Case Note & Summary
The appeal by the Revenue under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal (ITAT) dated 13 February 2009 for Assessment Year 1997-98. Two questions of law were framed. First, whether the ITAT was right in deleting the adjustment made by the Assessing Officer (AO) relating to Redemption of Debentures Reserve amounting to Rs.18.80 crores. Second, whether the ITAT was right in deleting the disallowance in respect of capital expenditure incurred in respect of Steel Division at Nashik as revenue expenditure. The court, per Dr. D.Y. Chandrachud and M.S. Sanklecha, JJ., held that the Debenture Redemption Reserve (DRR) is not a reserve under Section 115JA read with Schedule VI of the Companies Act, 1956, but a provision for a known liability, following the Supreme Court's decision in National Rayon Corporation Ltd. v. CIT. Therefore, the adjustment was rightly deleted. Regarding the second issue, the court noted that the expenditure was incurred for the purpose of business and was part of the profit-making apparatus, and thus the ITAT correctly treated it as revenue expenditure. The appeal was dismissed.
Headnote
A) Income Tax - Book Profit - Section 115JA of Income Tax Act, 1961 - Debenture Redemption Reserve - The issue was whether the amount transferred to Debenture Redemption Reserve (DRR) should be added back to book profit under Section 115JA. The court held that DRR is a provision for a known liability (repayment of debentures) and not a reserve, following National Rayon Corporation Ltd. v. CIT. Therefore, the adjustment made by the Assessing Officer was rightly deleted by the ITAT. (Paras 2-4) B) Income Tax - Revenue Expenditure - Capital Expenditure - The issue was whether expenditure incurred in respect of Steel Division at Nashik was capital or revenue. The court held that the expenditure was incurred for the purpose of business and was part of the profit-making apparatus, hence allowable as revenue expenditure. The ITAT's deletion of disallowance was upheld. (Para 5)
Issue of Consideration
Whether Debenture Redemption Reserve is a reserve under Section 115JA of the Income Tax Act, 1961 read with Schedule VI of the Companies Act, 1956; Whether capital expenditure incurred in respect of Steel Division at Nashik is allowable as revenue expenditure
Final Decision
Appeal dismissed. ITAT order upheld. No substantial question of law arises.
Law Points
- Debenture Redemption Reserve is not a reserve under Schedule VI of Companies Act
- 1956
- but a provision for known liability
- Capital expenditure incurred for business purposes may be treated as revenue expenditure if it is part of profit-making apparatus
