Judgment:
1. The assessee has filed this appeal for the asst. yr. 1988-89 against the order of CIT(A)dt. 4th Jan., 1994.
2. In the appeal, the assessee has assailed the impugned order of learned CIT(A) on 9th grounds. Subsequently, the assessee has filed two additional grounds and stated that the additional grounds do not involve any fresh investigation into facts but pertain to a question of law based on the facts and figures already available with the lower authorities and as such the same be admitted and be adjudicated upon.
3. We heard the appeal on 23rd Dec., 1999, at length when Shri R.K.Mitra made his submissions on behalf of the assessee and Sri A.K. Das represented the Department. At the time of hearing of the appeal, learned authorised representative of the assessee submitted that he does not press for ground Nos. 6, 7 and 8. Accordingly, ground Nos. 6, 7 and 8 of the appeal are dismissed as not pressed for. Further, ground No. 9 of the appeal is general in nature and requires no specific adjudication.
4. The assessee is a company engaged in the business of manufacture and sale of oxygen, nitrogen, dissolved acetylene, etc. In respect of assessment year under appeal the assessee furnished return of income declaring taxable income of loss of Rs. 9,82,65,154 which was subsequently revised by declaring income of loss of Rs. 9,76,82,479.
However, both the returns declared income chargeable to tax under Section 115J at Rs. 1,05,12,110. We now propose to take up the grounds of appeal in seriatim : 5. In ground Nos. 1 and 2 of the appeal, the assessee has disputed the order of learned CIT(A) in confirming the disallowance made by the AO on account of premium on redemption of debentures amounting to Rs. 6,60,000.
5.1 The brief facts giving rise to these grounds or appeal are that the assessee charged to P&L a/c for the year ended on 30th Sept., 1997, relevant to the assessment year under appeal a sum of Rs. 6,60,000 as proportionate premium @ 5 per cent payable on maturity of Rs. 1,000 lakh non-convertible debentures allotted to the financial institutions which were redeemable after a period of 7 years. However, AO disallowed the said amount which was confirmed, in appeal, by learned CIT(A).
5.2 In appeal before us, learned authorised representative of the assessee submitted that the issue is covered in favour of the assessee by the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT (1997) 225 ITR 802 (SC) followed by the jurisdictional High Court in the case of National Engineering Industries Ltd. v. CIT (1999) 236 ITR 577 (Cal). However, the learned Departmental Representative relied upon the orders of authorities below.
5.3 On consideration of the orders of authorities below and the submissions of learned representatives and also after going through the cases relied upon by learned authorised representative of the assessee, we find that the issue is covered by the decision of Calcutta High Court in the case of National Engineering Industries Ltd. (supra) where, following the decision of the Supreme Court (supra) to the effect that when a debenture carries a payment clause, say in the nature of a discount, that payment clause is to be spread over as a liability of the issuing assessee-company over the years ranging from issue of redemption, observed that there is no distinction between a discount and a premium because the result in both is that something over and above the face value is paid. It was further observed that the extra premium is to be spread over all the years which are occupied between the date of issue and the date of ultimate redemption and the amount relevant to the accounting year is deductible under Section 37 of the Act. In view of the above decision, the matter is no longer res integre. Accordingly, we decide ground Nos. 1 and 2 of the appeal in favour of assessee and reverse the order of CIT(A).
6. In ground Nos. 3 and 4 of the appeal, the assessee had disputed the order of learned CIT(A) is not allowing the claim for deduction of Rs. 5,000 under Clause (i) of Sub-section (2) of Section 37 of the Act on account of entertainment expenditure incurred by the assessee.
6.1 Learned CIT(A) confirmed the order of AO in not allowing minimum entertainment expenditure of Rs. 5,000 on the ground that the entertainment expenditure under Section 37(2)(i) are admissible only when the total income of the assessee is not computed at a loss figure.
6.2 In appeal before us, we have considered the submissions of learned representatives and orders of authorities below. We are of the view that the minimum entertainment expenditure of Rs. 5,000 is allowable under Section 37(2)(i) in the relevant assessment year and to be allowed irrespective of the fact that there was no income under the head 'Profits and gains of business' and the same is not linked as to whether the computed income is a loss or profit. Therefore, we accept ground Nos. 3 and 4 of the appeal in favour of the assessee and reverse the order of learned CIT(A).
7. In ground No. 5 of the appeal, the assessee has disputed the order of learned CIT(A) in confirming the disallowance of Rs. 4,57,000 which represents contribution to Indoxco Club, etc. under Section 40A(9) of the Act.
7.1 The AO disallowed under Section 40A(9) of the Act a sum of Rs. 4,57,000 which is the amount representing contribution to Indoxco Club, etc. The assessee disputed the said disallowance before the first appellate authority and submitted that the contribution was towards expenses incurred for various sports and recreational activities of the employees which were organised by the Employees Recreation Club.
However, learned CIT(A) confirmed the disallowance by following the order of first appellate authority for the asst. yr. 1987-88. The assessee is in further appeal before the Tribunal.
7.2 At the time of hearing of the appeal, learned authorised representative of the assessee submitted that the contribution was actually in the nature of reimbursement of expenses by the clubs on behalf of the assessee on various sports and recreational activities of the employees and as such, the expenditure does not come under the ambit of Section 40A(9)/40A(10) of the Act and as such, the same should not be disallowed. He submitted that the payment by the assessee was not for setting up or formation of the club nor it was a mere contribution but it was a payment to the club towards reimbursement of the expenses incurred for various sports and recreational activities of the employees. The assessee incurred the expenses through the club instead of incurring the expenses directly which is for the sake of convenience. Learned authorised representative of the assessee also relied upon the decision of the Tribunal, B Bench, Calcutta in ITA Nos.
527 of 531(Cal) of 1989, dt. 13th Feb., 1992, in the case of Dy. CIT v.A.P.E. Belliss India Ltd. He further submitted that CIT(A) allowed the said expenses in the subsequent assessment year i.e., 1992-93. However, learned Departmental Representative Justified the order of authorities below and submitted that the claim of the assessee was rightly disallowed as pers. 40A(9) of the Act.
7.3 We have considered the submissions of learned representatives and the orders of authorities below. We have also perused the order of the Tribunal dt. 13th Feb., 1992 (cited supra). In order to appreciate the issue we consider it useful to state Section 40A(9) of the Act : "No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, society registered under the Societies Registration Act, 1860 (21 of 1860) or other institutions for any purpose except where such sum is so paid for the purposes and to the extent provided by or under Clause (iv), Clause (v) of Sub-section (1) of Section 36 or as required by or under any other law for the time being in force." 7.4 From the above, it may be observed that contribution to any fund, trust, company, etc. for any purpose will not be allowed except contribution to recognised provident fund or approved superannuation fund or approved gratuity fund as contemplated in Section 36(1)(iv) and 36(1)(v) of the Act. In the case before us, it is not disputed that the assessee made payment to Indoxco Club, etc. as reimbursement of expenditure incurred for various sports and recreational activities of the employees of the assessee. We are of the view that Section 40A(9) of the Act is not applicable and as such the disallowance made by the authorities below of Rs. 4,57,000 is deleted. In this regard, we are supported by the order of the Tribunal dt. 13th Feb., 1992, and the relevant portion thereof reads as under: "18. The next ground is in regard to disallowance of a sum of Rs. 11,200 under Section 40A(9) of the Act deleted by the learned CIT(A). The assessee in this case paid a sum of Rs. 10,000 to APE Belliss Staff Club and a sum of Rs. 1,200 to APE Belliss Staff Recreation Club. The AO applied the provisions of Section 40A(9) of the Act and disallowed the said payments. The learned CIT(A), however, deleted the addition as follows : "I do not think that Section 40A(9) is applicable in this case because that section stands for any funds, institutions, where these subscriptions are made over ostensibly for the purpose of the welfare of the employees. That means that there should be a complete identity between a donor and the donee. Here, the Staff Recreation Club and the Staff Club are a part and parcel of the organisation itself and they are given money by way of subsidy, an age old practice. In various Government departments also subsidies are given as a matter of course for carrying on welfare activities. The intention behind the introduction of Section 40A(9) is something different and that has been made out in the Memorandum explaining the provisions of the Finance Act, 1984 [(1984) 146 ITR 165 ST]. In view of the aforesaid I hold that no disallowance can be made under Section 40A(9) and the amount of Rs. 11,200 is therefore, deleted.
19. After hearing both the parties on this point, we see no reason to interfere in this regard. The payments in this case are made to the staff clubs of the assessee. The finding of the learned CIT(A) is that the expenditure was for the purpose of the welfare of the employees. The payments were made in the form of subsidy to the staff recreation clubs and, therefore, the expenditure was wholly and exclusively for the purpose of the business. We are not inclined to hold a different view in this regard. We according uphold the order of the learned CIT(A) on his point." Accordingly, ground of appeal No. 5 is allowed and the order of learned CIT(A) is reversed.
8. Now we take up the additional grounds of appeal which, read as under: "1. That, on the facts and in the circumstances of the case, the amount of Rs. 50,00,000 transferred to the "debenture redemption reserve" account from the P&L a/c prepared for the relevant previous year, may be allowed as a deduction while computing the "book profit" within the meaning of Section 115J of the IT Act, 1961 (hereinafter referred to as the "Act").
2. That, on the facts and in the circumstances of the case, since the amount of Rs. 50,00,000 transferred to the "debenture redemption reserve" account from the P&L a/c, can neither be treated as being transferred to any reserve nor being set aside to provisions made for meeting unascertained liabilities, the said transfer cannot be disallowed for the purpose of computing the "book profit" within the meaning of Section 115J of the Act by invoking either of the Clause (b) or (c) of the Explanation appended below Section 115J(1A) of the Act or for that matter any of the other clauses of the said Explanation." 8.1 As may be observed from the additional grounds, the issue involved is whether the amount of Rs. 50 lakh transferred from P&L a/c prepared for the relevant previous year to the assessment year under appeal, and the debenture redemption reserve (DRR) amount is to be allowed for the purpose of computing "book profit" within the meaning of Section 115J of the Act.
8.2 In regard to the admissibility of the additional grounds for adjudication, learned authorised representative of the assessee contended before us that the additional ground is purely legal in nature and has been raised after the Supreme Court decision in the case of National Rayon Corpn. Ltd. v. CIT It was further submitted that the assessee is entitled to raise a new ground before the Tribunal for the first time even if the same was not raised at any time before the lower authorities. Learned authorised representative of the assessee placed reliance, in support of his submission, on the decision of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). He submitted that the facts relating to the additional grounds of appeal are contained in the audited accounts of the assessee prepared after the relevant previous year and the copy of which was available at the time of the assessment with the lower authorities and the same was filed along with the return of income. He submitted that for the relevant assessment year, the total income of the assessee was computed under the provisions of the Act at a loss of Rs. 4,16,76,246.
Therefore, the assessee falls within the ambit of Section 115J of the Act as the assessee had positive income as per the P&L a/c prepared for the relevant previous year. Accordingly, the assessee was assessed to tax at 30 per cent of the 'book profit' under Section 115J of the Act.
He submitted that the issue, by way of additional grounds of appeal, is with respect to proper method of computing 'book profit' for the purpose of Section 115J of the Act. He referred p. 7 of the paper book which is a copy of P&L a/c for the relevant previous year under appeal and submitted that the profit before making of appropriation was Rs. 3,50,40,000 and the assessing officer accepted the profit as reflected in the P&L a/c before making of appropriation as 'book profit' for the purpose of Section 115J(1) of the Act. He submitted that if the 'book profit' was computed in accordance with the provisions of the Explanation appended below Section 115J(1) of the Act, then the figure would have worked out to Rs. 3,00,40,000. The assessee referred p. 22 of the paper book giving the computation of the 'book profit' for the purpose of Section 115J of the Act. He submitted that the difference between the amount of 'book profit' previously computed by both the assessee and the AO and the amount of 'book profit' as per the correct computation works out to exactly Rs. 50 lakh which represents the amount transferred from the P&L a/c to the debenture redemption reserve a/c he submitted that the assessee had accepted the disallowance with respect to such transferred amount from P&L a/c to debenture redemption reserve A/c for the purpose of computing the 'book profit' as it was under the impression that the amount would be disallowed in view of Clause (b) of the Explanation, inasmuch as the said amount of Rs. 50 lakh was treated as having been carried to reserve. He submitted that the debenture redemption reserve is not a reserve but actually represent a known liability and accordingly the amount of Rs. 50 lakh cannot be disallowed for the purpose of computing the 'book profit' by invoking either of Clause (b) or (c) of the Explanation appended below Section 115J of the Act.
8.3 Learned authorised representative of the assessee Sri Mitra submitted that the term 'reserve' is not defined in the Act and as such, the definition of the terms "provision" and "reserve" given in the Companies Act become relevant for the purpose of Section 115J of the Act which deals with the assessment of companies. Sri Mitra referred to the decision of Bombay High Court in the case of Petrosil Oil Co. Ltd. v. CIT (1999) 236 ITR 220 (Bom) and submitted that for the purpose of construing the provision of IT Act, undefined words used in the said provision may be interpreted by importing the definitions as given in the companies Act. In this regard he referred to Clause 7(1) of Part III of Schedule VI to the Companies Act and stated that 'provision' and 'reserve' have been defined therein. He submitted that in the Sub-clause (a) provision means any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. He further stated that in Sub-clause (b) thereof the term 'reserve' has been defined in a negative way and does not include any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability. He further submitted that debenture redemption reserve is not a 'reserve' for the purpose of Companies Act.
In this regard, Sri Mitra dealt with at length the decision of the apex Court in the case of National Rayon Corpn. Ltd. (supra) and submitted that the term 'reserve' has not been defined under Section 115J of the Act and by drawing the same analogy, as per the decision of the Supreme Court, with reference to the provision of Companies (Profits) Surtax Act, 1964, as to whether debenture redemption reserve was to be a reserve for the purpose of Surtax Act, the debenture redemption reserve is not a reserve as the Supreme Court held that secure loans i.e., debentures may not be immediately repayable but the liability to repay this amount to an existing liability has to be included in the company's balance sheet for the relevant year of account as a liability. Thus, the amount set apart to pay the loans cannot be a reserve. He submitted that the Supreme Court held that the amount transferred to the said account cannot be held to have been set aside to meet unascertained liabilities. He submitted that, therefore, any part of the amount of Rs. 50 lakh cannot be treated as reserve and as such, the transfer of the said amount from the P&L a/c to the debenture redemption reserve can neither be said as an amount carried to any reserve nor an amount set aside to the provision for meeting unascertained liabilities. Hence, the said amount should not be disallowed for computing the book profit of the assessee for the purpose of Section 115J of the Act for the assessment year under appeal.
8.4 On the other hand, learned Departmental Representative opposed the admission and consideration of the additional grounds raised by the assessee on the ground that the said issue was neither raised by the assessee before the AO nor before the first appellate authority and as such, the same cannot be argued for the first time before the Tribunal.
He further submitted that the case of the Supreme Court in National Rayon Corpn. Ltd. (supra) is irrelevant. He further submitted that Section 115J is a deemed provision and has to be interpreted strictly and the appropriation of the sum of Rs. 50,00,000 towards debenture redemption reserve has to be added while computing the book profit for the purpose of Section 115J as per Explanation thereof.
9. We have carefully considered the submissions of learned representatives in regard to the question of admission of the additional grounds of appeal. We have perused the audited accounts as placed at pp. 1 to 21 of the paper book. We also observe that the total income of the assessee was computed at a loss of Rs. 4,16,76,246 and as such, the assessee was assessed to tax under Section 115J of the Act as it had positive income as per P&L a/c, in the relevant previous year.
The additional grounds of appeal relevant to the computation of book profit is computed for the purpose of tax at 30 per cent thereof under Section 115J of the Act. On perusal of p. 7 of the paper book, which is a part of the audited accounts of the assessee for the relevant assessment year under appeal, it is seen that the same depicts the profit before taxation, profit after taxation and appropriations of the profit. It is also observed that the assessee also made appropriation of Rs. 50 lakh under the head debenture redemption reserve. On consideration of the above facts we find that all the relevant facts are available on the record not only before us but also were available before the authorities below. The only issue before us is as to whether the debenture redemption reserve is a reserve within the meaning of Clause (b) or it is an unascertained liability within the meaning of Clause (c) of the Explanation to Section 115J of the Act or not.
Therefore, we agree with learned authorised representative of the assessee that the additional grounds raised before us relate to the question of law arising from the facts which were available also before the authorities below and it has a bearing on the tax liability of the assessee and as per the ratio laid down by the decision of the apex Court in the case of National Thermal Power Co. Ltd. (supra). We, admit the additional grounds raised before us for adjudication as it is a pure legal one and does not involve investigation of facts irrespective of the fact that this question is raised by the assessee for the first time before us.
10. Now coming to the question as to whether the amount of Rs. 50 lakhs transferred by the assessee from the P&L a/c to the debenture redemption reserve is to be allowed as a deduction while computing the book profit for the purpose of Section 115J of the Act, the term 'book profit' as per Explanation to Section 115J(1) of the Act means the net profit as shown in the P&L a/c for the relevant previous year prepared in accordance with provisions of Parts II & III of Schedule VI to the Companies Act, 1956, subject to certain adjustments by way of P&L A/c increase in respect of certain sums as referred to in Clauses (a) to (f) of the said Explanation if the said sums were debited to the P&L a/c and reduction in respect of certain sums as referred to in Clauses (i) to (iii) of the said Explanation.
10.1 Adjustments, inter alia, referred to in Clauses (a) to (f) of the said Explanation are : (c) the amount or amounts set aside to provision made for meeting liabilities, other than ascertained liabilities.............
10.2 It will be evident from the above that in order to compute 'book profit' as per the provision of Explanation appended below to Section 115J(1) of the Act, one has to start with the net profit as computed under the P&L a/c prepared in accordance with the provisions of Parts II and m of Schedule VI to Companies Act i.e., the net profit after making all appropriations and thereafter, certain adjustments are to be made to such net profit as are referred to in Clause (a) to (f) and in Clauses (i) to (iii) of the said Explanation.
10.3 Therefore, the method of computing the 'book profit' for the purpose of Section 115J of the Act is to start with the net profit as per the P&L a/c and then make adjustments to it as are referred to in Clauses (a) to (f) and Clause (i) to (iii) of the said Explanation. On perusal of p. 22 of the paper book profit by excluding the amount of Rs. 50 lakh which has been appropriated by the assessee towards debenture redemption reserve works out to Rs. 3,00,40,000 as against the 'book profit' assessed by the AO and also offered by the assessee for taxation under Section 115J of the Act of Rs. 3,50,40,000.
10.4 Now coming to the contention of the assessee that the debenture redemption reserve is not a reserve under Clause (b) of Explanation to Section 115J, we agree with the assessee's representative that the term 'reserve' has not been defined under the Act and as such, the meaning of the word 'reserve' is to be ascertained in the light of the meaning given in the Companies Act. In this regard our view is fortified by the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra) wherein it was held that for the purpose of construing the provisions of IT Act, dealing with the assessment of companies, undefined words used in the said provision may be interpreted by importing the definition recorded to them in the Companies Act.
10.5 The terms 'provision' and 'reserve' have been defined in Clause 7(1) of Part III of Schedule VI as under : "The said terms 'provision' and 'reserve' have been defined in Clause 7(1) of Part III of the Schedule VI to the Companies Act in the following manner: (a) The term 'provision' has been defined to mean, subject to Sub-clause (2) of the said clause, any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
(b) The term 'reserve' has been defined in a negative way so as not to include any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability.
Clause 7(2) of Part III of the said Schedule provides that if any provision, which is made as per Clause 7(1)(a), as referred to hereinbefore, is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of the Schedule as a reserve and not a provision." 10.6 Further, we observe that the apex Court in the case of Rayon Corpn. Ltd. (supra) has considered as to whether the debenture redemption reserve is a reserve within the meaning of the Companies Act. The issue involved in the said case was one with respect to an assessment under the provisions of Companies (Profits) Surtax Act, 1964. In our view, the Supreme Court has considered the definition of the term 'reserve' as provided under the Companies Act as the said term is not defined under the Surtax Act and, therefore, held that debenture redemption reserve is not a reserve for the purposes of Companies Act and accordingly the Surtax Act. The Supreme Court has held in the said case that any amount set apart in the accounts of the company to redeem the debentures must be treated as monies set apart to meet a known liability. The debentures will have to be shown in the company's balance sheet of the year as liability. Merely because the debentures are not redeemable during the accounting period, the liability of redeemed debenture does not sease to exist. The Supreme Court further held that the debenture redemption Reserve must be regarded as a provision made by the assessee-company to enable it to redeem the said debentures when they become due for redemption. The Supreme Court further stated that the amounts set apart for redemption of debentures are not in the nature of charge against profit but are merely appropriation of profits. The said debenture redemption reserve account cannot be held to be a reserve on that ground itself.
10.7 From the above, it is clear that the amounts set apart to redeem debentures are to be treated as an amount set apart to meet a known liability and as such, the debenture redemption reserve cannot be considered to be a reserve. From the above decision of apex Court it is also clearly evident that the amount so transferred cannot also be held to have been set aside to meet the unascertained liabilities.
Accordingly, the sum of Rs. 50 lakhs as appropriated by the assessee in the P&L a/c of the relevant previous year cannot be held to be a reserve within the meaning of Clause (b) or the amount set apart to meet unascertained liabilities within the meaning of Clause (c) of the Explanation to Section 115J(1) of the Act and as such, the said amount was not to be added to the net profit as computed by the assessee to arrive at the 'book profit' for the purpose of Section 115J.Incidentally, we may state that none of the other clauses viz., Clause (a) and Clauses (d) to (f) or the Explanation to Section 115J(1) or the Act are relevant to consider the addition of Rs. 50 lakhs.
10.8 In view of the above, we agree with the learned authorised representative of the assessee that the amount of Rs. 50 lakh transferred to debenture redemption reserve from the P&L a/c as prepared for the assessment year under appeal is to be allowed as deduction while computing the 'book profit' for the purpose of Section 115J of the Act. Accordingly, the additional grounds are decided in favour of the assessee.