Kilara Power Pvt. Ltd. v. The Income-tax Officer Ward-11(2), Bangalore
[Citation -2020-LL-1104-30]

Citation 2020-LL-1104-30
Appellant Name Kilara Power Pvt. Ltd.
Respondent Name The Income-tax Officer Ward-11(2), Bangalore
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 04/11/2020
Assessment Year 2007-08
Judgment View Judgment
Keyword Tags interest on accrual basis • pre commencement period • ascertained liability • waiver of interest • chargeable to tax • provision created • interest payable • payment of tax • book profits • net profit
Bot Summary: For the year ending 31.03.2007, the assessee entered into One Time Settlement with IREDA under which entire interest as well as a part of principle amount was also waived by the IREDA. The total amount of interest waived by the IREDA under the One Time Settlement for 4 the year ending 31.03.2007 was Rs.3,59,58,370/-. The assessee in the profit and loss account for the Assessment Year 2007-08 credited a sum of Rs.3,59,58,370/- being the amount of interest waived by IREDA. However, while preparing the return of income, the assessee excluded the amount as no part of such interest had even been allowed in any prior Assessment Year and provisions of Section 41(1) of the Act were not attracted. Learned counsel for the assessee submitted that finding recorded by the tribunal that the assessee has been debiting interest payable to profit and loss account of it is erroneous. The relevant extract of Section 115JB, which deals with special provisions for payment of tax by certain companies as it was in existence at the relevant time, reads as under: 115JB. Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on 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, 2007, is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ten per cent. 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, as increased by the amount of income-tax paid or payable, and the provision therefor; or the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or the amount by way of provision for losses of subsidiary companies; or the amount or amounts of dividends paid or proposed ; or the amount or amounts of expenditure relatable to any income to 11 which section 10 thereof) or section 11 or section 12 apply; or the amount of depreciation. The Assessing Officer on perusal of the balance sheet of the assessee as on 31.03.2006 and 31.03.2007 as well as schedules appended to the balance sheet has held that the amount 12 of Rs.3,59,58,370/- has neither been shown as reserve nor provision anywhere but has only been shown as liability in Schedule C. By taking into account Section 115JB of the Act, it has been held that amount withdrawn from reserves credited or provision made in a Previous Year shall not be reduced from the book profit unless book profit of such year has been increased by those reserves or provision. The Commissioner of Income Tax has held that profit and loss account of the assessee as on 31.03.2007, was prepared in accordance with the Companies Act, 1956 and the assessee showed the outstanding interest as credit to profit and loss account because of waiver of interest on account of One Time Settlement.


1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 4TH DAY OF NOVEMBER 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.356 OF 2014 BETWEEN: M/S. KILARA POWER PVT. LTD., NO.204C, 6TH MAIN 27TH CROSS, III BLOCK JAYANAGAR BANGALORE-560011. ... APPELLANT (BY SRI. ASHOK A. KULAKARNI, ADV.,) AND: INCOME TAX OFFICER WARD 11 (2), No.14/3 R.P. BUILDING, 5TH FLOOR NRUPATHUNGA ROAD BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 11.04.2014 PASSED IN ITA NO.589/BANG/2013 FOR ASSESSMENT YEAR 2007-08, PRAYING TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (II) ALLOW APPEAL BY SETTING ASIDE ORDER OF ITAT IN ITA NO.589/BANG/2013 DATED 11-04-2014 ORDER 2 OF COMMISSIONER OF INCOME TAX (APPEALS) DATED 26- 02-2013 AND ASSESSMENT ORDER DATED 29-12-2009 AND SUITABLY MODIFY IT AS SOUGHT IN APPEAL. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by assessee. subject matter of appeal pertains to Assessment year 2007-08. appeal was admitted by bench of this Court vide order dated 14.11.2014 on following substantial question of law: (i) Whether on facts and in circumstances of case for this assessment year while applying 115 JB to case of Appellant Rs.3,59,58,370/- is to be reduced from book profit in full? (ii) In alternative and without prejudice in event that answer to above question is in negative, whether on facts and in 3 circumstances while applying u/s 115JB to case of Appellant at least sum of Rs.1.08 Crores being amount of interest debited to Profit & Loss Account for accounting year ending 31-03-2002 should have been deducted? 2. Facts leading to filing of this appeal briefly stated are that assessee is company engaged in business of generation of power. According to assessee, it continuously ran into losses since its inception and borrowed amount from Indian Renewable Energy Development Agency (IREDA). However, assessee neither repaid principle nor interest. total interest, which was payable in Assessment Year 2007-08 was Rs.3.59 Crores. For year ending 31.03.2007, assessee entered into One Time Settlement (OTS) with IREDA under which entire interest as well as part of principle amount was also waived by IREDA. total amount of interest waived by IREDA under One Time Settlement for 4 year ending 31.03.2007 was Rs.3,59,58,370/-. assessee in profit and loss account for Assessment Year 2007-08 credited sum of Rs.3,59,58,370/- being amount of interest waived by IREDA. However, while preparing return of income, assessee excluded amount as no part of such interest had even been allowed in any prior Assessment Year and provisions of Section 41(1) of Act were not attracted. Assessing Officer by order dated 29.12.2009 inter alia included amount of Rs.3,59,58,370/- in book profits for levying tax under Section 115JB of Act and negatived plea of assessee that sum was deductible in full under Explanation to Section 115JB(2) of Act. 3. assessee thereupon filed appeal before Commissioner of Income Tax (Appeals) who by order dated 26.02.2013 affirmed by order passed by Assessing Officer. assessee thereupon filed appeal before Income Tax Appellate Tribunal 5 (hereinafter referred to as 'the tribunal' for short). tribunal by order dated 11.04.2014 inter alia held that no provision can be made for ascertained liability and therefore no provision was made by assessee for interest payable and waiver of interest by IREDA cannot be considered as withdrawal of provision and cannot be reduced from book profit as contended by assessee. However, it was held that only sum of Rs.1.08 Crores should be considered as waiver of interest and part of book profit as interest payable for pre-commencement period was capitalized, aforesaid contention needs examination, therefore, matter was remitted to Assessing Officer. Accordingly, appeal was partly allowed. In aforesaid factual background, assessee has filed this appeal. 4. Learned counsel for assessee submitted that finding recorded by tribunal that assessee has been debiting interest payable to profit and loss account of it is erroneous. It is submitted that 6 assessee had not claimed any reduction towards interest and sum of Rs.1,08,58,828/- was actually debited to profit and loss account for year ending 31.03.2002 i.e., Assessment Year 2002-03. However, in computation of income filed with return of income, aforesaid amount was added back. It is further submitted that when no reduction was claimed or allowed in Previous Years, condition of proviso stands fulfilled and accordingly waiver of outstanding interest ought to have been held eligible for reduction under sub-clause (i) of Explanation 1 to Section 115JB of Act. It is also pointed out that assessee is bound to follow Accounting Standard-29 issued by Standard of Chartered Accountants in order to arrive at book profit. Our attention has also been invited to para 10.1 of aforesaid Accounting Standard, which provides that provision is liability which can be measured only by using substantial degree of estimation. It is also argued that different between liability and provision 7 is essentially only basis of estimation / qualification and not on basis of recognition. It is also pointed out that since assessee had computed interest on accrual basis in accordance with terms of loan granted by IREDA and was unable to service principle amount as well as amount of interest. Therefore, conclusion of tribunal that interest was liability and not provision is misplaced. In support of aforesaid submissions, reliance has been placed on decisions in 'CIT VS. INDUSTRIAL CREDIT AND DEVELOPMENT SYNDICATE LTD.', 285 ITR (ST) 310 (KAR) @ 317, 318, 'INDO RAMA SYNTHETICS (I) LTD. VS. COMMISSIONER OF INCOME TAX', 330 ITR 363 (SC) @ 372, ' CIT VS. SHYAM CENTURY FERROUS LTD.', 386 ITR 477 (CAL) @ 479 AND CBDT CIRCULAR NO.495 DATED 22.09.1987. 5. On other hand, learned counsel for revenue submitted that even though assessee has claimed that entire amount was claimed as 8 expenditure on accrual basis, however, no provision was created and therefore, no adjustment was made in view of Clause (c) to Explanation 1 to Section 115JB of Act. It is also argued that unless Clause (c) is attracted, Clause (i) for reduction also cannot be applied. It is further submitted that Assessing Officer, Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal have recorded findings of fact that assessee has not created any provision as required under Clause (c) of Explanation 1 to Section 115JB of Act and same is not disputed by assessee. It is also argued that unless clause (c) of Explanation 1 to Section 115JKB of Act is attracted, reduction under clause (i) cannot be applied. In support of aforesaid submissions, reliance has been placed on APOLLO TYRES LTD. VS. COMMISSIONER OF INCOME-TAX, 255 ITR 273 (SC), and 'INDO RAMA SYNTHETICS (I) LTD. VS. COMMISSIONER OF INCOME-TAX', 330 ITR 363. 9 6. We have considered submissions made by learned counsel for parties and have perused record. relevant extract of Section 115JB, which deals with special provisions for payment of tax by certain companies as it was in existence at relevant time, reads as under: 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in case of assessee, being company, income-tax, payable on total income as computed under this Act in respect of any previous year relevant to assessment year commencing on or after 1st day of April, 2007, is less than ten per cent of its book profit, such book profit shall be deemed to be total income of assessee and tax payable by assessee on such total income shall be amount of income-tax at rate of ten per cent. (2) Every assessee, being company, shall, for purposes of this section prepare its profit and loss account for relevant previous year in accordance with 10 provisions of Parts II and III of Schedule VII to Companies Act, 1956 (1 of 1956) Explanation 1. For purposes of this section, book profit means net profit as shown in profit and loss account for relevant previous year prepared under sub- section (2), as increased by (a) amount of income-tax paid or payable, and provision therefor; or (b) amounts carried to any reserves, by whatever name called, other than reserve specified under section 33AC; or (c) amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) amount by way of provision for losses of subsidiary companies; or (e) amount or amounts of dividends paid or proposed ; or (f) amount or amounts of expenditure relatable to any income to 11 which section 10 (other than provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (g) amount of depreciation. If any amount referred to in clauses (a) to (g) is debited to profit and loss account, and as reduced by- (i) amount withdrawn from any reserves or provision (excluding reserve created before 1st day of April, 1997 otherwise than by way of debit to profit and loss account), if any such amount is credited to profit and loss account. 7. Thus, it is evident that for purposes of Section 115JB, expression book profit needs amount set aside to provisions made for meeting liabilities other than ascertained liabilities. Assessing Officer on perusal of balance sheet of assessee as on 31.03.2006 and 31.03.2007 as well as schedules appended to balance sheet has held that amount 12 of Rs.3,59,58,370/- has neither been shown as reserve nor provision anywhere but has only been shown as liability in Schedule C. By taking into account Section 115JB of Act, it has been held that amount withdrawn from reserves credited or provision made in Previous Year shall not be reduced from book profit unless book profit of such year has been increased by those reserves or provision. Thus, it has been held that in absence of any provision created or provision made, question of reduction from book profit does not arise. 8. Commissioner of Income Tax (Appeals) has held that profit and loss account of assessee as on 31.03.2007, was prepared in accordance with Companies Act, 1956 and assessee showed outstanding interest as credit to profit and loss account because of waiver of interest on account of One Time Settlement. It was further held that outstanding interest amount was not shown as either as reserve or 13 provision and it was shown as liability and even corresponding debits in earlier years were not added back. It has further been held that assessee's contention may be correct that there are no profits chargeable to tax under Section 115JB of Act but conditions stipulated in proviso were not fulfilled. tribunal has held that Assessing Officer on perusal of balance sheets as on 31.03.2006 and 31.03.2007 has held that amount of interest has neither been shown as reserve nor provision anywhere but same has been shown in Schedule C as liability. It was further held that no provision can be made for ascertained liability and therefore, no provision has been made by assessee for interest payable and therefore, waiver of interest by IREDA cannot be considered as withdrawal of provision and cannot be reduced from book profit. However, it was held that contention of assessee that sum of Rs.1.08 Cores should be considered as waiver of interest and part of book profit 14 as interest payable for pre commencement period, needs examination and therefore, matter was remitted for adjudication in accordance with law. aforesaid findings by all authorities under Act are based on meticulous appreciation of evidence on record and does not suffer from any perversity warranting interference of this court in this appeal. In view of preceding analysis, substantial questions of law framed by bench of this court are answered against assessee and in favour of revenue. In result, we do not find any merit in this appeal, same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Kilara Power Pvt. Ltd. v. Income-tax Officer Ward-11(2), Bangalore
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