9911796707
TMI Blog2023 (1) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Short c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NG 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) erred in not adjudicating the ground of short credit of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.1 The brief facts qua the issue in dispute are that the assessee in the process of real estate development of its land parcel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ICC 15,684 1,442,928 785 11,326,985 2,83,46,636 272,129,651 Two ICC 3,516 323,472 785 2,539,255 48,259,875 46,720 Total of 2013-14 5,307,038,903 Capital gain offered in ROI 2,060,938,801 Differential Capital Gain 3,245,102,102 As it is apparent that fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 Hon'bie Karnataka High Court, it is evident that facts of the Appellant are different from the facts decided by the Hon'bie Karnataka High Court in the case of CIT V/s Rudra Industrial Commercial Corporation.In the case considered by Hon'bie Court, although theimmovable property owned by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 said land in books of the company is credited to revaluation reserve. Based on Percentage Completion Method of accounting, the appropriate amount is released from Revaluation Reserve to statement of Profit loss in proportion of revenue recognized. In other words, the revenue comprising of Capital Gains and Business Profits is account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween 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 consideration. We, in view of the above facts and circumstances, direct the AO to verify the sale of stock in trade effected and offered the proportionate capital gains in the relevant years and the same should be taxed accordingly. This issue of assessee's appeal is set aside for verification purpose only with the above directions. 8. Respectfully following the finding of the Tribunal (supra), the ground No. 3 of appeal of the Revenue is accordingly dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 result of the transfer of the capital asset. 11. Explanation (iii) to s. 48 defines indexed cost of acquisition which means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later. 12. A harmonious interpretation of these two provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the decision of the Special Bench in the case of Vireet Investments (P) Ltd (2017) 58 ITR (AT) 313 (Delhi Trib)( SB). The relevant finding of the Tribunal is reproduced as under:- 57. The next issue in this appeal of assessee is against the order of DRP confirming the action of the AO / TPO making addition of disallowance under section 14A of the Act r.w.r 8D of the Rules, while computing book profit under section 115JB of the Act. For this assessee has raised following grounds: - GROUND NO: 9: ADDIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on account of investment made in new plant commenced at Patalganga and Ranjangaon. Further, in the context of subsidy, the question as to whether it is of 'revenue' or 'capital1 in nature will have to be determined, having regard to the purpose for which the subsidy is given. If it is given by way of assistance in carrying on the business, it has to be treated as a 'trading1 receipt. The source of the fund is immaterial. If the purpose was to help in setting up a business or complete a project, it must be treated as having b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey 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 ratio of SupremeCourt in Ponni Sugar (supra) has held the subsidy received from Government of West Bengal under scheme of industrial promotion for expansion of its capacities, modernization and improving its marketing capabilities would be 'capital' receipt. 30. Further, the Central Board of Direct Taxes ('CBDT) has issued Circular No. 142 dated 01-08-1974 wherein it has clarified that where the subsidy is primarily given for helping the growth of industries and not for supplementing their profits, such subsidy can be regarded as 'ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the Ld.CIT(A) allowed the additional ground of the assessee observing as under:- 11.5 The facts of the Appellant are similar to the facts considered by Hon ble Tribunals and Hon ble Rajasthan High Court as discussed in the foregoing paras. Therefore, respectfully following judgement of Hon ble Tribunal in Alok Industries Ltd (supra), Degee Orchards Pvt Ltd (supra), Shree Cement Ltd (supra) and CIT v Shree Cement Ltd (supra), appeal of the assessee on this ground is allowed. 24. Before us, the Ld. Counsel of the assessee relied on the decision of Hon ble Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances 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 even if no exempt income is earned on the investments for the purpose of calculation of disallowance u/s 14A r.w.r. 8D, these are to be included? 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing relief to the assessee relying on the decision of Hon'ble Special Bench of ITAT Delhi in the case of Vireet Investment (P) Ltd., without appreciating the facts that the issue has not reached to its finality as the Hon'ble Delhi High Court in its decision in the case of Goetz India Ltd., reported in 361 IT 505 held that while computing Book Profit disallowance us 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 created during the year to its audited profits applying the provisions of Clause (b) of Explanation I to section 115JB(2) of the Act. Before us assessee explained that in its segmental P L account, the Assessee has disclosed results of the following segments: a. Textile Division b. Polyster Division c. Real Estate Division In respect of the Real Estate Segment, as at the beginning of the relevant year- the assessee carried opening stock of certain work-in-progress relating to two residential projects under construction, namely, ICC-I Project and ICC-2 Project The Opening W1P of the two Projects was as follows: (a) For ICC-1 Project: Rs.384,34,95,000/- (b) For 1CC-2 Project: Rs.398,54,27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebiting 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 segment, these have been duty considered separately. It was claimed by the assessee before us that the Revenues from the said construction business is recognized on the basis of 'percentage completion method1. See note 31on page 1 2 of the Annual Accounts as part of the notes on Significant Accounting Policies. Accordingly, the Assessee has recognized revenue of Rs.258,62,49,100/- in respect of 1CC-1 Project and revenue ofRs.260,78,49,630/-for ICC-2 Project, aggregating to Rs. 519,40,98 730/-,Working of the Real Estate Projects based on the percentage completion method. Having recognized the revenues as above, the portion of the Revaluation Reserve which relates to the sale recognized as per percentage completion method needs to be released to the P L acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 by the amounts carried to any reserves by whatever name called. The underlined words imply a transfer of the relevant amounts, from the Profit and Loss Account to the Reserve Account. Indeed, this is duly supported by not only the dictionary meaning of the word 'carry as we shall shortly see, but, also by the use of the words 'if any amount' referred to in clauses ! (a)(i) debited to the profit and loss account in the text of Explanation 1 itself. The word 'earn/ has several shades of meaning as would be evident from the extracts from the Webster's dictionary and the Oxford dictionary. However, in the context in which the words 'earned to' are used, in clause (c ) of Explanation 1, it appears that the following shades ,of meaning are relevant in the present context; viz.;- In Merriam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income for the purposes of determination of net profit at all, hence clause b) of Explanation I 'was not applicable. Further, reserve as contemplated by clause (b) of the Explanation Ito section 1 15JB of the 1961 Act is required to be carried through the profit and loss account. At this stage it may be stated that there are broadly, two types of reserves, viz., those that are routed through profit and loss account and those which are not carried via profit and loss account, for example, a Capita! Resen/e such as Share Premium Account. AAD is not a reserve. It is not appropriation of profits.... The term 'Appropriation of profits' is explained in the Guidance Note on Terms used in Financial -Statements' issued by the Institute of Chartered Accountants of India in the following words: An account sometimes included as a separate section of-the- profit and loss state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dule 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 'Appropriations' so disclosed does not include any amount transferred to 'Revaluation Reserve'. The accounts have been duly audited by the statutory auditors of the company, approved by the shareholders of the company and filed with the Registrar of Companies. None of the three authorities have alleged that the accounts are not in accordance with the Revised Schedule and hence, this conclusively proves that Revaluation Reserve is not created out of the profits of the company. These reserves are not in the nature of appropriation of profit and therefore, the question of adding the same to the book profits by invoking clause (b) of Explanation f (I) to section 115JB (2) does not arise. 49. We are of the view that the action of the AO is contrary to the scheme of the provisions of MAT - clause (1) of the Explanation I to section 115J8 (2) of the Act. Clause (j) of the Explanation 1 requires that the book profits shown in the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 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 that certain companies were declaring significant book profits, paying dividends to its shareholders but not paying any tax because of various tax shields like investment allowance, depreciation etc. Accordingly, we delete the addition made by AO of the entire amount of revaluation reserve created during the year to its audited profit applying the provisions of section clause (b) of explanation (1) to section 115JB (2) of the Act. However, the AO will verify whether the assesses has released a sum of Rs. 165,26,83,871/-from revaluation reserve and credited to the profit and loss account, in that case this is not to be added as income under section 115JB of the Act This issue of assessee's appeal is partly allowed... 10.1 Neither there is any factual change nor any legal change during the year under consideration, therefore, respectfully following the judgement of Hon'ble ITAT in Appellant's own case for A.Yr.,2012-13, appeal of the assessee on this ground is allowed. 30. We have h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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