Income Tax Appellate Tribunal - Chandigarh
D.C.I.T. vs Avery Cycle Inds. on 16 June, 2003
Equivalent citations: [2004]89ITD497(CHD)
JUDGMENT
1. The Revenue has filed this appeal against the order of CIT(A) (C) Ludhiana for Assessment year 1998-99.
2. The only effective issue raised in this appeal is that the CIT(A) was not justified in deleting the addition made by the AO on account of interest relatable to capital employed in the setting up of new project styled as "H.R. Project" while computing the income u/s 115-JA. The facts of the case are that the assessee was setting up a new project known as HR Project and interest relatable to the capital borrowed and utilised in the said project was capitalised. This had not been debited to P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. However, in the statement of income filed alongwith the return the assessee, while computing the book profit u/s 115-JA, the assessee had claimed deduction for the interest amounting to Rs. 7,27,04,550 and thereby had shown net loss of Rs. 5,09,19,856. While processing the return u/s 143(1)(a), the AO adopted the book profit at Rs. 2,17,84,694 as shown in the P&L account prepared in accordance with the provisions of parts II & III of Schedule VI of Companies Act i.e. without allowing deduction for interest relating to HR Project and made an adjustment accordingly. The reasons given by the AO for making the impugned adjustment is as under.
"The assessee has wrongly computed deemed income u/s 115 JA by reducing interest of HR Project claiming it as revenue expenditure from the book profits. Since section 115 JA does not provide for any such reduction out of book profits. Only specified amounts have to be increased/decreased from the book profits. Since this does not fall within the items specified in the section, therefore, book profits for purpose of section 115 JA will be 2,17,84,694 and 30% of that will be deemed income."
3. Being aggrieved, the assessee impugned the adjustment made by the AO in appeal before the CIT(A). It was submitted before the CIT(A) that the issue in question was debatable and therefore, it fell outside the scope of provisions of section 143(1)(a). Accepting the contentions of the assessee, CIT(A) held that the issue being debatable, the same fell outside the scope of provisions of section 143(1)(a). Accordingly, the CIT(A) deleted the adjustment made by the AO computing the income at Rs. 2,17,84,694 u/s 115-JA. The Revenue is aggrieved by the order of CIT(A). Hence this appeal before us.
4. Ld. Departmental Representative for the Revenue, Smt. P.K. Janjua heavily relied on the order of AO. She submitted that the interest relating to HR Project was capitalized and as such was not debited to P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. The assessee had claimed deduction of the interest in the computation sheet for the purpose of computation of book profit u/s 115-JA. The AO is duty bound to take the profit as declared in the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. She submitted that the adjustment of the nature claimed by the assessee is not permitted while computing the book profit u/s 115-JA. Thus the AO had clearly acted in accordance with clear and unambiguous provisions of Act. Therefore, the CIT(A) was not justified in deleting the adjustment on the ground that the issue was debatable.
5. Ld. counsel for the assessee, on the other hand, heavily relied on the order of CIT(A). He submitted that this issue was debatable and therefore, the same fell outside the scope of prima facie adjustment mentioned u/s 143(1) (a). He drew our attention to proviso below section 115-JA (2) as per which the assessee is duty bound to calculate the depreciation on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing P&L account laid before the company at its Annual General Meeting in accordance with provisions of section 210 of Companies Act. Thus he submitted that there could be two balance sheets as per the provisions of section 115-JA. The issue-whether the assessee can claim deduction for interest in respect of a new project in the statement of income or the same should be debited to P&L account, was debatable and therefore, the same fell outside the scope of prima facie adjustment. He also relied on the decision of ITAT, Ahmedabad Bench in the case of Atul Ltd. V. ACIT, 69 ITD 187. When his attention was drawn to the recent judgment of Hon'ble Supreme Court in the case of Apollo Tyres V. CIT reported in 255 ITR 273, the Ld. counsel for the assessee submitted that this judgment is not applicable to this case in view of the fact that the adjustment has been made u/s 115 JA and not under section 115 J. However, he vehemently contended that the issue being debatable, the same fell outside the scope of provisions of section 143(1)(a). He further contended that the matter is squarely covered by the decision of ITAT, Ahmedabad Bench in the case of Atul Ltd V. ACIT, 69 ITD 187.
6. We have heard both the parties and given our thoughtful consideration to the rival submissions. The undisputed facts of the case are that the assessee had not debited interest of Rs. 7,27,04,550 to the P&L account prepared in accordance with the provisions of Parts II & III of Schedule VI of Companies Act. The assessee had claimed such deduction in the statement of income filed alongwith the return. The AO has made adjustment by adopting book profit as shown in the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act without allowing any adjustment of interest claimed in the statement of income filed alongwith the return. We are in complete agreement with the Ld. counsel for the assessee that as per provisions of section 143(1) (a) the powers of AO are limited to rectify any arithmetic errors in the return or accounts and documents accompanying it. Likewise he could allow any deduction, allowance or relief which on the basis of the information available in the return, accounts or documents was prima facie admissible but was not claimed. Similarly, he could disallow any deduction, allowance or relief in the return which on the basis of information available in such return was prima facie inadmissible. However, the AO is not empowered to make substantial adjustments which would require examination of any evidence or which would require a hearing to be given to the assessee. Reliance in this regard is placed on the judgment of Bombay High Court in the case of Khatau Junkar Ltd. V.K.S. Pathania, 196 ITR 57. Likewise all debatable issues fell outside the scope of prima facie adjustments mentioned in section 143(1)(a).
7. Now the main issue that requires to be considered by this Bench is whether the issue involved in the case under consideration was debatable or the action of the AO in making impugned adjustment was in accordance with the provisions of I.T. Act, 1961. We may mention that the provisions of section 115 JA ware inserted by the Finance (No. 2) Act, 1996 wef 1.4.1997. These are deeming provisions of the Act which provide for alternative minimum tax on companies, who are having book profits and paying dividends but were not paying any tax. The scheme envisaged the payment of a minimum tax by deeming 30% of the book profits computed under the companies Act, as taxable income, in a case where the total income as computed under the provisions of I.T. Act, 1961 Act, is less than 30% of the book profit. Section 115 JA(2) costs upon every company to prepare, for the purpose of section 115 JA, its P&L account for the relevant previous year in accordance with the provisions of Parts II & III of Schedule VI of Companies Act. The expression 'book profit' for the purpose of section 115 JA, have been defined in explanation to section 115 JA (2) so as to mean net profit as shown in the P&L account for the relevant previous year prepared u/s 115. JA(2) as increased by amounts mentioned in clauses (a) to (f) and as reduced by amounts covered by clauses (i) to (ix) of the explanation. Thus section 115 JA is self contained code in itself. Proviso to section 115 JA further stipulates that while preparing P&L account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing P&L account laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of companies Act, 1956, The provisions of section 115 JA are more or less the same as provisions of section 115 J with minor changes. This is accepted by the Kerala High Court in the case of CIT V. Apollo Tyres, 237 ITR 706. One such minor change introduced by the Finance (No. 2) Act, 1996 is that section, itself now provides that method of depreciation and the rate of depreciation shall be the same as adopted for preparing P&L account laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of companies Act. We may mention that earlier the provisions of section 115 J require that the depreciation should be provided as per companies Act. However, there was no stipulation that the rate of depreciation and the method of depreciation should be the same as adopted in the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. But the provisions of section 115 JA are more specific and stipulate that the method of rate of depreciation adopted by the assessee shall be the same as adopted for preparing P&L account in accordance with Parts II & III of Schedule VI of companies Act laid at its Annual General Meeting. In the present case the assessee has admittedly not debited interest to the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. The assessee has claimed deduction of the same in the statement of income filed alongwith the return. However, the provisions of section 115 JA provide adjustments of the amounts debited to P&L account and as reduced by the following items :
(i) the amount withdrawn from any reserves or provisions of any such amount is credited to the P&L 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 1st day of April 1997 (but ending before the 1st day of April, 2001) 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) the amount of loss brought forward or unabsorbed depreciation which ever is less as per books of account.
Explanation-For the purposes of this clause, the loss shall not include depreciation ; or
(iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power ; or
(v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in (sub section (4) and sub-section (5) of section 80-I.B) for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the (profits and gains under sub-section (4) or sub-section (5) or section 80-I.B.); or
(vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined (as defined in the Explanation to sub-section (4) of section 80-I.A and subject to fulfilling the conditions laid down in that sub-section); or
(vii) the amount of profits of sick industrial company for the Assessment year commencing from the Assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the Assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation - For the purposes of this clause, 'net worth' shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (special Provisions) Act, 1985 (1 of 1986); or
(viii) the amount of profits eligible for deduction under section 80 HHC, computed under clause (a), (b) or (c) of sub-section (3) or sub-section (3A) as the case may be of that section and subject to the conditions specified in sub-sections (4) and (4A) of that section ;
(ix) the amount of profits eligible for deduction under section 80 HHE, computed under sub-section (3) of that section).
Apart from the above specific items, no further deductions/adjustment can be allowed to the assessee while computing book profits for the purpose of provisions of section 115 JA. The adjustment of the nature claimed by the assessee has not been listed in the aforesaid nine items. Therefore, as per the provisions of Act the assessee could have not reduced the book profit by claiming deduction of interest of Rs. 7,27,04,550 which was not debited to P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. Thus the adjustment made by the AO was in accordance with clear and unambiguous provisions of the Act. The provisions of section 115 JA do not provide for any reduction of the nature mentioned above for the purpose of computing the book profit.
8. As mentioned above, there can be some doubt in regard to old provisions of section 115 JA as to whether the assessee could claim depreciation at different rates and method as provided under the companies Act in the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. However, the controversy has now been set at rest by the unambiguous and clear provisions of proviso to section 115 JA which provides that the depreciation shall be provided at the same rate and method adopted in the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act as laid before its Annual General Meeting. This does not leave any doubt in any body's mind that depreciation for the purposes of computing book profit u/s 115 JA would be same, as charged to P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. Even in regard to old provisions of the Act, the issue has been set at rest by the judgment of Hon'ble Supreme Court in the case of Apollo Tyres v. CIT, 255 ITR 273. This issue has been considered by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT, 255 ITR 273. Hon'ble Supreme Court by examining the object of introducing section 115 JA in the I.T. Act, 1961 observed that the AO under the I.T. Act, 1961, has to accept the authenticity of the accounts w.r.t. provisions of companies Act, which are duly certified by the statutory auditors and are required to be approved by the Company in its Annual General Meeting and thereafter file before the Registrar of Companies to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Hon'ble Supreme Court has, therefore, held that the AO does not have the jurisdiction to go behind the net profit shown in the P&L account accepted to the extent provided in the explanation to section 115 J. The relevant finding of the judgment is extracted below:
"The above Speech shows that the income tax authorities were unable to bring certain companies within the net of income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115 J was introduced in the I. T. Act with a deeming provision which makes the company liable to pay tax on at least 30% of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the companies books of accounts as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words "in accordance with the provisions of Parts II & III of Schedule VI of Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an assessing officer under the I. T. Act, 1961 has to accept the authenticity of the account with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the assessing officer to re- scrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. In our opinion, reliance placed by the Revenue on sub-section (1A) of section 115 J does not empower the assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the I.T. Act, for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that we do not think that the said sub-section empowers the authority under the Income tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115 J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There can not be two incomes one for the purpose of Companies Act and another for the purpose of income tax both maintained under the same Act. If the legislature intended the assessing officer to reassess the company's income, then it would have stated in section 115 J that "income of the company as accepted by the assessing officer". In the absence of the same and on the language of section 115 J it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.
Therefore, we are of the opinion that the assessing officer while computing the income u/s 115 J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115 J."
9. The judgment of Hon'ble Supreme Court lays down the law of the land and the same is binding on all the authorities in the country. On a careful reading of the judgment of Apex Court, we observe that the judgment is based on the following important facts :
i) The assessee shall prepare its. P&L account for the relevant accounting year in accordance with the provisions of Parts II & III of Schedule VI of Companies Act.
ii) Such P&L account is to be certified by the statutory auditors.
iii) Such P&L account is approved in the general body meeting.
iv) After approval, the same is submitted to the Registrar of the companies who has statutory obligation also to examine and satisfy himself that the accounts of the company are maintained in accordance with the requirements of the Companies Act.
Thus the Apex Court has held that the AO does not have the jurisdiction to go behind the net profit shown in the P&L Account. Admittedly, in the P&L account prepared by the assessee in accordance with Parts II & III of Schedule VI of Companies Act, profits u/s 115 JA works out to Rs. 2,17,84,694. The AO had adopted the same, book profit as reflected in the P&L account where the assessee had not debited interest relating to HR Project. The provisions of section 115JA does not provide for any adjustment/reduction of the interest for the purpose of computing book profit. Thus we fail to understand as to how the issue in question becomes debatable, when the provisions of the Act are so very clear. Thus action of the AO appears to be in conformity with the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd (supra) and the provisions of Act.
10. As mentioned above the provisions of section 115 JA are more less similar to the provisions of section 115 J. By inserting proviso to section 115 JA, legislature has only ensured that the method of depreciation adopted by the assessee is the same as debited to P&L account prepared in accordance with Parts II & III of Schedule VI of companies Act. This was only with a view to put an end to controversy arising under the old provisions of section 115 J where there was a cleavage of opinion as to whether depreciation charged to P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act should be same or it should be as per I.T. Act, 1961 for the purpose of computing book profit. But this does not mean that the assessee could prepare two balance sheets. Therefore, after the judgment of Hon'ble Supreme Court in the case of Apollo Tyres (supra) there is no controversy about the fact that the AO is duty bound to adopt the profit as shown in the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act without making any adjustment other than those specified in the explanation. As regards the decision of ITAT, Ahmedabad Bench in the case of Atul Ltd. (supra) the same is prior to the judgment of Supreme Court in the case of Apollo Tyres (supra). In view of the binding judgment of Supreme Court, decision of ITAT Ahmedabad Bench no longer holds goods. Moreover, there could be some dispute in that case whether a particular receipt was not in the nature of income. Even such controversy ceases to exist after the judgment of Supreme Court where the Apex Court has held that the AO cannot go behind the P&L account prepared in accordance with Parts II & III of Schedule VI of Companies Act. In this case, the position is conceded by the Ld. counsel for the assessee that adjustment/reduction of the nature claimed by the assessee is not covered by the provisions of section 115 JA. Thus how could there by a debate and therefore, the decision of ITAT Ahmedabad Bench in the case of Atul Ltd. (supra) relief upon by the assessee is not applicable to the facts of the present case.
11. We may further add that even if the judgment is of later date then the date when the impugned adjustment was made by the AO, the same would relate back to the date of order giving rise to present dispute. Reliance in this regard is placed on the judgment of Punjab & Harayana High Court (F.B.) in the case of CIT V. Smt. Aruna Luthra, 252 ITR 76. It is not in dispute that P&L account filed alongwith the return of income and as prepared in accordance with Parts II & III of Schedule VI of Companies Act was the same as certified by the statutory auditors and approved in the Annual General Meeting and submitted before the Registrar of companies. Thus the action of the AO is in conformity with the provisions of act and is in accordance with the judgment of Supreme Court in the case of Apollo Tyres Ltd (supra). Accordingly, we are of the considered opinion that the ICT(A) was not justified in deleting the impugned adjustment. We set aside the order of CIT(A) and restore that of the AO.
8. In the result, appeal of the revenue is allowed.