Mumbai ITAT: No penalty u/s 271(1)(c) for tax evasion when final determination of income on Minimum Alternate Tax basis.

Ruchi Strips & Alloys Ltd. v. DCIT, on 21^st January, 2011

Assessment Year/s: 2003-04, 2005-06

Question/s before the Hon’ble Tribunal: Whether penalty can be imposed in respect of the assessment of total income under the normal provisions of the act when ultimately the total income is determined u/s. 115 JB of the Income Tax Act?

Relevant facts: There was a search and seizure operation u/s. 132 of the Income Tax Act, 1961 (the Act) carried out by the department in the business premises of the assessee on 17.11.2005. In the return of income filed after the search for Assessment year 2003-04 and 2005-06, the income surrender at the time of search was duly offered for tax. Since the total income computed as per the normal provision of the Act in both the aforesaid assessment years was less than the book profits computed u/s. 115 JB of the Act. The AO ultimately levied tax on the total income computed under the provision of section 115 JB of the Act.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 7: "In the facts and circumstances of the present case no penalty could have been imposed on the assessee because there was no tax sought to be evaded because the addition in respect of which penalty was imposed was made while computing total income under the normal provisions of the Act and ultimately the total income of the Assessee was determined on the basis of book profits u/s.115JB of the Act. We, therefore, cancel the penalty imposed by the Assessing Officer and confirmed by the CIT(A)."

The decision is available here.

Supreme Court: Advance Tax payable on MAT and in default, interest u/s 234B, 234C applicable

Jt.C.I.T.,Mumbai v. M/S.Rolta India Ltd. on 7 January, 2011

Question before the Hon’ble Court: “Whether interest under Section 234B can be charged on the tax calculated on book profits under Section 115JA? In other words, whether advance tax was at all payable on book profits under Section 115JA?”

Relevant Facts: Assessee furnished a return of income on 28.11.1997 declaring total income of Rs. Nil. On 28.3.2000, an order under Section 143(3) was passed determining the total income at nil after set off of unabsorbed business loss and depreciation. The tax was levied on the book profit worked out at Rs. 1,52,61,834/- determined as per the provisions of Section 115JA. The interest under Section 234B of Rs. 39,73,167/- was charged on the tax on the book profit as worked out in the order of assessment.

Upholding the appeal of the Department, the Hon’ble Court held, inter alia that:

Para 8: “The pre-requisite condition for applicability of Section 234B is that assessee is liable to pay tax under Section 208 and the expression "assessed tax" is defined to mean the tax on the total income determined under Section 143(1) or under Section 143(3) as reduced by the amount of tax deducted or collected at source. Thus, there is no exclusion of Section 115J/115JA in the levy of interest under Section 234B. The expression "assessed tax" is defined to mean the tax assessed on regular assessment which means the tax determined on the application of Section 115J/115JA in the regular assessment.”

Para 9: “…held that Section 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under Section 115JB, it was liable to pay interest under Sections 234B and 234C of the Act.”

The decision is available here.

ITAT, Mumbai: Book Profit u/s 115JB includes amount of loan waived off

Duke Offshore Ltd. v. Dy. CIT decided on 5^th January, 2011

Question before the Tribunal: Whether in the course of settlement under OTS with a bank, the reduction of liability to Bank credited to the P&L account should be taken into account in computing Book Profits u/s 115JB, particularly when part of the same represents waiver of principal portion of loan?

Relevant facts: “The Assessee had an OTS with GTBank as a result of which there was a waiver/ reduction of the liability to bank to the extent of Rs. 44,513,406. This was shown as an extraordinary item, `below the Line’. The Assessee took the P&L figure of Rs. 1,08,48,955/- appearing before the extraordinary items and offered it as book profits and contended that the extraordinary item of Rs. 44,513,406/- cannot be added in computing the Book profits. The AO on the other hand took P&L as Rs. 54,168,537/- appearing after the extraordinary items and appropriations as the starting point for computation of Book Profits u/s 115JB and held that the extraordinary item of Rs. 44,513,406/- cannot be reduced in computing the Book profits.”

Dismissing the appeal of the assessee, it was held, inter-alia that:

1. (Para 8): “From the above, it is very clear that the net profit figure to be taken is only after the appropriation ie, below the line. Otherwise, adding to / reducing from the book profits the appropriations like amount carried to reserve, amount withdrawn form the reserve, the provisions made for diminution in value of assets, provisions for meeting liability etc. as per the explanations become unworkable. Therefore the language of Section 115JB is very clear to indicate that starting point of the profit and loss should be the figure after the appropriation as well as any extraordinary item made or prior year expenses which the company may for the purpose presentation show `below the line’. Therefore amounts credited or debited to the P&L account below line cannot be ignored.”

2. (Para 13): “Computation of book profit is a separate code itself and determination has to be made on the basis of profit computed in the Companies Act and in accordance with the various Accounting Standard and guideline issued in this regard. What is capital or revenue for the purpose of computation of taxable income under the normal provisions may not be the capital or revenue while computing book profit… As pointed out earlier, any receipt even if it is a capital receipt, which may or may not be taxable under the normal provisions of the Income tax Act, if it is credited to the profit and loss account cannot be excluded in computing the book profit, unless it is specifically excluded under any of the Explanations found in that section.”

The judgment is available here.

Supreme Court: Amounts of revaluation reserve not deductible from 'book profit'

Holding that Companies covered under section 115JB of the Income Tax Act, 1961 would not be entitled to reduce from its book profit, such amounts which are in the nature of capital reserve or more specifically, which exist as revaluation reserve the Hon’ble Supreme Court in Indo Rama Synthetics (I) Ltd. v. C.I.T, New Delhi on 5 January, 2011 observed as follows:

Facts: During the assessment year 2000-01, fixed assets of the assessee were revalued resulting in increase in the net book value of such assets by Rs.288,58,19,000/-, which was credited to the revaluation reserve.

(The revaluation reserve is in the nature of a capital reserve rather than a revenue reserve and thus affecting treatment only in the Balance Sheet)

For the assessment year 2001-02, the AO disallowed a reduction by transfer from revaluation reserve to the extent of Rs.26,11,74,000/- to the depreciation account at Rs.127,57,06,000/- which was resulting in a net debit on account of depreciation of Rs.101,45,32,000/- under Section 115JB of the Act, did not allow reduction of the afore-stated amount of Rs.26,11,74,000/- on the ground that the revaluation reserve stood created in the assessment year 2000-01 and had not been added back while computing the book profit in that year in terms of the proviso to clause (i) of explanation to Section 115JB.

Question of Law: Whether the amount transferred from the revaluation reserve and set off against the amount of depreciation debited to P & L Account can be excluded in terms of clause (i) of explanation to Section 115JB(2) read with the proviso?

Dismissing the appeal the Hon’ble Court held:

“In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31.3.2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the explanation to Section 115JB(2) in respect of depreciation has been rightly rejected by the AO.”

“Thus, if the reserves created had gone to increase the book profits in any year when the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to P & L Account. Now, from the above facts, it is clear that neither the said amount of Rs.288,58,19,000/- nor Rs.26,11,74,000/- had ever gone to increase the book profits in the said year ending 31.3.2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the P & L Account. Thus, the proviso to clause (i) of the explanation to Section 115JB(2) comes in the way of the claim for reduction made by the assessee.”

The judgment is available here.

4. Ajanta Pharma v. CIT on 9th September, 2010

Question of Law: “Whether for determining the "book profits" in terms of Section 115JB, the net profits as shown in the P&L Account have to be reduced by the amount of profits eligible for deduction under Section 80HHC or by the amount of deduction under Section 80HHC?”

The Hon’ble Court held at para 10 that:

"If the dichotomy between "eligibility" of profit and "deductibility" of profit is not kept in mind then Section 115JB will cease to be a self-contained code. In Section 115JB, as in Section 115JA, it has been clearly stated that the relief will be computed under Section 80HHC(3)/(3A), subject to the conditions under sub-clauses (4) and (4A) of that Section. The conditions are only that the relief should be certified by the Chartered Accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of Explanation to Section 115JB (subject to the conditions specified in sub-clauses (4) and (4A) of that Section) to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department.”

The decision can be accessed here.

CIT v. Tulsyan Nec Ltd. by Hon’ble Supreme Court of India

Date of Decision: 16th December, 2010

The question that arose before the Hon’ble Court was whether MAT credit admissible in terms of Section 115JAA has to be set off against the tax payable (assessed tax) before calculating interest under Sections 234B and 234C of the Income Tax Act, 1961?

Para 6: Thus, the tax credit allowable can be set off by the assessee while computing advance tax/ self-assessment tax payable for years 2 to 6 limited to the difference between the tax payable on the income computed under the normal provisions and tax payable on book profits in each of those years, as per assessee's own computation. Although the right to avail tax credit gets crystallized in year one, on payment of tax under Section 115JA and the set off thereof follows statutorily, the amount of credit available and the amount of set off to be actually allowed as in all cases of deductions/ allowances under Sections 30-37, is fluid/ inchoate and subject to final determination only on adjudication of assessment either under Section 143(1) or under Section 143(3). The fact that the amount of tax credit to be allowed or to be set off is not frozen and is ambulatory, does not take away/ destroy the right of the assessee to the amount of tax credit. (emphasis supplied)

Para 11: The position which emerged was that due to omission on one hand MAT credit was available for set off for five years under Section 115JAA but the same was not available for set off while calculating advance tax. This dichotomy was more spelt out because Section 115JAA did not provide for payment of interest on the MAT credit. To avoid this situation, Parliament amended Explanation 1 to Section 234B by Finance Act, 2006 w.e.f. 1.4.2007 to provide along with tax deducted or collected at source, MAT credit under Section115JAA also to be excluded while calculating assessed tax.

Para 13: It is immaterial that the relevant form prescribed under Income Tax Rules, at the relevant time (i.e. before 1.4.2007), provided for set off of MAT credit balance against the amount of tax plus interest i.e. after the computation of interest under Section 234B. This was directly contrary to a plain reading of Section 115JAA(4). Further, a form prescribed under the rules can never have any effect on the interpretation or operation of the parent statute.

The appeal of the department was dismissed.

The decision is available here.