Income Tax Appellate Tribunal - Ahmedabad
Gujarat Carbon & Industries Ltd.,, ... vs Assessee on 7 November, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL AT
AHMEDABAD
AHMEDABAD "D"BENCH
Before Shri G.C.Gupta, Vice-President (AZ) and
Shri B.P. Jain, Accountant Member
IT A No.671/ Ahd/2008
Assessment Year:2002-03
M/s Gujarat Carbon & बनाम ACIT, Circle-1(1),
Industries Ltd., /V/s. Baroda
6 t h Floor, Offtel Tower,
Baroda,
PAN No. AAACG7273L
अपीलाथȸ/ Appellant .. ू×यथȸ/ Respondent
अपीलाथȸ कȧ ओर से / Appellant by Shri Milin Mehta, AR
ू×यथȸ कȧ ओर से /Respondent by Shri B.L. Yadav, SR-DR
सुनवाई कȧ तारȣख / Date of Hearing 02-02-2012
घोषणा कȧ तारȣख / Date of Pronouncement 10-02-2012
आदे श/ORDER
PER B.P. Jain, Accountant Member:-
This appeal of the assessee arises from the order of Ld. Commissioner of Inc-tax (Appeals)-I, Baroda dated 07-11-2007 for the assessment year 2002-03. The assessee has raised the following grounds of appeal:-
"1. The learned Commissioner of Income Tax (Appeals)-I, Baroda ["the CIT(A)"] erred in fact and in law in conforming action of the Assistant Commissioner of Income Tax Circle-1(1), Baroda ["the AO "] in making disallowance of Rs.12,00,000/- being hiring charges of DG set on the erroneous ground that the same represents bogus expenses.ITA No.671/Ahd/2008 A.Y. 2002-03
M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 2
2. The learned CIT(A) erred in fact and in law in confirming action of the AO in making disallowance of Miscellaneous expenses of Rs.77,892/- on the erroneous ground that the same is incurred for non-business purpose.
3. The learned CIT(A) erred in fact and in law in confirming action of the AO in re-computing the book profits of the appellant and in not accepting the contention of the appellant that the book profits u/s.115JB of the Income Tax Act, 1956 [the Act] is Nil.
The learned CIT(A) erred in fact and in law in confirming action of the AO in making adjustments to book profit of the appellant despite the fact that the Profit and Los Account is prepared by the appellant on the basis of provisions of Parts II and III of Schedule VI to the Companies Act, 1956 and the same is approved by the company's Board of Directors, the Auditors, the company in General Meeting and also the Registrar of Companies under the Companies Act, 1956.
The learned CIT(A) erred in fact and in law in conforming action of the AO in concluding that there is no unabsorbed depreciation available for set off and therefore no set off is available under clause (iii) of Explanations to section 115JB(2) of the Act.
The learned CIT(A) erred in fact and in law in confirming action of the AO in observing that the unabsorbed depreciation available for set off / carry forward is Nil due to erroneous adjustments of losses and depreciation for earlier years.
4. The learned CIT(A) erred in fact and in law in confirming action of the AO in charging interest u/s. 234B, 234D of the Act.
5. The learned CIT(A) erred in fact and in law in confirming action of the AO in withdrawing interest u/s.244A of the Act.
6. The learned CIT(A) erred in facts and in law in confirming action of the AO in initiating penalty proceedings U/s. 271(1)(c) of the Act."
2. In ground No.1, the brief facts are that the Assessing Officer obsereved that the assessee was debiting Rs. 1 lakh per month on account of DG hire charges from Gujarat Power Field Pvt. Ltd. Ahmedabad and thus Rs.12 lakhs had been declared dto have been paid during the year. However, the assessee failed to give PAN of the DG supplier, other details of expenses, date of actual installation, date ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 3 and mode of transportation from Ahmedabad to Dhanora. In the invoice dated 03-07-2001 in respect of the hiring charges the supplier company has not given any description of the DG set. From this, the AO concluded that it was a bogus expenditure aimed at siphoning away the company's profits and accordingly disallowed the claim of Rs. 12 lakhs.
3. Before Ld. CIT(A) assessee filed letter dated 06-11-2007 but did not make any submission. The Ld. CIT(A) accordingly observed that assessee has nothing to say in the matter and accordingly he confirmed the action of Assessing Officer.
4. We have heard the rival contentions and perused the facts of the case. Before us the Ld. AR appearing for the assessee could not substantiate the claim of the assessee. The assessee had failed to give PAN of the DG supplier, details of expenses, date of actual installation date, mode of transportation etc. In the circumstances and facts of the case, we find no error in the order of Ld. CIT(A) on the issue. Thus, ground No.1 of the assessee is dismissed.
5. As regards ground No.2, the same is not pressed and therefore ground No.2 of the assessee is dismissed as not pressed.
6. As regards ground No.3, the brief facts are that the Assessing Officer observed from the assessee's record that it had not computed its book profits correctly as provided u/s.115JB of the Act. The main reason for the difference in the AO's working and the assessee's working was ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 4 on account of the transfer of amounts from re-valuation reserve account to the profit and loss account during financial years 1993-94 and 1998-
99. In addition to this, the assessee-company had also transferred amount from re-valuation reserve to neutralize the effect of increased depreciation on account of re-valuation of assets. The assessee contended that for the purpose of computation of book profit, any amount drawn from a reserve and credited to the profit and loss account was to be reduced by way of adjustment as provided in clause (i) of Explanation to Section 115JB(2) of the Act. However, the AO dismissed the assessee's argument by stating that before going into applicability of clause (i) of Explanation to Section 115JB(2) of the Act, it would be useful to go behind the spirit in which MAT was introduced. It was found that assessee-company had shown substantial book profit and had paid dividends but at the same time paid zero tax to the exchequer. In the instant case, the assessee-company admittedly revalued its assets on two occasions and created re-valuation reserve. This exercise has not increased the book profit of the relevant years when revaluation reserves were created. Thereafter the assessee-company in order to wipe out the brought forward losses / unabsorbed depreciation or to neutralize additional depreciation transferred amounts from re-valuation reserves in its books of account and presented a healthy balance-sheet before the investor. The AO relied upon the following decisions where it was held that in the cases of re-valuation reserves, the amount transferred to profit and loss account is not required to be excluded under clause (i) of Explanation to Section 115JB(2) of the Act:-
i) DCIT v. Sterling Steels & Wire Ltd. (2004) 91 ITD 564 (Ams)
ii) DCIT v. DCW Ltd. (2000) 72 TTJ 151 (Mum)
iii) Southern Petro Chemical Industry v. DCIT (2004) 93 TTJ 161 (Chen) ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 5 Thus, the AO concluded that all such reserves which were created otherwise than by way of appropriation of profits were not eligible for benefit of exclusion. Accordingly, AO re-worked the brought forward loses / unabsorbed depreciation for various years and held the same to be in accordance which the provisions of MAT. Applying the same principle, AO held that due to transfer from revaluation reserve to profit and loss account, there remains no unabsorbed depreciation and the brought forward business loss which comes to Rs.710.11 lakh. As provisions of clause (iii) of Explanation to Section 115JB(2), the amount of brought forward loss or unabsorbed depreciation, whichever is less as per books, is to be reduced from the current year's book profit. Thus, AO worked out a "nil" amount as against the claim of brought forward losses of Rs.534.08 lakh by the assessee under this clause.
7. The Ld. CIT(A) confirmed the action of the Assessing Officer.
8. The Ld. AR argued and submitted the written submissions which are reproduced as under:-
"01. The present appeal is appeal by the Assessee against the order of the CIT(A) passed in consequence of appeal filed against order U/s. 1443(3) of the Income Tax Act, 1961 passed by the Assessing Officer.
02: The Assessee had earned book profit of Rs.206.72 lacs during the year. Against the said book profits, the Assessee claimed deduction of Rs.96.37 lacs on account of amount withdrawn from reserves during the year and balance Rs.110.35 lacs was claimed as deduction on account of past loss or depreciation, whichever is lower by virtue of provisions of Clause (iii) of Explanation (1) to Section 115JB(2). Computation of the calculation done by the Assessee is on page 5 of the paper book. Further, amount withdrawn from the reserves can be seen on page 26 of the paper ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 6 book. You may also make reference to Note number 2(b) on Page 39 of the paper book, dealing with the withdrawal of reserves from revaluation reserve. The AO did not allow both the adjustments on the ground that as per his computation there was no carried forward loss or depreciation. Further, the current year's withdrawal from the reserves cannot be allowed as reduction as at the time of creation of the reserve, the amount was not included as part of the book profit U/s. 115JB of the Act.
03: It is submitted that adjustment made of Rs.96.37 lacs for the year is on account of withdrawal of revaluation reserve created on 31st March, 1999. In view of the amendment to Clause (i) of Explanation 1 to Section 115JB(2) of the Act w.r.e.f. 1st April, 2001, the said adjustment cannot be made by the Assessee as claimed in the return of income. It is therefore most respectfully submitted that the Assessee does not press the said adjustment on account of the amendment made in the book profits. Accordingly, book profits of the Assessee for the year [before set off of past losses / depreciation] would be Rs.206.72 lacs.
04: This therefore brings us to the computation of the available set off due to the amount of loss brought forward or unabsorbed depreciation whichever is less. It is most respectfully submitted that the only reason why the differences have arisen between the Assessee and the AO on account of available set off is due to treatment of revaluation reserve created for the earlier year. Attention is invited to Annexure 1 to this submission, wherein the differences have been highlighted. It is submitted that during the past years, the Assessee made revaluations twice i.e. on 30th September, 1993 and second revaluation on 31sst March, 1999, the treatment of which has come up for consideration herein.
05: The Assessee makes the following contentions in this regard:
i) The AO appears to have taken recourse to Clause (i) of Explanation 1 to Section 115JB for making the adjustment to the past profits of the company on account of revaluation. It is submitted that the said clause applies only amounts withdrawn from the reserves and credited to the profit and loss account, if the said amount is sought to be reduced from the book profits.
This does not apply to the determination of brought forward losses or unabsorbed depreciation. In fact, there is no provision under the Act, which permit the adjustment sought to ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 7 be made by the AO. Further, the following further acts are also required to be noted in this case:
a) The first revaluation was made on 30th September, 1993.
This therefore pertains to A.Y 1994-95. At this time the provisions of section 115J/115JA/115JB were not applicable. Section 115J was introduced w.e.f.1.4.1988 but was withdrawn with effect from 1.4.1991. 115JA was introduced w.e.f. 1.4.1997. It is submitted that the provisions of none of the sections dealing with the tax on book profits or determining the book profits were applicable and therefore it would be incorrect to reduce the revaluation reserve created during this period from the book profits.
b) Since provisions of section 115JB is a deeming fiction, the interpretation of the provisions are required to be done in a very restricted manner and no extended meaning should be given to any provision. In this connection it is submitted that the main reason for introduction of MAT was to tax the companies which declare huge profits for declaration of dividends but do not pay the tax. In this connection it is submitted that in any case the revaluation reserve is not available for any sort of dividend distribution and therefore it would be incorrect to enhance liability to pay the MAT on account of revaluation reserve.
c) The interpretation sought to be advocated by the AO would mean that if the assessee does a revaluation in a year by directly crediting the revaluation reserve, then the Assessee should pay MAT on the amount added to reserve. This interpretation would go much beyond the intended purpose and also go much beyond the provisions of section 115JB. Nowhere in he language it is provided that such tax is payable. The following illustration may be conducted:
a. An Assessee earns book profits of Rs.10.00 crores in a year.
b. During the said year, the Assessee also revalued its assets and created a revaluation reserve of Rs.30.00 crores.
c. The assessee contends that it should be liable to pay tax only on Rs.10.00 crore of book profits. The AO however, ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 8 wishes to say hat the Assessee should pay tax on Rs.40.00 crores.
d. It is submitted that in such a situation the view of the AO is completely wrong.
e. In case of the Assessee also, the AO wishes to increase the MAT of the assessee on account of revaluations done in the past.
f. Since revaluations of the asset is merely a book entry, the same should not affect the MAT liability in any case [either positively or negatively].
d) Provisions of section 115JB has been made neutral to the revaluation reserves created or withdrawal from the reserves. This is apparent from reading the provisions of Clause (i) of Explanation 1 to Section 115JB (2), by not allowing any reduction f profits from the reserves, if such reserves are not created by debit to the profit and loss account at the time of creation. Therefore, the book profits would not be reduced or increased on account of such book entries not routed through the profit and loss account. The Assessing Officer's stand would therefore mean that even where creation of reserves is not routed through profit and loss account, there would still be higher liability of MAT.
06: Without prejudice to the contentions raised above, the Assessee has given two cumulative alternative grounds. The first ground being, that the AO has erroneously adjusted the revaluation reserve against the depreciation. In fact, the adjustment should be first made against the losses and thereafter the profit and loss account. There is no provision under the law [in the year in which the provisions of the 115JB / 115JA are not applicable to adjust the reserves. Therefore, option should be allowed to the Assessee to adjust the revaluation reserve against the loss or depreciation as per its choice. It is submitted that if such a computation is carried out then you would notice that the computation would be as per Alternative worked out in the enclosed computation. You would kindly note that the in the said computation all the revaluations reserve, whenever created has been reduced from the loss or de. You would notice that the balance amount of loss or depreciation whichever is less works out to be Rs.337.77 lacs. Since the said amount is higher than the ITA No.671/Ahd/2008 A.Y. 2002-03 M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 9 profits of the year, there would not be any liability for MAT for the year under consideration.
07: The Assessee further contends that in any cases the revaluation reserve created on or before 1st April, 1997, i.e. the period prior to the period during which neither provisions of section 115JA nor provisions of section 115JB apply, should be adjusted. Accordingly, the revaluation reserve created on 30th September, 1993 is required to be ignored for computation. It is submitted that if the revaluation for 30th September, 1993 is ignored, then the total available loss / depreciation, whichever is less works out to be Rs.13.00 crores. The computation thereof is given in the enclosed computation under the heading Alternative 2. It is submitted that if the main contention of the Appellant is accepted or where alternative argument is accepted, there would not be any amount payable as tax on the book profits and it may accordingly be so held."
9. Ld. SR-DR on the other hand relied upon the orders of both the authorities below.
10. We have heard the rival contentions and perused the facts of the case. Before deciding the issue by the Assessing Officer, he had called for the details of earlier years and accordingly observed that the assessee had excluded the amount so transferred to profit and loss account. The AO has re-worked the brought forward losses and unabsorbed depreciation from assessment year 1991-92 onwards to have the figure for the assessment year 1994-95, since the revaluation was done on 30-09-1993. Similar exercise was carried out further since the revaluation was done on 31-03-1999. The cumulative effect of this working was brought forward for adjustments in the impugned assessment year.
ITA No.671/Ahd/2008 A.Y. 2002-03M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 10
11. As regards the book profits of Rs.206.72 lacs, there is no dispute by either of parties. The dispute before us as argued by Ld. AR and also submitted in his written submission hereinabove, is on account of available set off due to treatment of revaluation reserve created for earlier year. While deciding the present issue, the Assessing Officer has applied clause (i) of Explanation 1 to Section115JB for making adjustment to the past profits on account of revaluation. The AO has not examined the issue whether the said clause applies to determination of brought forward losses or unabsorbed depreciation on one side or applies only to the amounts withdrawn from reserves and credited to profit and loss account, if the said amount is sought to be reduced from book profits. The AO did not examine whether the relevant provisions dealing with tax on book profits were applicable with specific reference to when the revaluation was made on 30-09-1993 pertaining to A.Y 1994- 95 and Section 115J was introduced with effect from 1-4-1991 and 115JA was introduced w.e.f. 1-4-1997. It remains to be further examined by the AO especially for the year when provisions of Section 115JA and 115JB were not applicable for adjustment of reserves, then what should be the course to adjust the revaluation reserve against the losses / depreciation. An opportunity should have been provided to assessee which has not been done. In the circumstances and facts of the case and in the interest of natural justice, the matter is restored to the file of AO, who will examine the matter de novo keeping in view the directions hereinabove but by providing adequate opportunity of being heard to the assessee. Thus, ground No.3 of the assessee is allowed for statistical purposes.
ITA No.671/Ahd/2008 A.Y. 2002-03M/s Gujarat Carbon & Inds. Ltd. v. ACIT, Cir-1(1) BRD Page 11
12. As regards ground No.4 and 5 of the assessee the same are mandatory and consequential in nature therefore do not require any adjudication.
13. Ground No.6 is with regard to initiation of penalty proceedings does not arise from the order of the Ld. CIT(A) and therefore the same is dismissed.
14. Ground No.7 is general in nature and therefore does not require any adjudication.
15. In the result, appeal of assessee is partly allowed for statistical purposes.
इस आदे श कȧ घोषणा Ǒदनांकः 10/02/2012 को खुले Ûयायालय मɅ कȧ गई । This Order pronounced in Open Court on 10/02/2012.
Sd/- Sd/- (G.C.Gupta) (B.P. Jain) (Vice President) (Accountant Member) Ǒदनांकः- 10/02/2012 अहमदाबाद । Dkp*
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. अपीलाथȸ / Appellant
2. ू×यथȸ / Respondent
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाइल / Guard file.
By order/आदे श से, /True Copy/ उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।