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By Sameer Dalal & Ravindra Poojari, Advocate

1. S.115JB: While computing book profit for the purpose of 115JB the A.O does not have the jurisdiction to go beyond the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation to Section 115JB. A.Y. 2005 – 06

Shares held by assessee as investment were converted from investment to stock-in-trade in AY 2002- 03 at fair market value. The surplus arising there from was credited to capital reserve account in AY 2002-03 at the time of conversion. Thereafter, In A.Y. 2005 – 06 the assessee, sold these shares at a loss and claimed the loss as business loss and debit to Capital reserve. In the year of sale the long term capital gain (gain accrued to assessee on conversion) was also claimed as exempt under section 10 (23G) of the Act. The bifurcation of gains / losses was done only in accordance with the provisions of Section 45(2). This led to a peculiar situation where there was no credit to Profit & Loss Account and yet there was a Long Term Capital Gain exempt u/s 10(23G) which was only due to the provisions of Section 45(2).

The A.O. accepted the treatment of the assessee while computing income under normal provisions. However, the AO added the amount of Capital Gains arising according to section 45 (2) of the Act to the Book Profits u/s 115JB of the Act and reduced the Business Loss as claimed by the assessee on sale of the above shares from the above capital gain and determined adjusted book profits. The adjustment was objected to by the assessee on the ground that the capital gains did not accrued to the assessee in the current year and the same was recorded in the year of conversion in the books as per the provisions of the Companies Act, 1956.

On appeal Tribunal held, where the accounting methodology adopted by the assessee to record its transactions in the books of accounts are in consonance with the requirements of the Companies Act, the AO, could not tinker with the profits shown by the assessee as per the Companies Act. The AO has no power to disturb the profits in the Profit & Loss Account except to the extent provided in explanation to Section 115JB of the Act. Thus, both the adjustments of ‘Capital Gains’ and ‘Business Loss’ done by the A.O. while computing the book profits u/s. 115JB for the purpose of levying Minimum Alternative tax was liable to be deleted.

DCIT v Skil Infrastructure Limited, ITA No. 3092/M/2009 dt.07/06/2017

Skil Infrastructure Limited

2. S.263 – Revision - The claim of the assessee for the loss on transfer of securities from the category ‘Available for Sale’ to ‘Held to Maturity’ was an allowable deduction - As, the loss in question is allowable - the CIT has no jurisdiction to exercise the powers under section 263 of the Act. A.Y. 2010 – 11

The assessee a Co-operative Bank engaged in the business of banking. The assessment was completed u/s 143 (3) of the Act. Thereafter, CIT noticed that the assessee had debited an amount on account of loss on shifting of securities from the category ‘Available for Sale’ to the category ‘Held to Maturity’. The CIT accordingly issued show cause notice u/s 263 of the Act observing that the loss has arisen to the assessee from re-categorization of securities is notional loss not arising from any actual transaction of purchase and sale, therefore not allowable, accordingly the CIT set aside the assessment order invoking jurisdiction u/s 263 of the Act holding that the order of the A.O was erroneous and prejudicial to the interest of the revenue.

The assessee contended that the re-categorization of the investment was done in accordance with the guidelines of the Reserve Bank of India therefore, the loss is allowable.

On appeal the Tribunal held that the CIT had no jurisdiction to exercise the powers u/s. 263 of the Act, as the issue of allowability of loss on the transfer of securities from the category to another category was an allowable deduction, as held by the the Hon’ble Bombay High Court in the case of, CIT Vs. HDFC Bank [368 ITR 377 (Bom)].

Zorastrian Co-operative Bank Ltd v CIT, ITA No. 3028/M/2015 dt.31/05/2017

Zorastrian Co-operative Bank Ltd

3. S. 2(24)(x) r.w.s 36(1)(va) & 43B: Even employees’ contribution to PF, etc is allowable if deposited before due date of filing ROI. A.Y.: 2002 – 03

The assessee claimed employee’s contribution to PF u/s. 36(1)(va) read with section 2(24) of the Act as the amount was deposited before the filing of return of income u/s. 139 (1) of the Act. The AO rejected the assessee’s claim as the employee’s contribution to PF and ESI was not within the grace period as provided under the Provident Fund Act and ESI Act.

The Tribunal following the decision of the Hon’ble Bombay High Court in the case of, CIT vs. Ghatge Patil Transport Ltd. [ (2014) 368 ITR 749 (Bom)], wherein it is held that the PF and ESI of employees’ contribution was paid within the due date of filing of return of income u/s 139(1) of the Act, was to be allowed.

Cable Corporation of India Ltd v ITO, ITA No. 1621/M/2010 dt.31/05/2017

Cable Corporation of India Ltd

4. S.2(22)(e): Lending of money - constitutes substantial part of business of the lending company - The money borrowed by the assessee would be covered by exception provided u/s 2(22)(e) of the Act. A.Y.: 2009 – 10

The assessee received loan from a closely held company. The amount along with the interest stood was outstanding at the year end. The assessee was holding more than 10% of the shares in the above said company thus, the A.O assessed the outstanding balance at the end of the year as deemed dividend in the hands of the assessee in terms of section 2(22)(e) of the Act.

The assessee submitted that the lending was part of normal business activities of the lending company and hence the money borrowed by the assessee would fall within the exceptions provided u/s. 2(22)(e) of the Act. Further, the lending Company did not have accumulated profits, the “Reserves & Surplus” was showing balance in “Share Premium account” and “Statutory Reserves account”, which could not be used to pay dividend and hence they cannot be called as accumulated profits. Thus, in absence of accumulated profits also, provisions of section 2(22) (e) were not applicable.

On appeal Tribunal held that, noted that nature of business activities of the lending company has been described as, “Investment & financing advancing” in the tax audit report, the company has been registered as a ‘Non banking financing company’, and the loans given by lending company accounted for more than 25% of the available funds and the assets deployed. Thus, the lending of money constitutes substantial part of business of the lending company. Thus, the transaction was covered by exception provided u/s 2(22) (e) of the Act.

Lokesh Ramgopal Agrawal v DCIT, ITA No. 6921/M/2014 dt.31/05/2017

Lokesh Ramgopal Agrawal

5. S. 274(1) - No order imposing penalty shall be made - unless the assessee has been heard, or has been given reasonable opportunity of being heard. A.Y.’s 2004 – 05 to 2009 – 10

Before the Tribunal the assessee objected the levy of penalty on the ground that no show cause notice was issued before levy of penalty under section 271(1) (b) of the Act. It was submitted before the Tribunal that for levy of penalty under section 271(1) (b) of the Act no separate notice was issued but, only on the basis of observation of the AO in the notice issued under section 142(1) of the Act penalty was imposed.

The Tribunal held, the notice issued u/s. 142(1) of the Act requires the assessee to submit evidence to support his case but, that does not mean that assessee has been put to notice for levy of penalty u/s.271(1)(b) of the Act. For levy of penalty a separate notice is required to be given describing failure of the assessee for a particular date to comply with the notice. The requirement of section 274 is that order imposing penalty cannot be passed unless the assessee has been heard or has been given a reasonable opportunity of being heard. Thus, in the present case, as no notice was issued before levying the penalty, no opportunity has been given to the assessee thus, the AO had committed an error in levying the penalty.

Mikki Industries & Co. Ltd v DCIT, ITA No. 119-122/M/2014 dt.15/05/2017

Mikki Industries & Co. Ltd

Note: The Whole Decisions can be downloaded from the CTC Website www.ctconline.org under Knowledge Centre.

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