with the Registrar of Companies and no objections have been raised whatsoever of date which indicates that the provisions of section 217 have been duly complied with. Indeed, the phrase 'amounts carried to reserves' as understood under the Act inthe context of section 115JB cannot be different from its interpretation under the Companies Act. In view of the above, the application of clause (b) of the Explanation I to section 115JB (2) is evidently inappropriate. 48. Disclosures requirement under Revised Schedule VI to the Companies Act 1956 in terms of para 6 (B)(i)(h) of the general instructions for preparation of Balance Sheet under Revised Schedule VI to the Companies Act, 1956, the appropriations by of transfer to / from reserves needs to be disclosed under the caption 'Reserves and Surplus'. Annexure -6 sets out a copy of the relevant portions of the format of Revised Schedule VI. Ld Counsel explained that in compliance with the above requirements, the amounts transferred to General Reserve have been disclosed at page 69 of the audited annual accounts under the caption 'Appropriations' and the list of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nventories does not give rise to any profits [see an early decision of the Hon'ble Supreme Court in the case of Chainrup Sampatram V. CIT (24 FIR 481). The Hon'ble Supreme Court has explained at Page 485, the purpose of crediting the value of unsold stock in the Profit and Loss Account in the following words: "The true purpose of crediting the value of, unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading." In any case, this is not a case of revaluation of stocks. The Indian Accounting Standards (AS-2) does not permit upward revaluation of stock-in-trade. This is, a case of transfer of Fixed Asset to Stock-in-trade at a revalued amount. Indeed, in the year of creation of Revaluation Reserve, there is no commercial profit earned by the Assesses Company by virtue of revaluation. The entire purpose of introduction of MAT was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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