M/S. ICDS LIMITED V. THE DEPUTY COMMISSIONER OF INCOME-TAX

ITA/678/2017

AI Insights

The case involves ICDS Limited, a public limited company engaged in leasing and accepting deposits, which appealed against the decision of the Income Tax Appellate Tribunal (ITAT) regarding the treatment of lease equalization charges for the assessment years 1998-99 to 2000-01. The primary legal contention was whether these charges, treated as provisions for diminution in the value of assets, should be added back to the book profits under Section 115JA of the Income Tax Act, 1961. The ITAT had confirmed the addition, leading to this appeal. The High Court of Karnataka examined the application of Section 115JA, particularly focusing on the interpretation and implications of clause (g) of the Explanation to sub-section (2), which pertains to the calculation of book profits for tax purposes.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 726748 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 03-08-2021
• Assessment Year: misc
• Other Referred Cases: Apollo Tyres Ltd Vs. CIT, Commissioner of Income-Tax Vs. M/s.MGF India Ltd., Prakash Leasing Ltd. Vs. Deputy Commissioner of Income-Tax, Commissioner of Income-Tax Vs. Weizmann Homes Ltd.
• Laws Referred To: Income Tax Act, 1961, Companies Act, 1956
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: JINITHA CHATTERJEE
• Keywords: Assessment years; Book profit; Income tax appellate tribunal; Lease equalization charges; Provision for diminution of value of asset
• Section: 145; 115JA; 211; 260-A

Judgement Text

"1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 3RD DAY OF AUGUST 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR.JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.678 OF 2017 BETWEEN: M/S. ICDS LIMITED SYNDICATE HOUSE MANIPAL - 576104 REP. BY ITS WHOLETIME DIRECTOR SRI. T. MOHANDA PAI AGED 84 YEARS S/O DR. T.M.A. PAI PAN:AAACI43554. ... APPELLANT (BY MISS/SMT. JINITHA CHATTERJEE, ADV., FOR SRI. S. PARTHASARATHI, ADV.) AND: THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1 UDUPI RANGE, CANARA TOWERS MISSION HOSPITAL ROAD UDUPI-576101. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - 2 THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 02.05.2017 PASSED IN ITA NO.1025 TO 1027/BANG/2016, FOR THE ASSESSMENT YEAR 1998-99 TO 2000-01, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II. ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT, DATED 02.05.2017 BEARING ITA NO.1025 TO 1027/BANG/2016 FOR THE ASSESSMENT YEAR 1998-99 TO 2000-01 & ETC. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Years 1998-99 to 2000-01. The appeal was admitted by a Bench of this Court on the following substantial questions of law: a) Whether the Tribunal was justified in holding that lease equalization charges provided is a provision for diminution of value of asset to rope in clause (g) of Explanation to Section 115JA of the Act to increase the book profit for the purpose of determination of tax under the said section? 3 b) Whether the Tribunal was justified in ignoring the direction of this Hon'ble High Court in the Appellant's own case to follow the ratio of the Supreme Court in the case of Apollo Tyres Ltd Vs. CIT (2002) 255 ITR 273 while setting aside the assessment originally made and proceeded to hold the provisions of clause (g) of Explanation to Section 115JA(2) of the Act would apply to increase the book profit for the purpose of determination of tax? 2. Facts leading to filing of this appeal briefly stated are that assessee is a public limited company which is engaged in the business of leasing and accepting deposits from the public. The assessee filed its return of income for Assessment Year 1998-99. The Assessing Officer, while computing the book profit under Section 115JA of the Act, did not allow lease equalization charges and by orders dated 11.02.2015 and 29.01.2015 passed orders of assessment for Assessment Years 1998-99 to 2000-01, respectively. The assessee thereupon filed an appeal against the orders of assessment. The Commissioner of Income Tax (Appeals), by orders dated 08.03.2016 for Assessment Years 1998-99 to 4 2000-01, has deleted the addition on account of lease equalization charges and allowed the appeal. The revenue filed appeal before the Income Tax Appellate Tribunal. The Tribunal, by a common order dated 02.05.2017, has confirmed the addition on account of lease equalization charges. In the aforesaid factual background, this appeal has been filed. 3. Learned counsel for the assessee submitted that the assessee can be charged only on real income which can be calculated after applying the prescribed accounting method as per guidance note of the Institute of Chartered Accountants of India (ICAI). It is further submitted that on conjoint reading of Section 145 of the Act with Section 211 of the Companies Act, 1956, it is evident that the assessee is entitled to make such a bifurcation and there is no illegality in the same. It is further submitted that lease equalization charges have to be taxed to the extent of real income and the method of calculating the income has to be followed by applying guidance note of ICAI. It is also submitted that the Tribunal has cited the first substantial question of law 5 mentioned in the order dated 02.05.2017 passed in ITA Nos.1025-27/2016 and relying on the answer to substantial question of law No.2. In support of aforesaid submission, reliance has been placed on the decisions of High Court of Delhi in 'COMMISSIONER OF INCOME-TAX Vs. M/s.MGF INDIA LTD.' DATED 21.02.2018 PASSED IN ITA NO.378/2004 and 'PRAKASH LEASING LTD. Vs. DEPUTY COMMISSIONER OF INCOME-TAX' (2012) 208 TAXMANN 464. 4. On the other hand, learned counsel for the revenue submitted that lease equalization charges is in the nature of provision for diminution in the value of assets and the aforesaid fact has been admitted by the assessee before this Court and the Tribunal has therefore rightly answered the issue whether the aforesaid amount can be added back to book profit under Section 115JA of the Act. In support of aforesaid submission, reliance has been placed on the decisions of the Supreme Court in 'APOLLO TYRES LTD. Vs. COMMISSIONER OF INCOME-TAX' (2002) 122 TAXMAN 562 (SC) AND 'COMMISSIONER OF INCOME-TAX Vs. 6 WEIZMANN HOMES LTD.' (2013) 33 TAXMANN.COM 171 (KAR). 5. We have considered the submissions made on both sides and have perused the record. The issue involved in this appeal is whether lease equalization charges debited to profit and loss account has to be added to the book profit. The relevant extract of Section 115JA of the Act reads as under: \"115JA. Deemed income relating to certain companies.—(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. of such book profit. (2) Every assessee, being a company, shall, for the purposes of this section prepare its profit 7 and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956) which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. Explanation.—For the purposes of this section, \"book profit\" means the net profit as shown in the profit and loss account for the relevant 8 previous year prepared under sub- section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; (g) the amount or amounts set aside as provisions for diminution in the value of any asset, if any amount referred to in clauses (a) to (g) is debited to the profit and loss account, and as reduced by, xxxxxxx\" 9 It is pertinent to note that clause (g) to explanation to sub-section (2) of Section 115JA of the Act has been inserted by Finance Act, 2009 w.e.f. 01.04.1998. The aforesaid provision applies to companies. It provides that if total income of the company as computed under the provisions of the Act is less than 30% of the book profit, the total income of such assessee is chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of the such book profit. The explanation to sub-section (2) provides that for the purposes of this section book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by the amounts mentioned in clauses (a) to (g). 6. In the instant case, the assessee made a provision of Rs.11,09,04,763/- on account of lease equalization charges. The aforesaid provision was made for meeting the liabilities other than the ascertained liabilities as provided in clause (g) of explanation to sub-section (2) of Section 115JA of the Act. This amount which was earmarked as a provision of diminution in the value of the asset for the purposes of 10 arriving at book profit under Section 115JA of the Act, ought to have been included in view of retrospective operation of clause (g) to sub-section (2) to Section 115JA of the Act. Similar view has been taken by another Division Bench of this Court in COMMISSIONER OF INCOME-TAX Vs. WEIZMANN HOMES LTD., supra. Therefore, the Tribunal has rightly held that the aforesaid amount has to be added back to book profits for the purpose of determining deemed income under Section 115JA of the Act as it is specifically authorized by clause (g) to sub-section (2) to Section 115JA of the Act. For the aforementioned reasons, the substantial questions of law are answered against the assessee and in favour of the revenue. In the result, the appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE RV "