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TMI Blog2000 (3) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... specific adjudication. 4. The assessee is a company engaged in the business of manufacture and sale of oxygen, nitrogen, dissolved acetylene, etc. In respect of assessment year under appeal the assessee furnished return of income declaring taxable income of loss of Rs. 9,82,65,154 which was subsequently revised by declaring income of loss of Rs. 9,76,82,479. However, both the returns declared income chargeable to tax under s. 115J at Rs. 1,05,12,110. We now propose to take up the grounds of appeal in seriatim: 5. In ground Nos. 1 and 2 of the appeal, the assessee has disputed the order of learned CIT(A) in confirming the disallowance made by the AO on account of premium on redemption of debentures amounting to Rs. 6,60,000. 5.1 The brief facts giving rise to these grounds or appeal are that the assessee charged to P L a/c for the year ended on 30th Sept., 1997, relevant to the assessment year under appeal a sum of Rs. 6,60,000 as proportionate premium @ 5 per cent payable on maturity of Rs. 1,000 lakh non-convertible debentures allotted to the financial institutions which were redeemable after a period of 7 years. However, AO disallowed the said amount which was confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd orders of authorities below. We are of the view that the minimum entertainment expenditure of Rs. 5,000 is allowable under s. 37(2)(i) in the relevant assessment year and to be allowed irrespective of the fact that there was no income under the head 'Profits and gains of business' and the same is not linked as to whether the computed income is a loss or profit. Therefore, we accept ground Nos. 3 and 4 of the appeal in favour of the assessee and reverse the order of learned CIT(A). 7. In ground No. 5 of the appeal, the assessee has disputed the order of learned CIT(A) in confirming the disallowance of Rs. 4,57,000 which represents contribution to Indoxco Club, etc. under s. 40A(9) of the Act. 7.1 The AO disallowed under s. 40A(9) of the Act a sum of Rs. 4,57,000 which is the amount representing contribution to Indoxco Club, etc. The assessee disputed the said disallowance before the first appellate authority and submitted that the contribution was towards expenses incurred for various sports and recreational activities of the employees which were organised by the Employees Recreation Club. However, learned CIT(A) confirmed the disallowance by following the order of first ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perannuation fund or approved gratuity fund as contemplated in s. 36(1)(iv) and 36(1)(v) of the Act. In the case before us, it is not disputed that the assessee made payment to Indoxco Club, etc. as reimbursement of expenditure incurred for various sports and recreational activities of the employees of the assessee. We are of the view that s. 40A(9) of the Act is not applicable and as such the disallowance made by the authorities below of Rs. 4,57,000 is deleted. In this regard, we are supported by the order of the Tribunal dt. 13th Feb., 1992, and the relevant portion thereof reads as under: "18. The next ground is in regard to disallowance of a sum of Rs. 11,200 under s. 40A(9) of the Act deleted by the learned CIT(A). The assessee in this case paid a sum of Rs. 10,000 to APE Belliss Staff Club and a sum of Rs. 1,200 to APE Belliss Staff Recreation Club. The AO applied the provisions of s. 40A(9) of the Act and disallowed the said payments. The learned CIT(A), however, deleted the addition as follows: "I do not think that s. 40A(9) is applicable in this case because that section stands for any funds, institutions, where these subscriptions are made over ostensibly for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the other clauses of the said Explanation." 8.1 As may be observed from the additional grounds, the issue involved is whether the amount of Rs. 50 lakh transferred from P L a/c prepared for the relevant previous year to the assessment year under appeal, and the debenture redemption reserve (DRR) amount is to be allowed for the purpose of computing "book profit" within the meaning of s. 115J of the Act. 8.2 In regard to the admissibility of the additional grounds for adjudication, learned authorised representative of the assessee contended before us that the additional ground is purely legal in nature and has been raised after the Supreme Court decision in the case of National Rayon Corpn. Ltd. vs. CIT (1997) 142 CTR (SC) 202 : (1997) 227 ITR 764 (SC). It was further submitted that the assessee is entitled to raise a new ground before the Tribunal for the first time even if the same was not raised at any time before the lower authorities. Learned authorised representative of the assessee placed reliance, in support of his submission, on the decision of the Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt a known liability and accordingly the amount of Rs. 50 lakh cannot be disallowed for the purpose of computing the 'book profit' by invoking either of cl. (b) or (c) of the Explanation appended below s. 115J of the Act. 8.3 Learned authorised representative of the assessee Sri Mitra submitted that the term 'reserve' is not defined in the Act and as such, the definition of the terms "provision" and "reserve" given in the Companies Act become relevant for the purpose of s. 115J of the Act which deals with the assessment of companies. Sri Mitra referred to the decision of Bombay High Court in the case of Petrosil Oil Co. Ltd. vs. CIT (1999) 155 CTR (Bom) 445 : (1999) 236 ITR 220 (Bom) and submitted that for the purpose of construing the provision of IT Act, undefined words used in the said provision may be interpreted by importing the definitions as given in the companies Act. In this regard he referred to cl. 7(1) of Part III of Sch. VI to the Companies Act and stated that 'provision' and 'reserve' have been defined therein. He submitted that in the sub-cl. (a) provision means any amount written off or retained by way of providing for depreciation, renewals or diminution in valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the case of the Supreme Court in National Rayon Corpn. Ltd. is irrelevant. He further submitted that s. 115J is a deemed provision and has to be interpreted strictly and the appropriation of the sum of Rs. 50,00,000 towards debenture redemption reserve has to be added while computing the book profit for the purpose of s. 115J as per Explanation thereof. 9. We have carefully considered the submissions of learned representatives in regard to the question of admission of the additional grounds of appeal. We have perused the audited accounts as placed at pp. 1 to 21 of the paper book. We also observe that the total income of the assessee was computed at a loss of Rs. 4,16,76,246 and as such, the assessee was assessed to tax under s. 115J of the Act as it had positive income as per P L a/c, in the relevant previous year. The additional grounds of appeal relevant to the computation of book profit is computed for the purpose of tax at 30 per cent thereof under s. 115J of the Act. On perusal of p. 7 of the paper book, which is a part of the audited accounts of the assessee for the relevant assessment year under appeal, it is seen that the same depicts the profit before taxation, profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppended below to s. 115J(1) of the Act, one has to start with the net profit as computed under the P L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to Companies Act i.e., the net profit after making all appropriations and thereafter, certain adjustments are to be made to such net profit as are referred to in cl. (a) to (f) and in cls. (i) to (iii) of the said Explanation. 10.3 Therefore, the method of computing the 'book profit' for the purpose of s. 115J of the Act is to start with the net profit as per the P L a/c and then make adjustments to it as are referred to in cls. (a) to (f) and cl. (i) to (iii) of the said Explanation. On perusal of p. 22 of the paper book profit by excluding the amount of Rs. 50 lakh which has been appropriated by the assessee towards debenture redemption reserve works out to Rs. 3,00,40,000 as against the 'book profit' assessed by the AO and also offered by the assessee for taxation under s. 115J of the Act of Rs. 3,50,40,000. 10.4 Now coming to the contention of the assessee that the debenture redemption reserve is not a reserve under cl. (b) of Explanation to s. 115J, we agree with the assessee's representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt has held in the said case that any amount set apart in the accounts of the company to redeem the debentures must be treated as monies set apart to meet a known liability. The debentures will have to be shown in the company's balance sheet of the year as liability. Merely because the debentures are not redeemable during the accounting period, the liability of redeemed debenture does not sease to exist. The Supreme Court further held that the debenture redemption Reserve must be regarded as a provision made by the assessee-company to enable it to redeem the said debentures when they become due for redemption. The Supreme Court further stated that the amounts set apart for redemption of debentures are not in the nature of charge against profit but are merely appropriation of profits. The said debenture redemption reserve account cannot be held to be a reserve on that ground itself. 10.7 From the above, it is clear that the amounts set apart to redeem debentures are to be treated as an amount set apart to meet a known liability and as such, the debenture redemption reserve cannot be considered to be a reserve. From the above decision of apex Court it is also clearly evident that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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