In a latest judgment, Delhi High Court has ruled that for the computation of book profit for the purpose of Minimum Alternate Tax (MAT) under section 115JB of the Income Tax Act, 1961, amount transferred to all reserves other than specified under section 33AC shall be added back and even the statutory reserve created by a non banking finance company under section 45IC of reserve Bank of India Act, 1934 are not immune for addition.

Case Details:
Income Tax Appeal No. . 371-372/2012
Date of decision : 13th February, 2015
SREI Infrastructure Finance Ltd.. ...... Appellant ; Additional Commissioner of Income Tax…...Respondent
Coram: Hon'ble Mr. Justice Sanjiv Khanna and  Hon'ble Mr. Justice V. Kameswar Rao

Case Laws References
ICDS Vs. Commissioner of Income Tax, Mysore and Anr (2013) 350 ITR 527 (SC)
Commissioner of Income Tax Vs. Shaan Finance (P) Ltd. Bangalore (1998) 231 ITR 308 (SC)
National Rayon Corporation Vs. Commissioner of Income Tax (1997) 227 ITR 764 (SC)
Vazir Sultan Tobacco Company Ltd. Vs. CIT (1981) 132 ITR 559 (SC).
DCM Ltd. Vs. Commissioner of Income Tax [2004] 192 CTR 0408
Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285
Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690
Somaiya Orgeno-Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291
Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, [2010] 320 ITR 577 (SC)

Facts of the Case:
The both appeals were filed under Section 260A of the Income Tax Act, 1961 for assessment years 2006-07 and 2007-08 against the Income Tax Appellate Tribunal. The appeals raised questions on two aspects. The first was related to the higher rate of depreciation for motor vehicles given on lease and the second question was related to computation of book profits under Section 115JB of the Income Tax Act where the assessing officer, while computing book profit for minimum alternate tax (MAT) applied clause (b) to Explanation 1 to Section 115JB (2) and added back amount transferred to statutory reserve created under section 45IC of the reserve Bank of India Act, 1934. The appellant argued that the reserve created as per RBI mandate was a liability and not a reserve. It was also argued that since the appellant does not have any title over the reserve, it is a case of diversion of income at source.

The substantial question of law:
The substantial question of law framed on the two aspects were as under:

“Whether Income Tax Appellate Tribunal has erred in law in reminding the issue of claim of depreciation at the higher rate of 30% to the Assessing Officer in respect of motor vehicles given on lease?”

“Whether on the facts and in the circumstances of the case the Tribunal in computing book profit under Section 115JB was justified in confirming the addition of Rs. 9,80,00,000/- transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934 under Clause (b) of the Explanation to Section 115JB?”

“Whether on the facts and in the circumstances of the case the Tribunal in computing book profit under Section 115JB was justified in confirming the additions of :- (a) Rs. 16,00,00,000/- transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934; and (b) Rs. 18,66,00,000/- transferred to the debt redemption reserve, both under Clause (b) of the Explanation to Section 115JB?”

Judgment:
The first question was answered in favour of the assessee and against the respondent-Revenue. Accordingly it was ruled that the appellant-assessee was entitled to higher rate of depreciation. Regarding question of addition of amount transferred to statutory reserve u/s 45IC, it was ruled in favour of the respondent revenue and against the appellant assessee.

Important Excerpts from the Judgment:

“As noticed by this Court in Commissioner of Income Tax (Central-II) Vs. Goetze (India) Limited [2014] 361 ITR 505 (Del), Sub-section (1) to Section 115JB of the Act begins with a non obstante expression, which gives an overriding effect to the said section.”

“In the present case, we are concerned with clause (b) to Explanation 1 which states that book profit prepared in accordance with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount carried to any reserve by whatever name called, other than a reserve specified under Section 33AC of the Act. The legislature in express, lucid and categorical terms has stipulated that the book profit shall be increased by the amounts carried to any reserve. The word ―any‖, it is obvious, refers to all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression ―reserve by whatever name called‖. There could not have been more clarity and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i.e. book profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under Section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded. Guidance Note on revised Schedule VI to the Companies Act, 1956 by the Institute of Chartered Accountants of India would indicate that reserves and surplus are generally classified as; (a) capital reserve; (b) capital redemption reserve; (c) securities premium reserve; (d) debenture redemption reserve; and, (e) revaluation reserve or other reserves. In addition, there can be share options outstanding account and surplus, i.e. the balance in the statement of profit and loss disclosing allocations and appropriations such as dividend, bonus shares and transferred to/from reserves, etc.”

“The reserve, which is required to be created under Section 45-IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions from the Central Government subject to proviso to sub-section (3) of the said Section.”

“The special reserve under Section 40IC of the Reserve Bank of India Act, 1934 ……………….. was not on account of specific or known liability to repay. It is not the case of charge on profits. It was only appropriation of profits after they had been earned. It is not an expense.”

“…….. reserve under Section 45-IC of the Reserve Bank of India Act, 1934 and debt redemption reserve were below the line allocations, after computing the financial profit and were not treated and regarded as expenditure/liability for the for the purpose of the profit and loss account in the accounts. The amount treated as reserve created under Section 45-IC of the Reserve Bank of India Act, 1934 was not regarded as diversion of income at source by the statutory auditors.”

“Section 45-IC ensures that a Non- Banking Finance Company does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. No separate bank account is required to be maintained. It is an added measure of protection created by the statute, to prevent defaults by the Non Banking Financial Companies. Section 45-IC of the Reserve Bank of India Act, 1934 also permits appropriation but in restricted or controlled manner by a Non Banking Financial Company.”

“As noticed above, provision‘ and ‗reserves‘ are different accounting terms. A provision created to meet a known liability is a charge against the profit. Hence, it is debited to the Profit and Loss account and reduces the profit. Provisions should be created, even if there is insufficient profit. Provision is not, therefore, invested. On the other hand, ‘reserve‘ is only appropriation of profit and, therefore, it is not debited to the Profit and Loss account. The purpose of reserve is to strengthen the financial position and to meet unforeseen liabilities which may arise in future. The reserves are created out of adequate profits…………. Generally reserves are created at the discretion of the management as a matter of prudence, but in certain cases a statute can direct creation of special reserves. For the purpose of Section 115JB of the Act, statutory reserves are treated alike and in a similar manner as other reserves.”

Download Full Judgment Click Here >>