Ita/356/2014 Of M/S Kilara Power Pvt. Ltd v. The Income -Tax Officer

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 4TH DAY OF NOVEMBER 27020 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD BETWEEN: LT.A. NOC.356 OF 2014 M/S. KILARA POWER PVT. LTD.,.NO.204C, 6TH MAIN2/1TH CROSS, III BLOCKJAYANAGAR|BANGALORE-5600 11. (BY SRI. ASHOK A. KULAKARNI, ADV.,) — APPELLANT. AND" THE INCOME TAX OFFICER|WARD 11 (2), No.14/3R.P. BUILDING, 5TH FLOOR|NRUPATHUNGA ROADBANGALORE-560001. (BY SRI. K.V. ARAVIND, ADV.) .., RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961L ARISING OUT OF ORDER DATED 11.04.2014 PASSED IN ITANO.589/BANG/2013 FOR THE ASSESSMENT YEAR 2007-08,PRAYING TQ: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED ABOVE. (11) ALLOW THE APPEAL BY SETTING ASIDE THE ORDER OF.THE ITAT IN ITA NO.589/BANG/2013 DATED 11-04-2014 ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 26-O27-2013 AND ASSESSMENT ORDER DATED 29-12-2009 ANDSUITABLY MODIFY IT AS SOUGHT IN THE APPEAL. THIS|ITACOMING|ONFOR.HEARING,THISALOK ARADHE J.,DELIVERED THE FOLLOWING: | DAY, | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)nas been preferred by the assessee. The subject matterof the appeal pertains to the Assessment year 2007-08.The appeal was admitted by a bench of this Court videorder dated 14.11.2014 on the following substantialquestion of law: (i) Wnetner on the facts and in thecircumstances|OF|theCaASCforthis|assessment year while applying 115 JB tothe case of the Appellant Rs.3,59,58,370/-is to be reduced from the book profit in full?(ii) In the alternative and witnoutprejudice in the event that the answer tothe above question is in the negative,whether.Of)thefactsand|In|the circumstances while applying u/s 115JB tothe case of the Appellant at least a sum ofRs.1.08 Crores being the amount of interest:debited to the Profit & Loss Account for theaccounting year ending 31-03-2002 shouldhave been deducted? 2.|Facts leading to filing of this appeal brieflystated are that the assessee is a company engaged inthe business of generation of power. According to the.assessee, it continuously ran into losses since itsinception|and|borrowedan|amount|from.IndianRenewableEnergy|DevelopmentAgency|(IREDA).—However, the assessee neither repaid the principle northe interest. The total interest, which was payable inthe Assessment Year JOO/7-O8 was Rs.3.59 Crores. Forthe year ending 31.03.2007, the assessee entered intoOne Time Settlement (OTS) with IREDA under whichentire interest as well as a part of principle amount wasalso waived by the IREDA. The total amount of interestwaived by the IREDA under the One Time Settlement for the year ending 31.03.2007 was Rs.3,59,58,370/-. The|assessee in the profit and loss account for theAssessment.Year|2007-08.creditedaSUM|ofRs.3,59,58,370/- being the amount of interest waived byIREDA. However, while preparing the return of income,|the assessee excluded the amount as no part of suchinterest had even been allowed in any prior AssessmentYear and provisions of Section 41(1) of the Act were notattracted. The Assessing Officer by an order dated29.17.7009|Interaliaincludedan)amountofRs.3,59,58,370/- in the book profits for levying taxunder Section 115JB of the Act and negatived the plea ofthe assessee that the sum was deductible in full underExplanation to Section 115JB(2) of tne Act. — 3.The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) whoDy an order dated 26.02.2013 affirmed by the order|passed by the Assessing Officer. The assessee thereuponfiled an appeal before the Income Tax Appellate Tribunal 3.The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) whoDy an order dated 26.02.2013 affirmed by the order|passed by the Assessing Officer. The assessee thereuponfiled an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal for short). The)tribunal by order dated 11.04.2014.inter aliaheld that.no provision can be made for an ascertained liability andtherefore no provision was made by the assessee forinterest payable and waiver of interest by IREDA cannotbe considered as withdrawal of the provision and cannot be reduced from the book profit as contended by theassessee. However, it was held that only a sum ofRs.1.08 Crores snould be considered as waiver of.interest and part of book profit as interest payable forpre-commencement period was capitalized, the aforesaidcontention needs examination, therefore, the matter wasremitted to the Assessing Officer. Accordingly, the|appeal was partly allowed. In the aforesaid factualDackground, the assessee Nas filed this appeal. 4Learned counsel for the assessee submittedthat finding recorded by the tribunal that the assesseeNas been depbiting interest payable to profit and lossaccount of it Is erroneous. It Is submitted tnat the! assessee had not claimed any reduction towards interestand a sum of Rs.1,08,58,828/- was actually debited toprofit and loss account for the year ending 31.03.2002i.e., Assessment Year 2002-03. However, in thecomputation of income filed with the return of income,the aforesaid amount was added back. It ts furtherSubmitted that when no reduction was claimed orsallowed in Previous Years, the condition of provisoStands fulfilled and accordingly waiver of outstanding:interest ought to have been held eligible for reductionunder sub-clause (i) of Explanation 1 to Section 115JB ofthe Act. It is also pointed out that the assessee is boundto follow the Accounting Standard-29 issued by aStandard of Cnartered Accountants in order to arrive atbook profit. Our attention nas also been invited to para10.1 of aforesaid Accounting Standard, which providesthat a provision is a liability which can be measured onlyby using a substantial degree of estimation. It is alsoargued that the different between liability and provision is essentially only the basis of estimation / qualificationand not on the basis of recognition. It is also pointedout that since the assessee had computed interest onaccrual basis In accordance with the terms of the loan|granted by IREDA and was unable to service the.principle amount as well as the amount of interest.Therefore, the conclusion of tribunal that interest was aliability and not a provision is misplaced. In support ofaforesaid submissions, reliance has been placed ondecisions in ‘CIT VS, INDUSTRIAL CREDIT ANDDEVELOPMENT SYNDICATE LTD.', 285 ITR (ST) 310(KAR) @ 317, 318, ‘INDO RAMA SYNTHETICS (I)LTD. VS. COMMISSIONER OF INCOME TAX’, 330ITR 363 (SC) @ 372, CIT VS. SHYAM CENTURYFERROUS LTD., 386 ITR 477 (CAL) @ 479 ANDCBDT CIRCULAR NO.495 DATED 22.09.1987. 5. On the other hand, learned counsel for tne.revenue submitted tnat even thougn assessee hasclaimed tnat the entire amount was claimed as' 5. On the other hand, learned counsel for tne.revenue submitted tnat even thougn assessee hasclaimed tnat the entire amount was claimed as' expenditure on accrual basis, however, no provision wascreated and therefore, no adjustment was made in viewof Clause (c) to Explanation 1 to Section 115JB of theAct. It is also argued that unless Clause (c) is attracted,Clause (i) for reduction also cannot be applied. It isfurther submitted that the Assessing Officer, the.Commissioner of Income Tax (Appeals) and the IncomeTax Appellate Tribunal have recorded findings of fact.that tne assessee has not created any provision asrequired under Clause (c) of Explanation 1 to Section115JB of the Act and the same is not disputed by the.assessee. It is also argued that unless clause (c) of.Explanation 1 to Section 115JKB of the Act is attracted,the reduction under clause (i) cannot be applied. InSupport of aforesaid submissions, reliance has beenplaced on.APOLLO TYRES LTD. VS, COMMISSIONEROF INCOME-TAX, 255 ITR 273 (SC),and'TNDO|RAMA SYNTHETICS (I) LTD. VS. COMMISSIONEROF INCOME-TAX, SSO ITR 365. 6.|We have considered the submissions made bylearned counsel for the parties and have perused therecord. The relevant extract of Section 115JB, whichdeals with special provisions for payment of tax bycertain companies as it was in existence at the relevanttime, reads as under: 115JB. (1) Notwithstanding anything|contained in any other provision of this Act, where in the case of an assessee, being a.company, the income-tax, payable on the.total income as computed under this Act in.respect of any previous year relevant to theassessment year commencing on or after theIst day of April, 2007, is less than ten per|cent of its book profit, such book profit snalibe deemed to pe the total income of the.assessee and the tax payable by the assessee on such total [ncome shal!/ be the amount ofincome-tax at the rate of ten per cent. (2) Every assessee, being a company,|shall, for the purposes of this section prepare its profit and loss account for the relevant.previousYearIn|accordancewiththe provisions of Parts II and III of Schedule VIIto the Companies Act, 1956 (1 of 1956) Explanation 1.—For the purposes of thissection, “book profit” means the net profit asshown in the profit and loss account for therelevant previous year prepared under sub-section (2), as increased by—_ (a) the amount of income-tax paid or payable, and the provision therefor; or(Db)theamountscarriedTO anyreserves, by whatever name called,|otner than a reserve specified under|section S35AC; or(c) the amount or amounts set aside|CO provisionsmadeformeeting|liabilities,otherthan|ascertainedliabilities; or:(d) the amount by way of provision for|losses of subsidiary companies; or (e) theaMountOFamountsofdividends paid or proposed; or| (fF)theamountOfamountsofexpenaiture relatable to any income to| which section 10 (other than the|provisions contained in clause (38)|thereof) or section 11 or section 12|apply; or. (g) the amount of depreciation. If any amount referred to in clauses (a)to (g) is debited to the profit and loss|account, and as reduced by- (i)the amount withdrawn from any|reserves or provision (excluding a reserve|created before the ist day of April, 1997otherwise than by way of a debit to the profit|anda loss account), if any such amount Iscredited to the profit and loss account. J.Tnus, it is evident that for tne purposes ofSection 115JB, the expression book profit needs amountset aside to provisions made for meeting liabilities other.than ascertained liabilities. The Assessing Officer on.perusal of the balance sheet of tne assessee as on31.03.2006 and 31.03.200/7 as well as schedulesappended to the balance sheet nas held tnat the amount of Rs.3,59,58,3/70/- has neither been shown as reservenor provision anywhere but has only been shown asliability in Schedule C. By taking into account Section115JB of the Act, it has been held that amountwithdrawn from reserves credited or provision made in aPrevious Year shall not be reduced from the book profit J.Tnus, it is evident that for tne purposes ofSection 115JB, the expression book profit needs amountset aside to provisions made for meeting liabilities other.than ascertained liabilities. The Assessing Officer on.perusal of the balance sheet of tne assessee as on31.03.2006 and 31.03.200/7 as well as schedulesappended to the balance sheet nas held tnat the amount of Rs.3,59,58,3/70/- has neither been shown as reservenor provision anywhere but has only been shown asliability in Schedule C. By taking into account Section115JB of the Act, it has been held that amountwithdrawn from reserves credited or provision made in aPrevious Year shall not be reduced from the book profit unless book profit of such year has been increased bythose reserves or provision. Thus, it has been held thatin the absence of any provision created or provision.made, the question of reduction from book profit doesnot arise. 8.Tne Commissioner of Income Tax (Appeals)|Nas held tnat profit and loss account of the assessee ason 31.03.2007, was prepared in accordance with theCompanies Act, 1956 and the assessee showed theoutstanding interest as credit to profit and loss account.pecause of waiver of interest on account of One TimeSettlement. It was further neld that the outstandinginterest amount was not snown as eitner as reserve or. provision and it was shown as liability and even thecorresponding debits in the earlier years were not addedback. It has further been held that the assessee'scontention may be correct that there are no profitschargeable to tax under Section 115JB of the Act but theconditions stipulated in the proviso were not fulfilled.The tribunal has held that the Assessing Officer on.perusal of the balance sheets as on 31.03.2006 and31.03.200/7 nas neld that amount of interest nas neitnerbeen shown as reserve nor provision anywhere but theSame has been shown in Schedule C as a liability. It wasfurther held that no provision can be made. forascertained liability and therefore, no provision has been.made by the assessee for interest payable and therefore,|waiver of interest by IREDA cannot be considered aswithdrawal of provision and cannot be reduced from thebook profit. However, it was held that the contention ofthe assessee that a sum of Rs.1.08 Cores should be!considered as waiver of interest and part of book profit as interest payable for pre commencement period, needsexamination and therefore, the matter was remitted for adjudication in accordance with law. The aforesaid.findings by all the authorities under the Act are based on |meticulous appreciation of evidence on record and doesnot suffer from any perversity warranting interference ofthis court in this appeal. — In view of preceding analysis, the substantialquestions of law framed by a bench of this court areanswered against the assessee and in favour of therevenue. In the result, we do not find any merit in thisappeal, the same fails and is nereby dismissed. Sd/-—JUDGE. SS| Sd/-JUDGE.