Kalpesh Classes

No fresh inquiry​​ Apollo Tyres Ltd. (SC)

While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.

Generally accepted accounting principle.

[2003] 262 ITR 0330- ​​​​ KINETIC MOTOR CO. LTD. VS. DEPUTY CIT (BOM)

The assessee was a public limited company engaged in the business of manufacture and sale of two wheelers. For the previous year in the books of account maintained the assessee debited an amount of Rs. 6,32,65,430 on account of depreciation. This depreciation was calculated on the written down value method, which is one of the permissible methods under the Companies Act as well as under the Income-tax Act, although the assessee earlier used to provide the depreciation on the straight line method in its corporate accounts. The above change in treatment resulted in a book loss of Rs. 1,64,49,937.​​ These accounts were certified to be true and fair by the auditors. The Assessing Officer took the view that there was no justification for the assessee to change the basis of providing depreciation.​​ The Assessing Officer re-worked the depreciation and arrived at a revised figure of book profit. Held, that it was not in dispute that under the Companies Act both the straight line method and written down value method are recognised.​​ Therefore, once the amount of depreciation actually debited to the profit and loss account was certified by the auditors, it was not permissible for the Assessing Officer to make book adjustments.

Book profits not as per heads of income

The book profits tax is on book profits computed under section 115J/115JA/115JB. It is a code by itself with other provisions relating to computation inapplicable in view of the non obstante clause at the beginning of the section. The schedular system of computing head-wise income is also not applicable.​​ Though capital gains are taxable at a lower rate compared to the general rate, no such concession is provided when such capital gains form part of the book profits.​​ It was so held in Nafab India P. Ltd. v. Dy. CIT [2008] 303 ITR (AT) 403 (Delhi). The claim in this case raised by the assessee was for adoption of a pro rata lesser rate of tax for capital gains. The argument that capital gains cannot form part of the book profits within the meaning of income under company law was not raised and, therefore, not considered.

Software expenditure​​ 

The Delhi High Court in CIT v. G E Power Services India Ltd. [2008] 171 Taxman 10 held that software expenditure debited to profit and loss account is an allowable deduction in computing book profits. The Court refuted the argument of the revenue that such expenditure would be capital in nature after amendment to section 32 for the reason that the amendment is not retrospective in nature. Also it found such argument as unworthy, perhaps for the reason that section 32 has no relevance as far as determination of book profits goes.

This judgment thus provides a good tax planning method and, thus, an assessee can charge off software costs in accounts even while it resorts to depreciation claim in tax computation after taking disallowance first. Before the statutory auditor, the assessee can take the contention that the software in use has a short span of life and further it needs updation from time to time.​​ 

Prior period/extraordinary items​​ 

The Delhi High Court in CIT v. Khaitan Chemicals & Fertilizers Ltd. [2008] 175 Taxman 195 held that net profit (as referred to in section 115JA) was to be computed only after deducting the expenses on prior period/extraordinary items which were business expenditure, but were shown separately in the profit and loss account due to the specific requirement of the AS prescribed by the Institute of Chartered Accountants of India.

Power generation deduction ​​ 

The Delhi High Court in CIT v. DCM Sriram Consolidated Ltd.[2009] 176 Taxman 49 held that the term ‘Business’, which prefixes generation of power in clause (iv) of the Explanation to section 115JA(2), is not limited to one business which is prosecuted only by engaging with an outside third party and, thus, it allowed deduction of profit which was derived from transfer of energy from its Captive Power Plants in arriving at book profits amenable to tax under section 115JA.

Excess depreciation​​ 

In CIT v. CJ International Hotels Ltd. [2009]​​ 177 Taxman 39​​ (Delhi) the Commissioner had given a direction to the Assessing Officer to recompute the income under section 115JA considering the impact of excess depreciation claimed by the assessee. The Tribunal reversed such an order on the basis of the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 and noted that once the accounts had been certified by the auditor to have been prepared in accordance with the provisions of the Companies Act, then the​​ Assessing Officer did not have any jurisdiction to go behind the net profit shown in the Profit and Loss Account, except to the extent provided in the Explanation to section 115J. The Delhi High approved of such a stance.

Warranty provision​​ 

The Delhi ITAT in Hero Briggs & Stratton Auto Ltd. v. CIT [2007] 161 Taxman (AT) 127 held that​​ once the assessee is maintaining his account on the mercantile system and a liability accrued, though to be discharged at a future date, it would be proper to allow deduction of the same while working out the profit and loss​​ of his business, regard being had to the accepted principles of commercial practices and accountancy. The Commissioner was, thus, held unjustified in directing the Assessing Officer to add back amount of warranty provision as unascertained liability while working out profits u/s 115JA.

Loss on sale of capital assets​​ 

The Delhi Tribunal, in Asian Diet Products Ltd. v. Dy. CIT [2007]​​ 162 Taxman 210​​ (Mag.) held that the computation of book profit under section 115JA is quite different from computation of profits liable to be computed as per provisions of sections 28 to 44.​​ Any loss on sale of fixed assets debited to the profit and loss account is liable to be added while computing the taxable income as per Act and the depreciation as per the WDV of the block of assets is required to be reduced. However, while computing book profit under section 115JA, such loss is not required to be added. The Bench disapproved action under section 154 in this case to make such unauthorized adjustment.​​ 

Change in method of depreciation​​ 

The Madhya Pradesh High Court, in Gilt Pack Ltd. v. Union of India [2007] 163 Taxman 331,​​ held that any change in method of depreciation must take effect from the perspective effect contrary to the Bombay High Court decision in Kinetic Motors Co. Ltd. v. Dy. CIT [2003] 262 ITR 330.

Lease equalization charge

That the lease equalization charge was not an amount set aside for meeting any liability which was unascertained. It was a recognized method for preparing the financial statement of non-banking financial companies. The sum in question did not fall within any of the other clauses of the Explanation to section 115JA. The claim made by the assessee for the assessment year 1998-99 was to be allowed. Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) followed.​​ [2008] 306 ITR (A.T.) 0034- ​​​​ Goodwill India Ltd. v. Deputy Commissioner of Income-tax (Income-tax Appellate Tribunal--Delhi)

Where the assessee, while accounting for leases, charges lease equalisation charges to the profit and loss account, a recognised accounting practice, so as to recognise income on an even basis, it is not open to the Assessing Officer while computing book profits​​ under section 115JA to disallow such debit as notional. The Tribunal in coming to this conclusion in GE Capital Transportation Financial Services Ltd. v. Asst. CIT [2008] 301 ITR (AT) 69 (Delhi) followed the Supreme Court’s decision in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273.

290 ITR (A.T.) 0183- ​​ IBM India Ltd. vs. Commissioner of Income-tax (Appeals) (Income-tax Appellate Tribunal--Bangalore)

(i) that the liability to pay for warranty claims arises no sooner the sales are effected. The assessee had provided for liability on the basis of sales made during the year. The amount set apart to meet the liability was deductible.

(ii) That the concept of payment made once and for all and of “enduring benefit” must respond to the changing economic realities of the business. It was clear that the amount was paid for application software and not system software. The application software enables the assessee to carry out its business operation efficiently and smoothly. However, such software itself does not work on a stand alone basis. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation.​​ It is an aid in the manufacturing process rather than the tool itself. Thus, by payment for such application software, though there is an enduring benefit, it does not result in acquisition of any capital asset. It merely enhances the productivity or efficiency and hence has to be treated as revenue expenditure.

(iii) That the assessee had received a sum of Rs. 18.4 crores being consideration for the value which inheres in the human resources by reason of training, skill, practical experience and work culture for transfer of the personnel. To facilitate such transfer, the amount was paid.​​ Undisputedly, the training, skills and experience as well as work culture was imparted by the assessee. Acquisition of such training, skill, experience and work culture was at the cost of the assessee-company. Thus, it could be connected with the office or occupation which the assessee carried on. The amount was income of the assessee.

(iv) That while computing the book profit, one has to refer the provision of the Companies Act, 1956. As per the definition of provision in Part III of Schedule VI to the Companies Act the provision can be for diminution in value of asset or for meeting any liability. Under clause (c) of the Explanation to section 115JA, the amount to be increased is “the amount set aside to provision made for meeting liabilities other than ascertained liabilities”.​​ The amount being provision made for bad and doubtful debts cannot be considered as provision for meeting any liability which is not an ascertained liability and hence the book profit is not to be increased by such amount provided for.

Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519 (Karn) followed.

Interest payment : 252 ITR (STAT) 0050- CIRCULAR NUMBER: 13

The provision of section 115JB provides that if tax payable on total income is less than specified % of book profit, the tax payable under this provision shall be such % of book profit. It may be emphasised that the new provision of section 115JB is a self-contained code. Except for substitution of tax payable under the provision and the manner of computation of book profits, all the provisions of the tax including the provision relating to charge, definitions, recoveries, payment, assessment, etc., would apply in respect of the provisions. It is abundantly clear that all companies are liable for payment of advance tax having regard to the provisions contained in new section 115JB.​​ Consequently, the provisions of sections 234B and 234C for interest on defaults in payment of advance tax and deferment of advance tax would also be applicable where facts of the case warrant.​​ 

Advance tax payments​​ 

284 ITR 0434- ​​ Commissioner of Income-tax vs. Kwality Biscuits Ltd. (Supreme Court of India) The Supreme Court has resolved the controversy regarding the liability to pay advance tax and the consequent levy of interest, if it is so payable, but not paid. The Gauhati High Court in Assam Bengal Carriers Ltd. v. CIT [1999] 239 ITR 862 the Bombay High Court in CIT v. Kotak Mahindra Finance Ltd. [2004] 265 ITR 119, the Madras High Court in CIT v. Holiday Travels P. Ltd. ​​ [2003] 263 ITR 307 and the Punjab and Haryana High Court in CIT v. Upper India Steel Manufacturing and Engineering Co. Ltd. [2005] 279 ITR 123 decided in favour of the Revenue, while the Madhya Pradesh High Court in Itarsi Oils and Flours P. Ltd. v. CIT [2001] 250 ITR 686 (MP) and the Karnataka High Court in Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519 (Karn) decided in favour of the taxpayer. The latter decision had become final in CIT v. Kwality Biscuits Ltd. ​​ [2006] 284 ITR 434 (SC), wherein the appeal was dismissed without any discussion on the subject, so that it can be inferred that the arguments accepted by the High Court have been found to be valid. The reasoning of the High Court was that the Minimum Alternate Tax (MAT) gets determined only after the end of the relevant year, but then, so is the normal tax.​​ The better reason probably is that sections 234B and 234C, which authorise levy of interest refer to tax on total income, which has to be understood as total income defined under section 2(45) of the Income-tax Act as total income computed in the manner laid down under the Act.​​ Section 209 requiring computation of advance tax also refers to tax on total income and not on book profits. ​​ 

MAT for foreign company only if there is PE in India.

A doubt may arise about the applicability of the provisions of section 115JB to foreign companies with reference to the profits derived from operations in India. The Authority for Advance Rulings had occasion to examine this issue and held that the provisions of section 115JA are applicable to foreign companies. According to this decision, a foreign company shall calculate its Indian profits separately for the purpose of MAT. The same analogy shall apply to section 115JB.​​ 

The Authority for Advance Ruling in Praxair Pacific Ltd., In re [2010] 326 ITR 276 (AAR), was dealing with an application for ruling in respect of a company incorporated in Mauritius having an Indian subsidiary running an airlines in India. It made a profit by way of capital gains on transfer of its holding in its Indian subsidiary and sought the benefit of Double Taxation Avoidance Agreement between India and Mauritius, which spares such liability from tax in India. However, the question arose, whether its book profits pertaining to this transaction would be taxable under section 115JB based on the fact that the book profits are understood differently from the income including capital gains in view of the non obstante clause with which the provision begins. It was held that the foreign company, which has only investments in India not holding the shares in its subsidiary as its stock-in-trade, would not be liable to tax in India, merely because it held shares in an Indian company. It has no permanent establishment in India. It is under these circumstances that section 115JB would not be applicable and that capital gains would not, therefore, be taxable as was decided in this case.​​ 

Foreign company LTCG of 10(38)

The issue had come up again in Timken Company, In re [2010] 326 ITR 193 (AAR). A U.S. company was having a joint venture with Tata Iron and Steel Co. Ltd. (TISCO) forming Timken India Ltd. It decided to part with part of its holding in Timken India to Timken Mauritius Ltd. giving rise to liability for tax on capital gains. The shares were those of listed company and had been held for more than 12 months. Since Securities Transaction Tax had been paid, there was no statutory liability for capital gains tax under section 10(38).​​ The ruling was, however, sought, whether there would be liability for MAT on such capital gains. In line with the view taken in Praxair Pacific Ltd.’s case (supra), it was ruled that since the non-resident U.S. company had no permanent establishment in India, it could not be liable for MAT in this case as well.

Set off of credit is before interest

Where short-payment is on account of alternate liability for Minimum Alternate Tax (MAT), the issue was whether the credit under section 115JAA would have to be reduced from the amount of tax payable for purposes of interest chargeable under sections 234A, 234B and 234C.​​ It had been the subject matter of controversy with the Income-tax Department relying upon the format in the tax return for calculation of tax without reckoning the tax credit. Since the interest can be charged only for short- payment in respect of amount due from the assessee, such a stand was untenable with the High Courts not accepting the departmental view. The matter is now finally settled by the Supreme Court by a Bench of three Judges in favour of the taxpayer​​ in CIT v. Tulsyan NEC Ltd. [2011] 330 ITR 226 (SC) affirming [2011] 330 ITR 224 (Mad), while pointing out that a form of return, merely because it is prescribed under the rules, cannot have any effect on the interpretation or operation of the parent statute. It endorsed a number of decisions of various High Courts on the subject.