Income Tax Appellate Tribunal - Delhi
Jindal Steel And Power Ltd. vs Additional Commissioner Of Income Tax on 31 March, 2006
Equivalent citations: (2007)106TTJ(DELHI)943
ORDER
S.C. Tiwari, A.M.
1. This appeal has been filed by the assessee on 15th Sept., 2005 against the order of the learned CIT(A), Rohtak, dt. 14th July, 2005 in the case of the assessee in relation to assessment order under Section 143(3) r/w Section 147 for asst. yr. 2000-01. In this appeal the main disputes relate to initiation of proceedings under Section 147 and additions to the book profit as sustained by the learned CIT(A) in the computation of assessee's income chargeable to tax under the provisions of Section 115JA of the Act.
2. Facts of the case leading to this appeal briefly are that the assessee filed return of income on 28th Nov., 2000 declaring taxable income of Rs. 3,23,94,225 under the provisions of Section 115JA of the Act. This return of income was processed under Section 143(1) of the Act on 18th Dec, 2000. On the basis of this return a refund of Rs. 39,80,007 was found due under Section 143(1) on 18th Dec, 2000. The refund was accordingly issued. The AO did not issue any notice under Section 143(2) within the prescribed time-limit. Thereafter a notice under Section 148 was issued on 27th Oct., 2003 and served on the assessee on 21st Nov., 2003. This notice under Section 148 was issued after recording reasons in writing on 27th Oct., 2003 for initiating proceedings under Section 147 of the Act. This action was taken by the AO in the wake of assessment proceedings in the case of the assessee company for asst. yr. 2001-02 on the basis that the assessee had shown inflated income by charging @ Rs. 3.72 per unit for captive consumption of power as against Rs. 2.32 per unit charged from State Electricity Board with a view to claim reduction of book profit by a higher amount worked out as profits derived from the business of generation and distribution of power. According to the AO if the amount charged to captive consumption of power was taken at the same rate at which the assessee supplied power to State Electricity Board, the assessee's deduction on account of the business of power generation would be less by Rs. 25,76,59,186. Secondly, the learned AO also noted that the assessee had claimed deduction of depreciation of power generating plant installed/added after 1st April, 1997 on WDV basis rather than on straightline method. Thus, the assessee had claimed excessive depreciation by more than Rs. 2,21,00,000. The learned AO held that due to assessee's omission to declare all material facts relevant for assessment an income of Rs. 27,97,59,186 chargeable to tax had escaped assessment for asst. yr. 2000-01. He, therefore, issued notice under Section 148.
3. In response to the notice under Section 148 issued by the learned AO, the assessee filed a written reply on 19th Dec, 2003, inter alia, stating that IT return already filed for asst. yr. 2000-01 on 28th Nov., 2000 should be treated as IT return in response to notice under Section 148 also. Thereafter the AO has completed the assessment under Section 143(3) r/w Section 147 on 29th Dec, 2004. He computed income of the previous year under regular provisions of the Act at Rs. 37,56,89,119. However, as unabsorbed depreciation brought forward from the earlier years exceeded the income thus computed, the learned AO computed assessee's total income for asst. yr. 2000-01 at nil amount after set off of unabsorbed depreciation. Thereafter the learned AO computed assessee's income chargeable to tax under the provisions of Section 115JA of the Act. The assessee had disclosed a net profit Rs. 89,58,71,823. The assessee claimed reduction of a sum of Rs. 78,78,91,075 on account of profit on generation and distribution of power. The learned AO, however, worked out the assessee's profit on generation and distribution of power at Rs. 58,95,31,370 only. The learned AO, thus, worked out higher deemed income under Section 115JA than as disclosed by the assessee.
4. While computing the assessee's total income under the general provisions of the Act, the learned AO made a disallowance of Rs. 2,21,40,131 as the assessee, in the opinion of the AO, had claimed excess depreciation to that extent. According to the AO, various power generating turbines put to use and capitalized during the financial year 1998-99 are entitled to depreciation on straightline method. The assessee company was, therefore, entitled to depreciation on the turbines at Rs. 1,59,10,047 @ 7.84 per cent on the basis of straightline method. The assessee has, however, claimed depreciation on these turbines at Rs. 3,80,50,138 @ 25 per cent on the basis of WDV. The learned AO disallowed the assessee's claim of depreciation to the extent of Rs. 2,21,40,131 on the basis of his working of admissible depreciation. The basis for this disallowance has been stated by the learned AO in the reasons recorded in writing also for initiating proceedings under Section 147 of the Act.
5. After having made disallowance out of the assessee's claim of depreciation, as abovementioned, the learned AO proceeded to make certain further disallowances and additions based on the facts and materials brought on record during the course of assessment proceedings under Section 147. The same are as under:
1. Disallowance out of air journey expenses 2,00,000
2. Disallowance on account of alleged sales-tax liability 45,25,628 payable to Jindal Strips Ltd.
3. Disallowance of depreciation on hydraulic excavator 14,92,626
4. Disallowance of interest on loan 3,68,219
5. Addition on account of alleged undervaluation of closing 3,98,193 stock In addition, the learned AO also made a disallowance of Rs. 15.23 lakhs from out of commission expenses claimed by the assessee. That addition having been deleted by the learned CIT(A), we are not concerned with the same in this appeal.
6. While computing assessee's income under the general provisions of the Act, the learned AO made a total addition of Rs. 3,06,47,797. Out of the same the addition to the extent of Rs. 15,23,000 has been deleted by the learned CIT(A) in the impugned order. Out of the remaining additions to the returned income the addition to the extent of Rs. 2,21,40,131 is relatable to escapement of income from assessment, as referred to in the reasons recorded by the learned AO. Other additions are supported by the AO on the ground that escapement from assessment of those income was noticed during the course of proceedings under Section 147.
7. During the course of hearing before the learned CIT(A), first and foremost the assessee disputed initiation of assessment proceedings under Section 147. The assessee stated that the reasons if recorded by the AO for initiation of proceedings under Section 147 had not been communicated. Thereupon the learned CIT(A) forwarded on 20th May, 2005 the copy of reasons recorded by the AO. The assessee filed objections thereto in the reply dt. 30th May, 2005. The learned CIT(A) found that assessment proceedings had been validly initiated under the provisions of Section 147. At the time of recording the reasons the learned AO had before him the assessee's own case for subsequent asst. yr. 2001-02 wherein it had been found that with a view to getting higher benefit of Section 80-IA(8) of the Act, the profits from the assessee's own undertaking had been over-estimated. The learned CIT(A) held that while recording reasons under Section 148, the AO applied his mind on the question of reduction provided in Clause (iv) of Explanation to Section 115JA. The learned AO formed a belief for underassessment within the meaning of Expln. 2(b) to Section 147 in relation to Section 115JA. As to the second basis of escapement of income from assessment i.e., higher depreciation claimed by the assessee the learned CIT(A) held that under Section 32 of the Act r/w r. 5 of the IT Rules, 1962 an option had been granted to the assessee to claim depreciation on WDV basis. The assessee had not given any option for exercise of claim of depreciation on WDV basis. As no such option was exercised, the AO could not presume the exercise of option within the meaning of r. 5(1A) of IT Rules, 1962. The assessee committed a breach of statutory provisions that provided for depreciation under straightline method for an industrial undertaking carrying on power generation/distribution. There was, thus, escapement of income on account of assessee's omission to declare all material facts relevant for assessment for the assessment year. The learned CIT(A), therefore, held that proceedings under Section 147 had been validly initiated.
8. The assessee further argued before the learned CIT(A) that as per the reasons recorded for initiation of proceedings under Section 147 there were only two issues. The first issue pertained to the assessment under the general provisions of the Act and there the case of the AO was that the assessee had claimed excess depreciation by following WDV method instead of straightline method in relation to business of power generation and distribution. The second issue pertained to computation of tax liability under Section 115JA and there the case of the AO was that an inflated amount was excluded by way of profits of the assessee in the business of power generation and distribution. In the assessment order under Section 143(3) r/w Section 147 the AO had made a number of disallowances and additions to the income declared by the assessee that had nothing to do with the specific issues on which the assessment was taken up under the provisions of Section 147 of the Act. The assessee argued that it was not open to the learned AO during the course of proceedings under Section 147 to make roving/fishing enquiries and consequent disallowances/additions/adjustments to the assessed income. The assessee relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (SC) and the judgment of Hon'ble Punjab and Haryana High Court in the case of Vipan Khanna v. CIT . The learned CIT(A) held that the assessee's arguments might be applicable if the original assessment had been completed under Section 143(3) of the Act. It was only a case where the return has been filed and processed under Section 143(l)(a) of the Act. Hence the assessee's case was covered under Expln. 2(b) to Section 147 and main Section 147. Moreover the judgment in the case of Sun Engineering Works (P) Ltd. (supra) related to the phraseology of Section 147 prior to 1st day of April, 1989. After 1st April, 1989 the deficiency was made up by the legislature by insertion of the words "any other income, chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section." As in the case of the assessee there was no earlier assessment order and merely processing of the return under Section 143(l)(a), the AO could bring to tax all other disallowances/incomes which came to his notice during the course of enquiries and questionnaire under Section 142(1)/143(3). However, the learned CIT(A) noted that as per the observations of the jurisdictional High Court in the case of Vipan Khanna (supra) at p. 234, it made no difference whether the assessment proceedings had become final on account of an assessment under Section 143(3) of the Act or on account of non-issue of a notice under Section 143(2) of the Act within the stipulated period. The amendments made in Section 143 and Section 147 w.e.f. 1st April, 1989 did not in any manner negate the proposition of law as enunciated by the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra). The learned CIT(A) respectfully submitted that the abovesaid obiter and decision of the jurisdictional High Court in the case of Vipan Khanna (supra) deserved a reconsideration by the Hon'ble High Court. However, the judgment being binding upon him the learned CIT(A) chose to follow it. Hence, following the judgment in the case of Vipan Khanna (supra), the learned CIT(A) found himself compelled to hold that the additions of Rs. 2,00,000 on account of air journey expenses; of Rs. 45,25,628 on account of sales-tax liability payable to M/s Jindal Strips Ltd.; disallowance of Rs. 14,92,626 pertaining to depreciation on hydraulic excavator; disallowance of Rs. 3,68,219 on account of assessee's claim of interest on loan; addition on account of alleged undervaluation of closing stock and disallowance of Rs. 15,23,000 on account of commission payments could not have been made by the AO in the impugned assessment order under Section 147. The learned CIT(A), therefore, deleted those additions/disallowances. However, he did so subject to his directions/findings under Section 150(1) of the Act.
9. On merits, the learned CIT(A) held that disallowance of depreciation of Rs. 2,21,40,131 had rightly been made by the learned AO because the assessee had failed to furnish an option as required under r. 5(1A). As to the disallowance of Rs. 2 lakhs from out of expenditure on aircraft, the learned CIT(A) noted that there was no evidence of entitlement of even managing director/chairman to use the aircraft for the purpose other than business. As the assessee failed to produce any evidence of the business purpose of various air journeys prior to 27th Nov., 1999, the learned CIT(A) held that journeys to Bhuj, Patiala, Kullu and Bareilly were not for the purpose of business. At an average rate of expenditure of Rs. 8,177 per hour, the learned CIT(A) held that disallowance was called for of Rs. 1,37,046. The learned CIT(A) recorded this finding and directed the AO to initiate proceedings under Section 147 r/w Expln. 2(c) of the Act for asst. yr. 2000-01. He directed the AO under Section 150(1) to issue notice under Section 148. He further held that provisions of Section 149 shall not apply. In relation to the disallowance of Rs. 45,25,628 the learned CTT(A) held that the aforesaid sales-tax liability was no longer payable. The learned CIT(A) gave a finding under Section 150(1) that the amount of Rs. 45,25,628 deserved to be covered under Section 28(iv) of the Act. He gave direction under Section 150(1) to the AO to issue notice under Section 148 and held that the provisions of Section 149 relating to time-limit for issue of notice under Section 148 shall not apply. As to the depreciation on excavator the learned CIT(A) found that the excavator had left the vendor's premises on 31st March, 2000 at 16.40 hours and there was no time to reach the appellant's premises so as to be put to use on 31st March, 2000. Hence he gave similar findings and directions under Section 150(1) for asst. yr. 2000-01 irrespective of provisions of Section 149. As to the disallowance of interest of Rs. 3,68,219, the learned CIT(A) held that it was paid on a term loan from ICICI Bank for erection of a power project. Hence, the expenditure was capital in nature. Hence he gave findings and directions to the AO under Section 150(1) irrespective of the provisions of Section 149. Further, the learned CIT(A) held that the assessee was following exclusive method of accounting in respect of excise duty, on which MODVAT credit was available. That method was not correct method and the AO rightly added back Rs. 3,98,193. Accordingly, similar findings and directions under Section 150(1) to the AO were given irrespective of the provisions of Section 149.
10. The assessee disputed before the learned CIT(A) the deemed income under Section 115JA computed by the learned AO at Rs. 9,10,21,594 instead of Rs. 3,23,94,230 declared by the assessee. The assessee argued that in terms of Clause (iv) of Explanation to Section 115JA of the Act profit derived by the power plant as determined/computed, recorded in the books of accounts of the assessee was required to be deducted and it was not permissible to tinker with/recompute the same in any manner. Without prejudice, the assessee argued that the AO erred on facts and in law in substituting the recorded price at which power was sold by the captive power plants to the other units at the price at which power was supplied to the State Electricity Board. The assessee argued that the rate at which price of power was charged from the assessee's own units was fixed being the rate at which State Electricity Board charged price of power from industrial consumers. The learned CIT(A) held that sub-cl. (iv) of Explanation to Section 115JA did not speak of book profit. It referred to "profits derived". Therefore, the AO was not required to accept the profits as recorded in the books of accounts of the assessee and was required to correctly compute the profits derived. The learned AO was, therefore, justified to make adjustment to the book profits on the basis of what, according to the learned AO, was the correct amount of profit earned by the assessee from various units of the assessee company. As to the adjustment of Rs. 3,98,193 to the closing stock while computing book profit under Section 115JA, the learned CIT(A) held that here again the AO was required to work out the correct profits derived by the assessee and he was not bound to accept the amounts recorded in the books of accounts of the assessee. The learned CIT(A) also turned down the assessee's grounds of appeal relating to levy of interest under Sections 234B, 234C and 234D of the Act. He held that provisions of Section 115JA could not be considered to be out of purview of the obligation to make correct payment of advance tax. Aggrieved by this order the assessee is in appeal before us.
11. Shri S.K. Tulsiyan, the learned counsel for the assessee argued that proceedings under Section 147 of the Act had been initiated on account of the following alleged reasons:
(i) Alleged excessive depreciation claimed in respect of assets used in generation of power on WDV basis as against depreciation on straightline basis (SLM).
(ii) Alleged excess deduction claimed in respect of profit derived from power unit under Clause (iv) of Explanation to Section 115JA.
As to the first reason, retrospectively from 1st April, 1997, r. 5(1A) laid down that in respect of assets acquired on or after 1st April, 1997, depreciation shall be calculated at the specified percentage on the actual cost of the assets to the assessee. At the same time second proviso to r. 5(1A) laid down that an undertaking to which Clause (i) of Section 32(1) applied could, at its option instead of the depreciation at specified percentage, claim depreciation under sub-r. (1) r/w Appen. I if such option was exercised before the due date for furnishing the return of income under Section 139(1) for the assessment year relevant to the previous year in which it began to generate power. Proviso further stipulated that any such option once exercised would be final and apply to all the subsequent assessment years. Thus, at its option the assessee could claim depreciation on conventional WDV method instead of straightline method as prescribed under r. 5. The power generating unit of the assessee commenced operation in the previous year relevant to asst. yr. 1999-2000. Asst. yr. 1999-2000 being the first year of operation of the power generating undertaking, depreciation was calculated and claimed at the rates specified in Appen. I to IT Rules, 1962. The said return of income was processed under Section 143(1) vide intimation dt. 29th Sept., 2000. Thus, the claim of the assessee was impliedly allowed in asst. yr. 1999-2000. The assessee having once exercised the option available under the second proviso to r. 5(1A) continued to claim depreciation on WDV basis for the subsequent assessment years in accordance with the mandatory requirement of the third proviso to r. 5(1A). Consequently for asst. yr. 2000-01 the assessee claimed depreciation on the fixed assets of the power generating undertaking on WDV basis. The learned counsel argued that as the assessee's claim of depreciation was perfectly in accordance with law, there was no understatement of income as alleged by the AO. There was no force in the contention of the learned CIT(A) that assessee had not exercised the option within the meaning of r. 5(1A). There was no prescribed form or procedure for exercise of the option by the assessee. The deduction claimed by the assessee in the computation of income chargeable to tax for the first assessment year satisfied the requirement of the assessee exercising his option. The learned counsel for the assessee found support to these arguments from the decision of Tribunal, Delhi, in the case of Shiva Medicare v. Dy. CIT in ITA No. 5900/Del/1998 where the note given by the assessee at the end of the return of income was treated a declaration under Section 10A/B(7) of the Act.
12. The learned counsel argued that the second reason given by the learned AO for initiation of assessment proceedings under Section 147 relating to Clause (iv) of Explanation to Section 115JA was not tenable. The assessee had set up two separate and distinct undertakings for generation of power. The electricity generated was partly captively consumed and the surplus electricity generated was sold to Madhya Pradesh State Electricity Board in terms of agreement dt. 15th July, 1999. For the purpose of transfer of power, to meet the requirement of the manufacturing units belonging to the assessee, transfer pricing was made at the price at which power was being sold by the State Electricity Board to the manufacturing units owned by the assessee. The surplus power was sold to State Electricity Board at the price dictated/fixed by them. Based on the rate at which power was supplied to State Electricity Board, the AO had argued that the assessee had shown excessive transfer pricing for self-consumption resulting into higher profit being disclosed in the assessee's business of generation and distribution of power. On that basis the learned AO reduced the profit of the assessee's power business to a lesser amount. The learned counsel argued that the assessee had priced the power supplied for consumption by the assessee's own manufacturing units at the rate of market price the power was otherwise available to them in the open market. That was the right method as provided for in Section 80-IA(8). Power was supplied to State Electricity Board at a rate lower than market value because of the provisions of the Electricity (Supply) Act, 1948 whereunder the generation and distribution of power was the monopoly of the State. The assessee could generate power and distribute only on the basis of consent given by State Electricity Board under Section 44 of the Electricity (Supply) Act. Under these circumstances the rate at which power was purchased by Madhya Pradesh State Electricity Board was determined and dictated by the electricity board under the power purchase agreement. The acceptance of such rate by the assessee company and sale of power to the State Electricity Board was a condition precedent for their permission to the assessee to generate power in the first instance. That rate, by no stretch of imagination, could be termed as the market value of power. It was not the price at which power would normally be purchased or sold in the open market. Since the assessee was not entitled to sell power to third parties in the open market, the market value of power used for captive consumption could only be determined on the basis of the rate at which power was supplied by the State Electricity Board to its industrial customers. The learned counsel referred to the decision of Tribunal, Kolkata in the case of Assam Carbon Products Ltd, v. Asstt. CIT in ITA No. 11/Gau/2004 [reported at (2006) 100 TTJ (Kol) 224-Ed.]. In that case the assessee company used NH coke for manufacture of electrographized carbon blocks. The company had been importing the material from its collaborators in the UK. Subsequently, the assessee entered into an agreement with the collaborators in the UK for transfer of new technology for in-house production of NH coke in order to substitute imports. As stipulated by the Government of India the assessee was compulsorily required to export a part of the produce of NH coke at pre-determined price to the UK company. The Tribunal held that market value of NH coke for the purpose of valuing captive consumption of NH coke for claiming deduction under Section 80-IA would be the price at which the assessee could obtain NH coke from the open market. Accordingly the notional landed cost of NH coke was held to be indicative of market value and not the price at which NH coke had actually been exported to sister-concern out of compulsion at a price dictated as per stipulations of Government of India. The learned counsel argued that the aforesaid decision of Tribunal completely covered the case of the assessee in favour of the assessee and against the Revenue.
13. Thus, the learned counsel argued that both the reasons given by the learned AO for initiation of proceedings under Section 147 were not justified. For assumption of jurisdiction under Section 147 formation of belief by the AO about escapement of income chargeable to tax from assessment was prerequisite. The reasons recorded by the AO had to have a live link with the formation of belief about escapement of income. The belief had to be based on reasons which were relevant and material. If there was no rational and intelligible nexus between the reasons and the belief and the belief was such which no one properly instructed on facts and law could reasonably entertain, the initiation of proceedings in itself was required to be quashed. In support of these contentions the learned counsel placed reliance on the judgments in Calcutta Discount Co. Ltd. v. ITO , Ramnarain Bhojnagarwalla v. ITO , VXL India Ltd. v. Asstt. CIT , Birla VXL Ltd. v. Asstt. CIT . Vishnu Borewell v. ITO and Bhubaneswar Stock Exchange v. Asstt. CIT (2005) 95 TTJ (Ctk) 1033. The learned counsel argued that the reference to assessment order for asst. yr. 2001-02 in the impugned order of the learned CIT(A) was not justified because the reasons were recorded by the AO on 27th Oct., 2003, whereas the assessment order was passed on 26th March, 2004. Even otherwise, the reasons were unsustainable on the facts and in the circumstances of the case.
14. During the course of arguments the learned counsel for the assessee argued that the fact that the earlier assessment was made under Section 143(1) without issue of notice under Section 143(2) could not justify initiation of proceedings under Section 147 in the absence of any fresh material on record. That showed that the assessment was reopened for making roving or fishing enquiries. In support of this contention reliance was placed on the decision of Tribunal, Chandigarh in the case of Manish Ajmera v. Asstt. CIT (2005) 96 TTJ (Chd) 896 : (2005) 95 LTD 111(Chd).
15. The learned counsel vehemently opposed the action of the learned CIT(A) of announcing findings and directions under Section 150(1) in respect of the following additions made in the assessment order under Section 147:
Rs.
(i) Expenditure on aircraft 2,00,000 (ii) Amount refundable to Jindal Strips 45,25,628 (iii) Depreciation on hydraulic excavator 14,92,626 (iv) Interest on term loan 3,68,219 (v) Alleged undervaluation of closing stock 3,98,193
In the proceedings of assessment under Section 147 of the Act, Shri Tulsiyan argued, the powers of the AO were limited to look into items/issues in respect of which the proceedings were initiated. Any item/issue which was not in contemplation of the AO at the time of recording of reasons under Section 148 could not be subjected to verification/examination in the proceedings under Section 147. The expression "any other income which comes to his notice subsequently in course of the proceedings under this section" employed in Section 147 only empowered the AO to tax that escaped income which came to his notice while examining the items escaping assessment as recorded in the reasons under Section 148. That expression could not be construed to mean that the AO had been conferred power to conduct roving and fishing enquiries on issues/items unconnected with initiation of proceedings under Section 147. In the case of the assessee the learned AO had travelled far beyond the scope of Section 147 by making roving and fishing enquiries and thereafter additions/disallowances. The action of the learned AO was contrary to the judgment of jurisdictional High Court in the case of Vipan Khanna v. CIT (supra), as also the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (supra). The learned counsel contested the findings and directions given by the learned CIT(A) in the impugned order in this respect purporting to act under Section 150(1) on the following grounds:
(a) The directions issued by the learned CIT(A) purportedly under Section 150(1) of the Act is beyond jurisdiction and bad in law.
(b) The learned CIT(A) failed to appreciate that Section 150(1) does not confer power to issue directions to the AO to initiate proceedings under Section 147 of the Act.
(c) Even otherwise, the so-called findings recorded by the learned CIT(A) are baseless, devoid of any merit and unsustainable in law.
16. The learned counsel argued that the findings/directions given by the learned CIT(A) under Section 150(1) were intended to grant extended time to the AO for issue of notice under Section 148 which was otherwise barred by limitation of time laid down under Section 149 of the Act. In the case of the assessee assessment order under Section 143(3) r/w Section 148 had been framed by the AO on 29th Dec, 2004. Therefore the last date for issue of any further notice under Section 148 was before the expiry of four years from the end of the relevant assessment year i.e. 31st March, 2005. The impugned order of the learned CIT(A) itself was made on 31st May, 2005. On that date no further notice could be validly issued by the AO under Section 148. To circumvent the time-limit provided under Section 149 and to somehow bring to tax alleged incomes/additions which the learned CIT(A) had deleted following the ratio of binding judgment in the case of Vipan Khanna (supra), he issued so-called directions under Section 150(1). This action of the learned CIT(A) was contrary to law. For that purpose, the learned counsel placed reliance on the decision of Tribunal, Kolkata, in the case of Plastic Concern v. Asstt. CIT (1998) 61 TTJ (Cal) 87, wherein relying upon the decision of Hon'ble Madras High Court in N. Naganatha Iyer v. CIT (1966) 60 ITR 647 (Mad), the Tribunal had held that what the AO could not do directly, could not be done indirectly through the medium of appellate/revisionary orders. In support of these contentions, the learned counsel for the assessee also relied upon the judgments in the cases of CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617: (2002) 256 ITR 1 (Del)(FB), Windson Electronics (P) Ltd. & Anr. v. Union of India & Ors. . Durgabati & Smt. Narmadabala Gupta v. CIT , Raja Yadvendra Datt Dube v. State of Uttar Pradesh (1964) 54 ITR 506 (All) and Tribunal order in the case of Babulal Lath v. Asstt. CIT (2003) 78 TTJ (Mumbai) 14 : (2002) 83 ITD 691 (Mumbai).
17. The learned counsel for the assessee took us closely through the provisions of Sections 150 and 153 and he pointed out that the meaning of the term "finding or direction" as contemplated under Section 150 has been elucidated under Expln. 2 to Section 153(3). The effect of the second Explanation to Section 153(3) was that where the income of an assessee had been excluded from one assessment year and it had to be included in another assessment year, that had been fictionally treated for the purpose of Section 150 as a proceeding in consequence or to give effect to any finding or direction contained in an order. In such circumstances the bar of limitation was lifted. For that proposition reliance was placed on the judgment of Hon'ble Bombay High Court in the case of Ambaji Traders (P) Ltd. v. ITO and of Hon'ble Andhra Pradesh High Court in the case of B.A.R. Abdul Rahman Saheb v. ITO . Furthermore the Hon'ble Supreme Court in the case of CIT v. S. Raghubir Singh Trust held that the word 'finding' in the second proviso to Section 34(3) of the 1922 Act meant a finding necessary for giving relief in respect of the assessment for the year in question. If any finding was not necessary for the disposal of appeal before the learned CIT(A) such finding could not be said to be a finding under Section 150(1). The same view was taken by Hon'ble Supreme Court in the case of ITO v. Murlidhar Bhagwan Das . In the instant case the appellate authority had merely recorded a finding in a round about way so as to enable the AO to initiate proceedings under Section 147 in relation to the same assessment year with a view to bye-pass the time-limit provided under Section 149. Relying upon the judgment of Hon'ble Madras High Court in the case of N.N. Iyer v. CIT (supra), the learned counsel argued that when the AO had no jurisdiction over a particular issue, the appellate authority could not confer such a jurisdiction by giving a direction to that effect.
18. During the course of proceedings before us, the learned counsel for the assessee also addressed us at length on the merit of the disallowances/additions in respect of which the learned CIT(A) has given the alleged findings/directions under the provisions of Section 150(1).
19. In relation to ground of appeal No. 11 the learned counsel for the assessee argued that the provisions of Section 115JA created a legal fiction by which the total income is deemed to be 30 per cent of the book profit. It was trite proposition in law that a legal fiction has to be strictly construed. Liability to pay tax under Section 115JA arose only if the total income computed under the general provisions of the Act was less than 30 per cent of the book profit. Such event could not take place prior to the completion of assessment by the AO and certainly not at the time when the advance tax instalments become due. In this view of the matter provisions of Sections 234B and 234C levying interest could not be invoked in relation to tax liability determined under Section 115JA. In support of these contentions the learned counsel placed reliance on the following Tribunal decisions:
(i) Dy CIT v. Samir Diamond Mfg. (P) Ltd. (1997) 59 TTJ (Ahd) 1;
(ii) Tej International (P) Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 650;
(iii) Kwality Biscuits Ltd. v. CIT >
(iv) Steel Authority of India Ltd. v. Dy. CIT (1991) 40 TTJ (Del) 559 : (1991) 38 ITD 193 (Del);
(v) Bhushan Steels & Strips Ltd. v. Dy. CIT (ITA No. 3727/Del/1997) [reported at (2004) 91 TTJ (Del) 108-Ed.];
(vi) Asstt. CIT v. Pratappur Sugar & Industries Ltd. (ITA No. 2619/Kol/2002);
(vii) Jt. CIT v. IFGL Refractories Ltd. in ITA No. 1360/Cal/1999, dt. 19th Feb., 2002.
In relation to ground of appeal No. 12 directed against levy of interest under Section 234D of the Act, the learned counsel argued that since the assessment framed by the AO under Section 143(3) r/w Section 147 was itself bad in law and void ab initio the question of levy of any interest under Section 234D did not arise. In any case the provisions of Section 234D had been inserted by the Finance Act, 2003, w.e.f. 1st June, 2003. In the instant case the return of income had been filed by the assessee and had already been processed under Section 143(1) vide intimation dt. 18th Dec, 2000 and the refund was granted to the assessee Since the refund was granted to the assessee prior to insertion of the provisions of Section 234D, no interest could be levied under that provision in the case of the assessee. In support of this contention the learned counsel placed reliance on the judgments in the cases of S.S. Gadgil v. Lal & Company and KM. Sharma v. ITO . Without prejudice, the learned counsel argued that as the provisions of Section 234D had been inserted w.e.f. 1st June, 2003, the AO had no authority for levy of interest for the period prior to 1st June, 2003. At best, the AO could charge interest only in respect of the period subsequent to 1st June, 2003.
20. The learned Departmental Representative argued that in this case prior to issue of notice under Section 148, only an order of intimation under Section 143(l)(a) had been made. Notice under Section 148 was served on the assessee before the expiry of four years from the end of the assessment year. In these circumstances the only requirement in law was that the AO should have reasons to believe that assessee's income chargeable to tax had escaped assessment. In the instant case the learned AO recorded detailed reasons in writing. He pointed out escapement of income from assessment both under the general provisions of the Act and under the provisions of Section 115JA of the Act. Thus, all the conditions laid down for initiation of proceedings under Section 147 were duly satisfied and the assessee's challenge to initiation of proceedings under Section 147 was uncalled for. The assessee's challenge to initiation of proceedings under Section 147 was confined to his arguments on the merits of the reasons recorded by the learned AO. Relying upon the Supreme Court judgments in Phool Chand Bajrang Lal & Anr. v. ITO and CIT v. N. Kishore Settlement , the learned Departmental Representative argued that sufficiency or adequacy of reasons recorded by the AO was not justiciable. Reasons as recorded by the AO could be subject to challenge only on the ground of irrationality or having been based on no material at all. In the present case the learned AO's finding of escapement of income from assessment was based on the facts not disputed by the assessee. It was also not the case of the assessee that there was no application of mind on the part of the AO. There was absolutely no reason to consider that the AO had not acted bona fide. That being so, initiation of proceedings under Section 147 was in order and the assessee's ground of appeal challenging the initiation of Section 147 proceedings deserved to be rejected.
21. On merits of the assessment the learned Departmental Representative argued that the reliance placed by the assessee on earlier years' treatment was not justified. The assessee merely claimed depreciation in the return of income for asst. yr. 1999-2000 without making any declaration of exercise of his option in accordance with the second proviso to sub-r. (1A) of r. 5. That return of income was only processed under Section 143(1). That being so, it was open to the AO to disallow the assessee's claim of depreciation that had not been made in accordance with the provisions of the Act. The learned Departmental Representative strongly relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. British Paints in this behalf.
22. The learned Departmental Representative argued that the assessee had in its books of accounts worked out unduly high and inflated profit from the business of power generation and distribution. That was done by the assessee as a device to reduce the assessee's tax liability arising under the provisions of Section 115JA of the Act. The assessee's argument that it had charged power at the same rate at which the power was being supplied by State Electricity Board ignored the fact that it was a case of captive power generation. On account of integration with the assessee's manufacturing units the assessee did not incur any transmission loss of power. In the case of a State Electricity Board there was loss of power in transmission upto 40 per cent of the power supplied. That was the reason for supply to individual customers at higher rate than the price at which State Electricity Board received power supply from the assessee. In the case of the assessee cost of power to manufacturing unit should have been estimated at the same rate at which the assessee supplied power to State Electricity Board. There was no rational basis as to why the rate at which power was supplied by the SEB to its consumers should be treated as market price and not the rate at which the power was supplied by the assessee to SEB. As far as the assessee was concerned, the market price was the price charged from the third party i.e. SEB. Hence the same price was required to be considered as price of power consumption by the manufacturing units of the assessee.
23. The learned Departmental Representative argued that the AO was not bound by the unreasonable entries made by the assessee in its books of accounts. Clause (iv) of Explanation appended to Section 115JA required the AO to reduce from, the book profit, "the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power". There was nothing in Clause (iv) to suggest that the AO was fettered by the profit worked out in the assessee's books of accounts. The AO was required to reduce the amount of profit actually derived by the assessee from business of generation and distribution of power and not the artificially inflated profit worked out in the accounts of the assessee with an eye on the tax liability under the provisions of Section 115JA.
24. The learned Departmental Representative strongly defended the action of the learned CIT(A) in relation to the assessment of items of income not referred to in the reasons recorded by the AO. He argued that the AO made the aforesaid additions and disallowances in the assessment order under Section 143(3) r/w Section 147 on 29th Dec, 2004. As the assessment proceedings were already pending, the AO could not have issued a fresh notice under Section 147 after recording fresh reasons based on escapement of income noticed by the AO after recording of reasons earlier on 27th Oct., 2003 but before completion of assessment on 29th Dec, 2004. Otherwise, the AO had time-limit available to him at that point of time. The assessee's challenge to those disallowances and additions was accepted by the learned CIT(A) for technical reasons only. For that reason provisions of Section 150 were attracted and the learned CIT(A) was justified in invoking the provisions of Section 150.
25. During the course of hearing before us the learned Departmental Representative took us closely through the relevant portions in the assessment order of the AO and the impugned order of the learned CIT(A), which we have already narrated earlier in this order.
26. We have carefully considered the rival submissions. First ground in this appeal is directed against initiation of proceedings under Section 147. The assessee's challenge in this behalf is based on the reasons recorded in writing by the learned AO before issue of notice under Section 148 for his belief that the assessee's income chargeable to tax for asst. yr. 2000-01 had escaped assessment. During the course of hearing before us the learned counsel for the assessee has vehemently argued that both the escapement from assessment, viz., excess depreciation claimed in relation to the assessment under general provisions of the Act and excess deduction claimed under Clause (iv) of Explanation in relation to computation of the assessee's tax liability under Section 115JA are not tenable. The arguments advanced by the learned counsel in both respects are the same arguments on the basis of which the assessee has challenged assessment of these two amounts in the assessment order under Section 147 r/w Section 143(3) made by the AO. In other words, the assessee has disputed the AO's 'reasons to believe' on merits of the case as made out by the learned AO in the reasons recorded by him. To accept these arguments of the learned counsel would amount to holding that if assessment of an income in the assessment order under Section 147 fails, such failure would invalidate the reasons as recorded by the AO. To put it differently the case of the assessee before us is that the AO should not only entertain belief that assessee's income chargeable to tax has escaped assessment, his reasons for such belief should stand the test of ultimate appeal as well. In our humble opinion, that is not the correct legal position. At the stage of issue of notice under Section 148 the AO only initiates the proceedings for assessment and he does not make any assessment at all. After having recorded the reasons the hands of the AO are not tied and he has a discretion to examine the explanation of the assessee on merits and if convinced, not to assess the amount that he believed at the time of initiation of assessment proceedings as having been escaped assessment. To hold otherwise would render proceedings after service of notice under Section 148 on the assessee to be an empty formality.
27. In the case of Calcutta Discount Company Ltd. v. ITO (supra), the Hon'ble Supreme Court have stated the legal position relating to "reasons to believe" in the following words:
The expression 'reason to believe' postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the ITO : the forum of decision as to the existence of reasons and the belief is not in the mind of the ITO. If it be asserted that the ITO had reason to believe that income had been underassessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the ITO holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief; in other words, the ITO must on information at his disposal believe that income has been underassessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information.
28. It, therefore, follows that in a case where initiation of proceedings under Section 147 is disputed in relation to reasons to believe as recorded by the AO, the existence of the belief and the reasons for the belief can be called in question but not the sufficiency of the reasons.
29. In the case of S. Narayanappa & Ors. v. CIT , the Hon'ble Supreme Court have reiterated this position in the following words:
But, the legal position is that if there are in fact some reasonable grounds for the ITO to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the ITO to issue the notice under Section 34. Whether these grounds are adequate or not is not a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the ITO to act is not a justiciable issue. It is of course open for the assessee to contend that the ITO did not hold the belief that there had been such nondisclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again, the expression 'reason to believe' in Section 34 of the IT Act does not mean a purely subjective satisfaction on the part of the ITO. The belief must be held in good faith : it cannot be merely a pretence.
30. In the case of ITO v. Lakhmani Mewal Dass , the Hon'ble Supreme Court have elucidated the legal position in relation to "reasons to believe" recorded by an AO in the following words:
Once there exist reasonable grounds for the ITO to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the Court to investigate. The sufficiency of the grounds which induce the ITO to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the ITO did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the ITO in starting proceedings in respect of income escaping assessment is open to challenge in a Court of law.
31. In the recent judgment in the case of Raymond Woollen Mills Ltd. v. ITO , this position has once again been reiterated as under:
In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the Court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the ITO after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be on titled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs.
The correct legal position, therefore, is that at the stage of initiation of proceedings under Section 147, the AO records the reasons leading to formation of his belief that assessee's income chargeable to tax had escaped assessment. The reasons recorded by the AO must be based on some material and the formation of belief should be in earnestness and on application of mind. However, the reasons recorded by the AO need not be proved correct after a detailed examination of the facts and circumstances of the case and of law applicable. That is an exercise to be undertaken during the course of assessment proceedings. In the instant case we find the arguments led by the assessee against the AO's reasons to believe touch upon many of the inferences drawn by the AO at the time of initiation of proceedings under Section 147. It is not the case of the assessee that the inferences drawn by the AO are not based on facts and circumstances of the case. The assessee has also not been able to show that the reasons recorded by the learned AO are mere pretence and the view taken by him is such that no person reasonably instructed in law would take. On the contrary, we found animated debate on the contentions of the learned AO during the course of proceedings before us. We, therefore, hold that reasons to believe as recorded by the learned AO meet the requirements of provisions of Section 147. We, therefore, reject assessee's ground of appeal disputing initiation of proceedings under Section 147.
32. Ground of appeal No. 2 is directed against the disallowance of depreciation on turbines to the extent of Rs, 2,21,40,1312 out of Rs. 3,80,50,138 claimed by the assessee on the ground that the assessee was entitled to depreciation on straightline basis and not on the WDV basis. The learned AO held that under rules various power generating turbines put to use during the financial year 1998-99 were entitled to depreciation on straightline method. During the course of proceedings before the learned CIT(A), the assessee pointed out that under r. 5(1A) of IT Rules, the assessee was given an option to claim depreciation if he so desired on WDV basis instead of straight line method basis. Since the assessee had opted for depreciation on WDV basis, the AO erred in reducing the assessee's claim of depreciation to an amount worked out on the basis of straight line method. The learned CIT(A) held that the assessee had not exercised his option and, therefore, the AO rightly calculated depreciation on straight line method. On consideration of the matter we find that as per second proviso to r. 5(1A), the assessee may, instead of the depreciation specified in Appen. IA on his option, be allowed depreciation under sub-r. (1) r/w Appen. I i.e. on WDV basis if such option was exercise by the assessee before the due date for furnishing the return of income under Section 139(1) of the Act for asst. yr. 1998-99 or for the assessment relevant to the previous year in which the assessee began to generate power, whichever is later. It is seen that no particular format or procedure has been laid down in the second proviso in relation to exercise of option by an assessee. Second proviso only says that option is to be exercised before the due date for furnishing the return of income under Section 139(1) for the asst. yr. 1998-99 in respect of power generating undertaking then existing and for the first assessment year in which a new undertaking begins to generate power. The case of the assessee is that it began to generate power during the previous year relevant to asst. yr. 1999-2000. As per Annex. D annexed to the computation of income chargeable to tax filed along with the return of income for asst. yr. 1999-2000, the assessee had claimed depreciation in accordance with sub-r. (1) r/w Appen. I. Thereafter the assessee's return of income was processed under Section 143(1) on 29th Sept., 2000 and no adjustment in that behalf was made by the AO. According to the learned counsel for the assessee the return of income filed before the due date of furnishing the return under Section 139(1) for asst. yr. 1999-2000, made proper compliance to the requirements of the second proviso to r. 5(1A) of IT Rules. On consideration of the matter we accept this argument. As noticed earlier the provisions of IT Rules, 1962 have not laid down any particular procedure for exercise of option by the assessee. That being so the assessee could find the occasion to exercise his option while filing the return of income for asst. yr. 1999-2000. We do not appreciate the logic of the contention of the learned counsel CIT(A) that even after having claimed depreciation under the general provisions of Appen. I, the assessee had not exercised his option as contemplated in the second proviso. We, therefore, allow assessee's ground of appeal No. 2 and direct the learned AO to allow the assessee depreciation as admissible to the assessee under sub-r. (1) of r. 5 r/w Appen. I.
33. Ground of appeal No. 3 is directed against the assessee being allowed reduction under Clause (iv) of Explanation appended to Section 115JA at Rs. 19,83,59,705 instead of Rs. 78, 78, 91, 075 as worked out in the books of accounts of the assessee. Facts of the case in this behalf have already been briefly stated by us earlier in this order. The dispute has arisen because the assessee has worked out transfer pricing of power supplied to its industrial units from captive power generation plants at the rate at which State Electricity Board was supplying power for industrial units. According to the learned AO, the assessee has inflated the profits of power generation plants in this manner. He has, therefore, determined the profits of the assessee's power generation and distribution business at the selling rate at which the assessee supplied power to SEB. During the course of hearing before us, considerable arguments were made from both sides justifying the transfer pricing adopted by them. In our opinion, the entire debate is unnecessary, inasmuch as insofar as the provisions of Section 115JA are concerned, Clause (iv) of Explanation does not empower the AO to determine an amount other than the amount as worked out in the assessee's P&L a/c. It is not the case of the AO that the assessee's P&L a/c has not been prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956.
34. In the case of Bhilai Wires (P) Ltd. v. CIT , the Hon'ble Madhya Pradesh High Court have observed that Section 115J of the Act is a special provision relating to certain companies and it lays down that where in the case of such a company the total income, as computed under the provisions of the Act, is less than 30 per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. Their Lordships have held, "The Explanation further lays down that for the purposes of this section, book profit means the net profit as shown in the P&L a/c for the relevant previous year prepared under the Companies Act as increased by the conditions." Therefore, in a case where the income is less than 30 per cent of the book profit then the company has to prepare the account of profit and loss in terms of Section 205 of the Companies Act. In other words, it is the profit of the assessee as computed under Section 205 of the Companies Act that is the prime mover of the provisions of Section 115J.
36. In the case of Surana Steels (P) Ltd. v. Dy. CIT , the Hon'ble Supreme Court have held that under the provisions of Section 115J, first income is computed under the general provisions of IT Act and thereafter book profit is computed in accordance with the provisions of the Companies Act. The Hon'ble apex Court have further observed that provisions of Section 115J are to be interpreted taking into account the meaning of expression under the provisions of the Companies Act. Their Lordships have observed:
A comparison may be made with the language employed in Section 3(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, wherein a distinction is made between 'accumulated loss' and 'cash loss'. Learned senior counsel also referred to Garden Silk Weaving Factory v. CIT , wherein this Court has held that unabsorbed depreciation was part of loss. Learned Counsel also referred to Section 349(4)(1) of the Companies Act which uses the expression 'excess of expenditure over income' which is narrower in scope and excludes depreciation. We find substance in the submission. There is no reason to assign to the term 'loss' as occurring in Section 205, proviso Clause (b), of the Companies Act, a meaning different from the one in which it is understood therein solely because it is being read along with Section 115J of the IT Act.
Section 115J, Explanation, Clause (iv), is a piece of legislation by incorporation. Dealing with the subject, Justice G.P. Singh states in Principles of Statutory Interpretation (7th Edn., 1999):
Incorporation of an earlier Act into a latter Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the latter. When an earlier Act or certain of its provisions are incorporated by reference into a latter Act, the provisions so incorporated become part and parcel of the latter Act as if they had been 'bodily transposed into it'. The effect of incorporation is admirably stated by Lord Esher, M.R. : 'If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act as if they had been actually written in it with the pen, or printed in it', (p. 233):
Even though only particular sections of an earlier Act are incorporated into the latter, in construing the incorporated sections it may be at times necessary and permissible to refer to other parts of the earlier statute which are not incorporated. As was stated by Lord Blackburn : 'When a single section of an Act of Parliament is introduced into another Act, I think it must be read in the sense it bore in the original Act from which it was taken, and that consequently, it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other sections are not incorporated in the new Act', (p. 244). Once we have ascertained the object behind the legislation and held that the provisions of Section 205 quoted hereinabove stand bodily lifted and incorporated into the body of Section 115J of the IT Act, all that we have to do is to read the provisions plainly and apply the rules of interpretation if any ambiguity survives. Section 205(1), proviso Clause (b) of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. The words 'the amount provided for depreciation' and 'arrived at in both cases after providing for depreciation' make it abundantly clear that in this clause 'loss' refers to the amount of loss arrived at after taking into account the amount of depreciation provided in the P&L a/c'.
(Emphasis, italicized in print, supplied) It would be seen that in the case of Surana Steels (P) Ltd. (supra) the Hon'ble Supreme Court have held that for the purposes of incorporating the provisions of Section 115J by virtue of doctrine of incorporation various provisions of the Companies Act, 1956 should be held applicable. In other words for the purpose of quantification of the amount to be excluded from the book profit by virtue of Clause (iv) of Explanation, it is the provisions of the Companies Act, 1956 that would apply. If the amount of profit pertaining to the business of power generation and distribution as provided for in the books of account of the assessee is not in accordance with the provisions of the Companies Act, then for the purpose of adjustment as per Clause (iv) the amount of profit as computed in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act has to be substituted. Conversely, if the amount provided in the books of accounts of the assessee is found to be correctly provided in accordance with the provisions of the Companies Act, 1956, the amount as provided in the books of accounts cannot be ignored and substituted by what in the opinion of the AO is the correct amount of profit of the assessee from the business of power generation and distribution.
37. In the case of Krishna Oil Extraction Ltd. v. CIT , the Hon'ble Madhya Pradesh High Court have held that the depreciation and loss have to be worked out in terms of the borrowed Act, i.e., under Section 205(l)(b) of the Companies Act and not under the IT Act. The same view has been held by Hon'ble Kerala High Court in their judgments in the cases of CIT v. Malayala Manorama Co. Ltd. and CIT v. Dynamic Orthopedics (P) Ltd. . During the course of hearing before us and even during the course of proceedings before the authorities below, there is no issue that the amount provided for in the books of accounts of the assessee as profit of power generation and supply business is not in accordance with the provisions of the Companies Act.
38. That apart, there is a clear authority of Hon'ble Supreme Court that while working out the assessee's liability of tax payable under the provisions of Section 115J, the AO cannot question the correctness of the P&L a/c prepared by the assessee company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Sch. VI to the Companies Act. In the case of Apollo Tyres Ltd. v. CIT , that is the first question considered by Hon'ble Supreme Court:
Can an AO while assessing a company for income-tax under Section 115J of the IT Act question the correctness of the P&L a/c prepared by the assessee company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Sch. VI to the Companies Act ?
In that case the assessee company changed its method of accounting for working out depreciation allowance and provided for arrears of depreciation of earlier years worked out on the new basis in its P&L a/c. The AO while considering the case of that assessee recomputed the book profit so as to exclude the provision made for arrears of depreciation. On Revenue's appeal Hon'ble Kerala High Court accepted the adjustment as made by the AO. On assessee's appeal, the Hon'ble Supreme Court reversed the judgment of Hon'ble Kerala High Court and restored the order of the Tribunal on the basis that for the purpose of computation of book profit within the meaning of the provisions of Section 115J, the AO under the IT Act has to accept the authenticity of accounts with reference to the provisions of Companies Act as certified by the statutory auditors. The Hon'ble Supreme Court have stated the legal position in the following words:
The above speech shows that the IT 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 115J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, Section 115J makes the income reflected in the company's books of account 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 and III of Sch. VI to the 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 AO under the TV Act has to accept the authenticity of the accounts 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 scrutinised and certified by the 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 AO to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on Sub-section (1A) of Section 115J of the IT Act in support of the above contention is misplaced. Sub-section (1A) of Section 115J does not empower the AO 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 IT 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 IT 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 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the legislature intended the AO to reassess the company's income, then it would have stated in Section 115J that 'income of the company as accepted by the AO'. In the absence of the same and on the language of Section 115J, it will have to be 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, the AO while computing the income under Section 115J 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 AO 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 AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to Section 115J.
(Emphasis, italicized in print, supplied by us)
39. In view of the discussion in the foregoing paras, we had that for the purpose of adjustment as provided in Expln. (iv) to Section 115JA the AO cannot substitute the amount of profit derived by an industrial undertaking from the business of generation or generation and distribution of power as certified by the auditors of the company to be in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. We, therefore, delete the addition made by the AO while computing the assessee's income chargeable to tax under Section 115JA in this behalf and restore the working of the assessee in relation to Expln. (iv) to Section 115JA.
40. Ground of appeal No. 4 in this appeal is directed against the so-called "findings" and "directions" made by the learned CIT(A) and issued to the AO for the purpose of initiation of proceedings under Section 147 once again in the case of the assessee irrespective of the provisions of Section 149 of the Act. Brief facts in this regard have already been enumerated by us in the earlier part of the order. The learned CIT (A) has purported to act under the provisions of Section 150.
41. On consideration of the matter we find that the learned CIT(A) has made a self-contradictory order or worse still made a futile attempt to introduce assessment of such income from back door, as is admittedly not in accordance with the dictates of jurisdictional High Court In this case the AO has in the assessment order Under Section 147 r/w Section 143(3) made certain additions not enumerated anywhere in the reasons for issue of notice under Section 148 as recorded by the AO. The assessee challenged these additions, among other grounds, on the ground of the additions being contrary to the judgment of jurisdictional High Court in the case of Vipan Khanna v. CIT (supra). In the impugned order the learned CIT(A) accepts that such additions are not sustainable following the ratio of the jurisdictional High Court in the case of Vipan Khanna (supra). Revenue has not come in cross-appeal or cross-objection to this part of the order of the learned CIT(A) and the same has, therefore, become final. In the present appeal we are concerned with the short question as to whether after having deleted the addition made by the AO, the learned CIT(A) could issue finding and/or directions for assessment of the same additions to the income declared by the assessee by way of a fresh notice under Section 148 irrespective of the time-limit. From the impugned order it is quite clear that in the opinion of the learned CIT(A) the decision of the jurisdictional High Court in the case of Vipan Khanna (supra) deserves a reconsideration by the Hon'ble Punjab & Haryana High Court. The learned CIT(A) does not have the matter at that and proceeds to devise a way out so that the very same addition that he deletes, may later on be made to the assessee's returned income. In our opinion, it amounts to circumvent the effect of a binding judgment of jurisdictional High Court that cannot be permitted. To put it simply an assessment order or any of its part is either legally tenable or not legally tenable, it cannot be both. We, therefore, hold that the impugned order of the learned CIT(A) in this respect is self-contradictory. According to the learned CIT(A), following the judgment of the jurisdictional High Court in the case of Vipan Khanna (supra), proceedings under Section 147 as initiated by the AO, could not be misused for making roving and fishing enquiries so as to explore further items of income having escaped assessment. He, therefore, deletes the additions in due deference to the judicial pronouncement of the jurisdictional High Court. How can the learned CIT(A) then issue any finding or direction to the AO to initiate proceedings under Section 147 afresh for assessment of those very additions. In other words, according to the learned CIT(A) while the proceedings under Section 147 cannot be misused for the purpose of making fishing and roving enquiries, nonetheless proceedings under Section 147 can be misused for making fishing and roving enquiries for the purpose of initiating proceedings under Section 147 next time. To say the least, we cannot appreciate such convoluted logic of the learned CIT(A). We, therefore, allow the assessee's ground of appeal No. 4 and hold that the impugned order of the learned CIT(A) contains no finding or directions within the meaning of Section 150 in respect of the disputed additions in question.
42. Ground of appeal Nos. 5 to 10 are directed against the decision on the merits as given by the learned CIT(A). It so happened that after deleting the additions in question as not being legally tenable in the ratio of the judgment of jurisdictional High Court in the case of Vipan Khanna (supra), the learned CIT(A) considered it necessary to examine the additions independently on merit. He has, therefore, discussed each one of the additions in the impugned order and decided on merits in favour of the Revenue and against the assessee, except in relation to the addition of Rs. 15,23,000 made in para 14 of the assessment order which the learned CIT(A) has not approved of on merits. Thereafter, the learned CIT(A) has proceeded to give his "findings" and "directions" as discussed by us in the context of assessee's ground of appeal No. 4. We do not propose to go into the merit of these additions for the simple reason that part of the impugned order deleting the additions in question following the binding judgment of jurisdictional High Court has become final, inasmuch as Revenue is neither in appeal nor in cross-objections against that part of the impugned order of the learned CIT(A). We are, therefore, of the view that any discussion on the merits of these additions would be entirely academic. We, therefore, do not adjudicate upon the assessee's grounds of appeal Nos. 5 to 10 as being entirely academic.
43. Ground of appeal No. 11 is directed against levy of interest under Sections 234B and 234C. According to the learned counsel for the assessee the provisions of the Act pertaining to payment of advance tax do not apply to any liability of tax chargeable under the provisions of Section 115JA of the Act. We find that this issue is covered in favour of the Revenue and against the assessee by the judgment of Hon'ble Madras High Court in the case of CIT v. Holiday Travels (P) Ltd. , of Hon'ble Kerala High Court in the case of Karim Tharuvi Tea Estates Ltd. v. Dy. CIT (2000) 163 CTR (Ker) 565, of Hon'ble Gauhati High Court in the case of Assam Bengal Carriers Ltd. v. CIT of Hon'ble Madhya Pradesh High Court in the case of Itarsi Oils & Flours (P) Ltd. v. CIT and of Hon'ble Bombay High Court in CIT v. Kotak Mahindra Finance Ltd. . There is of course a contrary judgment of Hon'ble Karnataka High Court in favour of the assessee and against the Revenue on the same point in the case of Kwality Biscuits Ltd. v. CIT (supra). However, preponderance of the judicial opinion is in favour of Revenue. In the case of CIT v. B.C. Srinivasa Setty , Hon'ble Supreme Court have held that preponderance of judicial opinion should be respected. We, therefore, decide this ground of appeal in favour of Revenue and against the assessee.
44. Ground of appeal No. 12 is directed against levy of interest under Section 234D of the Act. The contention of the assessee is that the provisions of interest under Section 234D were inserted by the Finance Act, 2003, w.e.f. 1st June, 2003. The same are, therefore, not applicable to asst. yr. 2000-01. Alternatively the assessee has argued that such interest cannot be levied for the period prior to 1st June, 2003. On consideration of the matter we do not see merit in the main contention of the assessee but we agree with the alternate contention of the assessee. Levy of interest to be computed with reference to period of time has to come into force immediately and it cannot be bound to any particular assessment year. At the same time it would be wholly unreasonable to charge interest for the period when the provisions of Section 234D were not on the statute book. We, therefore, allow the assessee's ground of appeal No. 12 partially and direct the AO to compute interest chargeable under Section 234D, if any, w.e.f. 1st June, 2003.
45. In the result, this appeal is partly allowed.