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Tax Publishers Reliance Industries Ltd. v. ACIT [ITA No. 7299/Mum/2017, ITA No. 136/Mum/2017, dt. 10-11-2020] : 2020 TaxPub(DT) 5001 (Mum-Trib) 1. Exempted interest on tax free bonds under section 10(15)(iv)(h) whether taxable under MAT provisions? 2. Validity of TP additions of interest income on Convertible preference shares recharacterized as borrowing. 3. Interplay of Section 10AA vs. Section 80-IA(9) read with section 80A(4) 4. Profits allowable as per section 10AA. Retrospectivity of Explanation to section 10AA 5. The insertion of Explanation 5 to section 32 post Mahendra Mills decision (2000) 243 ITR 56 (SC) : 2000 TaxPub(DT) 1304 (SC) is only prospective and not retrospective, thus assessee is eligible to claim depreciation on the brought forward written down block from those years where in they had not claimed depreciation when depreciation claim was optional. *Facts:* Assessee a diversified conglomerate had a number of tax issues, in this case some raised by the revenue some by the assessee. The key ones being -- 1. They were in receipt of interest on tax free bonds under section 10(15)(iv)(h). It was the case of the revenue that the same should be included while computing MAT under section 115JB. This was upheld at lower levels and thus assessee went in higher appeal. 2. Assessee had subscribed to compulsorily convertible cumulative preference shares of its overseas AE's on which no preference dividend arose due to those AE's not making profits. These were recharacterized as debt instruments by the revenue and additions made notionally on the interest. On appeal this was reversed by the Commissioner (Appeals). Aggrieved revenue went in higher appeal. 3. Assessee had SEZ export profits eligible for deduction under section 10AA which were into business new oil exploration blocks. Thus claim was made of the residual income which was left after claiming section 10AA under section 80-IB(9) on the SEZ non-export profit. Total claim did not exceed the overall profit of the entire unit. It was the case of the revenue that once the claim under section 10AA is made then the provisions of section 80-IB(9) and section 80-IB(4) would prohibit assessee to claim the residual left over amount on the balance profits. In short the contention of revenue was section 10AA and section 80-IB(9) were mutually exclusive due to impact of section 80A(4). On higher appeal by the assessee 4. Profits allowable as per section 10AA ought to be gross profits that is profits prior to granting of depreciation and investment allowance and prior to allowing all expenses under section 30 to 43D. There is a difference between the word "gross profits and gains" vis a vis "profits and gains as computed per "profits and gains as computed under the Act". Where incomes have been referred to profits and gains as computed under the act they can be referred to as income as taxable or as computed under the Act. Where profits and gains are used there the word has to be given a wider meaning vide Apex Court decision in Vijay Industries v. CIT (SC) in Civil Appeal No. 1581-1582 of 2005 : 2019 TaxPub(DT) 1923 (SC) so they ought to be allowed on gross profits prior to reducing items under section 30 to section 43D. 5. Assessee opted by not claiming depreciation for years prior to the insertion of Explanation 5 to section 32 post Mahendra Mills case. Their plea was that in the year post insertion of the explanation the depreciation should be computed based on the brought forward block from those years when the depreciation claim was never made. On appeal -- Held in favour of the assessee -- 1. Tax free interest cannot be taken into account for computing MAT provisions but remanded for verification of the applicability of the said decisions on merits. *Applied:* Assessee's own case for assessment year 2010-11 to 2012-13 CIT v. Metal & Chromium Plater (P.) Ltd., (2019) 415 ITR 123 (Madras-HC) : 2016 TaxPub(DT) 5156 (Mad-HC) *Dissented:* Rain Commodities Ltd. v. DCIT, (2010) 131 TTJ 514 (Hyderabad) (SB) : 2010 TaxPub(DT) 2079 (Hyd-Trib) 2. Notional interest by recharacterizing preference shares as debt instruments and taxing these under TP regulations is not permitted. *Applied:* Assessee's own case for assessment year 2010-11 to 2012-13 DIT v. Besix Kier Dhabol SA (2013) 210 Taxman 151 (Bom-HC) : 2013 TaxPub(DT) 1472 (Bom-HC) M/s. Aegis Ltd. (ITA No. 1248 of 2016) and ITAT decision Pr. CIT v. Auto Components Pvt. Ltd. (ITA No. 1213/Mum/2014) 3. Section 80A(4) prevents only a double claim on the same income thus does not prohibit an assessee to claim the overflow of income under section 10AA under section 80-IB(9) thus the reading cannot be that section 80A(4) reduces the "computation of deduction". Assessee is thus entitled to claim the overflow beyond claimed amount under section 10AA as eligible amount for deduction under section 80-IB(9). The two sections section 10AA and section 80-IB(9) are not mutually exclusive nor can be read thus using section 80A(4). 4. Held in favour of the assessee that the distinction in the word gross profits and gains and the word profits and gains as computed under the act are distinct as held in the case of Vijay industries SC decision so the computation of section 10AA benefit of assessee ought to be done accordingly based on gross profit of the eligible unit. Thus remanded to assessing officer accordingly for recomputation. The decision of Vijay industries was in the realm of section 80HH which has held that the phrase "profits and gains is of wider purport than the word income". It also held that the deeming fiction then in section 80AB restricting the claim to income computed only under the act was only prospective. Section 10AA is in pari materia with section 80HH has also used the phrase "profits and gains derived from". Section 80AB cannot circumscribe exempted incomes can only bring in chapter VIA deductions unless specified. Explanation to section 10AA inserted with effect from 1-4-2018, "Explanation.--For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee", can only be read prospective and not retrospective thus the meaning of the word profits have to be construed as widely as possible making assessee eligible for the gross profits rather than the profits as computed under the Act. Section 80AB cannot be read to be in materia to section 10AA explanation thus cannot be given a circumscribed reading into section 10AA. It is to be noted that this point on the verdict might not apply to prospective years but only relevant to the years prior to the amendments in the statute due to insertion of the explanation to section 10AA. 5. Amendment made by inserting Explanation 5 to section 32 can only be prospective and not retrospective thus assessee is eligible to claim depreciation on the brought forward block of capital assets from those years when depreciation was only optional. This point on the verdict would also be of limited applicability only to the year of transition post insertion of Explanation 5 to section 32.

Tax Publishers

Reliance Industries Ltd. v. ACIT [ITA No. 7299/Mum/2017, ITA No. 136/Mum/2017, dt. 10-11-2020] : 2020 TaxPub(DT) 5001 (Mum-Trib)

1. Exempted interest on tax free bonds under section 10(15)(iv)(h) whether taxable under MAT provisions?

2. Validity of TP additions of interest income on Convertible preference shares recharacterized as borrowing.

3. Interplay of Section 10AA vs. Section 80-IA(9) read with section 80A(4)

4. Profits allowable as per section 10AA. Retrospectivity of Explanation to section 10AA

5. The insertion of Explanation 5 to section 32 post Mahendra Mills decision (2000) 243 ITR 56 (SC) : 2000 TaxPub(DT) 1304 (SC) is only prospective and not retrospective, thus assessee is eligible to claim depreciation on the brought forward written down block from those years where in they had not claimed depreciation when depreciation claim was optional.

Facts:

Assessee a diversified conglomerate had a number of tax issues, in this case some raised by the revenue some by the assessee. The key ones being --

1. They were in receipt of interest on tax free bonds under section 10(15)(iv)(h). It was the case of the revenue that the same should be included while computing MAT under section 115JB. This was upheld at lower levels and thus assessee went in higher appeal.

2. Assessee had subscribed to compulsorily convertible cumulative preference shares of its overseas AE's on which no preference dividend arose due to those AE's not making profits. These were recharacterized as debt instruments by the revenue and additions made notionally on the interest. On appeal this was reversed by the Commissioner (Appeals). Aggrieved revenue went in higher appeal.

3. Assessee had SEZ export profits eligible for deduction under section 10AA which were into business new oil exploration blocks. Thus claim was made of the residual income which was left after claiming section 10AA under section 80-IB(9) on the SEZ non-export profit. Total claim did not exceed the overall profit of the entire unit. It was the case of the revenue that once the claim under section 10AA is made then the provisions of section 80-IB(9) and section 80-IB(4) would prohibit assessee to claim the residual left over amount on the balance profits. In short the contention of revenue was section 10AA and section 80-IB(9) were mutually exclusive due to impact of section 80A(4). On higher appeal by the assessee

4. Profits allowable as per section 10AA ought to be gross profits that is profits prior to granting of depreciation and investment allowance and prior to allowing all expenses under section 30 to 43D. There is a difference between the word "gross profits and gains" vis a vis "profits and gains as computed per "profits and gains as computed under the Act". Where incomes have been referred to profits and gains as computed under the act they can be referred to as income as taxable or as computed under the Act. Where profits and gains are used there the word has to be given a wider meaning vide Apex Court decision in Vijay Industries v. CIT (SC) in Civil Appeal No. 1581-1582 of 2005 : 2019 TaxPub(DT) 1923 (SC) so they ought to be allowed on gross profits prior to reducing items under section 30 to section 43D.

5. Assessee opted by not claiming depreciation for years prior to the insertion of Explanation 5 to section 32 post Mahendra Mills case. Their plea was that in the year post insertion of the explanation the depreciation should be computed based on the brought forward block from those years when the depreciation claim was never made. On appeal --

Held in favour of the assessee --

1. Tax free interest cannot be taken into account for computing MAT provisions but remanded for verification of the applicability of the said decisions on merits.

Applied:

Assessee's own case for assessment year 2010-11 to 2012-13

CIT v. Metal & Chromium Plater (P.) Ltd., (2019) 415 ITR 123 (Madras-HC) : 2016 TaxPub(DT) 5156 (Mad-HC)

Dissented:

Rain Commodities Ltd. v. DCIT, (2010) 131 TTJ 514 (Hyderabad) (SB) : 2010 TaxPub(DT) 2079 (Hyd-Trib)

2. Notional interest by recharacterizing preference shares as debt instruments and taxing these under TP regulations is not permitted.

Applied:

Assessee's own case for assessment year 2010-11 to 2012-13

DIT v. Besix Kier Dhabol SA (2013) 210 Taxman 151 (Bom-HC) : 2013 TaxPub(DT) 1472 (Bom-HC)

M/s. Aegis Ltd. (ITA No. 1248 of 2016) and ITAT decision

Pr. CIT v. Auto Components Pvt. Ltd. (ITA No. 1213/Mum/2014)

3. Section 80A(4) prevents only a double claim on the same income thus does not prohibit an assessee to claim the overflow of income under section 10AA under section 80-IB(9) thus the reading cannot be that section 80A(4) reduces the "computation of deduction". Assessee is thus entitled to claim the overflow beyond claimed amount under section 10AA as eligible amount for deduction under section 80-IB(9). The two sections section 10AA and section 80-IB(9) are not mutually exclusive nor can be read thus using section 80A(4).

4. Held in favour of the assessee that the distinction in the word gross profits and gains and the word profits and gains as computed under the act are distinct as held in the case of Vijay industries SC decision so the computation of section 10AA benefit of assessee ought to be done accordingly based on gross profit of the eligible unit. Thus remanded to assessing officer accordingly for recomputation. The decision of Vijay industries was in the realm of section 80HH which has held that the phrase "profits and gains is of wider purport than the word income". It also held that the deeming fiction then in section 80AB restricting the claim to income computed only under the act was only prospective. Section 10AA is in pari materia with section 80HH has also used the phrase "profits and gains derived from". Section 80AB cannot circumscribe exempted incomes can only bring in chapter VIA deductions unless specified. Explanation to section 10AA inserted with effect from 1-4-2018, "Explanation.--For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee", can only be read prospective and not retrospective thus the meaning of the word profits have to be construed as widely as possible making assessee eligible for the gross profits rather than the profits as computed under the Act. Section 80AB cannot be read to be in materia to section 10AA explanation thus cannot be given a circumscribed reading into section 10AA.

It is to be noted that this point on the verdict might not apply to prospective years but only relevant to the years prior to the amendments in the statute due to insertion of the explanation to section 10AA.

5. Amendment made by inserting Explanation 5 to section 32 can only be prospective and not retrospective thus assessee is eligible to claim depreciation on the brought forward block of capital assets from those years when depreciation was only optional. This point on the verdict would also be of limited applicability only to the year of transition post insertion of Explanation 5 to section 32.