CIT vs J.K. Paper Ltd.

Revenue is in appeal against the judgment of the Tribunal dated 4th September, 2009, raising following question of law for our consideration:

(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in restricting the addition made by the Assessing Officer and confirmed by the Appellate Commissioner of Rs. 78,12,884 on account of disallowance of agricultural loss (including depreciation of Rs. 4,32,380) to Rs. 9.43 lakh ?

(2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting disallowance of Rs. 6,36,88,608 paid to Meconcy & Company for making advances on profit improving measures, made by the Assessing Officer and confirmed by the Appellate Commissioner ?

(3) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting non-allowance of deduction of Rs. 1,46,50,718 u/s 80HHC of the Act for the purpose of computation of book profit u/s 115JB of the Act, which is disallowed by the Assessing Officer and confirmed by the Appellate Commissioner ?

(4) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting disallowance made by the Assessing Officer of Rs. 1,63,85,686 being the expenditure incurred for the purpose of agricultural activities for the purpose of computing book profit u/s 115JB of the Act, and confirmed by the Appellate Commissioner ?

(5) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting disallowance of loss of Rs. 47,23,67,295 for the purpose of computing book profit u/s 115JB of the Act, made by the Assessing Officer and confirmed by the Appellate Commissioner ?

(6) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has committed an error in reversing the order of the Commissioner of Income tax (Appeals)-1, Surat, without assigning any cogent and relevant reasons ?

(7) Whether, on the facts and in the circumstances of the case, the order of the Income Tax Appellate Tribunal is contrary to the evidence and material on the record of the case and hence perverse or not ?

So far as question No. 1 is concerned, learned senior counsel pointed out that such question at the hand of assessee is being considered in cross appeal being Tax Appeal No. 288 of 2010. Such question is therefore, required to be considered.

Question No. 2 pertains to deleting of disallowance of Rs. 6.36 crores(rounded off) towards payments made to Meconcy & company. From the record which we have perused with the assistance of learned counsel for the parties, it emerges that such payment was made for advising the assessee on profit improving measures. Assessing Officer noticed that assessee had claimed depreciation on such amount by treating it as capital expenditure in the books and still claimed it has revenue expenditure in the return of the income. Before the Assessing Officer, the assessee contended that such payments were made to Meconcy & Co. who was engaged to take up project of profit improvement programme. Entire programme was divided into three parts consisting of three months each. Such activities helped the company in increasing sales, cost reduction and eventually would increase the profit and therefore, the expenditure was claimed as revenue expenditure.

2.1 Assessing Officer however, treated expenditure as capital primary on the ground that auditors of the company had treated it as capital expenditure and the assessee had not excluded the same from computation of book profit. He was also of the opinion that nature of expenditure showed that it was for earning enduring benefit to the company. Ultimately when the issue reached the Tribunal, it upheld the assessees contention. Relying on and referring to several decisions of various Courts, Tribunal formed an opinion that the expenditure was not capital in nature. It was held that no capital asset was acquired. Business of assessee was in existence for several years. No new business unit was set up. The amount paid was thus for existing business. No technical know-how for any new project was provided and thus the expenditure resulted only in improving income and efficiency of the business. Such expenditure which was therefore, incurred for improving profit earning system would be revenue in nature.

2.2 We do not find that Tribunal committed any error. Looking to the nature of expenditure and the purpose for which the same was incurred, Tribunal correctly came to the conclusion that it had to be treated as revenue expenditure.

3.3 As held by the Apex Court in case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, , mere entries in account books would not decide the nature of expenditure. Additionally we also note that this addition or deletion would have no bearing on the tax liability of the assessee company. Treatment of expenditure was for the purpose of normal computation of the companies profit which was worked out at Rs. 37.46 crores (rounded off) before giving effect to unabsorbed depreciation and losses. After giving effect to such adjustments, the profit of the company for year under consideration came to -117.46 crores(rounded off). In comparison, book profit for the purpose of Section 115JB of the Act was worked out to Rs. 69.38 crores. Considering all these aspects, this question therefore, in our opinion is not required to be entertained.

3.4 With respect to Question 3, learned counsel for the Revenue candidly pointed out that such question is covered by virtue of the decision of Apex Court in case of Ajanta Pharma Ltd. Vs. Commissioner of Income Tax-9, Mumbai, . Such question is required therefore, not entertained.

With respect to Question No. 4, we are informed, similar question is being considered in Tax Appeal No. 287/2010. Such question is therefore, required to be admitted.

With respect to Question No. 5, counsel for the Revenue vehemently contended that in view of provisions contained in Section 115JB of the Act and considering sub-section (7) of Section 94 of the Act inserted with effect from 1.4.2002, Tribunal erred in deleting disallowance of loss of 47.23 crores (rounded off) for the purpose of computation of book profit u/s 115JB of the Act. Counsel pointed out that such loss was suffered by the assessee on account of dividend stripping. To control which activities sub-section (7) of Section 94 of the Act was added. Counsel also relied on clause (f) of explanation (1) of Section 115JB of the Act and clause (2) thereof to contend that Tribunal committed error.

6.1 Counsel for the assessee however, placed reliance on decision of the Apex Court in case of Commissioner of Income Tax, Mumbai Vs. Walfort Share and Stock Brokers P. Ltd., , to contend that Tribunal committed no error.

6.2 Section 115JB of the Act as is well known makes special provision for payment of tax by certain companies. Such section makes provision for minimum tax to be paid by the company as prescribed on the basis of book profit when it is found that its computation of income as per normal computation is below certain minimum percentage. For the purpose of arriving at book profit for the purpose of Section 115JB of the Act, explanation (1) thereof is important. Relevant portion of it reads as under:

Explanation (1) - 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 (2), as increased by....

(f) the amount or amounts of expenditure relatable to any income to which section 10 other than provisions contained in clause (38) thereof or section 11 or section 12 apply; or

if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,-

(ii) the amount of income to which any of the provisions of section 10 other than the provisions contained in clause (38) thereof or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or.

6.3 On the basis of such statutory provisions, stand of the Revenue was that the amount of loss suffered by the assessee in dividend stripping, should be considered as the amount of expenditure relatable to earning dividend which would be covered by expression "any income to which section 10 of the Act applies" and in turn would be covered by clause (f) to explanation (1) of Section 115JB of the Act.

6.4 We may however, notice that the Apex Court in case of Walfort Share & Stock Brokers (P.) Ltd. (supra) had negatived this very contention of-course not in relation to question of book profit for a company. In case of Walfort Share & Stock Brokers (P.) Ltd. (supra), all through out stand of the Revenue was that loss suffered by an assessee in the process of dividend stripping should be considered as expenditure incurred in relation to acquisition of shares. This very contention came to be considered by the Apex Court at length but was negatived making following observations:

A pay-back does not constitute an "expenditure incurred" in terms of Section 14A. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an "expenditure" as it does not impact the Profit & Loss Account. Pay-back or return of investment will impact the balance-sheet whereas return on investment will impact the Profit & Loss Account. Cost of acquisition of an asset impacts the balance sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words "expenditure incurred" in Section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the Incomings of the business in ascertaining the true profits. A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not "expenditure incurred" in terms of Section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of Section 14A. For attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Payback or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked. In our view, return of investment cannot be construed to mean "expenditure" and if it is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under sections 30 to 37 of the Act and, therefore, Section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of Section 14A.

6.5 Counsel for the Revenue sought to rely on sub-section (7) of Section 94 of the Act which was introduced with effect from 1.4.2002. It was precisely because of the controversy involved in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra) that statutory amendment came to be made. Sub-section (7) of Section 94 was added in following terms:

(7) Where -

(a) any person buys or acquired any securities or unit within a period of three months prior to the record date;

(b) such person sells or transfers-

(i) such securities within a period of three months after such date or

(ii) such unit within a period of nine months after such date

(c) the dividend or income on such securities or unit received or receivable by such person is exempt.

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.

6.6 To our mind however, such statutory provisions cannot be applied while computing the book profit for the purpose of Section 115JB of the Act. Such provision provides that loss of assessee suffered under certain circumstances mentioned therein in purchase and sale of shares be ignored for the purpose of computing his income chargeable to tax. Such provision cannot be applied while computing book profit for the purpose of Section 115JB of the Act. Book profit u/s 115JB of the Act has to be worked out as per the provisions made in the section, giving effect to explanation contained therein. It is by now well settled that Section 115JB of the Act is a self contained Code. In case of Indo Rama Synthetics (I) Ltd. Vs. Commissioner of Income Tax , New Delhi, , Apex Court observed as under:

It is, thus, clear that what is "book profit" has been defined and explained in the above Explanation. Section 115JB is a self-contained code. It applies notwithstanding other provisions of the Act. There is no scope for any allowances or deductions under any other section from what is deemed to be total income of the company (assessee)."

Like-wise in case of Ajanta Pharma Ltd. (supra), the Apex Court observed as under:

By the Finance Act, 2000, Section 115JB was inserted w.e.f. 1.4.2001 providing for levy of MAT on certain companies. Section 115JB, though structured differently, stood inserted to provide for payment of advance tax by MAT companies. Section 115JB is the successor section to Section 115JA. In essence, it is the same except that Section 115JA provided for MAT on companies, so far as it does not deem the book profit as total income. u/s 115JB, however, clause (viii) of Section 115JA is re-numbered as clause (iv). Section 115JB continues to remain a self-contained Code.

In the result, we find no merits in the contention of counsel for Revenue. This question is not required to be entertained.

Questions No. 6 and 7 are in the nature of contention. Such questions therefore, requires no consideration.

In view of discussion above, tax appeal is admitted for substantial questions (1) and (4) only.