United Shippers Ltd. v. Assistant Commissioner of Income-tax, Central Circle 21, Mumbai

G.D. Agarwal, Vice-President. - The appeal of the assessee, for the assessment year 2004-05, is directed against the order dated 3-2-2009, of Commissioner of Income-tax (Appeals) -VII, Mumbai.

2. Ground No. 1 of the assessee’s appeal, which reads as under, was not pressed by the learned counsel for the assessee, at the time of hearing. Accordingly, the same is rejected as not pressed :

"1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance of proportionate interest and other expense under section 14A of the Income-tax Act, 1961 and directing the Assessing Officer to compute the amount disallowable as per rule 8D of the Income-tax Rules, 1962 and the reasons assigned for doing so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder."

3. Ground No. 2 of the assessee’s appeal reads as under :—

"2.(a)On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in confirming the action of Assessing Officer of treating interest income amounting to Rs. 83,89,178 as "Income from other sources" as against "Business income" and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder.

(b)On the facts and in the circumstances of the case and in law, the authorities below ought to have netted off the interest paid against the interest income, and not doing so is wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder."

4. At the time of hearing before us, it was pointed out by the learned counsel that this issue is considered by the ITAT, in assessee’s own case, for the assessment year 2000-01, in which the ITAT set aside the matter back to the file of the Assessing Officer. He, therefore, submitted that the same view may be taken in the year under consideration also.

5. The learned Departmental Representative, on the other hand, relied upon the orders of the authorities below.

6. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that in the assessment year 2000-01, a similar matter came up before the ITAT and the ITAT, in its order dated 3-7-2007, vide ITA No. 4558/Mum./2003, held as under :—

"4. Second ground relates to in confirming the action of the Assessing Officer of treating interest income amounting to Rs. 67,31,787 as income from other sources.

5. This issue also needs re-verification as the assessee has stated that the assessee is indulging in financing activities. It was submitted that the assessee has accepted intercorporate deposits and have also advanced money to various parties. The attention of the Bench was drawn on the copy of profit and loss account where interest income and interest expenditure have been shown. Once it is found that the assessee is indulged in the activities of finance business then whatever the income is earned on account of financing business activities that has to be taken as business activities. It was further submitted by the ld. counsel of the assessee that in the past the Assessing Officer has accepted interest income as business income. This aspect has also not taken into consideration by the Assessing Officer. Therefore, for the purpose of examining this aspect, we set aside the issue to the file of the Assessing Officer to pass a fresh order after affording reasonable opportunity of being heard to the assessee. We order accordingly."

7. Since the facts are admitted to be identical, the above decision of the ITAT would be clearly applicable. We, therefore, respectfully following the same, set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer, to be re-adjudicated as per the direction of the ITAT, for assessment year 2000-01. Ground No. 2 of the assessee’s appeal is allowed for statistical purposes.

8. Ground No. 3 of the assessee’s appeal reads as under :—

"3.(a)On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in confirming the addition of Rs. 89,30,258 being purchase values of vessels sold during the year on the ground that they have been sold within 8 years from the end of previous year in which they have been acquired even though the period of holding required is 3 years for this assessment year and the reasons assigned for doing so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder.

(b)The lower authorities failed to appreciate that as per the amended clause (c) of sub-section (3) of section 33AC with effect from 1-4-2004, the period of retention was reduced from 8 years to 3 years and, hence, there was no violation of conditions laid down in that section.

(c)On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in confirming disallowance of Rs. 25,00,000 in respect of sale of vessel to DB Girdhari even though no deduction under section 33AC was ever claimed by the appellant in any of the earlier years."

9. At the time of hearing before us, it is submitted by the learned counsel that the assessee derives income from shipping business. During the accounting year relevant to assessment year under appeal, the assessee sold three ships, which were purchased by utilizing the reserve created under section 33AC of the Income-tax Act, 1961. As per the Assessing Officer, the ships were sold after three years but within the period of eight years from the date of purchase of ships and, therefore, there was violation of provision of section 33AC(3)(c) of the Act. It is submitted by the learned counsel that section 33AC(3)(c) was amended by the Finance Act, 2003, with effect from 1-4-2004 and now the assessees are permitted to sell the ships after the period of three years from its acquisition. He submitted that the Assessing Officer made the addition of Rs. 89,30,258 on the ground that the provision of section 33AC(3)(c) as existed in the year in which such ship was purchased, would be applicable. He contended that it is a settled law that the law applicable as on first day of the relevant assessment year would be applicable and not the law in the earlier years. In support of this contention, he relied upon the following decisions :—

(i) Commissioner Of Income-Tax v. Orkay Silk Mills Pvt. Ltd. [1998] 230 ITR 108 (Bom.).

(ii) Karimtharuvi Tea Estate Ltd. v. State Of Kerala [1966] 60 ITR 262 (SC).

He further submitted that when the law is amended and the period mentioned in any provision is modified, it is the subsequent period that would be applicable. In support of this contention, he relied upon the following decisions :—

(i) Addl. CIT v. Watan Mechanical & Turning Works [1977] 107 ITR 743 (AP) (FB).

(ii) Steel Strips Ltd. v. Asstt. CIT [1995] 211 ITR 1021 ¹ (Punj. & Har.).

10. The learned DR, on the other hand, relied upon the orders of the authorities below.

11. We have carefully considered the arguments of both the sides and perused the material placed before us. The details of the ships sold during the year under consideration and its purchases are as under :—

From the above, it is evident that all the three ships sold during the year under consideration, were sold after the three years from the end of the previous year in which they were acquired but within the period of eight years. The provision of sub-section (2) and sub-section (3) of section 33AC, which is with regard to the utilization of reserve and the prohibition with regard to sale of ship acquired by utilizing the reserve, reads as under :—

"33AC. Reserves for shipping business.—(1) ******

(2) The amount credited to the reserve account under sub-section (1) shall be utilized by the assessee before the expiry of a period of eight years next following the previous year in which the amount was credited—

(a)for acquiring a new ship for the purposes of the business of the assessee; and

(b)until the acquisition of a new ship, for the purposes of the business of the assessee other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

(3) Where any amount credited to the reserve account under sub-section (1)—

(a)has been utilized for any purpose other than that referred to in clause (a) or clause (b) of sub-section (2), the amount so utilized; or

(b)has not been utilized for the purpose specified in clause (a) of sub-section (2), the amount not so utilized; or

(c)has been utilized for the purpose of acquiring a new ship as specified in clause (a) of sub-section (2), but such ship is sold or otherwise transferred, other than in any scheme of demerger by the assessee to any person at any time before the expiry of three years from the end of the previous year in which it was acquired, the amount so utilized in acquiring the ship,

shall be deemed to be the profits,—

(i)in a case referred to in clause (a), in the year in which the amount was so utilized; or

(ii)in a case referred to in clause (b), in the year immediately following the period of eight years specified in sub-section (2); or

(iii)in a case referred to in clause (c), in the year in which the sale or transfer took place,

and shall be charged to tax accordingly. . .

(4)******"

From the above, it is evident that as per sub-section (2) of section 33AC, the amount credited to reserve account as per sub-section (1) of section 33AC, is to be utilized by the assessee for acquisition of a new ship, within a period of eight years. As per clause (c) of sub-section (3) of section 33AC, once the new ship has been acquired by utilizing the reserve account, the assessee is debarred from selling such ship before the expiry of three years from the end of the previous year in which such ship was acquired. In the case under appeal before us, there is no dispute that the ships were acquired by utilization of the reserve as provided by sub-section (2) of section 33AC. It is also not in dispute that such ships were sold after the three years from the end of the previous year in which the ships were acquired but within the period of eight years.

Now the question is whether on the above facts there is violation of clause (c) of sub-section (3) of section 33AC. The above clause, i.e., clause (c) of sub-section (3) of section 33AC was amended by the Finance Act, 2003, with effect from 1-4-2004. By this amendment, the period of eight years is reduced to three years. As per the Assessing Officer, the assessee is debarred from selling the ships for the period of eight years, despite the above amendment. We are unable to agree with the view of the Assessing Officer. When the Legislature, in its wisdom, has decided to reduce the period of eight years to three years and made it effective from 1-4-2004, there is no warrant for holding that despite the above amendment the old provision of prohibition of eight years for the sale of ships would be applicable. It is a settled law that the law as applicable on the first day of the assessment year is to be applied for determining the income of the previous year. The Hon’ble jurisdictional High Court in the case of Orkay Silk Mills (P.) Ltd. (supra) held as under :—

"That it is well-settled that though the subject of charge under the Income-tax Act is income of the previous year, the law to be applied is that in force in the assessment year unless otherwise stated or implied. Therefore, for determining the liability of the assessee-company in respect of the income of the amalgamating company for the previous year ending 30-6-1975, the law applicable on the first day of the assessment year 1976-77, i.e., 1-4-1976, would apply and not the law applicable during the previous year." [Emphasis supplied]

Similar view is taken by the Hon’ble Apex Court in the case of Karimtharuvi Tea Estate Ltd. (supra), wherein Their Lordships held as under :—

"It is well-settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessment of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force." [Emphasis supplied]

From the above decisions of Hon’ble jurisdictional High Court and of Hon’ble Apex Court, it is clear that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessment of that assessment year. Since the law is amended by the Finance Act, 2003, with effect from 1-4-2004, the same would be applicable for the assessment year beginning from 1-4-2004, i.e., assessment year 2004-05. The assessment under consideration before us is for assessment year 2004-05. In view of above, we hold that the provision of section 33AC(3)(c), as amended by the Finance Act, 2003, with effect from 1-4-2004, would be applicable. The assessee has not sold the ships within the period of three years from the end of the previous year in which the ships were acquired. Therefore, in our opinion, there was no violation of section 33AC(3)(c) of the Income-tax Act, 1961. Accordingly, the addition of Rs. 89,30,258 made by the Assessing Officer is deleted. Ground No. 3 of the assessee’s appeal is allowed.

12. Ground No. 4 of the assessee’s appeal reads as under :—

"4.(a)On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of the deduction of Rs. 13,80,00,000 claimed by the appellant under section 33AC of the Income-tax Act, 1961 and the reasons assigned for doing so are wrong and contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and the Rules made thereunder.

(b)On the facts and in the circumstances of the case and in law, the authorities below erred in making various observations, which are contrary to the facts of the case and the provisions of the Income-tax Act, 1961 and the Rules made there under."

13. At the time of hearing before us, it is submitted by the learned counsel that the assessee is a shipping company. During the year under conside-ration, the assessee claimed deduction under section 33AC at Rs. 13,80,00,000. The Assessing Officer disallowed the same on the ground that as per proviso to section 33AC(1), where the aggregate of the amount carried to the reserve account as provided under section 33AC(1) exceeds twice the aggregate of the amounts of paid-up share capital and general reserve, then no deduction under section 33AC is allowable. As per the Assessing Officer, the total of paid-up share capital and general reserve is negative and, therefore, the assessee is not entitled to deduction under section 33AC at all. The above view of the Assessing Officer was based upon the following findings :—

(a)Preference share capital is not part of paid-up share capital.

(b)General reserve is to be reduced by :—

(i)Amount transferred from capital redemption account to profit and loss account; and

(ii)Amount transferred from section 33AC reserve utilized account to profit and loss account.

14. In respect of all the above three points, the learned counsel argued at length, which are summarized as under :—

(a)Preference share capital - It is submitted by the learned counsel that proviso to section 33AC uses the words "paid-up share capital" and not the "equity share capital". That preference share capital is also part of share capital. In support of this contention, he referred to sections 80, 85 and 86 of the Companies Act, 1956, as well as Schedule VI of the Companies Act, 1956. He submitted that section 85 of the Companies Act, 1956, provides that there are two types of share capital - Preference share capital and Equity share capital. That the Assessing Officer has himself used the words "preference share capital" in his assessment order. Once it is a share capital and paid-up also, there was no justification for holding that it is not the part of paid-up share capital. He stated that if the Legislature wanted to exclude the preference share capital, they could have used the words "equity share capital"; but the Legislature, in its wisdom, has used the words "paid-up share capital" and not "equity share capital". He further submitted that the Assessing Officer has relied upon the decision of ITAT in the case of Varun Shipping Co. Ltd. v. Jt.CIT [IT Appeal No. 882 (Mum.) of 2001, dated 31-10-2006]. He submitted that in the abovementioned case the issue before the ITAT was with regard to allowability of the expenditure incurred by Varun Shipping Co. Ltd. for issuance of preference share capital. The ITAT was of the opinion that the expenditure incurred by the assessee, in issuing the preference share capital, is an allowable expenditure and while taking that view, they have also held that the preference share capital is akin to the debenture. However, they have never said that the preference share capital is not the part of share capital. He also submitted that if the preference share capital is similar to debenture, then the dividend paid on such share capital should have been allowed as a deduction in computing the assessee’s total income. Neither in the year under consideration nor in any of the preceding or subsequent year the Assessing Officer has allowed the deduction of dividend paid on preference shares. He, therefore, submitted that the Assessing Officer was not justified in holding that the preference share capital is not a part of paid-up share capital.

(b)( i)Amount transferred from capital redemption account to the profit and loss account - It is submitted by the learned counsel that at page 27 of the assessment order, the Assessing Officer has worked out the balance in the general reserve account to be negative sum of Rs. 10,69,25,000. From the balance in general reserve account, as per assessee’s balance sheet, the Assessing Officer reduced the sum of Rs. 7,13,50,000 being the amount transferred from capital redemption account to profit and loss account, and also the sum of Rs. 16,75,99,000 transferred from section 33AC reserve utilized account to profit and loss account. He submitted that at page 20 of the assessment order, the Assessing Officer has given the complete chart with regard to preference share capital. As per his own total, the amount transferred from capital redemption account to profit and loss account was only Rs. 4,82,50,000. Rs. 7,13,50,000 was the amount for which capital redemption reserve was required to be created. He submitted that the above working by the Assessing Officer is absolutely incorrect and it is neither in conformity with the provisions of the Companies Law nor the Accounting Guidelines provided by the Institute of Chartered Accountants of India. That as per the Assessing Officer, the assessee’s working in this regard since assessment year 1997-98 is incorrect. He stated that in all the preceding years the assessment was completed under section 143(3) and assessee’s working of general reserve is accepted by the revenue. No infirmity therein was ever pointed out by the Assessing Officer. Neither any year’s assessment was reopened under section 263. That the assessee’s books of account are duly audited and the same is also placed before the Registrar of Companies because the assessee is a Limited Company. Neither the auditor has questioned the correctness of the reserve as per the balance sheet nor the Registrar of Companies have pointed out any mistake therein. Even on merits, the finding of the Assessing Officer that the balance in the general reserve account is to be reduced by sum of Rs. 7,13,50,000 being the amount transferred from capital redemption account is factually incorrect. He referred to chart prepared by the Assessing Officer at pages 20 and 21 of the assessment order. He pointed out that as per the column ‘F’ of the chart, the amount transferred from the capital redemption account to profit and loss account is Rs. 4,82,50,000 and not Rs. 7,13,50,000 as mentioned by the Assessing Officer, while calculating the balance in general reserve account at page 27 of the assessment order. Further, as per Column ‘G’ at pages 20 and 21 of the assessment order, the amount transferred from profit and loss account to the capital redemption reserve account was Rs. 8,51,91,800. Thus, the amount transferred from profit and loss account to the capital redemption reserve account was more than the amount transferred from capital redemption account to profit and loss account. He further pointed out that as per section 80(1)(a) of the Companies Act, the preference shares are to be redeemed either out of the profits of the company or out of the proceeds of a fresh issue of shares made for the purpose of redemption. That in most of the years, the preference shares issued was more than the preference shares redeemed. Thus, the redemption of preference share was out of the proceeds of preference shares issued. He also pointed out that the Assessing Officer has not accepted that redemption of preference shares was out of the sale proceed of the preference shares on the ground that in the objects of placement, it was mentioned that "company proposes to use the proceeds of this placement for funding its long-term working capital needs". It was pointed out by the learned counsel that first of all, there was no redemption in the year under consideration out of the fresh issue of preference shares. Therefore, the above observation/finding of the Assessing Officer is pertaining to earlier years. That the assessments of all earlier years have been completed under section 143(3). The same are neither reopened under section 147 nor set aside under section 263 of the Act, and, therefore, the Assessing Officer, while completing the assessment of assessment year 2004-05, has no jurisdiction to examine/comment upon the matter which has taken place in the preceding years and accepted by the revenue. Even otherwise, the object of the placement is mentioned in wide term. Out of the proceed of preference shares, part was utilized for redemption of preference shares and part for long-term working capital needs. He also pointed out that during the year under consideration, the preference capital redeemed was only Rs. 96,00,000 for which redemption reserve was already created from time to time since issue of preference shares. That the balance in the capital reserve redemption account was Rs. 3,69,41,800 which was much more than preference shares redeemed during the year under consideration, therefore, no further reserve was required. He also pointed out that the Assessing Officer has relied upon clause (d) of section 80(1) of the Companies Act, and as per this clause; capital redemption reserve account is to be treated as paid-up share capital of the company. Therefore, if the Assessing Officer strictly applies the provisions of the Companies Act, he should consider the balance in the capital redemption reserve account as part of paid-up share capital. In view of the above, it was contended by the learned counsel that the Assessing Officer was not justified in reducing the balance in the general reserve account by a sum of Rs. 7,13,50,000.

(b)( ii)Amount transferred from section 33AC reserve utilized account - It is stated by the learned counsel that the Assessing Officer has reduced the balance in general reserve account by the amount transferred from section 33AC reserve utilized account. It is stated by the learned counsel that as per the provisions of section 33AC(1), the assessee has created the reserve by debiting to the profit and loss account. That as per the provisions of section 33AC(2), the said reserve was utilized for acquiring a new ship for the purpose of business of the assessee within the period of eight years of the previous year in which the reserve was created. That after the utilization of the reserve as per section 33AC(2), the same was transferred to the profit and loss account. That similar issue was considered by various High Courts as well as Tribunals with reference to reserves created under similar other provisions. In this regard, he relied upon the following decisions :—

(i) Commissioner Of Income-Tax v. Shree Shantinath Silk Mills [1994] 49 ITD 341 (Ahd.).

(ii) CIT v. Karamchand Premchand (P.) Ltd. [1993] 200 ITR 281 ¹ (Guj.).

(iii) Meenu Equipments v. Commissioner Of Income-Tax [2004] 266 ITR 33 ² (Mad.).

(iv) CIT v. Sir Shadilal Enterprises Ltd. [2005] 276 ITR 302 ³ (All.).

(v) Travel Corpn. (India) (P.) Ltd. v. Asstt. CIT [2007] 293 ITR 577 ⁴ (Bom.).

He stated that the above decisions of various High Courts, including the jurisdictional High Court, would be squarely applicable in the case of the assessee because in the similar other provisions the Hon’ble Courts have taken the view that once the reserve is utilized for the purpose of business, the condition of the Act is satisfied and by subsequent merging of the reserve with the general reserve, there is no violation of the Act. He, therefore, submitted that the Assessing Officer was not justified in taking the view that the assessee was not permitted to transfer the section 33AC reserve to general reserve even after its utilization for acquisition of new ships. The learned counsel, therefore, concluded his argument with the submission that the Assessing Officer was not justified in denying the claim of deduction under section 33AC.

It was also pointed out by the learned counsel that the learned CIT(A) not only upheld the order of the Assessing Officer in this regard, but he also expressed doubt about the overall eligibility of the appellant’s claim for deduction under section 33AC of the Act. He observed that the assessee is not engaged in the business of operation of ships but only providing ancillary services. It is contended by the learned counsel that the Assessing Officer has never held that the assessee is not eligible to deduction under section 33AC; but while computing the deduction under section 33AC, he worked out the deduction to Nil. Therefore, the above observation by the CIT(A) was beyond the issue before him. It is submitted by the learned counsel that the assessee is in the same line of business since past several years and on the similar activity, it is being allowed deduction under section 33AC right from assessment year 1990-91. This position is noted by the Assessing Officer himself, at Page 27 of the assessment order. When the facts are similar, the CIT(A), just by casual remark, cannot hold that the assessee is not eligible to deduction under section 33AC.

15. The learned DR, on the other hand, heavily relied upon the order of the CIT(A). He stated that the cases relied upon by the learned counsel, with regard to transfer of reserve to the general reserve, are not relating to section 33AC of the Act, but with some other provisions of the Income-tax Act. Therefore, the same will not be applicable for interpreting the provisions of section 33AC. He contended that by this method the assessee has inflated the general reserve and, therefore, the Assessing Officer was fully justified in reducing the amount transferred to general reserve from section 33AC reserve utilized account. With regard to preference share capital redemption reserve, it was submitted by the learned DR that the reserve is to be created in the year of redemption of preference shares, unless the preference shares are redeemed out of the proceeds of fresh issue. He stated that the fresh issue should be made for the purpose of redemption of preference shares. In the case of the assessee, preference shares were issued for long-term working capital requirement of the assessee’s business and not for the redemption of preference shares and, therefore, the assessee was required to create reserve as required by section 80(1)(d) of the Companies Act. He further submitted that for the purpose of section 33AC, only the paid-up share capital is to be considered, which means paid-up equity share capital and, therefore, preference share capital cannot be considered for the purpose of proviso to section 33AC(1). In view of the above, it was contended by the learned DR that the Assessing Officer has rightly denied the deduction under section 33AC of the Act, to the assessee. The same should be sustained.

16. We have carefully considered the arguments of both the sides and perused the material placed before us. The assessee has claimed the deduction under section 33AC at Rs. 13,80,00,000, which was denied by the Assessing Officer as per proviso to section 33AC(1). Section 33AC(1) and proviso thereof reads as under:—

"33AC. Reserves for shipping business.—(1) In the case of an assessee, being a Government company or a public company formed and registered in India with the main object of carrying on the business of operation of ships, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount not exceeding fifty per cent of profits derived from the business of operation of ships (computed under the head "Profits and gains of business or profession" and before making any deduction under this section), as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account, to be utilized in the manner laid down in sub-section (2) :

Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the aggregate of the amounts of the paid-up share capital, the general reserves and amount credited to the share premium account of the assessee, no allowance under this sub-section shall be made in respect of such excess :

Provided further that for five assessment years commencing on or after the 1st day of April, 2001 and ending before the 1st day of April, 2006, the provisions of this sub-section shall have effect as if for the words "an amount not exceeding fifty per cent of profits", the words "an amount not exceeding the profits" had been substituted :

Provided also that no deduction shall be allowed under this section for any assessment year commencing on or after the 1st day of April, 2005. . . ."

16.1 From the above, it is clear that as per section 33AC(1), where the main object of the assessee is carrying on the business of operation of ships, he is entitled to deduction of an amount, being fifty per cent of the profits derived from the business of operation of ships, provided the assessee creates the reserve by debiting the same to the profit and loss account. The reserve so created, is to be utilized in the manner, as laid down in sub-section (2) of section 33AC. However, proviso to section 33AC(1), provides the ceiling for the creation of such reserve. As per the ceiling, the aggregate of the amounts carried to such reserve from time to time, should not exceed twice the aggregate of the amounts of the paid-up share capital, the general reserve and the amount credited to the share premium account. As per the Assessing Officer, the aggregate of paid-up share capital and general reserve is negative. The working given by him at page 27 of the assessment order reads as under :—

"9.15 Therefore, allowability of deduction under section 33AC is computed as under :

16.2 Thus, as per the Assessing Officer, when the total amount of paid-up share capital and general reserve is negative, the assessee is not entitled to any deduction under section 33AC of the Act. In the above working, the Assessing Officer has not considered the paid-up preference share capital amounting to Rs. 4,24,17,000 as part of paid-up share capital and from the general reserve, as per assessee’s balance sheet, he reduced the amount transferred from capital redemption account and 33AC reserve utilized account. The learned counsel challenged the above working of the Assessing Officer, while the learned DR has supported the working of the Assessing Officer. We have summarized the arguments of both the parties in the preceding paragraphs. The CIT(A) has not only confirmed the order of the Assessing Officer, but he also observed that the assessee is not eligible for deduction under section 33AC, as it is not in the business of operations of ships. We find this observation of the CIT(A) to be without any basis or material on record. In the assessment order, at page 27, the Assessing Officer has given the details of year-wise deductions allowed under section 33AC, to the assessee. As per the Assessing Officer, the assessee is being allowed deduction under section 33AC of the Act, since assessment year 1990-91. Admittedly, the nature of the business of the assessee in the year under consideration is similar to the business carried on by him in the preceding years. Moreover, in the year under consideration also the Assessing Officer has never held that the assessee is not in the shipping business. As per the Assessing Officer, the assessee is eligible to the deduction under section 33AC; but as per proviso to section 33AC(1), the deduction works out to be Nil. Therefore, he has not allowed any deduction under section 33AC. In view of above, we vacate the finding of the CIT(A) that the assessee is not eligible to deduction under section 33AC of the Act.

16.3 Now we revert back to the computation of deduction under section 33AC and our finding on each and every point as under: —

Regarding preference share - We find that as per proviso to section 33AC(1), the aggregate of the amounts of the paid-up share capital, the general reserve and the amount credited to the share premium account is to be considered. Thus, what is relevant for the purpose of this proviso is paid-up share capital. Therefore, it is to be examined whether the preference share capital is a part of share capital or not. Under the Income-tax Act, equity share capital and preference share capital has not been defined. However, we find that section 85 and section 86 of the Companies Act, 1956, deals with the kinds of share capital. It reads as under:—

"85. Two kinds of share capital.—(1) "Preference share capital" means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely—

(a)that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax, and

(b)that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid-up or deemed to have been paid-up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely—

(i)any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and

(ii)any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Explanation.—Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely—

(i)that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(ii)that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amount specified in clause (b), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

(2) "Equity share capital" means, with reference to any such company, all share capital which is not preference share capital.

(3) The expressions "preference share" and "equity share" shall be construed accordingly."

"86. New issues of share capital to be only of two kinds.—The share capital of a company limited by shares shall be of two kinds only, namely—

(a)equity share capital—

(i)with voting rights; or

(ii)with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed,

(b)preference share capital."

16.4 From the above, it is evident that as per Companies Act, there are two kinds of share capital - one "preference share capital" and the other "equity share capital". Therefore, if the share capital is paid-up, whether prefe-rence or equity both will come under the category of paid-up share capital of the company. Since under the Income-tax Act, the share capital has not been defined, in our opinion, the definition of "share capital" under the Companies Act, as discussed above, would be squarely applicable while dealing with the appeal under the Income-tax Act. The Assessing Officer has relied upon the decision of ITAT, Mumbai Bench, in the case of Varun Shipping Co. Ltd. (supra). However, we find that the issue before the ITAT was not with regard to deduction under section 33AC but was allowability of the expenditure incurred on the issue of preference share. The relevant portion of the order of the ITAT reads as under:—

"(5) Ground No. 4 relates to in confirming the disallowance of Rs. 20 lakhs being expenditure incurred on management fees in connection with the issue of preference shares treating the same as capital expenditure.

(5.1) The Assessing Officer made this disallowance by following the decision of the Hon’ble Supreme Court in case of Brooke Bond India Ltd. 225 ITR 798. It was submitted before CIT(A) that the expenses incurred in connection with issue of preference shares are in the nature of revenue expenditure as funds were needed for working capital finance and assessee did not acquire any capital assets or no benefit of enduring nature. However, the learned CIT(A) was also in agreement with the findings of Assessing Officer. Accordingly, he confirmed the disallowance.

(6) The contention raised before lower authorities were reiterated by the learned counsel of the assessee before the Tribunal. It was explained that facts before Hon’ble Supreme Court in case of Brooke Bond India Ltd. were entirely different as compared with the facts of the instant case. It was further submitted that the parties have no right to participate in the company’s affairs on account of fees paid for acquiring the preferential shares. It was further explained that the shares were redeemable in three years. It was also explained that no enduring benefit was acquired by the assessee nor any capital asset was created. The counsel of the assessee has stated that the amount received by the company on account of preferential redeemable shares are not capital in nature but revenue in nature as amount was redeemable in three years. The attention of the Bench was drawn on the letter/MOU issued by General Insurance Corporation on account of issue of 16 per cent redeemable cumulative preference shares of aggregate face value of Rs. 5 crores. After going through the contents of the letter issued by General Insurance Corporation we noted that proceeds of the preferential shares shall be utilized by company for the purpose of meeting the long-term working capital. The company was required to furnish Auditor’s certificate to the above effect to General Insurance Corporation and subsidiaries annually. In the same letter at page 2 in clause F it has been provided that company shall create Preference Shares Redemption Reserve by transferring to it suitable amounts every year out of profits of the company so as to redeem the preference shares at the date of the maturity. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the authorities below.

(7) After considering rival submissions and perusing the material on the record, we find that the Assessing Officer and CIT(A) were not justified in rejecting the claim of the assessee by following the decision of the Supreme Court in case of Brooke Bond India Ltd. 225 ITR 798 . The facts before the Hon’ble Supreme Court were distinguishable to the facts of the present case. The Hon’ble Supreme Court has held that "expenditure incurred by company in connection with issue of shares, with the view to increase the share capital is directly related to the expansion of the capital base of the company and capital expenditure, even though it may incidentally help in the business of the company and in the profit making".

(7.1) We find that the decision of the Supreme Court in the case of Brooke Bond India Ltd. (supra) is distinguishable on facts as in the present case, the capital of Rs. 8 crores was enhanced on account of issue of redeemable preference shares. There was no increase in the authorized share capital of the company. In the case before the Hon’ble Apex Court, there was increase in base capital/authorized capital of the company. The capital raised through redemption of preference shares is akin to loans because this was redeemable capital and in fact the same was redeemed. The chart showing redemption of capital was filed during the course of hearing and as per this chart, the balance on account of redemption of preference shares has been reduced to nil, means the capital has returned which was obtained for the purpose of working capital of the company.

(7.2) We have seen various cases on which reliance was placed by the ld. counsel, allowing expenses incurred on account of issue of debentures by holding that they are revenue in nature because the capital raised through debentures has been treated akin to the loans." [Emphasis supplied]

16.5 From the above, it is evident that the ITAT was examining the applicability of decision of Hon’ble Apex Court in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798¹ , with regard to issue of preference share capital and they were of the opinion that by issue of preference share capital, the capital of the assessee has not increased permanently because the preference share capital was redeemable and was ultimately redeemed. Therefore, the expenditure incurred on the issue of redeemable preference share capital was not capital expenditure. They have also observed that the capital raised through redeemable preference share is akin to loans. However, the Bench never said that the preference share capital is not the part of share capital. Merely because the share capital is held to be akin to loan, it does not loses its character as the share capital. Therefore, the above decision of ITAT would not support the case of revenue for holding that preference share capital is not part of share capital. As per Companies Act, 1956, there are two types of share capital - "preference" and "equity". The Legislature has also used the words "paid-up share capital" and not "equity share capital". Therefore, whatever is the amount of either preference or equity share capital, which is actually paid-up, would be considered for the purpose of proviso to section 33AC(1). In view of above, in our opinion, the Assessing Officer was not justified in excluding the preference share capital while considering the paid-up share capital for the purpose of computing deduction under section 33AC.

16.6 Regarding amount transferred from capital redemption account - The Assessing Officer has given the working of preference share capital issued, redeemed and redemption reserve created for various years by the assessee. These details, as given at pages 20 and 21 of the assessment order, read as under :

As per the chart prepared by the Assessing Officer, at page 27 of the assessment order, wherein he has computed the allowability of deduction under section 33AC, he has reduced the sum of Rs. 7,13,50,000 with the narration : "Less : Transferred from capital redemption account". Now, as per the chart, with regard to preference share capital prepared at pages 20 and 21 of the assessment order and also reproduced by us above, it is evident that the amount transferred from capital redemption account to the profit and loss account was Rs. 4,82,50,000 and not Rs. 7,13,50,000. In fact, Rs. 7,13,50,000 is the total amount, for which capital redemption reserve was required to be created, as per the Assessing Officer. Therefore, it is not clear what the Assessing Officer actually wanted to reduce from the general reserve because he gave the narration of one column and the amount from other column. We also find that while making the above working, the Assessing Officer has considered the relevant details beginning from financial years 1996-97 to 2003-04. The assessment for the year under consideration before us is for assessment year 2004-05, i.e., for financial year 2003-04. It was pointed out that the assessee is a company, whose accounts are audited every year, as per the provisions of Companies Act, 1956, as well as, as per section 44AB of the Income-tax Act, 1961. The audit report and balance sheet of the assessee is also placed before the Registrar of Companies. Neither the Auditor has made any adverse remark with regard to the balance sheet prepared by the assessee nor the Company Law authorities have ever pointed out any defect in the accounts of the assessee. He has also stated that the assessments of almost every preceding years were completed under section 143(3), in which deduction under section 33AC has been allowed. The above assessment has not been reopened either under section 147 or under section 263 of the Act. Therefore, the Assessing Officer, making the assessment for the assessment year 2004-05, can examine and comment upon the facts and figures relevant to the assessment year under consideration only and not earlier years.

16.7 The above submission has not been controverted before us. We entirely agree with the submission of the assessee’s counsel and hold that while making the assessment for the assessment year 2004-05, the Assessing Officer was not justified in examining the matters relating to preceding assessment years, i.e., assessment years 1996-97 to 2003-04. Therefore, we vacate his finding/observations relating to earlier years. Now coming back to the facts relating to the assessment year under consideration, we find that during the year under consideration the assessee redeemed the preference share capital amounting to Rs. 96,00,000, for which no capital redemption reserve, as required by section 80(1)(d) of the Companies Act, 1956, was created. At the time of hearing before us, it was explained by the learned counsel that the reserve was created in the earlier years. However, no specific detail has been furnished before us so as to point out whether any reserve was created against the redemption of the preference share of Rs. 96,00,000. In the absence of any details, we are unable to accept the assessee’s contention that the reserve was already created in excess of Rs. 96,00,000 and, therefore, no further reserve was required to be created in the year of redemption. In the above circumstances, we set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer. We direct him to examine whether the capital redemption reserve balance amounting to Rs. 3,69,41,800 includes any reserve created for redemption of the preference share capital amounting to Rs. 96,00,000, redeemed in the year under consideration. If the capital redemption reserve created against the redemption of preference share capital of Rs. 96,00,000 exceeds or is equal to Rs. 96,00,000, there would be no reduction from the general reserve. However, if the capital redemption reserve created is less than Rs. 96,00,000, to the extent of shortfall, the general reserve would be reduced.

16.8 Regarding transfer from section 33AC reserve utilized account - The Assessing Officer has reduced the sum of Rs. 16,75,99,000 from the general reserve on account of transfer from section 33AC reserve utilized account. The working of the general reserve account, as given by the Assessing Officer at page 26 of the assessment order, reads as under :—

"General Reserve Account:

(Rs. In lakhs)

From the above, it is evident that out of Rs. 16,75,99,000, only the sum of Rs. 2,61,39,000 was credited from section 33AC reserve utilized account to general reserve account in the year under consideration. Whether the Assessing Officer can make adjustment in the reserve of earlier years, has already been dealt with by us while considering the preference shares capital redemption reserve account and for the detailed discussion hereinabove, we hold that while making the assessment for assessment year 2004-05, the Assessing Officer is not entitled to make adjustment in the amount of general reserve already accepted in the earlier years. At the cost of repetition, we may mention that the assessments of earlier years have been completed under section 143(3), which have become final and, therefore, the Assessing Officer is not entitled to tinker with the figures of earlier years.

Now coming back to the credit from section 33AC reserve utilized account in the year under consideration, we find that during the year under consideration the assessee has transferred the sum of Rs. 2,61,39,000 from section 33AC reserve utilized account to the general reserve account. It is not in dispute that such transfer was made after the utilization of the section 33AC reserve, for the acquisition of new ships, as per section 33AC(2). As per the Assessing Officer, the assessee is not entitled to transfer the reserve to general reserve or profit and loss account, even after the utilization of the reserve for the purchase of ships. We find that similar matter is considered by various High Courts. In the case of Karamchand Premchand (P.) Ltd. (supra), the assessee was entitled for deduction under section 33 of the Income-tax Act, 1961, which was allowed for installation of new machinery or plant. The assessee was required to create development rebate reserve equivalent to 75 per cent of the development rebate. The amount earmarked for such reserve was to be utilized by the assessee within the period of eight years for the purposes of business of the undertaking other than for distribution by way of dividend or profits. The assessee created a development rebate reserve of Rs. 4,42,975 during the accounting year relevant to assessment year 1971-72. In the next year, the same was transferred to general reserve account, on the ground that the same was already utilized for purchase of plant and machinery. The dividend was distributed out of general reserve. On the above facts, the development rebate was disallowed by the Assessing Officer, on the ground that the development rebate reserve was utilized for paying dividend, which was prohibited user of such reserve. The Tribunal held that the assessee was entitled to development rebate. On reference, the Hon’ble Gujarat High Court confirmed the views of the Tribunal and held as under :—

". . . that an amount more than equivalent to the said reserve amount was actually spent by the assessee during the relevant period for installing capital assets. Therefore, the very purpose of the development rebate reserve was exhausted. That was done within eight years of the creation of such a reserve. Thereafter, it was open to the assessee to carry forward the amount to the general reserve . . . ."

In the case of Travel Corpn. (India) (P.) Ltd. (supra), the Hon’ble jurisdictional High Court held as under :—

". . . allowing the petitions, (i) that the specific case of the assessee was that as against the credit of Rs. 16,25,00,000 in the "section 80HHD reserve account", during the assessment years from 1989-90 to 1999-2000, a sum of Rs. 10,50,71,000 had been utilized for the purposes specified in section 80HHD(4). This had not been doubted or found to be incorrect. Thus, it was established by the assessee that after crediting a sum of Rs. 16,25,000 to the "section 80HHD reserve account", it had utilized a sum of Rs. 10,50,71,000 for the purposes specified in section 80HHD(4). As a result, the assessee could draw a sum of Rs. 10,50,71,000 from the "section 80HHD reserve account" which had become a free reserve and could utilize it for any purpose as the assessee deemed fit and proper. . . .". [Emphasis supplied]

In the case of Shree Shantinath Silk Mills (supra), the ITAT, Ahmedabad Bench, held as under :—

". . . Once the amount of investment allowable reserve had been utilized for purchase of new plant and machinery within the prescribed period, it was thereafter impossible to say that the same amount of reserve, which had already been utilized for purchase of plant and machinery, had been again utilized for the prohibited purposes, prescribed in section 32A(5)(c). The proper construction of the two relevant sub-clauses (b) and (c) of section 32A(5) means that the provisions of law require the assessee either to utilize the amount for purchase of new plant and machinery at any time before the expiry of 10 years, and in case the assessee cannot utilize that amount for purchase of new plant and machinery within the prescribed period of 10 years, the assessee, for that block of 10 years’ period, should not utilize that amount of reserve for distribution by way of dividends or profits or for other prohibited or non-business purposes prescribed in sub-clause (c) of section 32A(5). In the instant case, the assessee had duly complied with the condition of purchasing new plant and machinery within the prescribed time and, therefore, any transfer of investment allowance reserve to partners’ account after purchase of the new machinery would not result in withdrawal of the investment allowance in the facts and circumstances . . . ." [Emphasis supplied]

16.9 Thus, in all the above cases, an unanimous view is taken by the ITAT, Ahmedabad Bench; Hon’ble Gujarat High Court; and jurisdictional High Court that once the reserve created for any specific purposes is utilized for that specific purpose, it becomes a free reserve and could be utilized for any purposes as assessee think fit and proper. It can be transferred to general reserve; it can be transferred to partners’ capital account; or can be utilized for distribution of dividend. The learned DR has not pointed out any contrary decision to our knowledge, but he has contended that none of the above decisions is with regard to section 33AC and, therefore, will not be applicable. We agree with him that none of the above decision is pertaining to section 33AC, but at the same time, we find that the provisions of section 33AC are almost similar to the provisions considered by the Courts and the Tribunal in the abovementioned cases. In all above cases, certain deduction was permissible, with the condition that a part of the deduction is transferred to the reserve account. Such reserve was to be utilized within a specified period for the purposes specified in the relevant provision. Similar is the provision in section 33AC; wherein deduction under section 33AC is conditional upon the creation of the reserve as per section 33AC(1) and the utilization of the reserve within a period of eight years for purchase of new ship and machinery. Therefore, in our opinion, the ratio of the above decisions would be squarely applicable to the case under appeal before us. Accordingly, we respectfully following the decision of the Hon’ble jurisdictional High Court in the case of Travel Corpn. (India) (P.) Ltd. (supra); of Hon’ble Gujarat High Court in the case of Karamchand Premchand (P.) Ltd. (supra); and of ITAT, Ahmedabad Bench in the case of Shree Shantinath Silk Mills (supra), hold that the assessee was entitled to transfer the section 33AC reserve, after it has been utilized for purchase of new ships, to general reserve account. In view of the above, we set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer. We direct him to re-compute the deduction under section 33AC, as per our following finding:—

(1)Preference share capital is part of the paid-up share capital.

(2)Assessing Officer will examine the issue afresh with regard to creation of capital redemption reserve to the extent of Rs. 96,00,000, i.e., the preference share capital redeemed during the year under consideration, as per our direction in para Nos. 16.6 and 16.7 above.

(3)The amount from section 33AC reserve account has rightly been transferred by the assessee to general reserve account and, therefore, no reduction in the general reserve account for the amount transferred from section 33AC reserve utilized account is to be made.

(4)After the above working, the Assessing Officer will allow deduction under section 33AC(1) read with proviso thereto.

17. In the result, the appeal of the assessee is allowed in part.