Even statutory reserve created by NBFC was to be added back for computing book profits for MAT purposes

SREI Infrastructure Finance Ltd. v. ACIT - [2015] 54 taxmann.com 254 (Delhi High Court)

For the purpose of section 115JB, reserve required to be created by NBFC under the RBI Act is to be treated in a similar manner as other reserves. Such reserve is out of the profits earned by a NBFC and it is not an amount diverted at source by overriding title. Thus, statutory reserve created by NBFC is to be added back to book profits computed under Section 115JB.

Facts:

• Assessee was a NBFC engaged, interalia, in the business of leasing of commercial vehicles and financing of infrastructure project equipment's. It had created a special reserve under the RBI Act. The AO added back the amount of said reserve to Book profit computed under section 115JB.
• The CIT(A) and the Tribunal affirmed the finding of AO. The contention of the assessee was two-fold. Firstly, the reserve created as per the mandate of Section 45-IC of the RBI Act was, in fact, a liability and not a reserve. Secondly, it did not have any title over the reserve and, therefore, it was a case of diversion of income at source. 
• The aggrieved-assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

• Explanation 1 to Section 115JB provides that "book profit" shall be increased by the amounts carried to any reserves, by whatever name called [other than a reserve specified under section 33AC]. The word "any" refers to all kinds of reserves and encompasses all types and categories without any exception. Only reserves specified in section 33AC of the Act have to be excluded from computing book profit.
• The reserve which is required to be created under the RBI Act, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. 
• Such reserve of not less than 20% of net profit can only be computed after net profit is calculated and computed. Reserve so created is not a liability known or ascertained, even estimated. Hence, it can neither be diversion of income at source nor an expenditure or liability.
• Section 45-IC ensures that a NBFC does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. 
• It is an added measure of protection created by the statute to prevent defaults by the NBFCs. Section 45-IC of the RBI Act also permits appropriation but in restricted or controlled manner by a NBFC. 
• Hence, statutory reserves required to be created by NBFC under section 45-IC of the RBI Act was to be added back for computing book profits under section 115JB.6)