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TMI Blog2024 (11) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... ein, to the statutory reserve as mandated under the provisions of the RBI Act, is not an allowable deduction in computing the assessable income under the provisions of the Act under the regular computation and computation of book profits under section 115JB, as the case may be and therefore, the orders of the authorities below, do not call for any interference. Accordingly, the consequential issue is also decided against the assessee s - Decided in favour of revenue. - Honourable Dr. Justice Anita Sumanth And Honourable Mr. Justice G. Arul Murugan For the Appellant : Mr. R. Sivaraman For the Respondent : Mr. J. Narayanaswamy Senior Standing Counsel JUDGMENT DR. ANITA SUMANTH., J. This tax case appeal has been filed by the assessee relating to assessment year (AY) 2006 2007. The substantial question of law that have been admitted are as follows:- 1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that there has been no diversion of income by overriding charge in respect of amount transferred to Statutory Reserve Fund in compliance with the mandatory provisions of Sec.45IC read with Sec.45Q of RBI Act? 2. Whether on the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and that, a part of the corpus of the right of the company to have the entire income is sliced away at the threshold itself. The Tribunal also did not consider that there is no divergence of funds since the transfer is not through any other obligation created by the company out of its own volition or gratuitously. Thus, according to the learned senior counsel, it is an expenditure laid out wholly and exclusively for the purpose of commencement or carrying out the business and the business of the assessee s cannot survive without complying with the mandatory provisions of the RBI Act and hence, it is an admissible deduction under section 37 of the Income Tax Act. 5.3. Adding further, the learned senior counsel appearing for the appellants / assessee s submitted that the assessee s are Non-Banking Financial Companies (NBFC) which fall under Chapter III-B of the RBI Act. As per Section 45-IC of the RBI Act, the assessee companies are mandated to create a reserve fund and transfer certain amount to such reserve. Further, Section 45Q of the RBI Act gives an overriding effect to Chapter III-B in respect of all other laws and therefore, Section 45-IC of the RBI Act creates an ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the deduction is not allowable. 5.5. Elaborating further, the learned Senior Standing Counsel appearing for the respondent / Revenue submitted that if the funds are diverted at source, they shall not be included in the taxable income. Whereas, if they are diverted later, it must be included as a taxable income. In any event, such a diversion of funds is a question of fact and not of law. The Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal have dealt with the factual dispute at length, while rejecting the claim of the assessee s and hence, the same need not be interfered with by this Court. The learned Senior Standing Counsel also placed reliance on Section 45Q of the RBI Act and submitted that money in reserve fund only goes to the depositors and hence, it will not be allowed to be deducted for the purpose of arriving at taxable income. Adding further, it is submitted that when the income is diverted at source, it does not accrue to the assessee s and in that case, it is not really the income of the assessee s and it shall be deductible. On the other hand, when the income is required to be applied to discharge an obligation after the income rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer that the said deduction is not an expenditure incurred by the assessee companies and is an income accrued to the assessee s during the financial year under consideration and hence, it cannot be allowed as deduction under section 37 of the Act. It was also observed that the creation of reserve under the RBI Act is only a prudential effort to safeguard the interest of the shareholders of a NBFC company and it cannot be interpreted as an authorization to create a notional income and hence, the same cannot be claimed as a deduction from the total income computed for the purpose of computing the income tax. After having found that the assessee companies have created statutory reserve for 20% of the profits, by way of appropriation, the assessing officer held that the creation of statutory reserve is nothing but an application of income after the profit has been earned by the assessee companies and not a diversion of income as claimed and hence, such profit needs to be taxed. Referring to the decisions of this court in Tamil Nadu Power Finance and Infrastructure Development Corporation Ltd v. JCIT [280 ITR 491] and the Hon'ble Supreme Court in Southern Technologies Ltd v. JCIT [3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtainly not be called a diversion of income by overriding charge. 2.12. From the above, it is clear that the decisions referred to by the assessee's counsel are in a different context and are not applicable. On the other hand, the ratio from the Hon'ble Apex Court in the case of CIT vs. Sitaldas Tirathdas and Hon'ble Jurisdictional High Court in the case of Seshasayee Paper Boards Limited is clearly applicable in this case. The Companies Act, 1956 also mandates transfer to reserve fund a certain percentage of the profits before declaration of dividend. The Hon ble High Court in the case of Seshasayee Paper Boards Ltd. had held that in such a case, there is no diversion of income by overriding title nor can the amount set apart be claimed as expenditure and it cannot also be stated that it was loss. The ratio from this decision is very much applicable in this case, because as per the Reserve Bank of India Act, the Assessee has to create a Transfer Fund and to transfer therein certain percentage of its profits before any dividend is declared. This transfer to Reserve Fund was to be utilised for such purposes as specified by the Reserve Bank of India from time to time. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s transferred according to the provisions of the Madhya Pradesh Co-operative Societies Act. 5.11. The Delhi High Court in Vasisth Chay Vyapar Ltd case, while considering the issue relating to addition of unrealized interest income on Inter Corporate Deposits (ICD) by the assessing officer, when the same had to be declared by the assessee (NBFC) as an NPA as per the directions of the RBI, dealt with section 45Q of the RBI Act and held that the provisions of the RBI Act override the provisions of the Income Tax Act and decided the issue in favour of the assessee. The judgment of the Delhi High Court was affirmed by the Apex Court. However, the said decision is not applicable to the facts of the present case as the interest as held by the High Court and confirmed by the Apex Court was never received by the Assessee therein and held that interest income had not accrued. The present case concerns the amount sought to be deducted by the assessee s while computing the taxable income, which is already a part of the total income and transferred to reserve fund and therefore, the said decision may not be helpful to the case of the appellants. 5.12. In Travancore Sugar and Chemicals Ltd case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income is diverted at source, it can be deducted and the same reads as follows: ?Where income which accrues to the assessee is not his income the question of admissible deductions would not arise. Therefore, where income is diverted at source so that when it accrues it is really not his income but is somebody else's income the question as to whether that income falls under sub-section (2) of Section 10 does not arise. Again, income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else-s income. It is thus clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But where the income is required to be applied to discharge an obligation after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and is therefore not deductible.? In view of the above, we are of the firm view that when the income by way of profit, as in the present case, is received and then reflected as part of the total income, deduction is not permissible. Therefore, the authorities below were justified in disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 115 JB of the Act, was considered and it was observed as follows: ?14.In the present case, we are concerned with clause (b) to Explanation 1 which states that book profit prepared in accordance with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount carried to any reserve by whatever name called, other than a reserve specified under section 33AC of the Act. The legislature in express, lucid and categorical terms has stipulated that the book profit shall be increased by the amounts carried to any reserve. The word ?any?, it is obvious, refers to all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression ?reserve by whatever name called?. There could not have been more clarity and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i.e, book profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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