Income Tax Appellate Tribunal - Cochin
Travancore Chemicals And Mfg. Co. Ltd. vs Deputy Commissioner Of Income-Tax on 31 March, 1993
Equivalent citations: [1993]46ITD203(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee which is a widely held public limited company.
2. For the year ending on 31-3-1989, the relevant assessment year is 1989-90. In regard to this assessment year the assessee furnished two sets of adjustments along with its return of income as noticed by the Assessing Officer as follows:
'The assessee-company has furnished two sets of adjustments to arrive at the adjusted total income. In the normal course of computation, the total income has been arrived at Rs. 2,55,37,324 and after setting off the unabsorbed income returnable income has been worked out at Rs. 18,45.870.
However, for the computation of book profit under Section 115J, the total income has been arrived at 30 per cent of the book profit of Rs. 89,34,996, Rs. 26,80,439 whereas in the return of income the total income returned shown is of Rs. 30,07,420. As per the revised working given as per letter dated 7th March, 1990, the book profit under Section 115J has been arrived at Rs. 26,80,439 but no revised return is filed.
The Assessing Officer acting under Section 143(1)(a) of the Income-tax Act, 1961, read with the proviso thereto computed the book profit of the company as follows :-
Net profit as per published accounts Rs. Rs. 87,95,707
Add: Provision for taxation 20,00,000
Investment allowance
reserve 10,23,800
Unascertained gratuity 2,00,000
Short provision for
taxation 5,21,323
Additional depreciation 75,46,881
CVD refund as discussed
above as per assessee's
statement. 1,88,01,243
Sales tax refund 5,681 Rs. 3,00,98,928
------------ ---------------
Rs. 3,88,94,635
Less: Depreciation under Section
202 of the Companies Act
as per assessee's statement. Rs. 10,98,729
Rs. 3,78,04,906
30 per cent thereof Rs. 1,13,41,471
In the above process, the learned Assessing Officer found three items in the profit and loss account of the company as items of prima facie nature requiring adjustments by way of increase to the book profit under the provisions of Section 115J read with the provisions of Section 143(1)(a) and those adjustments are as follows :
A. Additional depreciation consequent upon the change in the method as per assessee's statement. Rs. 75,46,881 B. CVD refund as discussed above as per assessee's statement Rs. 1,88,01,243 C. Sales tax refund Rs. 5,861 It must be stated in this context that the sum of Rs. 75,46,881 is shown as a deduction from the prior period income of the assessee in Schedule 9 to the profit and loss account under the caption "Additional Depreciation consequent to change in basis from straight line method to written down value method" (page 22 of the Annual Accounts). This amount is not shown as a deduction from the income in the computation sheet accompanying the return of income that was filed with the Assessing Officer. However, subsequently the assessee had filed another computation statement without being accompanied by a return of income in which he had added back the sum of Rs. 75,46,881 to the income of the assessee. It is this latter statement that the Assessing Officer had adopted in his computation and it is worthwhile to recall his observation in this context:
In terms of provisions contained in Section 115J the assessee has suo motu added additional depreciation consequent upon" the change in method of depreciation working an amount of Rs. 75,46,881.
As far the addition of countervailing duty refund, the Assessing Officer, had made an addition of Rs. 1,88,01,243 for the following reasons :
It is seen from the regular computation of income filed along with the return that the prior year adjustments countervailing duty refund credited as per schedule 9 of the published accounts the amount credit in the books of accounts disclosed by the assessee is Rs. 1,00,62,986.
Over and above the aforesaid amount further settled refund stated to have been received during this period disclosed by the assessee amounts to Rs. 87,88,257. The refund of Rs. 87,88,257 the assessee-company has identified the year in which the dispute arose and after settlement the amount received whereas in the case of prior year adjustment of CVD refund the assessee has not identified the year in which the refund was due. However, as per published accounts, irrespective of the year the refund has been crystalised and assessee has accounted the revenue receipt this year. Hence the assessee's claim for reducing the book profit by like amount is prima facie inadmissible. Further, it is noticed that the refund of countervailing duty amount to Rs. 87,88,257 does not appear to have been accounted as income/profit for this year because as per the published accounts para 5 of schedule J the auditors have certified receipt of Rs. 1,00,62,986 towards refund of countervailing duty to prior years and treated as income. No certificate whatsoever has been given about the receipt during this year of Rs. 87,88,257. Therefore, for prirna facie adjustments under Section 143(1)(a) the total countervailing duty treated as income for the purpose of computation of 30 per cent of book profit the refund of the sum total of countervailing duty is taken at Rs. 1,88,01,243.
As for the sum of Rs. 5,861 his reasons are as follows :
The assessee-company has not taken into account sales tax refund of Rs. 5,861 for the purpose of computation of income under Section 115J. This is also taken as revenue receipt for the year under consideration. 30 per cent of the book profit is worked out as under.
In addition, the Assessing Officer has adopted the assessee's computation of depreciation under Section 205(2) of the Companies Act in a sum of Rs. 10,89,729, purported to be an adjustment under Section 115J. Thus, he arrived at the book profit in a sum of Rs. 3,78,04,906 and took 30 per cent of the same at Rs. 1,13,41,471. As this was higher than the income computed in accordance with the other provisions of the Income-tax Act, 1961,inasumofRs. 18,45,870, the former figure was adopted for purpose of taxation under Section 143(1)(a) of the I.T. Act. As the returned income was less than the assessed income, in addition to the tax leviable on the income thus computed, the additional tax in a sum of Rs. 9,09,408 and interest under Section 234B and 234C were also levied. The assessee applied for rectification under Section 154 of the I.T. Act and contended that such adjustments as have been made by the Assessing Officer are not to be made either under the provisions of Section 143(1)(a) or under the provisions of Section 115J and, therefore, the levy of additional tax and interest on the tax due were not called for. The learned first appellate authority felt that the inclusion of Rs. 87,97,707 was not called for as that refund pertained to the preceding accountingyears. As far as the inclusion of Rs. 1,00,62,986 being the countervailing duty refund was concerned, as it was refund obtained during the year, its inclusion was justified. He also deleted another addition of Rs. 5,21,328 being the short provision of tax relating to prior years as it did not relate to the year under revenue. He also noticed that the additional depreciation consequent on the change in the method of depreciation from straight line method to written down value method involving a sum of Rs. 75,46,881 related to preceding years and, therefore, it was not to be either added or deducted from the current year's profit. Thus, he computed the book profit as follows :
Net profit as per published accounts Rs. 57,27,649
Add : CVD refund of the current year Rs. 1,00,62,986
Rs. 1.57,90,635
Rs.
Add : Provision for taxation 20,00,000
Investment allowance 10,23,800
Unascertained gratuity 2,00,000
Sales-tax refund 5,681 Rs. 32,29,481
-------- ---------------
Rs. 1,90,20,116
Less : Depreciation under Section 202 Rs. 10,89,729
---------------
of the Cos. Act. Rs. 1,89,30,387
---------------
30 per cent thereof Rs. 56,79,116
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He also gave suitable directions for modification of interest under Section 234B and 234C of the I.T. Act. In the result, the assessee obtained part relief. Not being satisfied with the same, the assessee is on second appeal.
3. Sri C.K. Nair, the learned Advocate submitted that the authorities erred in arriving at a different figure of book profit from the one adopted by the assessee in the statement accompanying the return of income. The addition of refund of Rs. 1,00,62,986 or the additional sales-tax refund are not prima facie adjustments either under Section 115J or under Section 143(1)(a). A refund of excess duty might be an income by virtue of the provisions of Section 41(1) of the I.T. Act, but it can never be a profit from the angle of businessman. Income is different from profit and this distinction was not borne in mind by the authorities. The second statement filed by the assessee was unsupported by any revised return and, therefore, it has no legal validity. Further, it was prepared at the oral directions of the Assessing Officer. The adjustments envisaged under the proviso to Section 143(1) are in the realm of deductions, reliefs or allowances and it cannot be in the realm of income. The adjustments envisaged in Section 115J are not adjustments of prima facie nature, whether it is in relation to the provision for taxation or reserve by whatever name called. Therefore, the authorities erred in departing from the figures in the computation statement supporting the return of income filed by the assessee. If the Assessing Officer wanted to make specific additions for the reason stated by him, he has got all the powers but not under Section 143(1)(a) but under an assessment under Section 143(3) only. Hence the levy of additional tax and the consequential interest on the tax payable are all without any legal basis. In support of his contention he relied on the following cases:
1. S.R.F. Charitable Trust v. Union of India [1992] 193 ITR 95 (Delhi)
2. Khatau Junkar Ltd. v. K.S. Pathania, Dy. CIT.
4. Sri C. Abraham, the learned senior departmental representative submitted that the Assessing Officer has not travelled beyond the statements furnished before him along with the return of income and the annual accounts of the assessee. In the second statement the assessee had sought to deduct the refund of countervailing duty. As the duty refund was taken as profit in Schedule 9 to the profit and loss account in the annual report the same was rightly added back to the income of the assessee. Such an adjustment was prima facie in nature. As for the additional depreciation consequent on the change in the method of depreciation in the second statement, the assessee had suo motu made the addition to its profit. Therefore, the officer was entitled to take note of that and include it in the adjustment statement. So far as the refund of sales-tax is concerned, the assessee in its computation of income in accordance with the other provisions of the Income-tax Act, prior to applying the provisions of Section 115J had suo motu claimed the deduction of this refund which was prima facie not an admissible item and, therefore, the same was added back. Thus, the adjustments made by the Assessing Officer were all prima facie adjustments which he is entitled to make under the proviso to Section 143(1) of the I.T. Act and the assessee cannot have any grievance against such adjustment. Elaborating his submission, Sri Abraham contended that the countervailing duty was paid in the earlier years and as a result of the Supreme Court judgment which was pronounced during the relevant previous year, the assessee was entitled to the refund and has, in fact, obtained such refund in the relevant previous year and had taken it into account as its income in the schedule to the profit and loss account. Therefore, its inclusion by way of adjustment in the intimation sent to the assessee was just and proper and had legal basis. Therefore, it cannot be said that the Assessing Officer has travelled beyond the statement accompanying the return of income in invoking the provisions of Section 143(1) of the Income-tax Act. 1961.
5. We have thus heard rival submissions and perused the records. The first issue that arises before us for consideration is whether in an assessment under Section 143(1) read with Section 115J of the I.T. Act, the adjustments as have been made by the Assessing Officer or by the appellate authority are prima facie adjustments at all and are legally sustainable. Sri Nair contends vehemently that the adjustments that were made are not the adjustments envisaged in the proviso to Section 143(1) as they do not relate to deductions, allowances or reliefs wrongly claimed. His further submission is that such adjustments as have been made are not within the purview of Section 115J. In short his submission is that neither under Section 143(1)(a) nor under Section 115J, the kind of adjustments that have been made by the authorities can be contemplated and, therefore, the intimations sent by the Assessing Officer and the subsequent refusal to rectify the assessment under Section 154 and the part relief granted by the CIT (Appeals) are not in order. We have considered his submissions carefully. The assessee had submitted the return of income along with a statement showing the computation of book profit under Section 115J. It had also submitted a statement of income computed in accordance with the provisions other than the provisions of Section 115J. When these two statements are compared, the book profit as according to the assessee's own computation was higher than the income computed in accordance with the other provisions of the Act and, therefore, the assessee had invited the Assessing Officer to the provisions of Section 115J as its return was on that basis. Hence, the Assessing Officer did not have any option under Section 143(1) except to invoke the provisions of Section 115J. Of course, the adjustments envisaged in the proviso to Section 143(1) are in the realm of deductions, allowances and reliefs and not in the income filed. However, at the invitation of the assessee, the Assessing Officer was obliged to have a look at the book profit in terms of Section 115J. The profit and loss account furnished by the assessee had shown the figure of Rs. 57,27,649 "above the line" and a profit of Rs. 87,95,707 "below the line". The difference is due to the addition of Rs. 30,68,058 by way of adjustment for prior year items. Thus, the Assessing Officer took the latter figure as the starting point of computation, as according to him, the correct profit was not taken by the assessee in its first statement which accompanied the return. He was obliged to take the higher figure by the assessee's own conduct in furnishing another statement starting with a net profit of Rs. 87,95,707. Sri Nair vehemently contends that prior period adjustments by definition cannot be considered as profits of the year under review and submitted that the refund of countervailing duty can be treated as income only under Section 41(1) of the I.T. Act and cannot be construed as profit. We do not uphold such a contention. We are not concerned with the income aspect of the book profit in applying the provisions of Section 115J. We are concerned only with the book profit as such as revealed in the profit and loss account and recognised as profit by the assessee itself. Therefore, the adoption of the profit figure of Rs. 87,95,707 is proper on the part of the Assessing Officer. This is reinforced by the assessee taking the same figure of Rs. 87,95,707 in its second statement. The original profit figure of Rs. 57,27,649 adopted by the assessee in its computation accompanying the return of income should in such circumstances be viewed only as an arithmetical error which is a permissible adjustment in terms of Section 143(1) of the I.T. Act. However, the other disputed adjustments whether made by the assessee or by the Assessing Officer cannot be sustained in terms of either Section 143(1) or in terms of Section 115J of the Act.
6. The second issue is how far the adjustments made by the authorities are valid in terms of Section 143(1) read with Section 115J. Of the three adjustments made by the Assessing Officer to the book profit in terms of Section 115J, two are found in the schedule 9 to the profit and loss account at page 22 of the annual report for the accounting year 1988-89, relevant to the assessment year 1989-90 and the same are as follows :-
Schedule 9: Adjustments relating to prior years' items': Rs. 31,03,189
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Refund of Countervailing Duty Rs. 1,00,62,986
Excess provision of power charges
for prior years written back Rs. 10,73,276
Short provision of Taxes relating to
prior year (5,21,323)
Additional Depreciation consequent
to change in basis from SLM to WDV (75,46,881)
Income-tax provision for prior
year Written back -
Income-tax Refund -
Investment Allowance Reserve no
longer required, written back --------------
Rs. 30,68,058
--------------
The caption of the schedule itself is specified that the adjustments relate to prior years' items and Sri Nair argues that the same cannot be considered as germane to the working results of the company for the year under review. We are not persuaded by the submission of Sri Nair. In our opinion, such items are to be included in the profits of the year under review in terms of Clause 2(b) of Part II of Schedule VI to the Companies Act which set out the requirements as to profit and loss account and Clause 2(b) is as follows:-
(2) the profit and loss account-
(a) ... ...
(b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.
Accounting Standard (A:S. 5) (page 31 of Compendium of Accounts and Standards issued by the Institute of Chartered Accountants of India in November, 1982) defines prior period items "as material charges or credits which arise in the current year as a result of errors or omissions in the preparation of financial statements of one year or more periods". Therefore, the sum of Rs. 30,68,058 is to be considered as forming part of the book profit of the company. Hence, the book profit of the company has to be taken at Rs. 87,95,707 (Rs. 57,27,649 plus Rs. 30,68.058). The Assessing Officer is right in starting his computation with the figure of Rs. 87,95,707 and the assessee is also right in starting with such a computation in its second statement without filing a revised return. To this book profit certain additions have been made both by the assessee and by the Assessing Officer and these additions relate to the provision of tax, investment allowance reserve, unascertained gratuity liability and short provision for taxation. On these items there is no dispute and there can be no dispute also. The dispute centres round the adjustment made in respect of refund of countervailing duty. While the assessee sought to deduct it from the net profit in its second computation, the Assessing Officer has added it back to the net profit. In our considered opinion, both are in error. It should be remembered that in an exercise under Section 115J, one is not concerned with the income aspect of the figures found in the profit and loss account. but only with the profit as disclosed in the books subject to certain specified adjustments. The assessee, while deducting the sum of Rs, 1,00,62,986 has, in fact, neutralised the effect of refund received during the year reckoned as profit in its books through Schedule 9 to the profit and loss account. This is the assessee's mistake. The Assessing Officer, while adding back a similar sum has in effect made a double addition because the sum of Rs. 1,00,62,986 lies embedded in the starting figure of Rs. 87,95,707 itself. This is the Assessing Officer's mistake. Thus, we do not uphold either the computation of the assessee in its second statement or the computation of the Assessing Officer in so far as this sum of Rs. 1,00,62,986 is concerned.
7. Turning to the adjustment in respect of Rs. 75,46,881 it must be remembered that this was treated as a prior period expense in Schedule 9 to the profit and loss account of the assessee and was deducted in arriving at the net Sum of Rs. 30,68,058 which got included in the sum of Rs. 87,95,707. The assessee in its second statement has added the sum of Rs. 75,46,881. This is an error committed by the assessee in the second statement because the arrears of depreciation pursuant to the change in the method of depreciation from straight line method to written down value method being a prior period expense item should be viewed as a proper adjustment against prior period income and such an adjustment having already been made in Schedule 9 to the profit and loss account in the annual report of the assessee, the assessee should not have added back the said sum thus neutralising the effect of adjustment originally made in the Schedule. The learned Assessing Officer adopted this adjustment for the simple reason that the assessee had made such an adjustment. No other reason is assigned for making such an adjustment by the Assessing Officer and, therefore, it is deleted.
8. Turning to the third adjustment namely, the sales-tax refund of Rs. 5,681, we hold that the profit and loss account does not contain the figure of Rs. 5,681 but the information is available in the statement computing the income of the assessee in accordance with the provision other than the provisions under Section 115J of the I.T Act, as item No. 11 of such statement under the caption "Sales tax etc. refunded not credited in P & LRs. 5,681". From this information, the Assessing Officer had made the adjustment in his intimation. Having regard to the fact that the Assessing Officer is only concerned with ascertainment of the book profit under Section 115J of the Act, which has specified certain adjustments to be made, we hold that an item of refund (not of reserve) which was not at all credited to the profit and loss account cannot be taken into account for purpose of quantifying the book profit. So the book profit of the assessee for purpose of Section 115J cannot take in its sweep the three adjustments that were made by the Assessing Officer. As far as the other adjustments are concerned, there is no dispute between the assessee and the revenue. On this basis, the book profit of the assessee is re-cast as follows:-
Net profit as per books Rs. 87,95,707
Add: Provision for
taxation Rs. 20,00,000
Investment all. reserve Rs. 10,23,800
Unascertained
gratuity. Rs. 2,00,000
Short provision for
taxation. Rs. 5,21,323 Rs. 37,45,123
------------ -------------
Rs. 1,25,40,830
Rs. 1,25,40,830
Less: Depreciation under Section 202
of the Companies Act as per
assessee's statement Rs. 10,89,729
---------------
Rs. 1,14,51,101
30 per cent of Rs. 1,12,51,101 = Rs. 34,35,330.
-------------
As the income computed in accordance with the provisions other than the provisions of Section 115J amounted to Rs. 18,45,875, the sum of Rs. 34,35,330 should be viewed as the total income of the assessee in terms of Section 115J of the I.T. Act, 1961. We hold accordingly.
9. In the light of our discussion, we hold that the CIT (Appeals) erred in holding that the net profit as per books should have taken only at Rs. 57,27,649 without taking into account the prior period profit of Rs. 30,68,058. Further, we may observe that in the adjustment made towards countervailing duty refund, the Assessing Officer had taken an additional sum of Rs. 87,95,707 in addition to Rs. 1,00,62,986 and the CIT (Appeals) deleted the sum of Rs. 87,95,707 as the refund related to preceding years and had been accounted for in the accounts for the preceding years and as such it did not form part of the book profit of the year. Therefore, the CIT (Appeals) was justified in deleting the additional sum of Rs. 87,95,707. Further, to complete the records it may be stated that the revenue is not on appeal against such deletion.
10. Before parting with the order we are tempted to observe that in a case where the short-lived provisions of Section 115 are liable to be attracted, it will be in fairness to the assessee that scrutiny assessments are made rather than summary assessments under Section 143(1). The reasons are that before invoking the provisions of Section 115J, the Assessing Officer is duty bound to compute the income of the assessee in accordance with the other provisions of Income-tax Act and compare it with 30 per cent of the book profit. Such a primary computation of income in accordance with the other provisions of the Act may give rise to disputes about the admissibility or otherwise of expenses or about the exigibility of a receipt to be taken as income under the other provisions of the Income-tax Act. There could be more than one view of what constitutes 'book profit'. For these reasons, it is preferable that in such cases, where the provisions of Section 115J are liable to be invoked, scrutiny assessments are made as otherwise an assessment under Section 143(1) entails levy of non-appealable additional tax at 20 per cent. Of course, in this case, it is the assessee who invited an assessment under Section 115J and there is no dispute between the assessee and the revenue regarding the computation of income under the other provisions of the Income-tax Act. Therefore, we sustain the order of assessment under Section 143(1) read with Section 115J of the I.T. Act to the extent specified above.
11. In the result, the appeal is partly allowed.