Case Law Details
Brief of the Case
ITAT Kolkata held in the case of DCIT vs. M/s. Binani Industries Ltd. that it is not in dispute that the receipt representing forfeiture of share warrants is only a capital receipt & not chargeable to tax. However, the same has been duly credited in the profit and loss account as an extraordinary item. A capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB. Further the assessee also has duly disclosed the fact of forfeiture of share warrants amounting to Rs. 12,65,75,000/- in its notes on accounts. The profit and loss account prepared in accordance with Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon’ble Apex Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in (2011) 330 ITR 363 (SC), adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment , should be considered for the purpose of computation of book profits u/s 115JB.,
Facts of the Case
The assessee filed its original return of income on 30.9.2009 disclosing total income at Rs Nil under normal provisions of the Act and declaring book profits u/s 115JB of the Act at Rs. 21,24,72,340/-. Later the assessee filed revised return of income on 31.3.2011 disclosing total income at Rs. Nil under normal provisions of the act and declaring book profits u/s 115JB of the Act at Rs. 33,90,47,340/-. In the said revised computation of book profits u/s 115JB of the Act, an extraordinary item of receipt to the tune of Rs. 12,65,75,000/- representing forfeiture of share warrants was included by the assessee. Later the assessee vide letter dated 27.12.2011 at assessment stage stated that the said extraordinary receipt of Rs. 12,65,75,000/- was erroneously included in the computation of book profits reported in the revised return and pleaded for exclusion of the same on the ground that it is capital receipt. The assessee also sought to disallow a sum of Rs. 1,37,12,550/- towards section 14A voluntarily under the normal provisions of the Act in the revised return filed by it on 31.3.2011.
However, the AO considered the book profits at Rs. 33,90,47,340/- as per the revised return of the assessee and proceeded with the assessment by relying on the decision of the Hon’ble Apex Court in the case of Apollo Tyres Ltd reported in 255 ITR 273 (SC) and also the provisions of section 115JB which stated that the profit and loss account (a) shall be made out so as clearly to disclose the result of the working of the company during the period covered by the account and (b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.
Contention of the Assessee
The ld counsel of the assessee submitted that the intention of section 115J and the memorandum explaining the provisions of the Act and giving purposive construction to the same, it could be safely concluded that the Legislature never intended to bring to tax such receipt which otherwise is not taxable under the provisions of the Act. It only intended to bring to tax zero tax companies pay some tax due to availing of various concessions and incentives which are provided in the statute. Hence the Rule of Purposive Construction should be given to the intention behind introduction of provisions of section 115J / 115JA / 115JB of the Act so that it doesn’t gets defeated.
He further submitted that the subject mentioned receipt comprising of forfeiture of share warrants amounting to Rs. 12,65,75,000/- is not chargeable to tax as it is undisputably a capital receipt, the same would not be liable to be taxed u/s 115JB of the Act merely because it is credited in the profit and loss account by the assessee. In this regard, he pointed out the two different nature of receipts that might arise to an assessee. According to him there is a basic dichotomy between receipts which are not taxable at all and receipts which are taxable but subject to exemption / deduction on fulfilling certain conditions. The receipt stated in the former case would never enter the stream of taxation even under the book profits u/s 115J / 115JA / 115JB of the Act going by the intention of the said provisions. However, the receipt stated in the latter case would definitely be liable to be taxed u/s 115JB of the Act as per the intention of the said provision. According to him, applying this principle, it could be safely concluded that the subject mentioned receipt of forfeiture of share warrants, which is admittedly not income, would fall in the former category and accordingly not liable to be taxed u/s 115JB.
He referred to the decision of the Special Bench of Calcutta Tribunal in the case of Sutlej Cotton Mills Ltd vs ACIT reported in (1993) 45 ITD 22 (Cal) (SB) dated 26.10.1992 wherein it was held that a particular receipt which is admittedly not an income cannot be brought to tax under the deeming provisions of section 115J of the Act as it defies the basic intention behind introduction of provisions of section 115J of the Act.
Held by CIT (A)
The CIT (A) duly appreciated all the contentions of the assessee and deleted the disallowance made u/s 14A of the Act both under normal provisions of the act as well as for the computation of book profits u/s 115JB of the Act.
Held by ITAT
ITAT held that the entire investments were made long back by the assessee and the assessee was having sufficient own funds to make those investments in the earlier years. The AO had not brought on record any nexus between the borrowed funds and the investment in shares of various companies. We find that the following case laws relied upon by the Learned CIT(A) in his order are well placed and are squarely applicable to the facts of the instant case – CIT vs Reliance Utilities & Power Ltd ( 313 ITR 340 ) (Bom) and G.D. Metsteel Pvt. Ltd. vs ACIT reported in 142 TTJ 641 (Mum ITAT). We also hold that the investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn any exempt income in the form of dividend but only for obtaining controlling interest in the said companies and to further the business interests of the assessee in the said company. Reliance in this regard is placed on the decision of the co-ordinate bench of Delhi Tribunal in the case of Inter globe Enterprises Ltd vs DCIT reported in (2014) 40 CCH 0022 Del Trib in ITA No. 1362 & 1032 /Del/ 2013 , ITA No. 1580/Del/2013 dated 4.4.2014 for Asst Years 2008-09 & 2009-10.
The Learned AO without appreciating the various contentions raised by the assessee had mechanically applied the provisions of Rule 8D(2)(ii) of the IT Rules without recording his satisfaction in terms of Rule 8D(1) of IT Rules as to why the disallowance made voluntarily by the assessee u/s 14A of the Act is incorrect. It is not in dispute that the assessee had voluntarily disallowed a sum of Rs. 1,37,12,550/- u/s 14A of the Act towards 0.5% of average value of investments applying the third limb of Rule 8D(2) of the IT Rules. The language of Rule 8D (1) is very clear in this regard. In view of the aforesaid facts and circumstances and respectfully following the various judicial precedents relied upon hereinabove, we hold that the addition u/s 14Aof the Act deleted by the Learned CITA does not require any interference.
Whether, forfeiture of share warrants, being a capital receipt, would be liable for taxation u/s 115JB
ITAT held that it is not in dispute that the subject mentioned receipt of Rs. 12,65,75,000/- representing forfeiture of share warrants is only a capital receipt by its nature not chargeable to tax. However, the same has been duly credited in the profit and loss account as an extraordinary item and the said profits after such extraordinary items has been approved by the shareholders in the annual general meeting of the assessee company. A capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB.
In the case of Shivalik Venture (P) Ltd vs DCIT reported in (2015) 173 TTJ (Mumbai) 238 dated 19.8.2015, the Mumbai tribunal held that the profit arising on transfer of capital asset to its wholly owned Indian subsidiary company is liable to be excluded from the Net profit., i.e., the Net profit disclosed in the Profit and Loss account should be reduced by the amount of profit arising on transfer of capital asset and the amount so arrived at shall be taken as “Net profit as shown in the profit and loss account” for the purpose of computation of book profit under Explanation 1 to sec. 115JB of the Act. Alternatively, since the said profit does not fall under the definition of “income” at all and since it does not enter into the computation provisions at all, there is no question of including the same in the Book Profit as per the scheme of the provisions of sec. 115JB. Also in this case, the assessee has attached a note in the notes forming part of accounts related to such capital receipts.
In the instant case, the assessee also has duly disclosed the fact of forfeiture of share warrants amounting to Rs. 12,65,75,000/- in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence respectfully following the aforesaid decision of the Mumbai Tribunal, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon’ble Apex Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in (2011) 330 ITR 363 (SC), adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment , should be considered for the purpose of computation of book profits u/s 115JB of the Act and thereafter, the Learned AO has to make adjustments for additions / deletions contemplated in Explanation to section 115JB.
Accordingly appeal of the revenue dismissed.
