Sum set-aside as debenture redemption reserve couldn’t be considered as a reserve for computing book profits: ITAT

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Business expenditure - Allowability of (Interest)

Case Details: ACIT v. India Power Corporation Ltd - [2021] 131 taxmann.com 41 (Kolkata - Trib.)

Judiciary and Counsel Details

    • A.T. Varkey, Judicial Member and Dr. M.L. Meena, Accountant Member
    • Praveen Kishore, CIT for the Appellant. 
    • Soumen Adak, AR for the Respondent.

Facts of the Case

The Assessing Officer had disallowed Rs. 3.50 crore while computing income under section 115JB. According to him, the Debenture Redemption Reserve was carried to reserve, so it should be added back under Explanation 1(b) to section 115JB. Thus, he added back the amount to book profit.
The assessee preferred an appeal before the CIT(Appeals), who gave relief to the assessee. Aggrieved-revenue filed the instant appeal before the Tribunal.
The Kolkata Tribunal has held that an amount of Rs. 3.50 crore was transferred by the assessee to Debenture Redemption Reserve. It was required to be paid at the time of redemption of the debentures, and the assessee claimed exclusion of it while computing book profit under section 115JB.
The Hon’ble Supreme Court in the case of National Rayon Corp. Ltd. vs. CIT [1997] has held that “the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve”. It is common knowledge that by issuing debentures, a company takes a loan which it has to repay, and the loan is taken against the security of its assets. Even though the loan need not be repaid in the year of account, the obligation to repay exists. Therefore, any money that is set apart to meet a known liability is shown in the Balance Sheet under the head liability.

ITAT Held

In the instant case, the amount transferred to Debenture Redemption Reserve was not in excess of the amount required to be paid at the time of repayment of the debentures. Thus, it cannot be treated as a reserve for the purpose of Schedule VI to the Companies Act, 1956. Accordingly, such Debenture Redemption Reserve cannot be considered as ‘reserve’ to attract Explanation 1(b) of section 115JB.

Case Review 1

    • SREI Equipment Finance (P.) Ltd. v. Dy. CIT [IT Appeal No. 424 (Kol.) of 2011, dated 11-4-2011] (para 11)
    • Chambal Fertilisers & Chemicals Ltd. v. Jt. CIT [D.B. IT Appeal No. 52 of 2018, dated 31-7-2018] (para 15)

Case Review 4

List of Cases Referred to

    • National Rayon Corpn. Ltd. v. CIT [1997] 93 Taxman 754/227 ITR 764 (SC) (para 11)
    • SREI Equipment Finance (P.) Ltd. v. Dy. CIT [IT Appeal No. 424 (Kol.) of 2011, dated 11-4-2011] (para 11)
    • CIT v. Raymond Ltd. [2012] 21 taxmann.com 60/209 Taxman 65 (Bom.) (para 11)
    • SREI Infrastructure Finance Ltd. v. Addl. CIT [IT Appeal No. 1318 (Delhi) of 2012, dated 31-12-2019] (para 14)
    • Chambal Fertilisers and Chemicals Ltd. v. Jt. CIT [D.B. IT Appeal No. 52 of 2018, dated 31-7-2018] (para 15)
    • ITC Ltd. v. ACIT [IT Appeal No. 685 (Kol.) of 2014, dated 27-11-2018] (para 15)
    • Peerless General Finance & Investment Co. Ltd. v. Dy. CIT [IT Appeal No. 937 (Kol.) of 2018, dated 24-4-2019] (para 15)
    • Dy. CIT v. Tega Industries Ltd. [2019] 112 taxmann.com 259 (Kol. – Trib.) (para 15)
    • CIT v. Veekaylal Investment Co.(P.) Ltd. [2001] 116 Taxman 104/249 ITR 597 (Bom.) (para 17)
    • Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.) (para 19).

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