Income Tax Appellate Tribunal - Mumbai
Mukund Limited, Mumbai vs Ito 3(2)(2), Mumbai on 5 December, 2018
Mukund Limited Vs. ITO-3(2)(2) 1 ITA No. 679/Mum/2011 IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, AM AND SHRI RAVISH SOOD,JM ITA No. 679/Mum/2011 (निर्धारणवषा / Assessment Year:2004 -05) Mukand Limited, Income Tax Officer - 3(2)(2) Bajaj Bhavan, 3rd Floor, बिधम/ Aayakar Bhavan, M.K. Road, 226, Nariman Point, New Marine Lines, Mumbai Vs. Mumbai - 400021 स्थामीरेखासं ./ जीआइआयसं ./ PAN No. AAACM5008R (अऩीराथी /Appellant) : (प्रत्मथी / Respondent) अऩीराथीकीओयसे / Appellant by : S/sh. Arvind Sonde & Parth Achwal प्रत्मथीकीओयसे/Respondent by : S/shri. Ramjirao Pantow, CIT & Milind V. Patil. D.R's सुनवाईकीतायीख / : 07.09.2018 Date of Hearing घोषणा की तायीख / : 05.12.2018 Date of Pronouncement आदे श / O R D E R PER RAVISH SOOD,JUDICIAL MEMBER:
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-7, Mumbai, dated 04.11.2010, which in turn arises from the order passed by the Assessing Officer (for short A.O) under Sec. 143(3) of the Income-tax Act, 1961 (for short ‗Act'), dated 30.11.2006 for A.Y. 2004-05. The assessee assailing the order of the CIT(A) has raised before us the following effective grounds of appeal:-
Mukund Limited Vs. ITO-3(2)(2) 2 ITA No. 679/Mum/2011 "1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not excluding waiver of principal and interest under one time settlement with lender amounting to Rs. 162,30,33,516/- while computing the book profit under section 115JB of the Act.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in rejecting the claim of the appellant in respect of deduction of interest paid to the income-tax department amounting to RS. 6,223,304/-
3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not granting deduction of an amount of RS. 111,810,595/- in respect of prior period adjustments (net) while computing the book profits under section 115JB of the Act."
2. Briefly stated, the assessee company which is engaged in the business of manufacturing, processing and trading of steel casting and Iron products, rendering of technical services etc. had filed its return of income for A.Y 2004-05 on 29.10.2004, declaring total income at Rs. NIL. The return of income filed by the assessee was processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act.
3. In the course of the assessment proceedings the A.O inter alia made the following additions/disallowances.
(I). The A.O dislodged the claim of the assessee that the amount of principal and interest of Rs. 162,30,33,516/- which was waived under ‗One time settlement' (for short ‗OTS') with the lender banks was to be excluded while computing the ‗book profit' u/s 115JB of the Act.
(II). The claim of deduction of interest of Rs. 62,23,304/-paid by the assessee to the Income-tax department was disallowed by the A.O. (III). The claim of the assessee for deduction of the prior period adjustments (net) of Rs. 11,18,10,595/- for computing the ‗book profit' u/s 115JB of the Act was also declined by the A.O. Mukund Limited Vs. ITO-3(2)(2) 3 ITA No. 679/Mum/2011
3. The A.O after inter alia making the aforesaid adjustments/ disallowances assessed the income of the assessee company under the normal provisions at Rs. ‗NIL' and the ‗book profit' under the MAT provisions as per the Sec. 115JB of the Act at Rs. 38,66,62,372/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). However, the CIT(A) after deliberating on the contentions advanced by the assessee was not persuaded to subscribe to the same. Insofar the claim of the assessee that while computing the ‗book profit' under Sec. 115JB the amount of Rs. 162,30,33,516/- credited in the ‗Profit & loss account' of the assessee company towards waiver of principal and interest amount under OTS by the lender banks was liable to be excluded, the same did not find favour with the CIT(A). The CIT(A) was of the view that as the exclusion sought by the assessee did not fall within the sweep of the permitted adjustments u/s 115JB of the Act, therefore, in the backdrop of the judgement of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. Vs CIT (2002) 255 ITR 273 (SC) the A.O had rightly declined the said claim of the assessee. Further, adopting a similar view as regards the claim of deduction by the assessee in respect of prior period adjustment (net) of Rs. 11,18,10,595/- while computing the ‗book profit' as per Sec. 115JB, it was observed by the CIT(A) that no provision for exclusion or reduction of the same was contemplated under the said statutory provision. The CIT(A) was also not impressed with the claim of deduction of the interest amounting Rs. 62,23,304/- that was paid by the assessee to the Income-tax department. The CIT(A) was of the view that the A.O had computed the income of the assessee by taking the figure as shown in the revised statement of computation of income, and the only additions which were made by him were in respect of prior period expenses (Rs. 1,29,41,824/-) and lease hold premium written off (Rs. 13,57,446/-). In the back drop of his aforesaid deliberations, the CIT(A) was of the view that now when the A.O had accepted the assesses computation, thus there was no reason for him to be aggrieved as regards the same. The CIT(A) on the basis of his aforesaid observations partly allowed the appeal.
Mukund Limited Vs. ITO-3(2)(2) 4 ITA No. 679/Mum/2011
5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Ld. Authorised Representative (for short ‗A.R') of the assessee Shri Arvind Sonde, Senior Counsel, at the very outset assailed the declining on the part of the lower authorities to exclude the amount of principal and interest of Rs. 162,30,33,516/- that was waived under OTS by the lender banks and was credited in the ‗Profit & loss account' of the assessee, while computing the ‗book profit' u/s 115JB of the Act. It was submitted by the Ld. A.R that the assessee company had in its revised return of income categorically claimed that the waiver of principal and interest amount under OTS with lenders amounting to Rs. 162,30,33,516/- was not liable to be included in the total income for the purpose of computing the ‗book profit' as per Sec. 115JB of the Act. In support of his aforesaid contention the Ld. A.R drew our attention to the statement of revised computation of ‗book profit' as per Sec. 115JB of the Act at Page 19 of the assesses ‗Paper book' (for short ‗APB'). It was further submitted by the Ld. A.R that the crediting of the amount of OTS had to be read along with the qualification of the auditors in their audit report. It was the contention of the Ld. A.R that as per the judgement of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT (2002) 255 ITR 273 (SC), the qualification by the auditors that the amount had wrongly been credited in the profit and loss account was to be duly considered while computing the ‗book profit' as per the MAT provisions u/s 115JB of the Act. The Ld. A.R submitted that the assessee company was a potentially sick industrial company under the Sick Industrial Companies (special provisions) Act, 1985. The Ld. A.R drawing our attention to Page 7 of the ‗Annual report' of the assessee company for the year 2003-04 submitted, that in terms of Financial Restructuring Package approved by the CDR cell the banks and financial institutions had rescheduled and converted the outstanding interest into ‗Funded Interest Term Loan' and also reduced the rate of interest to 10.50 p.a. The Ld. A.R drew our attention to Page 21 of the ‗Annual report'. It was submitted by the Ld. A.R that the auditors had at Page 21-Para 3(iv) categorically stated that the balance sheet, profit and loss Mukund Limited Vs. ITO-3(2)(2) 5 ITA No. 679/Mum/2011 account and the cash flow statement dealt with by the report were subject to the reservations expressed in Paras 3 (vi)(9) and (11), and complied with the accounting standards referred to Sub Sec.3(c) of Sub Sec. 211 of the Companies Act, 1956. The ld. A.R took us through Para 3 (vi)(9) and (11) of the ‗Annual report', which revealed that the auditors had specifically stated that pursuant to OTS made with the lenders resulting in waiver of principal and interest, the same had been credited by the company to the ‗Profit and loss account' prior to the fulfilment of the conditions of the settlement. The auditors had further stated that taking of such credit which had not yet ‗accrued' to the company had translated the loss to the extent of Rs. 162,30,33,516/- into profit and the same had an equivalent effect to the reserves and surpluses of the company. The Ld. A.R further took us through the ‗Auditing and Assurance Standard (AAS) 28' published in the Chartered Accountants journal, 2003. It was submitted by him that at Para 29 it was provided that an unqualified opinion should be expressed when the auditor concludes that the financial statements give true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. The Ld. A.R further drew our attention to Para 31 of the ‗AAS' which contemplated the circumstances where an auditor's report is considered to be modified. The Ld. A.R taking support of Para 37 of the ‗AAS' submitted, that an auditor may not be able to express an unqualified opinion where there is a disagreement with the management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures, which in the auditors judgment would have a material bearing on the financial statements. It was submitted by the Ld. A.R that as per Para 38 of the ‗AAS' a qualified opinion should be expressed as being ―subject to‖ or ―except for‖ the effects of the matter to which the qualification relates. In the backdrop of the aforesaid deliberations, it was submitted by the Ld. A.R that the case of the assessee was clearly subjected to the qualifications by the auditors in the audit report. The Ld. A.R in order to fortify his contention that the auditors had qualified the audit report in the case of the present assessee, therein drew our attention to Page 27 of the Mukund Limited Vs. ITO-3(2)(2) 6 ITA No. 679/Mum/2011 ‗Annual report'. It was submitted by the Ld. A.R that the waiver of Rs. 162,30,33,516/- under OTS with the lenders, and shown as income in the profit and loss account for the year ended 31.03.2004 was categorically qualified by ‗Notes' forming part of the accounts i.e Notes B 9(e) to (j). The Ld. A.R took us though the said notes Notes B 9(e) to (j) at Pages 52-53 of the ‗Annual report'. The Ld. A.R submitted that although the OTS of the assessee with the respective banks was subject to the approval of the monitoring committee overseeing the restructuring package finalized by the CDR cell, and provided for reinstatement of all the rights of the bank in case of default in payment of a certain stipulated amount in terms of the settlement, however the assessee company expecting that the conditions regulating the OTS would be settled before the due date, had thus considered it appropriate to take credit of the said amount of waiver. Further, the current years interest charges were also reversed by the assessee. The Ld. A.R further drew our attention to the revised computation of income that was filed by the assessee and submitted that the waiver of principal and interest amount of Rs. 162,30,33,516/- under OTS with lenders was excluded from the total income of the assessee for computing the ‗book profit' u/s 115JB of the Act. The Ld. A.R further brought to our notice the bifurcated details as regards the waivers under OTS with the different lenders at Page 30 of the ‗APB'.
6. The Ld. AR took us through the observations of the CIT(A) in context of the issue under consideration. It was submitted by the Ld. A.R that by virtue of sub-section (6) of Sec. 211 of the Companies Act,1956 the reference to the balance sheet or the profit & loss account of a company shall include the ‗Notes' to the accounts giving information required under the said Act. In support of his aforesaid contention the Ld. A.R relied on the judgment of the Hon'ble High Court of Delhi in the case of CIT Vs. Sain Processing and Waiving Mills (P) Ltd. (2010) 325 ITR 565 (Del). The Ld. AR taking us through the facts of the aforementioned case submitted, that the assessee in the case before the Hon'ble High Court had not charged current year ‗depreciation' in its profit and loss account which was prepared in the form Mukund Limited Vs. ITO-3(2)(2) 7 ITA No. 679/Mum/2011 prescribed i.e Part II and III of Schedule VI of the Companies Act,1956, but had disclosed the fact along with the quantum of current year depreciation computed in accordance with Sec.205(2) of the Companies Act,1956 as per the mandate of Clause 3(iv) of Part II of Schedule VI to the Companies Act,1956 by way of a ‗Note' to the accounts. It was submitted by the ld. A.R, that the Hon'ble High Court observed that as long as the depreciation which was though not charged to the profit & loss account was disclosed in the ‗Notes' of the accounts, it would come within the expression of the ‗shown' in the profit and loss account, as the notes to the accounts, form part of the profit & loss account by virtue of sub-sec (6) of Sec. 211 of the Companies Act, 1956. In the back drop of the aforesaid observations, it was held by the High Court that though the current year depreciation had not been debited by the assessee to the profit and loss account, however, as the ‗notes' to accounts formed part of the accounts, thus the same would in no way deprive the assessee of its claim for deduction of the same from the ‗net profit' for arriving at the figure of ‗book profit' under Sec. 115JB of the Act. The ld. A.R taking support of the aforesaid judicial pronouncement submitted, that as long as the disclosure is made by the assessee in the ‗notes' to the accounts, the same would form part of the profit and loss account by virtue of sub-sec. (6) of Sec. 211 of the Companies Act, 1956. The Ld. A.R further relied on the order of the ITAT, Pune Bench ‗A' in the case of K.K Nag Ltd. Vs. Addl. CIT, Range-9, Pune [(2012) 52 SOT 381 (Pune)]. It was submitted by the Ld. A.R that the Tribunal in the aforementioned case had observed that in view of Sec. 211 of the Companies Act,1956 the net profit as shown in the profit and loss account for the purpose of Explanation 1 of the second proviso to Sec. 115JB was to be understood with reference to the ‗Notes' to accounts accompanying the annual accounts. It was observed by the Tribunal that where the incremental liability towards leave encashment had not been debited by the assessee to its profit and loss account, but was disclosed in the ‗Notes' to accounts, the same would have to be deducted while determining the ‗book profit' u/s 115JB of the Act. The Ld. A.R further relied on the order of the ITAT, Mumbai ―J‖, Mumbai in the case of M/s. JSW Steel Limited Vs. ACIT, Mukund Limited Vs. ITO-3(2)(2) 8 ITA No. 679/Mum/2011 Circle-11(5), Bangalore (ITA No. 923/Bang/2009; dated 13.01.2017). It was submitted by the Ld. A.R that in the aforementioned case wherein a similar issue was involved the assessee had entered into a Financial Restructuring Package i.e ‗Corporate Debt Restructuring Package' (for short ‗CDR') in respect of loans taken from various Indian and foreign financial institutions. The assessee in the said case had entered into an agreement to settle the dues, pursuant to which principal and interest payable were reworked and part of the same amounting to Rs. 390,76,03,999/- was waived. Accordingly, the entire sum of Rs. 390,76,03,999/- was credited by the assessee to its profit and loss account as an exceptional item on account of waiver of the principal and interest payable thereon, with a specific note in the accounts that the exceptional item represented waiver of dues on settlement with certain lenders and since the principal amount of borrowing of Rs. 228.46 crore was utilized to pay purchase price of the plant and machinery imported by the assessee for setting up steel plants, therefore, it amounted to a capital surplus and was not a trading liability. It was submitted by the Ld. A.R that the Tribunal after deliberating at length on the issue under consideration had concluded that as the assessee company was in receipt of a ‗capital receipt' which was not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income-tax Act, then the same cannot be treated as part of the net profit as per the profit & loss account or reckoned as ‗working result' of the company of the relevant previous year and consequently, cannot be held to be taxable as ‗book profit' under MAT in terms of Sec. 11JB. On the basis of its aforesaid observations, the Tribunal had in the aforesaid case concluded that the capital surplus on waiver of dues is neither taxable nor can be included in the computation of the ‗book profit' under Sec. 115JB of the Act. On the basis of the aforesaid submissions it was averred by the Ld. A.R that the amount of Rs. 162,30,33,516/- waived in respect of principal and interest under OTS with the lenders was rightly excluded by the assessee company for the purpose of computing the ‗book profit' u/s 115JB of the Act.
Mukund Limited Vs. ITO-3(2)(2) 9 ITA No. 679/Mum/2011
7. The ld. A.R further assailed the order of the lower authorities on the ground that they had erred in not granting deduction of an amount of Rs. 11,18,10,595/- in respect of prior period adjustments (net) while computing the ‗book profits' under Sec. 115JB of the Act. It was the contention of the ld. A.R that the ‗net profit' for the purpose of computing the ‗book profit' under Sec. 115JB was to be computed after reduction of the amount of prior period adjustments. Further, the ld. A.R assailed the order of the CIT(A) on the ground that he had erred in rejecting the claim of the assessee in respect of deduction of interest paid to the income-tax department amounting to Rs. 62,23,304/-. In support of his contention the ld. A.R relied on the order of the Hon'ble Supreme Court in the case of Harshad Shantilal Mehta Vs. Custodian and others (1998) 231 ITR 871(SC).
8. Per contra, the Ld. Departmental Representative (for short ‗D.R') submitted, that the accounts of the assessee were audited. It was submitted by the D.R that though the assessee has revised its return of income, however, the profit and loss account for the year under consideration remained the same, as the assessee had only excluded the waiver of principal and interest amount under OTS with its lenders from its revised computation of ‗book profit' as per Sec. 115JB of the Act. The Ld. D.R submitted that as per the provisions of Sec. 115JB the assessee remained under a statutory obligation to compute its ‗book profit' as per the MAT provisions on the basis of its profit and loss account for the relevant previous year in accordance with the provisions of Schedule VI to the Companies Act, 1956 (as was then so applicable). It was submitted by the Ld. D.R that as per Part II of Schedule VI to the Companies Act, 1956 referred to in Sub Sec. (2) of Sec 211 of the Companies Act, 1956, it was obligatory on the part of the assessee to disclose every material aspect, including credits or receipts, debits or expenses in respect of non-recurring transactions of an exceptional nature in its profit and loss account. It was submitted by the Ld. D.R that as waiver of loan was an exceptional item, thus it was obligatory on the part of the assessee as per Part II of Schedule VI to the Companies Act, 1956 to disclose the same in its profit and loss Mukund Limited Vs. ITO-3(2)(2) 10 ITA No. 679/Mum/2011 account for the year under consideration. The Ld. D.R submitted that the exempt incomes which were to be excluded for the purpose of computing the ‗book profit' u/s 115JB were specifically spelt out in Clause II of Explanation I to Sec. 115JB(2) of the Act. In order to buttress his aforesaid contention that the waiver of principal and interest under OTS with lenders were not liable to be excluded while computing the ‗book profit' of the assessee under Sec. 115JB of the Act, the Ld. D.R relied on the following judicial pronouncements:
(i). B & B Infratech Vs. ITO [2017] 396 ITR 420 (KAR). (ii). Duke Offshore Ltd. Vs. DCIT [2011] 45 SOT 399 (ITAT Mum)
(iii). Hindustan Shipyard Pvt Ltd. Vs. DCIT [2011] 130 TTJ 213 (Vishakapatnam)
9. Insofar the claim of the assessee that the CIT(A) had erred in rejecting its claim in respect of deduction of interest paid to the income tax department amounting to Rs. 62,23,304/-, it was submitted by the Ld. D.R that no such contention was raised by the assessee before the lower authorities. Alternatively, it was submitted by the Ld. D.R that interest on TDS was not allowed as an expenditure under the normal provisions of the income tax Act. In support his aforesaid contention the Ld. D.R relied on the following judicial pronouncements :
(i). East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC)
(ii). Bharat Commerce & Industries Ltd. Vs. CIT (1998) 230 ITR 733 (SC)
10. The Ld. D.R adverting to the contention raised by the assessee that the CIT(A) had erred in not granting deduction of an amount of Rs. 11,18,10,595/- in respect of prior period adjustment (net) while computing the ‗book profits' u/s 115JB submitted, that as the assessee had not proved that the liability has crystallized during the year, thus, the same was rightly disallowed by the A.O. Further, it was submitted by the Ld. D.R that as the said amount did not form part of the profit and loss account, therefore, the same could not have been excluded while computing the ‗book profit' of the assessee u/s 115JB of the IT Act.
Mukund Limited Vs. ITO-3(2)(2) 11 ITA No. 679/Mum/2011
11. The Ld. A.R in his rejoinder to the contentions advanced by the revenue submitted, that the auditors had never approved the crediting of the waiver of principal and interest under OTS with lenders amounting to Rs. 162,30,33,516/- in the profit and loss account of the assessee company. The Ld. A.R submitted that the reliance placed by the revenue on the judgment of the Hon'ble High Court of Karnataka in the case of BNB Infotech Vs. ITO (ITA No. 726/Bang/2014; dated 08.09.2015), being factually distinguishable was deliberated upon by the ITAT, Mumbai in its order passed in the case of M/s JSW Steel Ltd.(supra). Further, it was submitted by the Ld. A.R that the order of the ITAT, Mumbai in the case of Duke Offshore Ltd, (supra) was also distinguished by the Tribunal in the case of M/s JSW Steel Ltd. (supra). Lastly, the Ld. AR submitted that the judgment of the Hon'ble High Court of Bombay in the case of CIT Vs. Veekaylal Investment Company Pvt Ltd. [2001] 249 ITR 597 (Bom) was also considered by the Tribunal and was found to be distinguishable on facts. Insofar the claim of deduction of interest paid by the assessee to the Income tax department amounting to Rs. 62,23,304/-, it was submitted by the Ld. A.R that the revenue had wrongly stated that the said contention was not raised before the lower authorities, as the said contention was specifically raised before the CIT(A). In respect of the contention advanced by the assessee seeking deduction of an amount of Rs.11,18,10,595/- in respect of prior period adjustment (net) while computing the ‗book profit' u/s 115JB of the Act, the Ld. A.R relied on the order of the ITAT Delhi Bench in the case of M/s Essar Projects (India) Ltd Vs. ACIT 5(1), Mumbai.
12. We have heard the authorized representatives for both the parties, perused the orders of the authorities below and the material available on record. Before adverting to the issue as to whether the CIT(A) was right in law and the facts of the case in declining to exclude the waiver of principal and interest under OTS of the assessee with its lenders amounting to Rs. 162,30,33,516/- while computing its ‗book profit' u/s 115JB of the IT Act, we shall first deliberate upon the taxability of the same under the normal provisions of the IT Act. In our considered view the waiver or remission of a Mukund Limited Vs. ITO-3(2)(2) 12 ITA No. 679/Mum/2011 liability cannot be regarded as an income in the hands of the assessee, unless the same is in the nature of a ‗trading liability'. However, in case if the waiver of the loan is on capital account then the same cannot be held as ‗income' in the hands of the assessee. Our aforesaid view can be safely gathered from a perusal of Sec. 41(1) of the Act, which reads as under:
"1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,--
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of the previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.
[Explanation 1.--For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.]"
Thus, where an assessee had obtained some benefit by way of remission or cessation of a ‗trading liability' in respect of which an allowance or deduction has been made in the assessment for any year, the same shall be chargeable to tax as per Sec. 41(1) under the normal provisions of the Act. However, a similar treatment cannot be accorded for bringing to tax a remission or cessation of a liability arising on a capital account under the aforesaid statutory provision. We find that the issue that as to whether the waiver of a loan by a creditor is taxable either as a perquisite under Sec. 28(iv) of the IT Act or as a remission of liability under Sec. 41(1) of the IT Mukund Limited Vs. ITO-3(2)(2) 13 ITA No. 679/Mum/2011 Act, had recently been deliberated upon by the Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Mahindra and Mahindra Ltd. [Civil Appeal No. 6949-6950 of 2004; dated24.04.2018]. Insofar the provisions of Sec. 28(iv) were concerned, it was observed by the Hon'ble Apex Court that as a cash receipt was involved in the waiver of loan, therefore, the very first condition envisaged in the said statutory provision that the benefit or perquisite arising from the business shall be in the form of a benefit or perquisite other than in the shape of money was not satisfied. In the backdrop of the aforesaid observations it was held by the Hon'ble Apex Court that the waiver of loan would not fall within the realm of the provisions of Sec. 28(iv) of the IT Act. Further, the Hon'ble Apex court deliberating on the scope and gamut of Sec. 41(1) of the IT Act observed that the same particularly dealt with the remission of a ‗trading liability'. The Hon'ble Apex Court taking cognizance of the difference between a ‗trading liability' and ‗other liability' concluded that as neither the waiver of the loan did amount to cessation of a ‗trading liability' nor the assessee had claimed any deduction under Sec. 36(1)(iii) of the IT Act qua the payment of interest in any previous year, therefore, the same could not be brought to tax under Sec. 41(1) of the Act. We are of the considered view that after the judgment of the Hon'ble Apex Court in the case of Mahindra and Mahindra Ltd. (supra) the issue that the waiver of a loan by a creditor on a capital account cannot be brought to tax either under Sec. 28(iv) or Sec. 41(1) is no more res integra. However, we may herein observe that the aforesaid view had been arrived at by the Hon'ble Apex court in context of waiver of a loan that was taken by the assessee on capital account and no part of the interest expenditure pertaining to the same was claimed as a deduction under Sec. 36(1)(iii) of the IT Act. It is the contention of the ld. A.R that as the waiver of the principal amount of loan of Rs. 113,22,84,679/- is in the nature of a ‗Capital receipt', therefore, the exclusion of the same by the assessee in its ‗computation of income' under the normal provisions of the IT Act had been accepted by the revenue. The ld. A.R in order to fortify his aforesaid contention had drawn our attention to the ‗computation of income' which revealed that the assessee had excluded the waiver of the principal amount under OTS of Rs. 113,22,84,679/- from Mukund Limited Vs. ITO-3(2)(2) 14 ITA No. 679/Mum/2011 its total income. Further, a perusal of the assessment order reveals that the A.O had not drawn any adverse inferences as regards exclusion of the waiver of principal amount of loan of Rs. 113,22,84,679/- by the assessee while computing its income under the normal provisions, and as such it can safely be gathered that the same had been accepted by him.
13. We shall now advert to the contention of the ld. A.R that the lower authorities had erred in declining to allow the claim of the assessee for exclusion of the waiver of loans of Rs. 162,30,33,516/- (including Principal amount : Rs. 113,22,84,679/- & Interest : Rs.49,07,48,836/-) credited in the profit & loss account while determining the ‗book profit' under Sec. 115JB of the Act. Insofar Sec. 115JB is concerned, the same as was then so available on the statute contemplated that if the income-tax payable on the ‗total income' as computed under the IT Act in respect of any previous year relevant to the assessment year is less than 7½% of the ‗book profit', then such ‗book profit' shall be deemed to be the ‗total income' of the assessee, and the assessee shall pay tax on such ‗book profit' at the rate of 7½%.
14. Insofar the meaning of ‗book profit' is concerned, the same has been defined to mean the ‗net profit' as shown in the profit & loss account prepared for the relevant previous year in accordance with the provisions of Part II and III of the Schedule VI of the Companies Act, 1956. It is further subjected to adjustments provided in the Explanation 1 to Sec. 115JB of the Act. Further, while preparing the annual accounts the profit & loss account, accounting policies, accounting standards shall be the same which had been adopted for the purpose of annual general meeting in accordance with the provisions of Sec. 210 of the Companies Act, 1956.
15. We find that in the case of the assessee before us the auditors had by way of ‗notes' at Para 3(vi)(9) and Para 3(vi)(11) of Auditors Report qualified the financial statements and had specifically mentioned that the benefit of waiver of loan on OTS with the lenders had been credited to the profit & loss account of the company prior to the fulfilment of the conditions of the settlement, and that such credit has not yet accrued to the assessee. It is Mukund Limited Vs. ITO-3(2)(2) 15 ITA No. 679/Mum/2011 stated by the auditors that taking of such credit which had not yet ‗accrued' to the company had translated the loss to the extent of Rs. 162,30,33,516/- into profit, and the same had an equivalent effect to the reserves and surpluses of the company. Further, the assessee company had in its revised return of income categorically claimed that the waiver of principal and interest amount under OTS with the lenders amounting to Rs. 162,30,33,516/- was not liable to be included in the total income for the purpose of computing the ‗book profit' as per Sec. 115JB of the Act. It is thus a matter of record that the auditors of the assessee company had at the very initial stage disclosed all the particulars, and by way of qualification ‗notes' to the auditors report had mentioned that the benefit of the OTS made with the lenders resulting in waiver of principal and interest had been credited by the assessee company to the profit & loss account prior to the accrual of the same to the assessee company. In our considered view by virtue of sub-section (6) of Sec. 211 of the Companies Act,1956 the reference to the balance sheet or the profit & loss account of a company shall include the ‗notes' to the accounts giving information required under the said Act. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Delhi in the case of CIT Vs. Sain Processing and Waiving Mills (P) Ltd. (2010) 325 ITR 565 (Del). The Hon'ble High Court of Delhi in its aforesaid judgment observing that ‗notes' to the accounts form part of the P & loss account by virtue of sub-s. (6) of s. 211 of the Companies Act, 1956, held as under:
―4.8 Having said that, the issue still remains as to whether notes to accounts form part of the accounts, and whether the fact that the current year depreciation which has not been debited to the P&L a/c would in any way deprive the assessee of its claim for the deduction from the 'net profit' in arriving at the figure of "book profit" for the purposes of s. 115J of the Act.
4.9 The answer to this poser is found in sub-s. (6) of s. 211 of the Companies Act, which provides that except where the context otherwise requires any reference to a balance sheet or P&L a/c shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents by the Companies Act. As already noted it is obligatory under cl. 3(iv) of Part II of Sch. VI to Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears.
According to us, once this information is disclosed in the notes to the account it would clearly fall within the ambit of the Explanation to s. 115J of Mukund Limited Vs. ITO-3(2)(2) 16 ITA No. 679/Mum/2011 the Act which defines "book profit" to mean 'net profit' as 'shown' in the P&L a/c for the relevant assessment year.
4.10 To our minds, as long as the depreciation which is not charged to P&L a/c but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression 'shown' in the P&L a/c, as notes to the account, form part of the P&L a/c by virtue of sub-s. (6) of s. 211 of the Companies Act, 1956. This is quite evident if the provisions of sub-s. (6) of s. 211 of the Companies Act, are read in conjunction with, sub-s. (1A), as well as, the Explanation to s. 115J of the Act.‖ Still further, the coordinate bench of the Tribunal i.e ITAT, Pune in K.K Nag Vs. Addl. CIT (2012) 52 SOT 381 (Pune) observing that in view of Sec. 211 of the Companies Act,1956 the ‗net profit' as shown in the profit and loss account for the purpose of Explanation 1 of the second proviso to Sec. 115JB was to be understood with reference to the ‗notes' to accounts accompanying the annual accounts, has held as under:
―12. In our view, the aforesaid parity of reasoning is squarely applicable in the present situation also, inasmuch as the provisions of section 115J of the Act and 115JB of the Act which are before us, are pari materia in so far as it relates to the obligation on a corporate assessee to prepare its Profit & Loss account for the relevant previous year in accordance with the provisions of Part II & III of Schedule VI to Companies Act, 1956. Therefore, having regard to the aforesaid parity of reasoning, once it is clear that the information towards incremental liability of leave encashment, which has not been provided in the Profit & Loss account, is otherwise disclosed in the Notes to the accounts, it would clearly fall within the ambit of Explanation 1 to the second Proviso to section 115JB of the Act which defines "book profits" to mean "net profit" as "shown" in the Profit & Loss account for the relevant previous year prepared under sub-section (2) of section 115JB of the Act. Notably, sub-section (2) of section 115JB of the Act imposes an obligation on every assessee to prepare a Profit & Loss account in the relevant previous year in accordance with the provisions of Part II & III to Schedule VI of Companies Act, 1956. At this stage, it would also be pertinent to emphasis the provisions of sub-section (6) of section 211 of the Companies Act, which were referred to by the Hon'ble Delhi High Court in the aforesaid judgment. Subsection (6) of section 211 provides that any reference to a Balance Sheet or Profit & Loss account shall include any Notes thereon giving information required by this Act or is allowed by this Act to be so given. Therefore, in view of the aforesaid statutory provision contained in Companies Act 1956, the impact is that the net profit as shown in the Profit & Loss account for the purposes of Explanation 1 to the second Proviso to section 115JB of the Act is to be understood with reference to the Notes to accounts accompanying the annual accounts also. In this view of the matter, the use of the expression 'net profit' in Explanation 1 to the second Proviso to section 115JB of the Act makes it clear that the impugned incremental liability towards leave encashment not debited to the Profit & Loss account but otherwise disclosed in the Notes to Accounts will have to be taken into Mukund Limited Vs. ITO-3(2)(2) 17 ITA No. 679/Mum/2011 account while determining the "book profits" under section 115JB of the Act. In other words, the liability of Rs 8,35,447/- towards leave encashment has to be considered to determine net profit as the information was disclosed in the Notes appended to accounts, which have been held to be part of the accounts of the assessee company. Therefore, we find ample force in the plea of the assessee which, in our opinion, is allowable having regard to the parity of reasoning laid down by the Hon'ble Delhi High Court in the case of Sain Processing & Weaving Mills P. Ltd (supra).‖ We thus in the backdrop of our aforesaid deliberations on the facts and the settled position of law, are of the considered view that the A.O while determining the ‗book profit' under Sec. 115JB had erred in failing to consider the ‗notes' to the accounts, wherein it was clearly mentioned by the auditors that by crediting the benefit of the amount of ‗waiver of loan' which had not yet ‗accrued' to the company the loss to the extent of Rs. 162,30,33,516/- was translated into profit and the same had an equivalent effect to the reserves and surpluses of the company. In our considered view, now when the auditors of the assessee company had disclosed all the particulars and had qualified the crediting of the amount of Rs. 162,30,33,516/- in the profit & loss account by way of ‗notes' to the accounts, therefore, it was obligatory on the part of the A.O to have considered the same while determining the ‗book profit' under Sec. 115JB of the IT Act. We are unable to persuade ourselves to subscribe to the reading of the profit & loss account in isolation by the A.O, de hors qualification of the same by way of ‗notes' of the auditors to the financial statements. We thus in all fairness are of the considered view that as the A.O had failed to consider the crediting of the waiver of the loan of Rs. 162,30,33,516/- in the profit & loss account in the backdrop of the qualification of the auditors by way of ‗notes' to the accounts in context of the same, therefore, the matter requires to be restored to his file for fresh adjudication. The A.O shall in the course of the ‗set aside' proceedings readjudicate the claim of the assessee that the waiver of loan of Rs. 162,30,33,516/- was not liable to be included while determining the ‗book profit' under Sec. 115JB of the IT Act after taking cognizance of the aforesaid qualifications of the auditors. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a Mukund Limited Vs. ITO-3(2)(2) 18 ITA No. 679/Mum/2011 liberty to substantiate its claim before him. The Ground of appeal No. 1 is allowed for statistical purposes.
16. We shall now advert to the claim of the assessee that the CIT(A) had erred in rejecting its claim in respect of deduction of interest paid to the income-tax department of Rs. 62,23,304/-. It was the claim of the assessee before the CIT(A) that as the aforesaid interest was paid for the delay in depositing tax deducted at source, therefore, the same ought to have been treated at par with interest on delay in payment of sales-tax and was liable to be allowed as a deduction. On a perusal of the order of the CIT(A) it emerges that he had rejected the said claim of the assessee for the reason that as per his him no such disallowance was made by the A.O while framing the assessment. It was observed by the CIT(A) that the A.O had in the assessment order only made two additions/disallowances viz. (i).
disallowance of prior period expenses (Rs. 1,29,41,824/-); and (ii). disallowance of leasehold premium written off (Rs. 13,57,446/-). In the backdrop of his aforesaid observations it was concluded by the CIT(A) that now when there was no such addition or disallowance and the A.O had accepted the assesses computation, therefore, there was no reason for the assessee to be aggrieved.
17. We have perused the revised ‗computation of income' that was filed by the assessee alongwith its revised return of income. On a perusal of the same it is revealed that though the assessee had on his own added back the interest of Rs. 62,23,304/- for arriving at its ‗business income' of Rs. 7,22,76,900/- (prior to set off of b/forward losses), but had by way of ‗Note No. 3' in his revised computation of income had stated that the interest paid to income-tax department was not being claimed as deduction by way of abundant caution. Further, the assessee in support of his claim that the interest paid to the income-tax department is eligible for deduction had relied on the judgment of Hon'ble Supreme Court in the case of Harshad Shantilal Mehta Vs. Custodian 231 ITR 871 (SC). The A.O while framing the assessment had adopted the aforesaid returned ‗business income' income of Mukund Limited Vs. ITO-3(2)(2) 19 ITA No. 679/Mum/2011 Rs. 7,22,76,900/-(prior to set off of b/forward losses) and after making additions/disallowances viz. (i). prior period expenses (Rs. 1,29,41,824/-); and (ii). leasehold premium written off (Rs. 13,57,446/-), had determined its ‗business income' at Rs. 8,79,35,470/-(prior to set off of b/forward losses). We thus find ourselves to be in agreement with the observation of the CIT(A) that the A.O while framing the assessment had not made any addition/disallowance in respect of the interest paid to the income tax department.
18. Admittedly, the assessee had on its own disallowed the interest paid to the Income-tax department of Rs. 62,23,304/- in its revised computation of income (though subject to a qualification that the addition of the interest paid to the income-tax department was not being claimed as deduction by way of abundant caution). In our considered view no fault can be found with the A.O who had proceeded with the ‗business income' of Rs.7,22,76,900/- (prior to set off of b/forward losses) and had assessed the same at Rs. 8,79,35,470/-(prior to set off of b/forward losses). In the course of the proceedings before the CIT(A) the assessee had assailed the disallowance of the interest on income tax paid of Rs. 62,23,304/- by wrongly stating that the A.O had erred in disallowing the said amount, specifically when the disallowance was suo motto made by the assessee in the return of income. Be that as it may, the assessee in the course of the appellate proceedings had assailed the validity of the disallowance of the interest paid to the income-tax department. We though are not oblivious of the trite law that as per the judgment of the Hon'ble Apex Court in the case of Goetz (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC) the A.O is not vested with the power to entertain a claim of deduction not made by the assessee in its return of income, except for in a case where a revised return of income is filed by the assessee. However, as observed by the Hon'ble Apex Court the said restriction is only as regards the power of the A.O and the same in no way did impinge on the powers of the Tribunal under Sec. 254 of the Act. Rather, we are of the considered view that as the issue involved in the present case involves adjudication of a legal issue based on the facts available on record, Mukund Limited Vs. ITO-3(2)(2) 20 ITA No. 679/Mum/2011 therefore, the said claim of the assessee can be admitted for adjudication in the backdrop of the judgment of the Hon'ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers & Shareholders (P) Ltd. (2012) 349 ITR 336 (Bom). In the said case it was observed by the Hon'ble High Court of Bombay that the appellate authorities are vested with the power to consider the claim of the assessee, though not raised in the ‗return of income'. Further, in our considered view if the assessee is able to show that a particular income was not taxable or an expenditure was not liable to be disallowed, then he can always demonstrate before the authorities that the same was returned under an erroneous impression. Our aforesaid view is fortified by the judgment of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC). The Hon'ble Apex Court had in the said judgment observed that the issue as to whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto, and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. We thus in the backdrop of our aforesaid observations entertain the claim of the assessee that the interest on the delay in payment of tax deducted at source was not liable to be disallowed in its hands.
19. We have deliberated at length on the issue under consideration. Insofar any amount paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains is concerned, the same as per Sec. 40(a)(ii) shall not be deducted in computing the income chargeable under the head ―Profits and gains of business or profession‖. On a perusal of the definition of the term ―tax‖ contemplated in Sec. 2(43) of the Act, it stands revealed that the same takes with its sweep viz. (i). income-tax under the provisions of the Income-tax Act, 1961 for the assessment year 01.04.1965 and any subsequent assessment year; (ii). income-tax and super-tax chargeable under the provisions of the Income-tax Act,1961 in relation to years prior to A.Y 1965-66; and (iii). Fringe benefit tax payable Mukund Limited Vs. ITO-3(2)(2) 21 ITA No. 679/Mum/2011 under Sec. 115WA in relation to the A.Y 2006-07 and any subsequent year. Insofar ―interest‖ is concerned, the same does not find mention in the definition of ‗tax'' and does not fall within its sweep. Our aforesaid view that ‗interest' does not fall within the gamut of the definition of ‗tax' is fortified by the judgment of the Hon'ble Apex Court in the case of Harshad Shantilal Mehta Vs. Custodian & Ors. (1998) 231 ITR 871 (SC). In the aforesaid judgment it was observed by the Hon'ble Apex Court that the definition of ―tax‖ does not include penalty or interest. Further, it was observed by the Hon'ble Apex Court that the provisions of imposition of penalty and interest are distinct from the provisions for imposition of tax. In the backdrop of the aforesaid settled position of law, we are of the considered view that the interest on delayed payment of TDS cannot be disallowed under Sec. 40(a)(ii) of the Act. In our considered view as the interest on delayed payment of TDS is not on the personal tax but is attributable to the tax which the assessee has deducted in respect of payment to others, therefore, the same would be allowable under Sec. 37 of the Act. Our aforesaid view is supported by an order of a coordinate bench of the Tribunal viz. ITAT, ―L‖ Bench, Mumbai in the case of M/s Essar Projects (India) Ltd. Vs. ACIT, 5(1), Mumbai [ITA No. 1844 & 1845/Mum/2015]. We thus in terms of our aforesaid observations conclude that interest on delayed payment of TDS would be allowed as a deduction while computing the income of the assessee under the head ―Business or Profession‖. However, as the said issue was never contesed by the assessee before the A.O, therefore, we restore the matter to his file for verifying the veracity of the claim of the assessee that the amount of Rs. 62,23,304/- was paid towards interest on delayed payment of TDS. In case the claim of the assessee is found to be in order, then the A.O shall give consequential effect in terms of our aforesaid directions. The Ground of appeal No. 2 is allowed for statistical purposes in terms of our aforesaid observations.
20. We shall now advert to the claim of the assessee that the CIT(A) has erred in not granting deduction of an amount of Rs. 11,18,10,595/- in respect of prior period adjustments (net) while computing the ‗book profit' Mukund Limited Vs. ITO-3(2)(2) 22 ITA No. 679/Mum/2011 under Sec. 115JB of the Act. It is the claim of the ld. A.R that the A.O had erred in taking the ―Profit before tax‖ as per the profit & loss account as the starting point for computing the ‗book profit' under Sec. 115JB and thus erred in not granting deduction of the prior period adjustments (net) of Rs. 11,18,10,595/-. It is further the claim of the ld. A.R that as no adjustment/modification has been prescribed for the prior period adjustments, therefore, the A.O had erred in not allowing deduction of the aforesaid amount debited in the profit & loss account. We have deliberated at length on the issue under consideration and are unable to persuade ourselves to subscribe to the claim of the assessee. In our considered view the starting point for determining the ‗book profit' under Sec. 115JB is the ‗net profit' shown in the profit & loss account for the relevant previous year prepared as per Part II and III of the Companies Act, 1956 (1 of 1956), which is further subject to the adjustments contemplated in Explanation 1 of Sec. 115JB. The claim of the assessee that the starting point of computation of ‗book profit' under Sec. 115JB should be the profit as per the profit & loss account after making all provisions, transfers to various reserves, appropriations and transfer from various reserves does not find any support from the mandate of law. We thus in terms of our aforesaid observations find no infirmity in the order of the CIT(A), and are of the considered view that he had by declining to accept the interpretation accorded by the assessee to Sec. 115JB had rightly upheld the order of the A.O in context of the issue under consideration. We thus in terms of our aforesaid observations uphold the order of the CIT(A) as regards rejecting of the claim of the assessee for deduction in respect of prior period adjustment (net) of Rs. 11,18,10,595/-. The Ground of appeal no. 3 is dismissed.
21. The appeal of the assessee is partly allowed in terms of our aforesaid observations.
Order pronounced in the open court on 05.12.2018
Mukund Limited Vs. ITO-3(2)(2) 23
ITA No. 679/Mum/2011
Sd/- Sd/-
(R.C SHARMA) (RAVISH SOOD)
ACCOUNTANT MEMBER JUDICIAL MEMBER
भुंफई Mumbai; ददनांक 05.12.2018
नन.स./PS. Rohit Kumar
आदे श की प्रनिलऱपि अग्रेपषि/Copy of the Order forwarded to :
1. अऩीराथी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमक् ु त(अऩीर) / The CIT(A)-
4. आमकय आमुक्त / CIT
5. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai
6. गार्ड पाईर / Guard file.
सत्मावऩत प्रनत //True Copy// आदे शधिस ु धर/ BY ORDER, उि/सहधयक िंजीकधर (Dy./Asstt. Registrar) आयकर अिीऱीय अधर्करण, भंफ ु ई / ITAT, Mumbai