ITO 7(3)(2), MUMBAI V. UNITED ESTATE P LTD, MUMBAI

ITA 6049/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59811 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 05-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 05-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBHACHAN RAM
• Assessee Lawyers: V C SHAH
• Keywords: Depreciation; Advance ruling; Fair market value; Valuation report; Scheme of amalgamation
• Section: 115JB; 11

Judgement Text

IN THE INCOME TAX APPELLATE APPELLATE APPELLATE APPELLATE TRIBUNAL MUMBAI BENCH F MUMBAI BEFORE SHRI D. MANMOHAN (VICE PRESIDENT) & SHRI T.R.SOOD, ACCOUNTANT MEMBER I.T.A.NO.6049/MUM/2010 A.Y 2007-08 THE INCOME TAX OFFICER-7(3)(2), MUMBAI. VS. M/S UNITED ESTATE P. LTD., 1404, ARCADIA, NCPA MARG, NARIMAN POINT, MUMBAI 400 020. PAN: AAACU 4558 Q (APPELLANT) (RESPONDENT) APPELLANT BY : MR. SUBHACHAN RAM. CIT DR RESPONDENT BY : MR. V.C.SHAH. DATE OF HEARING: 5-01-2012. DATE OF PRONOUNCEMENT: 03-02-2012. O R D E R PER T.R.SOOD, AM: IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWING T WO GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN HOLDING THAT THE RESERVES CREATED ON R EVALUATION OF THE ASSETS OF THE AMALGAMATED COMPANY WILL NOT BE ADDED WHILE CALCULATING BOOK PROFITS FOR THE PURPOSES OF SEC.1 15JB OF THE ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN NOT APPRECIATING THAT CLAUSE(B) OF THE EXPLANATION(1) OF SEC. 11 5JB PROVIDES THAT FOR CALCULATING BOOK PROF IT THE PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT HAS TO BE INCR EASED BY ALL RESERVES BY WHATEVER NAME CALLED, OTHER THAN A RESERVE SPECI FIED ULS.33AC. 2. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG THE ASSESSMENT PROCEEDINGS AO NOTICED THAT DURING THE F .Y UNDER CONSIDERATION TWO COMPANIES VIZ., M/S UNITED REAL E STATES AND BUILDINGS PVT. LTD. AND M/S. SUKHSAGAR DEVELOPERS P VT. LTD. [WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY] HAVE BE EN AMALGAMATED ITA NO.6049 OF 2010 2 UNDER THE SCHEME OF AMALGAMATION VIDE ORDER OF THE HON'BLE BOMBAY HIGH COURT DATED 27-4-2007. THESE COMPANIES WERE AM ALGAMATED INTO M/S. UNITED ESTATES PVT. LTD., I.E. THE ASSESSEE CO MPANY AND AS PER THE ORDER OF THE HIGH COURT THE EFFECTIVE DATE OF AMALG AMATION WAS 1-1- 2007. THE AO VERIFIED THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET OF THE ASSESSEE COMPANY AND NOTED THAT IN THE BALANCE SHEET A RESERVE OF RS.39,79,89,292/- WAS CREDITED BY TRANSFER THE SAME FROM PROFIT & LOSS ACCOUNT. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WH Y THE SAME SHOULD NOT BE ADDED TO THE BOOK PROFITS AS PER THE PROVISI ONS OF SEC.115JB. IN RESPONSE TO THIS SHOW CAUSE NOTICE IT WAS MAINLY PL EADED THAT THE ASSESSEE COMPANY PREPARED THE ACCOUNTS IN ACCORDANC E WITH PART II & PART III OF SCHEDULE VI OF THE COMPANIES ACT, 1956 AND NONE OF THE PROVISIONS OF SEC.115JB HAVE BEEN VIOLATED WHILE PR EPARING THE PROFIT & LOSS ACCOUNT. THE BREAK UP OF THE GENERAL RESERVE I S AS UNDER: (I) SHARE PREMIUM ACCOUNT 1,40,00,000 (II) GENERAL RESERVE 38,32,08,934 (III) PROFIT AND LOSS ACCOUNT 7,80,348 ---------------- TOTAL 39,79,89,282 IT WAS CONTENDED THAT THE SAID GENERAL RESERVE WAS CREATED ON THE TAKE OVER OF M/S. UNITED ESTATES PVT. LTD. AND M/S. SUKHSAGAR DEVELOPERS PVT. LTD. IN PURSUANCE OF THE SCHEME OF AMALGAMATION. AS PER THE SCHEME THE ASSETS I.E. WORK-IN-PROGRESS WER E VALUED AT MARKET VALUE BASIS AS PER THE VALUATION REPORT WHICH RESUL TED IN THIS RESERVE AND THE SAME HAS BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS AS PER THE SCHEME OF AMALGAMATION AS APPROVED BY THE HON'B LE HIGH COURT AS ITA NO.6049 OF 2010 3 WELL AS ACCORDING TO THE ACCOUNTING STANDARDS ISSUE D FOR AMALGAMATION BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. IT WAS CLARIFIED THAT DEBIT IN THE PROFIT & LOSS ACCOUNT WAS ON ACCOUNT O F VALUE OF WORK-IN- PROGRESS AND U/S.115JB AND SAME COULD BE ADJUSTED O NLY IN RESPECT OF ADJUSTMENTS PROVIDED UNDER EXPLANATION 1 TO SEC.115 JB AND DEBIT IN RESPECT OF ONE WORK-IN-PROGRESS WAS NOT INCLUDED AS ONE OF THE ADJUSTMENTS. THE ASSESSEE HAS NOT DEBITED ANY RESER VE TO THE PROFIT & LOSS ACCOUNT. IT WAS ALSO ARGUED THAT ASSESSEE HAS NOT EARNED ANY INCOME ON SALE OF ANY PREMISES AND, THEREFORE, THER E BEING NO INCOME THERE WAS NO QUESTION INVOKING PROVISIONS OF SEC.11 5JB. IT WAS ALSO SUBMITTED THAT AS PER CLAUSE (B) OF EXPLANATION 1 T O SEC.115JB ONLY ACTUAL AMOUNT CARRIED TO RESERVE ARISING OUT OF PRO FIT COULD BE CONSIDERED FOR ADJUSTMENT AND NOTIONAL INCREASE TO RESERVE BY WAY OF REVALUATION OF WORK-IN-PROGRESS COULD NOT BE CONSID ERED UNDER THE SAME CLAUSE. IT WAS ALSO CLARIFIED THAT WORK-IN-PRO GRESS CONSISTED OF COST OF WORK-IN-PROGRESS ACQUIRED ON AMALGAMATION A ND NO FURTHER COST WAS INCURRED. IT WAS ALSO CONTENDED THAT IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES L TD. VS. CIT [255 ITR 273], IT WAS NOT OPEN TO THE ASSESSING OFFICER TO RE-SCRUTINIZE THE ACCOUNTS TO VERIFY WHETHER THE SAME HAVE BEEN PREPA RED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT . RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HON'BLE BOMBAY H IGH COURT IN THE CASE OF KINETIC MOTOR CO. LTD. VS. DCIT [262 ITR 33 0]. THE AO AFTER EXAMINING THE ABOVE SUBMISSIONS NOTED THAT A GENERA L RESERVE ITA NO.6049 OF 2010 4 AMOUNTING TO RS.39,79,89,282/- HAS BEEN CREDITED IN THE BALANCE SHEET BY TRANSFERRING THE SAME FROM PROFIT & LOSS ACCOUNT . FURTHER A SUM OF RS.47,39,19,646/- HAS BEEN DEBITED TO PROFIT & LOSS ACCOUNT. OUT OF THE ABOVE A SUM OF RS.39,79,89,282/- HAS BEEN CREDITED AS RESERVE. THE AO ALSO OBSERVED THAT THE DECISIONS OF HON'BLE SUPR EME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT [SUPRA], AND ALSO OF BOMBAY HIGH COURT IN THE CASE OF KINETIC MOTOR CO. LTD. VS. DCI T [SUPRA], WERE OF NO RELEVANCE BECAUSE HE HAS NOT ALTERED OR DISTURBED T HE PROFIT & LOSS ACCOUNT GIVEN BY THE COMPANY. THEREAFTER HE COMPUTE D THE BOOK PROFITS U/S.115JB AS UNDER: COMPUTATION OF INCOME U/ S 115JB NET PROFIT AS PER P&L A/C 43,883/- ADD:- AMOUNT REFERRED TO IN CLAUSES (A) TO (F) - OF THE EXPLANATION OF SUB-SECTION (2) OF THIS SECTI ON I) PROVISION FOR TAX 56,000/- II) AMOUNT CARRIED TO GENERAL RESERVE 39,79,89282 /- BOOK PROFIT RS 398,089,165/ - 10% OF THE BOOK PROFIT 398,08,917/- 3. BEFORE THE CIT(A) IT WAS MAINLY CONTENDED THAT T HE AMALGAMATION WAS APPROVED BY THE HIGH COURT OF BOMB AY AND AS PER THE REQUIREMENTS OF AMALGAMATION, ASSETS AND LIABIL ITIES HAVE TO BE VALUED AT FAIR MARKET VALUE AND THE SAME WERE VALUE D ON THE BASIS OF THE REPORT OF A VALUER AS ON 1-1-07 AND THE RESULTI NG DIFFERENCE DUE TO THIS AMALGAMATION WAS CREDITED TO GENERAL RESERVE O N 1-1-2007. ALL THESE TRANSACTIONS HAVE BEEN INCORPORATED IN THE PR OFIT & LOSS ACCOUNT AND THE PROFIT & LOSS ACCOUNT MAINLY CONSISTS OF VA LUE OF WORK-IN- PROGRESS RECEIVED ON AMALGAMATION AND CURRENT REVEN UE TRANSACTIONS. IT WAS ARGUED THAT PERUSAL OF THE PROFIT & LOSS ACC OUNT WOULD SHOW THAT ITA NO.6049 OF 2010 5 NO DEBIT WAS MADE DURING THE YEAR ON ACCOUNT OF GEN ERAL RESERVE AND ACCORDINGLY AO HAS WRONGLY CONCLUDED THAT THE GENER AL RESERVE AMOUNTING TO RS.39,79,89,282/- HAS BEEN CREDITED IN THE BALANCE SHEET BY TRANSFERRING THE SAME FROM THE PROFIT & LOSS ACC OUNT. IT WAS CONTENDED THAT ACCOUNTING STANDARDS (AS-14) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SPECIFIED ACCOUNTING FOR AMALGAMATION PROVIDED AS PER CLAUSE 23 AS UNDER: THE SCHEME OF AMALGAMATION SANCTIONED UNDER THE PR OVISIONS OF THE COMPANIES ACT,1956 OR ANY OTHER STATUTE MAY PRESCRI BE THE TREATMENT TO BE GIVEN TO THE RESERVES OF THE TRANSFEROR COMPA NY AFTER ITS AMALGAMATION. WHERE THE TREATMENT IS SO PRESCRIBED; THE SAME IS FOLLOWED. IT WAS CONTENDED THAT ASSESSEE HAS SIMPLY FOLLOWED THE ORDER OF THE HIGH COURT AND GAVE THE TREATMENT TO VARIOUS ITEMS AS ORDERED BY THE HIGH COURT. IT WAS ALSO ARGUED THAT IN ANY CASE SEC .43C OF THE I.T.ACT, 1961 WHICH HAS BEEN SPECIFICALLY ENACTED FOR VALUAT ION OF ASSETS IN CASE OF AMALGAMATION PROVIDES THAT ONLY THE ORIGINAL COS T OF SUCH ASSETS HAD TO BE RECKONED, WHICH MEANS ANY REVALUATION RESERVE HAS TO BE IGNORED. SINCE ONE COULD NOT MAKE ANY PROFIT ON REV ALUATION WITHOUT ANY SALE, THERE WAS NO QUESTION OF INVOKING THE PRO VISIONS OF SEC.115JB. FURTHER REFERENCE MAY BE MADE TO SEC.32 OF THE I.T.ACT WHICH DEALS WITH DEPRECIATION AND CLEARLY PROVIDES THAT WHEN REVALUATION OF FIXED ASSETS IS DONE ON AMALGAMATION , SAME HAS TO BE IGNORED FOR THE PURPOSE OF GRANT OF DEPRECIATION. R ELIANCE WAS ALSO PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF APOLLO ITA NO.6049 OF 2010 6 TYRES LTD. VS. CIT [SUPRA], FOR THE PROPOSITION THA T AO HAS NO POWER TO SCRUTINISE THE ACCOUNTS. 4. THE LD. CIT(A) AFTER CONSIDERING THE ABOVE SUBMI SSIONS DISCUSSED VARIOUS CLAUSES OF AMALGAMATION SCHEME AP PROVED BY THE HON'BLE HIGH COURT AND OBSERVED THAT NO RESERVE HAS BEEN CREDITED AND THE EXCESS OR DEFICIT IN THE AMALGAMATION ENTRI ES HAS BEEN CARRIED TO THE RESERVE ACCOUNT WHICH IS NOT A CASE OF CREAT ION OF RESERVE. HE ALSO OBSERVED THAT AS PER SEC.43C COST OF ACQUISITI ON IN CASE OF AMALGAMATION SHALL BE THE COST OF ASSET TO THE AMAL GAMATING COMPANY AND, THEREFORE, ANY INCREASE IN THE COST OF ASSETS DUE TO AMALGAMATION WOULD BE IGNORED. HE ALSO OBSERVED THAT ONE CANNOT MAKE PROFIT MERELY ON REVALUATION OF ASSETS, THEREFORE, SAME CO ULD NOT BE CONSIDERED FOR THE PURPOSE OF SEC.115JB AND THERE C ANNOT BE ANY DICHOTOMY BETWEEN THE PROVISIONS OF SEC.115JB AND S EC.43C(1). THE LD. CIT(A) THEREAFTER RELIED ON THE DECISIONS OF TH E HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. M. CT. M. CORPORATION PVT. LTD. [221 ITR 524] AND HON'BLE SUPREME COURT IN THE CASE OF NATIO NAL HYDROELECTRIC POWER CORPORATION LTD. VS. CIT [320 ITR 374], AND H ELD THAT ADDITIONS ON ACCOUNT OF NOTIONAL RESERVE TO BOOK PROFITS WERE NOT MAINTAINABLE AND ACCORDINGLY DELETED THE SAME. 5. BEFORE US, LD. DR SUBMITTED THAT THE AO HAS NOT RESCRUTINISED /RECASTED ACCOUNTS, THEREFORE, THE DECISION OF HON' BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT [SUPRA] HA S NO RELEVANCE ON THE ISSUE BEFORE US. HE CARRIED US THROUGH EXPLANATION 1 (B) TO SEC.115JB ITA NO.6049 OF 2010 7 AND POINTED OUT THAT ANY AMOUNT CARRIED TO ANY RESE RVE BY WHATEVER NAME CALLED HAS TO BE ADDED BACK. IN CASE BEFORE US ASSESSEE HAS DEBITED A SUM OF RS.47,39,19,646/- IN THE PROFIT & LOSS ACCOUNT BUT THAT AMOUNT ALSO INCLUDES THE AMOUNT OF GENERAL RES ERVE WHICH WAS CARRIED TO THE BALANCE SHEET. IN THIS REGARD HE REF ERRED TO PAGE-22 OF THE PAPER BOOK WHICH IS THE COPY OF THE PROFIT & LO SS ACCOUNT AND ALSO PAGE 23 OF THE PAPER BOOK WHICH IS COPY OF SCHEDULE II OF THE BALANCE SHEET DEALING WITH THE RESERVES AND SURPLUS. HE POI NTED OUT THAT, IN FACT, THE RESERVE HAS BEEN CREDITED OUT OF VALUE OF OPENING WORK-IN- PROGRESS AND, THEREFORE, IT IS CLEAR THAT BY DEBITI NG THE PROFIT & LOSS ACCOUNT BY A SUM OF RS.47,39,19,646/- ASSESSEE HAS DEBITED PROFIT & LOSS ACCOUNT EVEN BY THE AMOUNT OF RESERVE, HENCE, SAME WAS CLEARLY COVERED BY THE DEFINITION OF CLAUSE (B) OF EXPLANAT ION 1 TO SEC.115JB. HE ALSO SUBMITTED THAT SEC.43C HAS NO RELEVANCE FOR COMPUTING THE PROFITS U/S.115JB. 6. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE R EITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) AND EMPHASISED T HAT NO RESERVE HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT. IN F ACT, COST OF WORK-IN- PROGRESS HAS BEEN REVALUED AS PER THE VALUATION REP ORT AND HAS BEEN DEALT WITH AS PER AS-14, WHICH CLEARLY RECOMMENDS I N THE SCHEME OF AMALGAMATION TREATMENT TO VARIOUS RESERVES HAVE TO BE GIVEN AS PER THE VARIOUS STATUTORY PROVISIONS AND THE SCHEME. TH E AMALGAMATION WAS SANCTIONED BY THE HON'BLE HIGH COURT AND COPY O F HIGH COURTS ORDER IS ANNEXED IN THE PAPER BOOK WHEREIN IT WAS C LEARLY PROVIDED THAT ITA NO.6049 OF 2010 8 EXCESS OR DEFICIT SHALL BE CREDITED BY THE TRANSFER EE COMPANY TO THE GENERAL RESERVE OR DEBITED TO THE GOOD WILL, AS THE CASE MAY BE. HE REFERRED TO PAGE-19 OF THE PAPER BOOK WHICH IS A CO PY OF THE GOURNAL ENTRIES MADE REGARDING WORK-IN-PROGRESS, WHICH RESU LTED IN SURPLUS AND HAS BEEN CARRIED TO THE GENERAL RESERVE AND PROFIT & LOSS ACCOUNT HAS NOT BEEN DEBITED FOR CREATION OF THIS RESERVE AND I N THIS REGARD HE REFERRED TO PAGES 22 AS WELL AS 41 OF THE PAPER BOO K WHICH ARE THE COPIES OF THE PROFIT & LOSS ACCOUNTS. HE ALSO SUBMI TTED THAT SEC.43C WHICH IS APPLICABLE TO AMALGAMATION, CLEARLY PROVID ES THAT COST OF ASSETS HAS TO BE TAKEN AT THE SAME FIGURE WHICH WAS FOR THE AMALGAMATING COMPANY AND INCREASE, IF ANY, HAS TO B E IGNORED. THEREFORE, ASSESSEE COULD NOT POSSIBLY MAKE ANY PRO FIT MERELY ON REVALUATION. THE LD. COUNSEL OF THE ASSESSEE RELIED ON THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS . M. CT. M. CORPORATION PVT. LTD.[SUPRA] WHEREIN IT WAS CLEARLY HELD THAT ANY TRANSFER MADE DURING THE AMALGAMATION CANNOT GIVE R ISE TO ANY CAPITAL GAIN. 7. THE LD. COUNSEL OF THE ASSESSEE ALSO SUBMITTED T HAT CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB WAS NOT APPLICABLE IN THE CASE BEFORE US BECAUSE NO AMOUNT HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT. HE SUBMITTED THAT THE HON'BLE SUPREME COURT HAS CLEARL Y DECIDED THIS ISSUE BY MAKING SIMILAR OBSERVATIONS IN THE CASE OF NATIONAL HYDROELECTRIC POWER CORPORATION LTD. VS. CIT [SUPRA ]. ALTERNATIVELY HE SUBMITTED THAT ADDITION BY THE AO ON ACCOUNT OF RES ERVE ALSO CONTAINS ITA NO.6049 OF 2010 9 A SUM OF RS.1.40 CRORES ON ACCOUNT OF SHARE PREMIUM ACCOUNT AND RS.7,80,348/- ON ACCOUNT OF CREDIT BALANCE IN THE P ROFIT & LOSS ACCOUNT WHICH WAS MERELY A TRANSFER ENTRY AND CANNOT BE CAL LED A DEBIT TO THE PROFIT & LOSS ACCOUNT, BECAUSE SUCH AMOUNT ALREADY STOOD ON THE CREDIT SIDE OF AMALGAMATING COMPANY AND THEREFORE THERE IS NO JUSTIFICATION FOR TAKING THESE AMOUNTS ALSO INTO RESERVE ACCOUNT. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. WE AGREE WITH THE SUBMISSIONS OF THE LD. DR THAT THE DECISIO N OF HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT [SUPRA] HAS NO RELEVANCE BECAUSE AO HAS NOT TRIED TO RECAST THE PR OFIT & LOSS ACCOUNT. SIMILARLY, LD. DR WAS RIGHT IN POINTING OUT THAT TH E DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. M. CT. M. CORPORATION PVT. LTD. [SUPRA] IS ALSO OF NO RELEVANCE BECAUSE THAT C ASE WAS DECIDED UNDER THE NORMAL PROVISIONS OF THE ACT AND DEALT WI TH AN ISSUE WHETHER WHERE COMPANIES WERE AMALGAMATED AND ALLOTMENT OF S HARES ON SUCH AMALGAMATION WOULD RESULT INTO ANY PROFIT OR NOT. S IMILARLY, SEC.43C IS ALSO OF NO RELEVANCE BECAUSE THOUGH THE SECTION DEA LS WITH THE COST OF ASSETS DURING AMALGAMATION AND PROVIDES THAT COST O F ASSETS IN CASE OF AMALGAMATION HAS TO BE RECKONED ONLY THAT COST WHIC H WAS INCURRED BY THE AMALGAMATING COMPANY AS INCREASED BY THE COST O F IMPROVEMENT ETC. THIS MEANS ANY REVALUATION HAS TO BE IGNORED B UT THE WHOLE PROVISION DEALS WITH THE NORMAL PROVISIONS OF COMPU TATION AND, IN OUR OPINION, HAS NO RELEVANCE FOR DETERMINATION OF BOOK PROFITS. ITA NO.6049 OF 2010 10 9. THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET OF T HE ASSESSEE COMPANY READ AS UNDER: P&L FOR YEAR ENDED ON 3JST MARCH 2007 PARTICULARS (DR) PARTICULARS (CR.) EXPENDITURE (COST OF PROPERTIES SOLD ) 1,517,163 WI P OPENING- NIL ADD-ADDITION AMALGAMATION- AS PER SCHEME OF 473,919,646 ADD DIRECT EXPENSES INCURRED DURING THE YEAR 168,915 ADD- EXPENSES INCURRED DURING THE YEAR- FINANCE COST- 1,050,714 PERSONNEL EXPENSES 328,729 DEPRECIATION 83,362 PROVISION FOR TAXES 56,000 475,598,694 INCOME SALE OF DEVELOPED PROPERTIES OTHER INCOME CLOSING- WORKING IN PROGRESS 1,615,000 2,046 475,598,694 NET PROFIT (AFTER TAXATION) 43,883 477,215,740 477,215,740 BALANCE SHEET AS ON 31ST MARCH 2007 LIABILITIES ASSET SHARE CAPITALS 9,000,000 (100,000) W.I.P. 475,598,694 RESERVE AND SURPLUS 397,989,282 (NIL) CURRENT LIABILITIES ADVANCES 38,626,878 TOTAL 437,239,171 TOTAL 437,239,17 1 ITA NO.6049 OF 2010 11 THIS HAS BEEN RECASTED IN HORIZONTAL VERSION AT PAG E 41A WHICH IS AS UNDER: UNITED ESTATES PVT. LTD. FOR THE YEAR ENDED ON 31.03.2007 PARTICULARS DEBIT RS. DEBIT RS. PARTICULARS CREDIT RS. CREDIT RS. TO STOCK OF READY PREMISES FLAT AT JOGESHWARI PROJECT 12,40,000 1,24,000 BY SALE OF FLAT BY OTHER INCOME 16,15,000 2,046 TO WORK IN PROGRESS OF AMALGAMATED COMPANIES BY CLOSING WORK IN PROG. PROJECT 1-AQUA MARINE I 24,00,00,000 PROJECT 1-AQU A MARINE I 24,08,06,324 PROJECT 2-AQUA MARINE III 23,00,00,000 PROJECT 2-A QUA MARINE III 23,08,26,441 PROJECT 3-UNITED TOWER PROJECT 3 UNITED TOWER 13 ,52,860 PHASE II 13,12,355 PHASE II PROJECT-4 KURLA 26,07,291 47,39,19,646 PROJECT 4-KU RLA 26,13,069 47,55,98,694 TO DIRECT EXPENSES PROJECT 1-AQUA MARINE I 85,087 PROJECT 2-AQUA MARINE III 73,727 PROJECT 3-UNITED TOWER PHASE II 10,101 1,68,915 TO MAINT. EXP. OF FLAT IN STOCK 2,77,163 TO FINANCE EXPENSES 10,50,714 TO PERSSONEL EXPENSES SALARY 45,000 TRAVELLING EXP. 2,329 47,329 TO DEPRECIATION EXP. 83,362 TO ADMINISTRATIVE EXPENSES AUDITORS REMUNERATION 52,807 LEGAL & PROFESSIONAL CHARGES 11,224 PRELIMINARY EXPENSES W/O 1,13,822 BANK CHARGES 6,211 INSURANCE EXPENSES 12,600 MISCELLANEOUS EXPENSES 23,854 PETROL EXPENSES 57,213 TELEPHONE EXPENSES 13,906 INTEREST 37,092 3,28,729 BY NET PROFIT TRANSFERRED 99,883 TOTAL 47,72,15,741 TOTAL 47,72,15,741 THE CASE OF THE AO IS THAT WHEN THE SUM OF RS.47,39 ,19,646/- WAS DEBITED TO THE PROFIT & LOSS ACCOUNT IT CONSISTED T HE AMOUNT OF RESERVE ALSO. THE LD. DR MAINLY RELIED ON THIS PORTION BECA USE AS PER CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB AMOUNT CARRIED TO ANY RESERVE BY WHATEVER NAME CALLED HAS TO BE CONSIDERED FOR ADJUS TMENT UNDER CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB. ON THE OT HER HAND, THE CASE ITA NO.6049 OF 2010 12 OF THE ASSESSEE IS THAT IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF NATIONAL HYDROELECTRIC POWER C ORPORATION LTD. VS. CIT [SUPRA] THIS CANNOT BE TREATED AS A DEBIT TO TH E PROFIT & LOSS ACCOUNT. IN THE CASE OF NATIONAL HYDROELECTRIC POWE R CORPORATION LTD. VS. CIT [SUPRA] THE HEAD NOTE OF THE DECISION READS AS UNDER: TO MAKE AN ADDITION UNDER CLAUSE (B) OF EXPLANATIO N I TO SEC OF THE INCOME-TAX ACT, 1961, PROVIDING FOR TAXING THE BOOK PROFIT OF CERTAIN COMPANIES TWO CONDITIONS MUST BE JOINTLY SATISFIED: (A) THERE MUST BE A DEBIT OF THE AMOUNT TO THE PROFIT AND LOSS ACCOUNT, AND (B) THE AMOUNT SO DEBITED MUST BE CARRIED TO THE RESERVE. FURTHER, THE RESERVE CONTEMPLATED BY CLAUSE (B) OF EXPLANATION 115JB(2) IS REQUIRED TO BE CARRIED PROFIT AND LOSS ACCOUNT. THE FACTS IN THIS CASE AS RECORDED BY THE HON'BLE S UPREME COURT IN PARA-8 ARE AS UNDER: ACCORDING TO THE AUTHORITY FOR ADVANCE RULINGS (AA R), THE ASSESSEE SUPPLIED ELECTRICITY AT THE TARIFF RATE NOTIFIED BY CERC AND RECOVERED THE SALE PRICE, WHICH BECAME ITS INCOME; THAT, IN F UTURE THE SAID SALE PRICE WAS NEITHER REFUNDABLE NOR ADJUSTABLE AGAINST THE FUTURE BILLS; THAT, THE SALE PRICE (WHICH INCLUDES AAD) WAS SHOWN AS 'SALES' IN THE P&L A/C; THAT, IT WAS RECEIVED IN TERMS OF THE INVO ICE RAISED BY THE ASSESSEE AND, THEREFORE, IT WAS 'INCOME' IN THE YEA R, OF RECEIPT. HOWEVER, ACCORDING TO AAR, WHEN IT CAME TO COMPUTAT ION OF BOOK PROFIT, ASSESSEE DEDUCTED THE AAD COMPONENT FROM TO TAL SALE PRICE AND ONLY THE BALANCE AMOUNT NET OF AAD WAS TAKEN INTO P &L A/C AND BOOK PROFIT. CONSEQUENTLY, AAR RULED (WHICH IS CHALLENGE D HEREIN) THAT REDUCTION OF AAD FROM THE 'SALES' WAS NOTHING BUT A RESERVE WHICH HAS TO BE ADDED BACK ON THE BASIS OF CL. (B) OF EXP LN. 1 TO S. 115JB OF THE IT ACT, 1961 ('1961 ACT', FOR SHORT). AFTER QUOTING THE PROVISIONS OF CLAUSE (B) OF EXPLA NATION 1 TO SEC.115JB THE HON'BLE SUPREME COURT OBSERVED THAT THERE WAS NO DEBIT IN THE PROFIT & LOSS ACCOUNT AND THE AMOUNT DID NOT ENTER INTO THE STREAM OF INCOME FOR THE PURPOSE OF DETERMINATION OF NET PROF IT AND HENCE CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB WAS NOT APPLICABL E. ITA NO.6049 OF 2010 13 10. NOW LET US SEE THE FACTS OF THE CASE BEFORE US IN THE LIGHT OF THE ABOVE DECISIONS. THE AS-14 RECOMMENDS THE TREATMENT OF VARIOUS RESERVES ETC., AS UNDER: THE SCHEME OF AMALGAMATION SANCTIONED UNDER THE PR OVISIONS OF THE COMPANIES ACT,1956 OR ANY OTHER STATUTE MAY PRESCRI BE THE TREATMENT TO BE GIVEN TO THE RESERVES OF THE TRANSFEROR COMPA NY AFTER ITS AMALGAMATION. WHERE THE TREATMENT IS SO PRESCRIBED; THE SAME IS FOLLOWED. THE HON'BLE HIGH COURT WHILE SANCTIONING THE SCHEME HAS DEALT WITH THIS ISSUE IN CLAUSE 13 AND THE ISSUE REGARDING TRE ATMENT OF RESERVE IS CONTAINED IN CLAUSE 13.4 WHICH READS AS UNDER: 13.4 THE EXCESS OR DEFICIT, IF ANY, REMAINING AFTE R RECORDING THE AFORESAID ENTRIES SHALL BE CREDITED BY THE TRANSFER EE COMPANY TO GENERAL RESERVE OR DEBITED TO GOODWILL, AS THE CASE MAY BE. FROM THE ABOVE IT IS CLEAR THAT ASSESSEE HAS SIMPLY DEBITED THE AMOUNT OF WORK-IN-PROGRESS AT THE NEW VALUE AND THEREFORE IT CANNOT BE SAID THAT IT CONSISTS OF RESERVE ALSO. IN FACT, THE RESE RVE WAS GENERATED BECAUSE OF THE JOURNAL ENTRIES WHICH HAVE BEEN EXTR ACTED BY THE LD. CIT(A) AT PAGES 11 TO 13 WHICH ARE AS UNDER: ON ACCOUNT OF AMALGAMATION OF UNITED REAL ESTATE BU ILDINGS P.LTD. DATE 1-1-2007 DETAILS DEPOSIT FOR CELLULAR PHONE DEPOSIT - UNIVERSAL MOTORS DEPOSIT TATA TELE SERVICE FRINGE BENEFIT TAX (A (2007-08) ADVANCE INCOME TAX (A.Y. 2006-07) ADVANCE MISC. TO STAFF PREPAID INSURANCE EXPENSES INTEREST RECEIVABLE PROPOSED SOCIETIES A/C ICICI BANK LTD. DEVELOPMENT CREDIT BANK CASH ON HAND AT UNITED TOWER JOGESHWARI WORK IN PROGRESS UNITED TOWER PHASE II WORK IN PROGRESS BALMORAL VILLA DEBIT RS. 8,500 5,000 500 41,586 614,537 194,000 44,656 40 63,309 3,787 647 101,235 1,240,000 1,312,355 230,000,000 CREDIT RS. ITA NO.6049 OF 2010 14 WORK IN PROGRESS KURLA FIXED ASSETS INVESTMENTS - EQ SHARE - UNITED R E & B P. TO LTD.A/C TO PREF. SHARE CAPITAL A/C TO PROFIT & LOSS ACCOUNT TO ICICI LOAN (CAR SKODA) TO UNSECURED LOAN UNITED ESTATE P. LTD. TO UNITED BUILDERS TO KASHMIRA M U KAISER TO ABDUL N KAREDIA TO AKBERALI N MAKNOJIA TO AMINA A MERCHANT TO AMINAMERCHANT TO AZIZ MERCHANT TO HAFIZA U SHAMA TO LMRAN N MAKNOJIA TO MAKSON REALTORS P. LTD. TO MAKSON TRADING & INVEST P. LTD. TO MRS. MUMTAZ N MASANI TO SAIZAD N MAKNOJIA TO SHAMIM MERCHANT TO UNIMAX REALTORS P. LTD TO UNITED ESTATE P. LTD. TO UNITED RESSORTS & RETREATS P LTD. TO UTNITED SHELTERS P. LTD. TO USMAN J SHAMA TO YASMIN R KAREDIA TO TELEPHONE EXPENSES PAYABLE TO PROFESSIONAL FEES PAYABLE TO FBT PAYABLE TO SECURITY EXPENSES PAYABLE TO TDS PAYABLE TO RENT & MAINTENANCE PAYABLE TO PETROL EXPENSES PAYABLE TO ELECTRICITY EXP. PAYABLE TO BMC ASSESSMENT TAX PAYABLE TO INTEREST PAYABLE TO LNCOMETAX AND FBT TO FBT TAX PROVISIONS (A Y 2007-08) TO INCOME TAX PROVISIONS (AY 2006-07) TO FBT TAX PROVISIONS (A Y 2006-07) TO INCOME TAX PROVISIONS (AY 2005-06) TO GENERAL RESERVE TOTAL 2,607,291 1257,984 237,495,427 2,503: 200, 874, 834, 14,080, 27,646, 1240, 100, 1,600,( 150,( 150,( 100,( 200,( 179,( 75,( 75,C 280,C 530,5 100,0 75,0 75,0 65,0 50,0 3,600,0 300 0 6,5 70,6 18,8 67,4 303,3 209,4 5,0 2,5 6,0 2,566,1 18,0 22,3 300,0 20,0 243,4 178,552,670 237,495,427 ITA NO.6049 OF 2010 15 ON A/C OF AMALGAMATION OF SUKH SAGAR DEVELOPERS (P) LTD. DATE 1-1-2007 DETAILS DEPOSIT FOR ELECTRIC METER RELIANCE ENERGY LTD. ADVANCES TO S G ENTERPRISES CASH ON HAND BALANCES WITH SCHEDULED BANKS IN CURRENT ACCOUNTS LAND - AQUAMARINE I PROJECT COMPUTERS PROFIT & LOSS ACCOUNTS PRELIMINARY EXPENSES TO INV. EQ. SHARE - SUKH S D. P. LTD. A/C TO PREFERENCE SHARE CAP. NC TO UNSECURED LOAN UNITED ESTATE P. LTD. TO MR. NIZARALI S MAKNOJIA TO MRS. KARIMA N MAKNOJIA TO MRS. MUMTAZ N MAKNOJIA TO MEHER FOUNDATION TO PROFESSIONAL FEES PAYABLE TDS PAYABLES TO INTEREST PAYABLE TO TELEPHONE EXP. PAYABLE TO SECURITY EXP. TO ELECTRICITY EXP. PAYABLE TO BMC ASSESSMENT TAX TO M/S UNITED BUILDERS TO DEPRECIATION ON COMPUTERS TO GENERAL RESERVE TOTAL DEBIT RS. 7,900 100,000 2,656 7,681 240,000,000 40,000 116,542 99,300 240,374,079 CREDIT RS. 5,000,000 200,000 695,000 16,334,180 10,214,541 1,133,999 622,832 20,204 101,360 938,159 750 13,194 450 788 433,330 9,030 204,656,262 240,374,078 THE HON'BLE SUPREME COURT CLEARLY OBSERVED IN THE C ASE OF NATIONAL HYDROELECTRIC POWER CORPORATION LTD. VS. CIT [SUPRA ] THAT FOR MAKING AN ADDITION UNDER CLAUSE (B) OF EXPLANATION 1 TO SE C.115JB TWO CONDITIONS MUST BE SATISFIED JOINTLY. (1)(A) THERE MUST BE A DEBIT OF THE AMOUNT TO THE PROFIT & LOSS ACCOUNT, (CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB) THE AMOUNT SO DEBITED MUST BE CARRIED TO THE RESERVE. FURTHER, THE RESERVE CONTEMPLATED BY CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB IS REQUIRED TO BE CARRIED THROUGH THE PRO FIT & LOSS ACCOUNT. ITA NO.6049 OF 2010 16 THE HON'BLE COURT ALSO OBSERVED THAT THERE CAN BE T WO TYPES OF RESERVES, NAMELY, THOSE THAT ARE ROUTED THROUGH THE PROFIT & LOSS ACCOUNT AND THOSE WHICH ARE NOT ROUTED THROUGH THE PROFIT & LOSS ACCOUNT, E.G. CAPITAL RESERVE SUCH AS SHARE PREMIUM ACCOUNT. TESTING THE FACTS ON THIS TOUCHSTONE IT IS CLEAR THAT ASSES SEE HAS DEBITED A SUM OF RS.47,39,19,646/- WHICH IS THE PRESENT MARKET VA LUE OF THE WORK-IN- PROGRESS WHICH HAS BEEN TAKEN OVER AND, THEREFORE, IT CANNOT BE SAID THAT IT CONSISTS OF SOME PORTION OF RESERVE ALSO. T HEREFORE, THERE IS NO DEBIT FOR CREATION OF RESERVE AND HENCE RESERVE OF RS.39,79,89,282/- HAS NOT BEEN CARRIED THROUGH THE PROFIT & LOSS ACCO UNT. THE DEBIT OF WORK-IN-PROGRESS CANNOT BE CALLED A RESERVE. IT IS ALSO TO BE NOTED THAT THE HON'BLE SUPREME COURT OBSERVED THAT AAD WHICH W AS BEFORE THEM WAS NOT APPROPRIATION OUT OF PROFITS. SIMILARLY, CR EATION OF GENERAL RESERVE OUT OF REVALUATION RESERVE CANNOT BE SAID T O BE OUT OF APPROPRATION OF PROFITS. THEREFORE, IN OUR OPINION, THE AMOUNT WHICH WAS NEVER ROUTED THROUGH THE PROFIT & LOSS ACCOUNT AND NEVER DEBITED TO THE PROFIT & LOSS ACCOUNT COULD NOT BE CONSIDERE D FOR THE PURPOSE OF DETERMINATION OF BOOK PROFITS UNDER CLAUSE (B) OF E XPLANATION 1 TO SEC.115JB. ACCORDINGLY, WE CONFIRM THE ORDER OF THE LD. CIT(A). 11. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 3 /2/2012. SD/- SD/- (D.MANMOHAN) (T.R.SOOD) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI: 3 RD FEB., 2012. ITA NO.6049 OF 2010 17 P/-*