Case Law Details
Case Name : M/s. Kailash Vahan Udyog Ltd. Vs DCIT (ITAT Pune)
Appeal Number : ITA No. 1322/PN/2011
Date of Judgement/Order : 14/08/2015
Related Assessment Year :
Brief of the case:
In the case of M/s. Kailash Vahan Udyog Ltd. Vs. DCIT Pune Bench of ITAT have held that according to the provisions of section 115JB Explanation 1 Clause (iii) while computing book profit, the amount of loss brought forward (before depreciation) or unabsorbed depreciation, whichever is less (as per books of account), shall be reduced from net profit. ITAT while deciding another issue have held that burden lies on revenue to prove the nexus between the expenditure to be disallowed and non-taxable income. The AO cannot simply brush aside the claim of assessee, in respect of disallowance u/s. 14A of the Act.
Facts of the case:
- The assessee company is engaged in manufacturing and sale of Tippers and other Load bodies.
- Assessee filed its return of income computing taxable income under normal provisions as well as under MAT provisions (i.e. u/s. 115JB).
- Assessee claimed set off of carried forward loss and unabsorbed depreciation of previous years under MAT provisions in both AYs 2007-08 & 2008-09.
- AO in scrutiny assessment disallowed the same by following the decision of the Authority for Advance Rulings (AAR) in the case of Rashtriya Ispat Nigam Ltd. reported as 285 ITR 1 (AAR).
- In AY 2008-09 AO further included the book profits amounting to Rs.4,24,21,240/- of Bangalore and Pune units of M/s. Kailash Auto Builders Ltd. (KABL) that were merged with the assessee company in pursuance of order from BIFR.
- Assessee has earned exempt dividend income of Rs.1,94,493/- and capital gain of Rs.1,61,815/- on sale of mutual funds exempt from tax, during the period relevant to the assessment year in appeal.
- The Assessing Officer applied Rule 8D(2)(ii)&(iii) and made disallowance of Rs.1,40,820/-.
- During AY 2008-09 assessee had paid interest on borrowing Rs.1,00,81,717/-.
- The borrowed funds were entirely used for business purposes and thus, interest paid thereon is allowable u/s. 36(1)(iii).
- The dividend during the relevant period was directly credited in the bank account of the assessee through ECS, therefore, the assessee had not incurred any expenditure on managing and deposit of dividend income.
- Before CIT (A) assessee had offered an amount of Rs.3,000/- as expenditure on earning interest free income, however, the same was rejected and the order of Assessing Officer was confirmed.
Contention of the assessee:
- Appeal of the assessee for AY 2007-08 and the appeal of the revenue in AY 2008-09 are on same issue i.e. manner in which brought forward business loss and unabsorbed depreciation is to be dealt with under MAT provisions.
- Assessee has applied FIFO method for set off of loss against book profits. AO erred in considering entire accumulated business/depreciation loss for set off against book profits.
- The first ground of appeal for AY 2008-09 relates to disallowance u/s. 14A r.w. Rule 8D. AO made disallowance on tax free dividend income and capital gains from sale of mutual funds, which are exempt from tax.
- Assessee purchased mutual funds from its capital and reserves and no interest bearing funds were utilised. There were only 18 transactions with respect to redemption of mutual funds during the year.
- As far as dividend is concerned, the same was directly credited in the bank account of the assessee through ECS. Thus, no disallowance was required to be made on earning interest free income during the impugned assessment year.
- During AY 2008-09 BIFR passed order for merger of Bangalore and Pune units on 18-08-2008 and the same was received on 01-10-2008.
- Due to proceedings before BIFR and appellate proceedings further no stretch of imagination regarding profits of Bangalore and Pune units could have been considered by the assessee in its accounting year ending on 31-03-2008.
- It is a well settled law that the books of account finalized cannot be redrafted for the purpose of section 115JB.
- The order of BIFR, the Department filed appeal before AAIFR. According to the order of AAIFR, the assessee is exempt from the provisions of section 115JB in respect of Bangalore and Pune units merged with the assessee company.
Contention of the revenue:
- While computing book profits u/s. 115JB set off of brought forward unabsorbed depreciation cannot be allowed.
- CIT (A) in AY 2007-08 had disallowed the set off of brought forward business loss and unabsorbed depreciation by following the decision of AAR in the case of Rashtriya Ispat Nigam Ltd. (supra). CIT (A) should have followed the same in subsequent year as well.
- It is an undisputed fact that the assessee has earned tax free income for which no disallowance was made by the assessee on its own. Disallowance was required to be made u/s. 14A r.w. Rule 8D.
- Assessee has included the profits of Bangalore and Pune units under normal computation but ignored the same for computation of book profits u/s. 115JB.
- Once, the assessee is including profits of the above said two units while computing profits under normal computation the same should have been considered for computation of book profits u/s. 115JB as well.
- Although, the order of AAIFR was passed after the preparation of books of account, however there is no bar in recasting the books after considering of profits of two amalgamated units.
Held by CIT (A):
- In AY 2007-08, the CIT (A) upheld the findings of AO with respect to disallowance of carried forward business loss and unabsorbed depreciation in computing book profits u/s. 115JB.
- In AY 2008-09, the CIT (A) accepted the claim of the assessee and permitted the set off of brought forward business loss and unabsorbed depreciation for computation u/s. 115JB, in light of the order of Tribunal in the case of Kirloskar Ferrous Industries Ltd. Vs. Addl. CIT in ITA No. 519/PN/2009 where it was held that
Quite clearly, clause (iii) of Explanation 1 to section 115JB envisages adjustment for the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. It is quite clear that the loss depicted in the account books which comprises of business losses and depreciation is required to be split up for the purposes of clause (iii) of Explanation 1 to section 115JB(2).
- CIT (A) upheld the findings of AO regarding addition of profits of Bangalore and Pune units for computation of book profits u/s. 115JB and disallowance u/s. 14A r.w. Rule 8D
Held by ITAT:
- According to the provisions of section 115JB Explanation 1 Clause (iii) while computing book profit, the amount of loss brought forward (before depreciation) or unabsorbed depreciation, whichever is less (as per books of account), shall be reduced from net profit.
- The Co-ordinate Bench of the Tribunal in case of Kirloskar Ferrous (Supra) has explained the method in which brought forward losses and unabsorbed depreciation has to be dealt with while computing book profits u/s. 115JB of the Act.
- In the present case, the issue involved is identical to the case of Kirloskar Ferrous (Supra) and there was not any infirmity in the order of CIT (A) for AY 2008-09 in allowing the claim of the assessee in the light of order of Tribunal rendered in the case of Kirloskar Ferrous Industries Ltd. Vs. Addl. CIT (supra).
- It is a well settled law that the application of provisions of Rule 8D are not automatic.
- The Assessing Officer cannot straight away proceed to apply Rule 8D, without considering the correctness of the claim made by the assessee, in respect of expenditure incurred in relation to exempt income.
- The Assessing Officer has not refuted the claim of assessee that there was direct credit of dividend through ECS and no interest bearing funds were utilized for making investment.
- ITAT Mumbai in the case of J.K. Investors (Bombay) Ltd. Vs. ACIT in ITA No. 7858/Mum/2011 dealt with the issue of disallowance u/s. 14A r.w. Rule 8D after thorough analysis of judgments rendered by the Hon’ble Apex Court, various Hon’ble High Courts and the Tribunal and held that rule 8D cannot be invoked directly without satisfying the claims of assessee.
- It is evident that the order of BIFR and the order of the Appellate Authority were received after the accounts of the assessee were finalized and adopted in the Annual General Meeting of the assessee company.
- A perusal of BIFR order shows that the sanctioned scheme finally accepted by the BIFR is to be implemented from the date of order i.e. 18-08-2008.
- As per Clause 31 the scheme is to be effective on complying with two conditions, i.e. (i) Sanction of scheme by BIFR and (ii) Filing of certified copy of order of BIFR with Registrar of Companies (ROC), Kanpur and Mumbai.
- From the analysis of the BIFR order it is evident that both the conditions as set out in Scheme of Arrangement were complied on 07-11-2008, therefore, scheme of arrangement was to be implemented w.e.f. 07-11-2008.
- Therefore, by no stretch of imagination the profits of amalgamating units could have been included in financial year ending on 31-03-2008.
- The authorities below have erred in including profits of Bangalore and Pune units while computing book profits u/s. 115JB for the period relevant to assessment year 2008-09.