Delhi High Court
Commissioner Of Income Tax vs R.T.C.L. Ltd. on 28 March, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~14
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 28th March, 2012.
+ ITA 612/2009
COMMISSIONER OF INCOME TAX ..... Appellant
Through Ms. Rashmi Chopra, sr. standing
counsel
versus
R.T.C.L. LTD. ..... Respondent
Through Dr. Rakesh Gupta and Ms. Poonam
Ahuja, Advs.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
This appeal filed by the Revenue under Section 260
A of the Income Tax Act, 1961 („Act‟, for short) impugns order
dated 29.8.2008 passed by the Income Tax Appellate Tribunal
(„Tribunal‟ for short) in the case of R.T.C.L. Ltd. and relates to
assessment year 2002-03. Having heard the counsel for the parties,
we feel no substantial question of law arises in the present appeal.
ITA 612/2009 Page 1 of 10
2. The Assessing Officer vide order dated 15.3.2005 had assessed
total income of the assessee at Nil under Section 143(3) of the Act.
Subsequently, notice under section 154 of the Act was issued and a
rectification order dated 21.07.2006 under the said Section was
passed recording:-
"After going through the records it was found that while
computing book profit the assessee had claimed prior
period adjustment for Rs.3,74,59,471/- which was
inadmissible nature.
In compliance to this office notice u/s 154 of the
Act dated 22.11.2005, the assessee has filed its reply
dated 22.02.2006, which is placed on record. The
assessee has submitted that calculation of book profits
were made strictly an accordance with and in compliance
of the provision contained in Section 115JB of the Act.
The reply of the assessee has been considered. It is
found that prior period expenses cannot be adjusted
against book profits of calculating tax u/s 115JB of the
Act with these remarks the income is computed as under:
Income as per P & L A/c 2,38,63,629/-
(Prior period adjustment for Rs.3,74,59,471/-
Not allowed as discussed above)
-----------------
Revised income 2,38,63,629/-"
ITA 612/2009 Page 2 of 10
3. In the first appeal, the assessee was unsuccessful and the order
under Section 154 was confirmed by the CIT(Appeals), who held as
follows:
"4. I have considered facts of the case and arguments
taken by Sh. Taneja quite carefully. It is seen that for the
purpose of working out the profits u/s 115 JB of the I.T.
Act, the profits as computed in the profit and loss
account for the relevant accounting year had only to be
considered. Certainly, it is undisputed fact that further
debit of Rs.3,74,54,471/- was not the expenditure for the
current year but undisputedly it was prior period
adjustments on account of change in the depreciation
method. Profits for the relevant period as shown in the P
& L account is relevant and while working out such
profits and adjustments for prior period cannot be
allowed as per relevant provision of I.T.Act. Since while
passing the 143(3) order, the AO has committed apparent
mistake of the law. Therefore, in my considered view
the AO was fully justified in rectifying the said mistake
through aforesaid order passed u/s 154 of the I.T. Act.
Various decisions which are relied upon by Sh. Taneja
are having different facts and, therefore, under the facts
of present case these cannot be applicable. With this
discussion, the rectification order passed by AO is
hereby confirmed by rejecting relevant grounds of
appeal."
4. It is noticeable from the aforesaid findings of the Assessing
officer and the CIT(Appeals) that the respondent-assessee was
ITA 612/2009 Page 3 of 10
following the straight line method of depreciation under the
Companies Act, 1956, prior to the assessment year 2002-03.
However, in the year in question, it changed the method to written
down value method and the difference due to the said change of
`3,74,59,471/- was shown in the profit and loss account under the
head „Expenditure - Depreciation‟. Due to this change, the
said/current year‟s book profits got reduced to `13,14,552/-.
5. There are two aspects of the matter. First aspect relates to
whether or not this adjustment, is permissible and should be taken
into consideration while computing book profits under Section
115JB. We may notice clause (iia) to Explanation 1 to Section
115JB(2) is inserted by the Finance Act, 2006 w.e.f. 1.4.2007 and
reads:-
"115JB-
xxx
Explanation [1].- 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 (2), as increased by-"
xxx
(iia) the amount of depreciation debited to the profit and
loss account (excluding the depreciation on account of
revaluation of assets); or"
ITA 612/2009 Page 4 of 10
6. We are not inclined to go into the said question and issue in the
present case as we feel that the Assessing Officer could not have
examined and gone into the said aspect while exercising limited
jurisdiction under Section 154 of the Act. The jurisdiction under the
said Section is confined and restricted to rectification of errors and
mistakes which are apparent from the record. The Assessing Officer
cannot go into a debatable issue on which two or more views are
possible and pass an order on merits. We have quoted the orders
passed by the Assessing Officer as well as CIT(Appeals). They have
not indicated or specifically stated how and why the issue was clear
and that no debate or two views were possible. The contention of the
assessee, which has been referred to by the Tribunal in the impugned
order, shows that there was considerable controversy on the said
aspect and this is clear when we read the following paragraph from
the order of the Tribunal:-
"As to whether the arrears of depreciation can be provided
or not, the matter is settled by various decisions of the
Tribunal as also by the decision of the Bombay High Court
in the case of Kinetic Motor Co. Limited 262 ITR 330
wherein also there was a change in the method of providing
depreciation and the profits of the assessee were lowered
ITA 612/2009 Page 5 of 10
by Rs.6,32,65,430/-. The High Court held that under the
Companies Act, both the straight-line method and written
down value method are recognized and, therefore, once the
amount of depreciation actually debited in the profit and
loss account was certified by the auditors, it was not
permissible for the Assessing Officer to make any book
adjustments in view of the decision of the Supreme Court
in the case of Apollo Tyres Limited vs. Cit 255 ITR 273.
Besides above, we find that there are decisions of the
Tribunal holding the similar view, namely, Calcutta Bench
of the Tribunal in the case of JCT Limited vs. DCIT 253
ITR 61, Cochin Bench of the Tribunal in the case of Apollo
Tyres Limited vs DCIT 43 ITD 464, Bombay Bench of the
Tribunal in the case of Modern Woollens, Ltd. Vs. DCIT
47 ITD 154 and Amritsar bench of the Tribunal in ITA No.
353/Ars./91 order dated 14.4.1994. In all these cases, it
was held that the net profit as shown in the accounts of the
assessee after writing off arrears of depreciation of the
earlier years would alone represent the book profits of the
assessee and it was not for the Assessing Officer to
substantiate his own figures in its place. The learned DR
however buttressed the view from a different angle and
submitted that the arrears of depreciation had been claimed
by the assessee below the line of the profit and loss account
and, therefore, it cannot form part of the profit & loss
account and book profit to be provided only above the
profit line. This issue is also not res Integra and the
Tribunal in the case of Gulf Oil Corporation Limited vs.
ITA 612/2009 Page 6 of 10
ACIT 111 ITR 124 dealt with the issue by observing as
under:
"6. We have duly considered the rival
submissions and material on record. Sub-section (2)
of Section 115JB provides that every assesses
company shall prepare its profit and loss account in
accordance with the provisions of Part-II and Part-III
of Schedule VI to the Companies Act, 1956. The said
Schedule-VI does not speak of the Appropriation
Account at all. It is only as a matter if presentation
that most of the companies segregate to reflect as to
what has been appropriated where out of the profits
earned by them. Otherwise, sub-clauses (a) and (b) of
clause (viii) of Note-II in para 3 of Part-II of Schedule-
VI specifically provide that the aggregate amounts set
aside or proposed to be set aside to reserves should be
distinctly shown in the Profit and Loss account.
Similarly, sub-clause (b) and sub-clauses (a) and (b) of
causes (xii) and (xiii) respectively in Note-II of Part-II
of Schedule - VI provide that profits or losses in
respect of transactions not usually undertaken or
undertaken in exceptional circumstances or which are
of non-recurring nature should be shown in the Profit
and Loss Account. The aggregate amount of
dividends paid and proposed are also to be shown in
the Profit and Loss Account. The point we are trying
to drive home is that all the items which are generally
classified in the Appropriation Account are in fact to
ITA 612/2009 Page 7 of 10
the included in the Profit and Loss Account prepared
as Part-II and III of Schedule-VI. Therefore, we are in
agreement with the argument of the learned counsel
that the starting point for computation of book profits
for the purposes of Section 115JB should be Rs.660.81
lakhs which is the final balance in the Profit and Loss
account carried to balance Sheet. It may also be noted
from the above discussion that even extraordinary
items have to be debited to the Profit and Loss
Account. Having adopted the figure of Rs.660.81
lakhs as the starting point, the same has to be increased
by the items specified in clauses (a) to (f) and has to be
reduced by the items specified in clauses (i) to (vii)
given in the Explanation. No other adjustment is
permitted by law and also as laid down by the
Supreme Court in the case of Apollo Tyres Ltd.
(supra). None of the clauses given in the Explanation
provide for the increase or decrease of the book
profi8ts (sic.) by extraordinary items. The reference of
AS-5 by the learned Department Representative does
not in any manner advance the case of the revenue. It
merely says that prior period and extraordinary items
should be separately disclosed along with their nature
so that their impact on the operating results can be
perceived. It does not say that they are not part of the
Profit and Loss Account. Similarly, the Guidance
Note issued by the ICAI also does not help the revenue
as it merely says that sometimes, Appropriation
Account is included as a separate section of the Profit
ITA 612/2009 Page 8 of 10
and Loss Account. But, as we have seen earlier, Parts-
II and III of Schedule-VI to the Companies Act do not
speak of Appropriation Account at all. In the light of
this discussion, we are convinced that it was in
accordance with law for the assessee to have taken
Rs.978.55 lakhs as the base figure to compute the book
profits for the purposes of Section 115JB."
7. We may also notice that it is the contention of the assessee that
the book profits as declared were in confirmity and as per provisions
of part II and III of the Schedule VI of the Companies Act, 1956. It
is stated by the assessee that the Assessing Officer and the
CIT(Appeals) have not adversely commented or stated that the entry
was contrary to part-II and III of the said Schedule. The first proviso
to Section 115JB(2) has not been specifically referred to and applied
by the Assessing Officer and the CIT(Appeals). They have not stated
as to why and how the book profits were not computed in
consonance with provisions of part II and III of the Schedule VI of
the Companies Act, 1956. The issues and contentions being
debatable and in the realm of uncertainity, we do not think the
Assessing Officer was right in invoking under Section 154 of the
Act. The Tribunal was right in observing that the action of the
Assessing Officer under Section 154 was not warranted. With the
aforesaid observations, we decline to entertain the present appeal.
ITA 612/2009 Page 9 of 10
We clarify that we have not examined the question on merits and it is
left open. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. MARCH 28, 2012 vld/Bisht ITA 612/2009 Page 10 of 10