Whether Statutory reserve created u/s 45-IC of RBI Act is a "diversion of income at source" and can be excluded from book profits?

Last updated: 23 February 2015

Court :
Delhi High Court

Brief :
The appellant is a NBFC engaged in the business of leasing of commercial vehicles, infrastructure construction machinery/equipment and financing of infrastructure projects equipment/machinery. The total income of the appellant-assessee was assessed under the normal provisions and the book profits under Section 115JB of the Act. By theimpugned order, addition of Rs.9,80,00,000/- to the special reserve as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934 stands confirmed relying upon Explanation 1 clause (b) to Section 115JB(2) of the Act. The Assessing Officer by his assessment order applied clause (b) to Explanation 1 to Section 115JB (2) of the Act and added back the said amount to Book profit. For the same reason, the Assessing Officer also made adjustment of Rs.18,66,00,000/-, which were treated by the assessee as Debt Redemption Reserve. The assesse contented that - Firstly, the reserve created as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934, is a liability and not a reserve.Secondly, that in terms of Section 45-IC of the Reserve Bank of India Act, 1934, the appellant-assessee does not have any title over the reserve and, therefore, it is a case of diversion of income at source.

Citation :
SREI Infrastructure Finance Ltd. –Appellant – Versus –Additional Commissioner of Income Tax -Respondent