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Rajasthan High Court · body

2005 DIGILAW 1876 (RAJ)

Rajasthan Spinning & Weaving Mills v. D. C. I. T.

2005-07-22

R.S.CHAUHAN

body2005
Judgment Rajesh Balia, J.-The Income Tax Appellate Tribunal, Jodhpur has submitted the statement of case and referred the following questions of law arising out of the appellate order dated 10.01.1995 passed in Income Tax Appeal No. 1047/JP/94 for Assessment Year 1990-1991 at the instance of assessee on an application for Assessment under Section 266(1) of the Income Tax Act 1961. Q. No.1 Whether on facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the order passed by the CIT under Section 263 was correct and thereby upholding the same? Q. No.2. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue? 2. Facts giving rise to this appeal are as under: 3. That the assessee is a public limited company carrying on the business of textiles. For the assessment year 1990-1991 the assessee returned a net loss of Rs. 5,72,56,454/-. The assessment was completed under Section 143(3) of the Act on 210.1991 and the total income was assessed at nil. 4. Thereafter, the Commissioner of Income Tax issued a notice under Section 263 calling upon the assessee as to why book profit may not be computed under Section 115-J in accordance with the provisions of the Act at Rs. 3,26,16,000/-and consequently 30% of the same be not taken as taxable income as subject to tax. 5. The Annexure-2 submitted on 210.1991 shows that in computing the total income, the assessee has shown net loss as per Profit and Loss Account at Rs. 31,65,800/-and had claimed adjustment on account of depreciation at Rs.8,29,95,990/-. The Assessing Officer after considering claim to depreciation in respect of different assets finally allowed the depreciation at Rs. 8,71,81,294/-and after making some adjustments, disallowed certain part of the claim made by the assessee in this regard. However, no additions were made on account of depreciation provided for by the assessee in his books of accounts, on newly installed plant and machinery. Determination of depreciation and its allowance in computing taxable income of the assessee in accordance with Income Tax Act, 1961 was not found to be erroneous. The Assessing Officer in assessment Order dated 20.10.1991 had referred to Section 115-J. 6. Determination of depreciation and its allowance in computing taxable income of the assessee in accordance with Income Tax Act, 1961 was not found to be erroneous. The Assessing Officer in assessment Order dated 20.10.1991 had referred to Section 115-J. 6. After the assessment was completed, the Commissioner of Income Tax was of the opinion that the order dated 210.1991 passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue in considering the entire claim of depreciation on new machinery as provided in P & L Account which were duly audited, approved by AGM and certified by Registrar of Companies to be erroneous and prejudicial to interest of revenue resorted to his jurisdiction under Section 263 of the Income Tax Act and recomputed to book profit of company by disallowing the claim to depreciation. From the order dated 21.03.1994 passed by the CIT, it is revealed that the Assessing Officer while making assessment under Section 143(3) and computing the total income under the provisions of the Income Tax Act has not considered the applicability of Section 115-J of the Income Tax Act by way of reasoned order. 7. So far as consideration of applicability of Section 115-J is concerned, the Assessing Officer has observed that applicability of Section 115-J was also considered. The Assessing Officer has further considered that certain additions are required to be made in the return of the assessee in its correct perspective and on the basis of which, he has made certain modifications in computing the total income of assessee and also computed the amount for carrying forward of losses/unabsorbed depreciation to subsequent years with which we are not concerned here. 8. The power of the Commissioner under Section 263 was exercised in respect of finding that the computation of book profit made under Section 115-J by the Assessing Officer was erroneous. For this purpose, he referred to following table about the information furnished by the Assessee in his return regarding applicability of Section 115-J (4) : Profit as per P & L A/C Rs. 31,65,800/- LESS: Amount credited to P & L A/C. (i) Excess provisions written back. Rs.43,74,155/- (ii) Provision for doubtful debt, written back. Rs.------ (iii) Export profit under Section 80-HHC Rs.88,10,754 Rs.1,31,84,909 (-) Rs.1,00,19,109/- Tax Due -Rs. Nil. 9. 31,65,800/- LESS: Amount credited to P & L A/C. (i) Excess provisions written back. Rs.43,74,155/- (ii) Provision for doubtful debt, written back. Rs.------ (iii) Export profit under Section 80-HHC Rs.88,10,754 Rs.1,31,84,909 (-) Rs.1,00,19,109/- Tax Due -Rs. Nil. 9. By referring to foot Note 4 (b) to Schedule 13 of the balance-sheet, it came to the conclusion that it appears that P & L Account of the assessee did not reflect the correct book profit. The A.O. ought to have recomputed the book profit by reducing the inflated claim to depreciation to the extent of Rs. 436.35 lacs and obviously the book profit would have come to Rs. 3,26,16,000/-which according to the C.I.T ought to have been computed as Book Profit in terms of Section 115-J and accordingly for 30% of this recomputed Book Profit, the Assessee ought to have been subjected to tax in terms of the provision which is popularly known as N.A.T. 10. The principal ground for passing the order by C.I.T. was that in terms of the Schedule XIV the depreciation ought to have been allowed on pro rata basis and not in respect of complete year. Therefore, excess depreciation of Rs.436.35 Lacs has been made and to that extent, the book profits are to be reduced. As a result of this concision, the CIT held the order of the Assessing Officer relating to applicability of Section 115-J to be erroneous and prejudicial to the interest of the revenue and directed the Assessing Officer to recompute the book profit as above and levy tax. 11. On further appeal, the Tribunal has affirmed the order of the CIT over-ruling the objection of the assessee that book profit shown in P and L Account of the Company prepared in terms of Part II and Part III of the Schedule VI of the Companys Act was not open for recomputation by any authority under Income Tax Act except the permissible adjustments under Explanation to Section 115-J (1A). The CIT was in error in holding the Assessment Orders to be erroneous and prejudicial to interest of Revenue. 12. The CIT was in error in holding the Assessment Orders to be erroneous and prejudicial to interest of Revenue. 12. The Tribunal found that the order of the Assessing Officer if read in the light of applicability of Section 115-J, no reference is found of Section 115-J. In the entire order only observation is made about Section 115-J, however, there is no discussion whatever in the order that the Section 115-J is not applicable. Section 115-J being an important provision, some discussion in the order would not have been out of place. 13. This sort of passing reference by the Assessing Officer may lead a Superior Officer to think as to whether the Subordinate Officer must have considered all the aspects of law as well as facts or not in arriving at a particular conclusion. 14. On these premises, the Tribunal found that the CIT was right in holding that the order of the Assessing Officer was erroneous to that extent. 15. The other objection of the assessee was that there was nothing on the basis of which, the CIT could also found the order to be prejudicial to the interest of revenue. The Tribunal went into various provisions of the Companies Act to find what is the purpose of maintaining accounts and what ought to be fair book profit in its opinion. 16. The Tribunal was of the view that the condition laid down in Sub-section (1-A) of Section 115-J that the Company has prepared its profit and loss account in accordance with the provisions of Parts II and III of schedule VI to the Companies Act, 1956, has to be read conjoined with the provisions of Section 211(2) and other provisions of the Companies Act. The principal ground was that as per Schedule XIV the depreciation on new machines ought to have been allowed on pro-rata basis and not for the whole year. In not adhering to Schedule XIV the profits declared by the Company are not fair and true as per Section 212(2) of the Act. 17. With this premise, the Tribunal held that what is fair and correct result is essence of finding book profit within the meaning of Sub section (1-A) of Section 115-J. It said, “Substantial provision of Section 212(2) is the true and fair result concept. 17. With this premise, the Tribunal held that what is fair and correct result is essence of finding book profit within the meaning of Sub section (1-A) of Section 115-J. It said, “Substantial provision of Section 212(2) is the true and fair result concept. Section 212(2) not only requires a company to show a true and fair view of profit or loss, but further it also requires that while complying with requirement of Part II and III of the Schedule VI of the Companies Act, the end result shall be subject to true and fair result concept. While applying Section 115-J enquiry into question whether book profit shown by the Company is true and fair is permissible. 18. The Assessing Officer according to the Tribunal is required to probe into the Profit and Loss Account of the Company while considering the acceptability of Book profit shown in P & L Account while applying the provisions of 115-J(1). 19. The Tribunal embarked on the discussion of other provisions of Companies Act rather than confine to Part II and Part III of Schedule VI to find out whether the Book Profit shown by the assessee satisfied the test of declaring “true and fair result”. .20. The Tribunal referred to the report of the auditors regarding Profit and Loss Account and Balance sheet that the account of the Company gives true and fair value result subject to the various notes appended to it, which included Note 4(b) under Schedule 13, which inter alia reads as under: - .“Depreciation on additions to Fixed Assets acquired and put to use after 010.1987 together with existing Looms in Sulzer Weaving Unit except temporary construction at Banswara, wherein the rate applied is 20% has been provided on Written Down Value Method at the rates specified in Schedule XIV of the Companies Act, 1956 for the whole year instead of pro-rata for the period of use. As a result of above, charge on account of depreciation for the year is higher by Rs. As a result of above, charge on account of depreciation for the year is higher by Rs. 426.35 Lacs, the resultant Profit for the year is lower to this extent and came to the conclusion that by considering the various aspects of the accounting and the different requirements of the Companies Act for the purpose of providing of depreciation under Section 350 and the general guidelines issued by the Institute of Chartered Accountants, it came to the conclusion that by not providing pro rata depreciation in the new acquired assessment during the previous year relating to the assessment year. The books of accounts does not give true and fair value of the profit and loss account of the Company in terms of the Section 211(2). This additions made in the books profit on account of depreciation charged referred to above added bank to the book profitable, otherwise shown in the Profit and Loss Account of the Company and affirmed the order of the CIT passed under Section 263 of the Income Tax Act.” 21. The two questions which have been referred to us, in our opinion, are the aforesaid two aspects of the exercise of jurisdiction by the CIT under Section 263 namely whether the order passed by Assessing Officer is erroneous and secondly if it is erroneous, whether it is also prejudicial to the interest of the revenue, as these are the two cumulative conditions satisfaction of which alone gives the CIT to invoke Section 263 of the Income Tax Act, 1961. 22. It would require inquiry into the question through scope and ambit of the provision related to Section 115-J, which was then in force in the context of the object with which the provison had been enacted and the scope of the enquiry, which the Assessing Officer can make into the book profits, disclosed in the books of accounts by the Assessee in accordance with Part II and Part III to the Schedule VI of the Companies Act. .23. .23. One more important fact, which we may notice at this juncture is that Tribunal has said that though the Auditors report does not say that “Book Profit” shown in the Profit and Loss Account is not in accordance with Part II and Part III of The Schedule VI of the Companies Act or that “Book .Profit” declared for the purpose of Section 115-J, does not disclose true and fair result as per Companies Act, yet by referring to very many other provisions of Companies Act, regulating different matters to be taken into consideration for different purposes, more particularly Schedule XIV, that Book Profits shown by the assessee in his audited accounts which were duly approved by Annual General Meeting and duly certified by Registrar of Companies with whom such Accounts were filed, did not disclose true and correct results. For this reason it upheld rejection of admitted Book Profits and substitution of recomputed book profits as per CIT in his order under Section 263 as correct for the purposes of invoking Section 115-J. 24. This common ground that prevailed with CIT while exercising jurisdiction under Section 263 and on appeal by the Tribunal was that the book profit disclosed as per Profit and Loss Account and Balance Sheet prepared in accordance with Part II and Part III of the Schedule VI, did not disclose true and fair result relating working of the Company and the matter whether the book profit declared by the Assessees Company reflects true and fair result for the relevant period is a matter which is open to be enquired into and is required to be inquired into by the Assessing Officer, while considering the applicability of Section 115-J in respect of any Company. 25. It may be noticed that Section 115-J is to be resorted to in alternative to a regular assessment by computing taxable income of a Company in accordance with the provisions of the Income Tax Act. It is only where the result arrived at by regular assessment of the Company by computing its income in accordance with the provisions of Income Tax Act, if the Assessees total taxable income to be less than the 30% of the income admitted by the assessee through declaration of Book Profits in its Profit and Loss Account presented before AGM for the purpose of distributing the dividends. This is with the object that the Company is at least held liable to pay tax on 30% of such admitted profits, which has been placed before AGM for the purpose of distributing its dividends. The object of insertion of Section 115-J initially w.e.f. 01.04.1988 by Income Tax Act, 1961 and later on by introducing Section 115-J-A w.e.f. 01.04.1997 vide Finance Act, 1996 was to secure minimum tax on the basis of admitted profits earned by the Company for the purpose of distributing the dividends if the computation of Income in accordance with the provisions of Income Tax Act yields lesser income. The provisions was thus not introduced as an alternate regular procedure to be gone into for determining the maximum tax to be collected from the Company, but it was the procedure provided in alternative to ensure that minimum tax is paid by the Company on its book profits as admitted by it before distributing the dividends to its share holders. 9.26. The Part II and part III of the Schedule VI really do not concern with how and in what manner the accounts are to be prepared, but they deal with what disclosure has to be made in the books of accounts prepared by the Company about the matters detailed in the accounts. It is silent about how and in what manner the accounts are to be prepared and whatever expenses, credits or tax benefits were taken into account, the Profit and Loss Accounts has found their way into the book of accounts. Part II and Part III of the Schedule VI does not direct whether they are concerned nor these provisions envisage any directions to the companies to provide for any matters in the books in a particular manner. It is significant that Sub-section 1(a) of Section 115-J was inserted w.e.f. 01.04.1989 vide Finance Act, 1988 to eliminate the possible inquiry by the Assessing Officer in the matter of computation of minimum tax on profits as disclosed by the company in its P & L Account except to make specific adjustments, if any, enumerated in Explanation attached to said provision, by way of additions to or deductions from such disclosed book profits. It is like acceptance of self disclosures. .27. It is like acceptance of self disclosures. .27. Sub-section (1A) directed not in general way to prepare Profit and Loss Accounts for the previous year in accordance with general provisions of the Companies Act which are relevant for the various purposes, but it defined what book profit means for the purpose of Section 115-J. The book profit for the purposes of Section 115-J means the profit and Loss mentioned in the Profit and Loss Account, which has been prepared in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956. It did not rest merely with that requirement, but further ordained that net profit shown in the Profit and Loss Account for the relevant previous year prepared as per Sub-section (1-A) is to be increased by such items specifically detailed under Clause (a) to Clause (ha) of Explanation and further ordained that after the book profit is augmented by additions made as per Clauses (a) to (ha), it be reduced by items shown in Clause (i) to Clause (iv) relating to .the amounts to be reduced from Book Profits so derived. 10.28. Therefore, for the purpose of Section 115-J, a complete code was laid to take the net profit as shown in the Profit and Loss Account of the Company and not net profit as computed by Assessing Officer as per his opinion of true and correct result of working of Company as basis for making the adjustment, which have been specified in the Explanation. 129. No additional adjustments are permissible whether by way of addition or by way of reduction other than one enumerated in Explanation. 130. One fact which may be noticed in this connection is that even before insertion of Section 1-A, the position was made clear by using the expression in the Explanation which came into existence alongwith the insertion of Section 115-J. The Explanation which was existing prior to insertion of Section (1-A) read as under: EXPLANATION: For the purpose of this Section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956. 31. 31. After the amendment, with the insertion of Sub-section (1-A) read with the Explanation it reads as under: -Sub-section 1-A: “Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 (1 of 1956). Explanation: For the purposes of this Section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section 1-A as increased by- .(a) the amount of income-tax paid or payable, and the provision therefor; or .(b) the amounts carried to any reserves (other than the reserves specified in Section 80-HHD by whatever named called; or .(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or .(d) the amount by way of provision for losses of subsidiary companies; or .(e) the amount or amounts of dividends paid or proposed; or .(f) theamount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or .(g) theamount withdrawn from the reserve account under Section 80-HHD where it has been utilised for any purpose other than those referred to in Sub-section (4) of that section; or (h) the amount credited to the reserve account under Section 80-HHD; to the extent that amount has not been utilied within the period specified in Sub-section (4) of that section; (ha) the amount deemed to be the profits under Sub-section (3) of Section 33-AC; and as reduced by .(i) theamount withdrawn from reserves (other than the reserves specified in Section 80HHD or provisions, if any, such amount is credited to the Profit and Loss Account; Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the first day of April, 1988 shall not be reduced from the Book Profit unless the Book Profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or .(ii) the amount of income to which any of the provisions of Chapter III applies, if any, such amount is credited to the Profit and Loss Account; or (iii) theamounts (as arrived at after increasing the net profit by the amounts referred to in Clauses .(a) to(f) and reducing the net profit by the amounts referred to in Clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under Section 80HHC or Section 80-HHd; so however, that such amounts are computed in the manner specified in Sub-section (3) or Sub-section (3-A) of Section 80-HHD or Sub-section (3) of Section 80-HHD as the case may be; or .(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable. 1.32. Therefore, for the purpose of finding the book profit in order to determine, the 30% of its profits in terms of Section 115-J(1) as minimum income chargeable to tax in a particular assessment year, where the chargeable income assessed in accordance with the provisions of Income Tax Act, 1961, is less that 30% of book profit so arrived at, the 30% of the book profit so arrived at under Sub-section (1-A) may be taken as the chargeable income to the tax by this deeming provision. 2.33. Apparently, there is no room for re-determining the net profit as shown in the Profit and Loss Account of the Company containing relevant declarations as incorporated in the light of Part III of Schedule VI. The Assessing Officer had to accept the result shown in the Profit and Loss Account as book profit subject to the adjustment by additions or reductions, as detailed in Explanation. The enquiry by the Assessing Officer into the conceptual “true and fair result” of the working of the Company to be adverted to by the Tribunal is alien to enquiry under Section 115-J. As such it is not a substitute procedure laid down for re-computing the income of the assessee in different manner by the Assessing Officer himself , as he thinks proper, then he has already computed under the provisions of the Income Tax Act. He is not required to embark upon the detail requirement into the different aspects of the matter and re-compute the net profit shown in the books of Accounts for applying basis to revive as Book Profit which he thinks ought to be fair and true result by resorting to conceptual theory of true and fair result, by foraying into various other provisions of the Companies Act, that may provide many other matters to be taken into account for various other purposes. For example, Section 49 requires determination of Profit for the purpose of determining permissible limit of remuneration that could be paid to Managing Agents. That part of the exercise is always open to be made to the extent it is permissible under law while computing the Profit and Loss Account of the Company in accordance with the provisions of the Income Tax Act. It is open to dis-allow any claim to specific deductions or exemptions or benefit of tax concessions by resorting to regular computation of income at that stage. 3.34. It is open to dis-allow any claim to specific deductions or exemptions or benefit of tax concessions by resorting to regular computation of income at that stage. 3.34. It is open to the Assessing Officer while computing the income of any company in accordance with the provisions of the Income Tax Act to find whether the depreciation or other adjustments permissible to be made under the Income Tax Act, while computing taxable income of the Company. In fact Assessment Order itself shows that Assessing Officer has gone in detail of acceptable W.D.V., the claim to depreciation on specific assets and has also gone into reason for claim to enhanced depreciation amount. Many of assessees claims have been denied while determining finally how much depreciation is entitled to be deducted from Assessees income. 4.35. It would be pertinent to mention that while computing the assessees income in accordance with the provisions of the Income Tax Act, the claim of depreciation to which the subject matter of controversy relates, had fully been held to be allowable in computing the taxable income of the Company and on that premise, the assessment had been made. 5.36. The order of the Assessing Officer computing the income of the Company in accordance with the provisions of the Income Tax Act has neither been found erroneous nor prejudicial to interest of Revenue by C.I.T. If claim to depreciation in respect of assets in question was found to be justified while computing the income in accordance with the provisions of Income Tax Act, one fails to find reason how the same could be found to be erroneous for the purpose of arriving at book profit as per assessees admission under Section 115-J on “the concept of fair and true result” of the Company for the same period. There can hardly any occasion arise to make adjustment of book profit on that account. 6.37. In the present case, this position is obvious from the computation of income in terms of the provisions of the Income Tax Act, in which the claim to depreciation had not been found to be erroneous because that claim has resulted in nil income while computing the income of the assessee. The same cannot be found to be not resulting in giving true and fair picture of the assessee book profits in terms of Section 115-J. 38. The same cannot be found to be not resulting in giving true and fair picture of the assessee book profits in terms of Section 115-J. 38. This is apart from our conclusion that no such inquiry is permissible for the purpose of re-computing book profit by the Assessing Officer. In the absence of any note by auditors or AGM or Registrar of Companies that the book of accounts of Profit and Loss Account and Balance-Sheet has not been prepared in accordance with Part II and Part III of the Schedule VI of the Companies Act. 39. As a matter of fact, the issue is now no more res integra. 7.40. The Kerala High Court and Andhra Pradesh High Court had taken the view that while applying Section 115-J for the purpose of determining alternative tax in order to fix a minimum tax liability on the Companies the book profit shown as per P and L Account and balance-sheet of the Company is not open to scrutiny by the Assessing Officers. The view taken by the Kerala High Court and Andhra Pradesh High Court in this regard has since been affirmed by the Supreme Court in Apollo Tyres Ltd. vs. Commissioner of Income Tax, reported in (2002) 255 ITR Page 273. 8.41. In Apollo Tyres Ltd. vs. Commission of Income Tax, reported in (2002) 255 ITR Page 273, the Supreme Court was concerned with a case in which th