Income Tax Appellate Tribunal - Kolkata
Sutlej Cotton Mills Ltd. vs Assistant Commissioner Of Income-Tax on 26 October, 1992
Equivalent citations: [1993]45ITD22(KOL)
ORDER
1. This appeal raises the question whether the profit arising from sale of a capital asset could be added to the book profits shown by the assessee for the purpose of imposing tax under Section 115J of the Income-tax Act, 1961.
2. Preliminary objection. --This appeal was posted for hearing before a Special Bench constituted by the President of the Income-tax Appellate Tribunal under Section 255(5) of the Income-tax Act, 1961. When the Bench assembled on September 8, 1992, to take up the matter, the Revenue presented a petition dated September 8, 1992, signed by Shri S. Halder, Appellate Assistant Commissioner, Central Circle-XII, Calcutta, stating that there was no difference of opinion on the point raised in this case, that the decisions so far rendered by the Benches of the Tribunal in the cases of V.V. Trans-Investments (P) Ltd. v. ITO [1992] 42 ITD 242 (Hyd), Asst. CIT v. Lallacherra Tea Co. (P) Ltd. [1992] 42 ITD 446 (Gauhati) and Buttwelded Tools (P) Ltd. v. Asst. CIT [1991] 39 ITD 432 (Mad) were in favour of the Revenue and references have been made to different High Courts that, when the matter was seized of by the High Court concerned, the question of referring the matter to a Special Bench of the Tribunal could not arise, that Sub-sections (3) and (4) of Section 255 should be read conjunctively so that unless there was a difference of opinion between the members of the Bench, a Special Bench cannot be constituted by the President and the views taken by the three Benches referred to above should be accepted. It was submitted that, in the circumstances, the constitution of the Special Bench was redundant and without jurisdiction.
3. Responding to this petition, it was contended on behalf of the assessee that there were no decisions of the Tribunal so far on the point raised in this case and, consequently, any reference pending in any High Court on that issue does not arise. It was submitted that the cases referred to related to different issues. Reference was made to the decision of the Supreme Court in the case of Union of India v. Paras Laminates Pvt. Ltd. [1990] 186 ITR 722 to contend that the President had the inherent power to constitute a Special Bench, even if there was no conflict of opinion among the Benches of the Tribunal. It was pointed out that the provisions of Section 255(5) were clear that such a Bench could be constituted to take up a particular case. Reference was also made to the order of the Tribunal in the stay petition in this case and it was pointed out that the Revenue had not objected when the Bench which passed that order had referred the matter to the President for constituting a Special Bench.
4. At that stage, it was found that the Revenue was not aware of the Supreme Court decision cited above and we, therefore, proceeded to hear the case on its merits. At the end of the day, the Revenue sought time to reply and the case was adjourned to September 17, 1992. On that day, learned standing counsel for the Revenue read out his written arguments both on the preliminary objection as well as on the merits of the appeal. Even though we normally do not entertain written arguments since they are usually prolix and deviate from an involved oral discussion of the case, we accepted a copy of the written submission only as an aide-memoire. In the course of that argument, it was contended that the decision of the Supreme Court having been rendered under the Customs Act, it could not be applied to the provisions of the Income-tax Act, that in view of the Rules of the Calcutta High Court, a Special Bench must have at least five members and not three and if a court takes upon itself the jurisdiction which it does not possess, its decision will amount to a nullity.
5. In order to consider the objection of the Revenue, we have to first read the provisions of Section 255. They are as follows :
" 255. Procedure of Appellate Tribunal. -- (1) The powers and functions of the Appellate Tribunal may be exercised and discharged by Benches constituted by the President of the Appellate Tribunal from among the members thereof.
(2) Subject to the provisions contained in Sub-section (3), a Bench shall consist of one judicial member and one accountant member.
(3) The President or any other member of the Appellate Tribunal authorised in this behalf by the Central Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he is a member and which pertains to an assessee whose total income as computed by the Income-tax Officer in the case does not exceed forty thousand rupees and the President may, for the disposal of any particular case, constitute a Special Bench consisting of three or more members, one of whom shall necessarily be a judicial member and one an accountant member.
(4) If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it.
(5) Subject to the provisions of this Act, the Appellate Tribunal shall have powers to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions, including the places at which the Benches shall hold their sittings.
(6) The Appellate Tribunal shall, for the purpose of discharging its functions, have all the powers which are vested in the income-tax authorities referred to in Section 131, and any proceeding before the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purpose of Section 196 of the Indian Penal Code, 1860 (45 of 1860 ), and the Appellate Tribunal shall be deemed to be a civil court for all the purposes of Section 195 and Chapter XXXV of the Code of Criminal Procedure, 1898 ( 5 of 1898 ). "
6. This Section shows that, generally, the Tribunal functions through Benches of two members and its procedure is regulated by itself. Subsection (3) provides for allocation of work among the Benches. Sub-Section (4) provides for resolution of differences among Benches. These two Sub-sections are independent of each other. While allocating the work under Sub-section (3), it is to be noted that cases relating to total income of less than Rs. 1 lakh can be allotted to members sitting singly if authorised to hear such cases. Other cases have to be allotted to Benches. In that context only, the President has been given the discretion to constitute a Special Bench consisting of three or more members for any particular case. Since this Section comes prior to Sub-section (4) which is a specific provision for resolving conflicts, and is independent of such a resolution process, the constitution of a Special Bench is not confined to such a resolution process. No doubt, where there are conflicts between Benches, the proper way of resolving such conflict can only be by constituting a larger Bench. But it does not preclude the President from constituting a Bench of three or more members for a particular case if it appears to him that the case is so complicated or raises a substantial issue that, in the interests of providing a certainty with respect to the law which is to be administered all over India, it should be decided by a Special Bench.
7. In the present case, the assessee had applied for stay of collection of taxes which was disposed of by order dated March 3, 1992, in S. P. No. 7 (Cal)-92. While rejecting the application for stay, the Bench had occasion to consider whether the assessee had a prima facie case. It was observed :
" The question raised in appeal is quite substantial and both the parties have much to argue in support of their respective stand. There are, therefore, circumstances to take the appeal out of turn. We accordingly direct that this appeal be fixed for hearing on April 27, 1992, for final disposal before an appropriate Bench.
The power and discretion to constitute a Special or larger Bench lies with the Hon'ble President of the Appellate Tribunal under Section 255(3) of the Act and the assessee is at liberty to approach the President under the above provision. We need say nothing more on this."
8. Thereafter, the Bench sent in their unanimous recommendation for constituting the Special Bench. Pursuant to this, the President considered that this was a fit case to be heard by a larger Bench because, there was no decided case on that issue and the matter has to be decided on first principles. Therefore, it would be appropriate for a Bench consisting of more than two Members to apply their minds to the question. The practice in such cases is to give wide publicity and invite intervention by affected parties. It enables the Bench to have the assistance of a wider Section of the Bar in arriving at a considered decision.
9. In the case of Paras Laminates Pvt. Ltd. [19901 186 ITR 722 (SC), which arose under the Customs Act, a Bench of the Customs, Excise and Gold (Control) Appellate Tribunal had perceived an error in an earlier decision and requested the President of that Tribunal to make a reference to a larger Bench. The Supreme Court pointed out that, even though there was no specific provision in that Act for making such a reference, that power should be constrained to be wide enough to enable the President to make a reference where members of a Bench find themselves unable to decide a case according to what they perceive to be the correct law and fact because of an impediment arising from an earlier decision with which they cannot honestly agree. The Supreme Court further observed (at page 727) :
" In such cases, it is necessary for the healthy functioning of the Tribunal that the President should have the requisite authority to refer the case to a larger Bench. That is a power which is implied in the express grant authorising the President to constitute Benches of the Tribunal for effective and expeditious discharge of its functions."
10. Though that case related to a difference of opinion among the Benches, the basic power of the President to regulate the functioning of the Benches has been affirmed by the Supreme Court and that principle equally applies to the functioning of the Income-tax Appellate Tribunal.
11. It is in this background that several contradictions showed up in the preliminary objection of the Revenue. Firstly, the cases referred to in the petition do not relate to the question raised in this case and the basis of the petition that different High Courts are seized of the matter is incorrect. Consequently, the point taken that the view of the three Benches of the Tribunal should be accepted is again incorrect. Secondly, since the functioning of the Tribunal is self-regulatory, the Rules of the Calcutta High Court have no relevance. Thirdly, while, on the one hand, it is stated in the petition that a Special Bench cannot be constituted, on the other hand, it is stated in the argument that a Bench should consist of five members. Fourthly, while, on one issue raised in the appeal it is claimed that the decisions already given in favour of the Revenue (though there are no such decisions), should not be departed from, it is argued that, on another issue raised in the appeal, an earlier decision of the Tribunal in favour of the assessee should be reversed. Moreover, the Revenue was not aware of the decision of the Supreme Court which has a bearing on the constitution of a Special Bench and that such an objection had been taken earlier before another Special Bench in the case of Dy. CIT v. Shree Lalit Fabrics (P) Ltd. [1992] 41 ITD 119 (Chandigarh) and had been rejected pointing out that it is the power of the President to allocate the work and cannot be questioned by the Members constituting the Bench. Yet, the same objection has been raised once again with the petition carrying an innuendo.
12. Learned standing counsel repeatedly stated that he was taking the objections " on instructions " but he did not reveal the authority who had instructed him to take the objection. We do not know whether it was the Departmental Representative or the Assessing Officer or the Commissioner of Income-tax who is the only person empowered by Section 253(2) to direct the Income-tax Officer to appeal to the Tribunal, However, this petition has been signed by Shri S. Halder, A.A.C., Central Circle-XII, Calcutta. We do not know how he has come into the picture. When we consider this along with the fact that the Revenue was unaware of the Supreme Court decision as well as the decision of the earlier Special Bench rejecting the objection to the constitution of a Special Bench, it appears to us that there has been no application of mind at the appropriate level for taking this objection. It was argued that the Special Bench should not be constituted only for the purpose of reversing a decision given already in favour of the Revenue. As mentioned already, there is no decision of the Tribunal in favour of the Revenue. Even if there had been such a decision, if it was wrong, we do not see how the Revenue could say that such a decision should never be reversed. On the other hand, if that earlier decision were right, we do not see how the Revenue could apprehend that such a decision would be reversed. It was stated that, if the decision in favour of the Revenue is reversed, then the collection drive for taxes would be jeopardised. This again is an untenable proposition. If the decision is incorrect, then surely the Revenue cannot be allowed to perpetuate an unjust collection drive. On the other hand, if the Tribunal were to find that the levy is correct, the Revenue would be strengthened in their right to collect the proper levy. It appears to us that the anxiety of the Revenue is to collect the tax first while keeping the appeals pending as long as possible so that even if the assessments were to be reversed, they would have had the benefit of the amounts collected in the meanwhile. In other words, the Revenue wants to take advantage of the delay in the disposal of appeals. Nobody can have a vested right in delay, much less the Government which is enjoined to see that justice is rendered as expeditiously as possible.
13. The petition contains the following sentence :
" If a Bench of the Tribunal on identical facts and law is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institution of integrity (sic) itself."
14. We find that this sentence has been taken out of context from the decision in the case of CIT v. L G. Ramamurthi [1977] 110 ITR 453 (Mad). The full passage in which this sentence occurs is as follows (at page 467) :
" It is worthwhile emphasising that if a Bench of a Tribunal on identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single judge takes a view different from the one taken by another judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly, if a Division Bench differs from the view taken by another Division Bench, it does not express disagreement and does not pronounce its different views, but has the matter posted before the Full Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal in the present case wanted to take an opinion different from the one taken by the earlier Bench, it should have placed the matter before the President of the Tribunal so that he could have referred the case to a Full Bench of the Tribunal, consisting of three or more members for which there is provision in the Act itself."
15. While this passage recognises the power of the President under the Income-tax Act to constitute Special Benches, the High Court only deprecated the practice of one Bench differing from another without referring the matter to the President for constitution of a larger Bench. As, admittedly, there is no difference of opinion at all involved, other than mere complexity of the problem, the anxiety expressed by the Revenue is a mere exercise to overcome the Bench. Thus the power of the President to regulate the functioning of the Benches by constituting the Benches is well-recognised. Since that power is a purely administrative act of allocating the work, the parties to the litigation can have no say in the matter as, otherwise, it would amount to granting them the privilege of choosing the Bench which is the exclusive power of the President.
16. We have to deal with this preliminary objection at length, as it was argued at length, only to highlight the fact that the persons conducting the litigation before the Tribunal on behalf of the Revenue appear to be quite confused, taking contradictory stands in the petition as well as in the arguments. The preliminary objection thus has no substance and deserves to be rejected.
17. Facts of the case. - The assessee is a public limited company running spinning mills.
18. The balance-sheet of the company as at March 31, 1986, indicated that the fixed assets had been revalued at Rs. 29,20,89,624 inclusive of additions as against Rs. 14,44,35,506 as at March 31, 1985. Note No. 8 in the balance-sheet and profit and loss account stated :
" 8. Buildings and plant and machinery of company, excluding those owned by the company at Kathu Unit under working arrangement as on March 31, 1986, have been revalued by the valuers appointed for the purpose and as per their valuation report, there has been a net increase, on the basis of current replacement cost, in the book values of the assets as on March 31, 1986, amounting to Rs. 12,56,11,905 which has been added to the respective fixed assets and credited to revaluation reserve. The revaluation having been made as on March 31,1986, after taking into consideration the book written down value as on that date, no depreciation of the incremental value is required for the year."
19. The assessee-company had investments in shares which were being shown at book value of Rs. 2,98,32,263. These shares held by the assessee consisted of both quoted and unquoted shares. These shares were not revalued in the year ended March 31, 1986, along with other fixed assets.
20. However, in the next year, in the balance-sheet as at March 31, 1987, the assessee revalued all the quoted shares at market value with the result that the value shown was Rs. 42,29,55,027 as against Rs. 2,89,83,006 shown as at March 31, 1986. The difference in revaluation of these shares which worked out to Rs. 39,39,52,870 was taken to the capital reserve account. However, it continued to retain the value of the remaining unquoted investments at cost. Note No. 5(a) in the balance-sheet stated :
" Method of valuation of investments which were being valued at cost has been changed to market rate in the case of quoted investments. As a result of such revaluation Rs. 39,39,52,870 have been transferred to capital reserve."
21. The balance-sheet showed a sum of Rs. 4,67,361 added to the capital reserve by way of capital gain on sale of fixed assets.
22. Even by the time the balance-sheet was annexed to the auditors' report dated November 12, 1987, the assessee had already sold shares in Grasim Industries Ltd., Hindustan Aluminium Corporation and Tunga-bhadra Industries Ltd. on May 13, 1987 and September 21, 1987.
23. In the balance-sheet as at March 31, 1987, the value of the remaining quoted investments was recorded at book value which was as revalued in the earlier year. The shares sold fetched a sum of Rs. 33,77,71,220 which was invested in full in capital units of the Unit Trust of India and displayed as part of the investments held by the assessee. Schedule 2, namely, " Reserves and Surplus " was as follows :
SCHEDULE 2 Reserves and Surplus Balance as at 31st March, 1987 Additions Deductions Balance as at 31st March, 1988 Transfer from P&L account Others Transfer from P&L account Others Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Capital Reserves Revaluation of fixed assets 11,30,86,612
-
-
2,35,22,622 (a) 53,70,610 (b) 8,41,93,380 Revaluation of quoted investments 39,39,52,870 _ _ 44,23,157 38,95,29,713 Others 6,30,641 _ 1,53,234 _
(c)
(d) 7,83,875 Revenue Reserves and Surplus Investment allowance 3,28,32,000
(e) 4,50,000 3,23,82,000 General Reserves
(f) 9,74,96,850 69,79,357 4,50,000 (g)
-
(g) 1,04,92,620 63,79,98,973 69,79,357 6,00,234 2,35,22,622 1,02,43,767 61,18,15,173
(a) Depreciation charged on revalued assets.
(b) Adjustment relating to fixed assets sold/discarded.
(c) Adjusted due to lower realisation on sale of certain investments
(d) Includes Rs. 32,57,05,162 realised during the year on sale of certain investments.
(e) Includes Rs. 1,50,800 capital subsidy on D. G. set and Rs. 2,434 capital gain on sale of fixed assets.
(f) Utilised for acquiring new plant and machinery.
(g) Transferred to General Reserve to the extent reserve created in 1976-77.
24. It will be seen from the above that the revalued shares, though at market rate, fetched only Rs. 33,77,71,264 on sale and the difference of Rs. 44,23,157 was debited to the capital reserve account so that the balance in that account stood at the end of the year at Rs. 38,95,29,713. It will also be noted that the capital reserve was enhanced by a sum of Rs. 2,434 being capital gain on sale of fixed assets. With regard to depreciation also, there was an adjustment of Rs. 2,35,22,662. Depreciation on the revalued assets came to Rs. 7,06,51,070 and the amount of Rs. 2,35,22,662 was deducted there from by transfer from revaluation reserve so that the actual depreciation charged was only Rs. 4,71,28,448. It will be noticed that the sale proceeds of investment in shares was not credited to the profit and loss account, nor was the loss debited to it but both were carried to the capital reserve account.
25. Assessment proceedings for the assessment year 1987-88. --In the assessment proceedings for the assessment year 1987-88, the Assessing Officer noticed the revaluation of the quoted investments. He was of the opinion that this amounted to a change in the method of valuation and had been done only to avoid the application of Section 115J of the Income-tax Act. He drew this inference because the balance-sheet that had been prepared as on November 12, 1987, was after the shares were actually sold on May 14, 1987, and on September 21, 1987, and by then the provisions of Section 115J had been brought into the statute book effective from the next assessment year. The assessee thus knew the effect of Section 115J. He also noted that the method of valuation had been reverted to book value in the next year which again proved that the assessee being aware of the consequence of the application of the provisions of Section 115J, deliberately undertook the exercise of revaluation of shares and crediting the proceeds to capital reserve account, to defeat the invocation of Section 115J. He asked the assessee to show cause by his letter dated February 9, 1990, as to why the change in the method of valuation should not be rejected under Section 145 of the Income-tax Act in view of the decision of the Supreme Court in McDowell's case [19851 154 ITR 148. The assessee replied by letter dated March 5, 1990, that the provisions of Section 145 were not applicable in respect of investments since the capital gain arising from the transfer of such investments would be taxable under Section 45 only. It was also submitted that, even under Section 115J(1A), the assessee-company had to prepare its profit and loss account in accordance with the Companies Act and since they were prepared strictly in accordance with those provisions and certified as such by a reputed chartered accountant, there was nothing wrong with the same. The assessee also expressed apprehension that the proposal of the Assessing Officer was motivated with a view to prepare a ground for subjecting to tax more than Rs. 5 crores under Section 115J for the assessment year 1988-89. The Income-tax Officer thereafter made the assessment order on March 19, 1990, He observed that the assessee had changed the method of accounting with reference to its investments in order to inflate the cost of shares and eventually understate the book profits to overcome the incidence of higher taxation under Section 115J of the Act for the year in which the shares have been sold. He, therefore, stated that the change in the method of valuation of quoted shares was not acceptable and proceeded to compute the total income of that year. The assessee thereupon appealed contending that the Assessing Officer was not justified in rejecting the revaluation of the shares. The Commissioner of Income-tax (Appeals), in his order dated March 1, 1991, dismissed this ground of appeal stating :
"I feel that the observations of the Assessing Officer have no effect on the computation of income for the year. This is an academic dispute as far as computation of income during the year is concerned. Hence, no specific direction is called for."
26. It is stated that the assessee has taken up the ground in further appeal to the Tribunal which is still pending.
27. Assessment proceedings for current assessment year 1988-89.--When the assessment for the present year was taken up, the Assessing Officer referred to the observations made in the earlier year. By letter dated March 4, 1991, he indicated to the assessee that the shares have been revalued with the sole intention of defrauding the Revenue and avoiding payment of tax due under the provisions of Section 115J. He observed that the bona fides of the assessee can always be questioned if the assessee has adopted any change in the method of accounting that is not followed regularly thereafter. He, accordingly, inferred that the books of account did not disclose the true state of affairs and the correct income and proposed to recast the book profit for the purpose of Section 115) as follows :
(Rs.) "Profit before tax 1,44,76,106 Add : Profit on sale of investments 32,57,65,162 34,01,81,268 Less : Amount credited to profit and loss account on account of amount withdrawn from Revaluation Reserve 2.35,22,622 31,66,58,646 30% thereof 9,49,97,594"
28. By letter dated March 22, 1991, the assessee replied to this proposal by contending that the capital gain was to be considered only under the provisions of Section 45 and, therefore, the question of any change in the method of valuation for consideration under Section 145 which has relevance only for computation of income from business did not arise. It was also pointed out that the assessee has reinvested the entire proceeds in capital units and, therefore, what was exempt under Section 54E could not be brought to tax under Section 115J which referred only to commercial business profits and not to capital gains. The assessee submitted that the profit and loss account prepared by the assessee was in conformity with the provisions of Parts II and III of Schedule VI to the Companies Act and being duly audited, the book profit shown therein could be the only basis for imposition of tax under Section 115J.
29. The Income-tax Officer then made an assessment on March 27, 1991. In that assessment, she stated that the change in the method of valuation of quoted shares was adopted only for one year and not followed consistently thereafter, that the bona fides of the assessee in changing the method of accounting can be questioned, that the assessee knew that the provisions of Section 115J would be applicable from the assessment year 1988-89 and had prepared the account for the assessment year 1987-88 after the sale of the shares with the sole intention of avoiding payment of due taxes under Section 115J by inflating the price of the quoted investments and thereby understating the book profit to that extent. The Income-tax Officer was of the view that because of the non obstante Clause in Section 115J, the computation of the capital gain under Chapter IVE would not affect the computation of book profit including capital gain. The Income-tax Officer also observed that, according to the principles laid down by the Supreme Court in McDowell's case [1985] 154 ITR 148, a colourable device cannot be part of tax planning and, therefore, the change in the method of accounting must be considered to be such a colourable device and is to be disregarded for the purpose of assessment. She thus computed the book profit as proposed. The book profit shown by the assessee was Rs. 1,44,76,106 and 30 per cent, thereof was Rs. 43,42,331 with the result that tax under Section 115J could not be prima facie leviable. Since the Assessing Officer has recast the book profit at Rs. 31,84,99,420, 30 per cent, thereof came to Rs. 9,55,49,826 which was more than the computed profit of Rs. 45,71,490. She, therefore, applied the provisions of Section 115J and imposed tax on the higher amount of Rs. 9,55,49,826.
30. Appellate order. -- The assessee appealed and contended that the tax under Section 115J should be only on the book profit as shown by the assessee and the Income-tax Officer had no power to modify the same. The Assessing Officer who was present before the Commissioner of Income-tax (Appeals) contended that the book profit shown was not in accordance with the provisions of the Companies Act and, therefore, it was required to be recomputed. The Commissioner of Income-tax (Appeals) held, by his order dated January 21, 1992, that, under Clause 3 (xii)(a) of Part II to Schedule VI of the Companies Act, the profit on investment has to be shown in the profit and loss account and that would also include capital gain. He then concluded that the book profit taxable under Section 115} was not just as shown by the assessee but as should be shown in accordance with the provisions of the Companies Act. He was of the view that the assessee had tailored its accounts in order to escape the mischief of Section 115J and, therefore, such a colourable device could be ignored in imposing tax under Section 115J.
31. Contentions of the assessee. -- Before us, it was contended on behalf of the assessee that tax under Section 115J could be imposed only on the book profit as shown by the assessee and, therefore, the Assessing Officer had no power to disturb the profit as shown. It was submitted that the rationale of this provision was that the assessee should be bound by the figure given in the profit and loss account and, consequently, it was also binding on the Income-tax Officer. The legislative history was referred to for the purpose of the argument that the intention was to impose the tax on the profit as shown by the assessee without any adjustment other than that given in the Section itself. It was also argued that what was taxable under Section 115J was only the commercial profit. According to the assessee, even the provisions of the Companies Act did not require any capital gain to be disclosed in the profit and loss account and the accounting standards also accept the option of the assessee to take the capital gain to the balance-sheet without passing it through the profit and loss account. It was further argued that capital gain was exempt under Section 54E upon reinvestment in capital gains units and what was exempt under that Section should not again be brought to tax under Section 115J. It was submitted that, as far as the revaluation was concerned, it was in the preceding year and if that revaluation could not be modified in any manner in any regular assessment proceedings, the figures of the closing balance and opening balance could not also be disturbed. According to the assessee, it was well within its rights to revalue the shares and there was no fraud or misrepresentation which could enable the assessing officer to recast the value. Even so, it was argued that it would-be a case of computation of the profits which could not be done otherwise than in accordance with the provisions of Section 115J which was confined to the book profit as shown by the assessee and certain other permitted adjustments which did not cover what the Income-tax Officer did. It was submitted that there was no question of any tax avoidance in this case and hence the levy of tax under Section 115J should be cancelled.
32. Contentions of the Revenue. -- Learned standing counsel argued for the Revenue that it was open to the Assessing Officer to question the book profit shown by the assessee particularly when there was a change in the method of valuation only in one year with the sole purpose of avoiding tax. It was submitted that the Finance Minister, in his speech while introducing the provision, had noted the phenomenon of " zero-tax " companies and that that was the reason why the provision was introduced 'to compel the companies to pay some tax even if it was otherwise exempt. According to the Revenue, such a dubious method of tax planning should not be entertained and, ignoring the revaluation made by the assessee, the profit on sale of investments was required to be brought to tax under Section 115J. The arguments of the Revenue proceeded on the premises that the assessee, knowing fully well that it would be caught within the mischief of Section 115J if it credited the profit on sale of investments to the profit and loss account, adopted a carefully devised and well-executed plan of revaluing the shares in one year to generate a capital reserve and then sell the shares in another year, to take the resultant profit to the reserve account, thereby avoiding crediting the profit on the sale of investments to the profit and loss account. This being a device adopted with the sole purpose of defeating the provisions of Section 115J, the Revenue is entitled to go behind the facade of these transactions and to discover the truth to bring to surface the real situation. It also submitted written arguments, all pointing to the above conclusion.
33. Legislative history. -- Before we consider the arguments of both sides, it is necessary to keep in mind the legislative background of the provisions of Section 115J. In his Budget Speech for 1983-84, the Finance Minister stated [1983] 140 ITR (St.) 25, 29 :
" Hon'ble Members must be aware of the phenomenon of companies which are flourishing, but are paying no tax at all, or only nominal tax. This is largely due to these companies availing of the tax incentives and concessions available under the provisions of the Income-tax Act. It has been a matter of concern to us that under our tax system several highly profitable companies are able to reduce their tax liability to zero even though they continue to pay high dividends. It seems reasonable that profitable and prosperous companies should contribute at least a small portion of their profits to the national exchequer at a time when other and less better off Sections of society are bearing a burden. I, therefore, propose to provide that fiscal incentives and concessions shall not absorb more than 70 per cent, of the profits. This would secure that companies pay a minimum tax, on at least 30 per cent, of their profits."
34. Thereupon, Chapter VI-B was introduced by Section 32 of the Finance Act, 1983 [1983] 142 ITR (St.) 34 as follows :
"CHAPTER VI-B RESTRICTION ON CERTAIN DEDUCTIONS IN THE CASE OF COMPANIES 80WA. Restriction on certain deductions in the case of certain companies. --(I) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company, the amount or, as the case may be, the aggregate amount which, but for the provisions of this Section, would have been admissible as deduction for any assessment year under any one or more of the provisions of this Act specified in Sub-section (2) exceeds seventy per cent, of the amount of total income as computed had no deduction been allowed under any of the said provisions (such total income being hereinafter referred to as the pre-incentive total income), the amount or, as the case may be, the aggregate amount to be allowed as deduction for that year in respect of any one or more of the said provisions shall be restricted, in the manner specified in Sub-section (3) to seventy per cent, of the pre-incentive total income.
(2) The provisions referred to in Sub-section (1) shall be the following, namely :--
(i) Clause (iii) of Sub-section (1) of Section 35 ;
(ii) Clause (ia) of Sub-section (2) of Section 35 ;
(iii) Sub-section (2A) of Section 35, to the extent to which the deduction under the said Sub-section exceeds the sum paid by the assessee ;
(iv) Sub-section (2B) of Section 35, to the extent to which the deduction under the said Sub-section exceeds the expenditure incurred by the assessee ;
(v) Section 35C ;
(vi) Section 35CC ;
(vii) Section 35CCA ;
(viii) Section 35CCB ;
(ix) Clause (ii) of Sub-section (2) of Section 33 ;
(x) Clause (ii) of Sub-section (2) of Section 33A ;
(xi) Sub-section (1) or, as the case may be, Sub-section (1), read with Clause (i) of Sub-section (2) of Section 33A ;
(xii) Clause (ii) of Sub-section (3) of Section 32A ;
(xiii) Sub-section-(1), or, as the case may be, Sub-section (1), read with Clause (i) of Sub-section (3) of Section 32A ;
(xiv) Section 80G ;
(xv) Clause (b) of Sub-section (2) of Section 80GGA ;
(xvi) Clause (c) of Sub-section (2) of Section 80GGA ;
(xvii) Section 80HH ;
(xviii) Section 80HHA ;
(xix) Section 80HHB ;
(xx) Section 80HHC ;
(xxi) Section 80-I ;
(xxii) Section 8QJ ;
(xxiii) Section 80JJ ;
(xxiv) Section 80K ;
(xxv) Section 80M ;
(xxvi) Section SON ;
(xxvii) Section 80-O ; and (xxviii) Section 80-QQ.
(3) The deductions under the provisions specified in Sub-section (2) shall, for the purposes of restricting under Sub-section (1), the amount or, as the case may be, the aggregate amount of deduction, under those provisions, be allowed in the order in which the said provisions have been specified in Sub-section (2), and accordingly --
(a) deduction shall first be allowed under the provision specified in Clause (i) of Sub-section (2) ; and
(b) if no deduction is allowable under the provision specified in the said Clause (i) or the deduction allowable under that provision is less than seventy per cent, of the pre-incentive total income, deduction shall next be allowed under the provision specified in Clause (ii) of Subsection (2) ; and
(c) if no deduction is allowable under the provision specified in the said Clause (ii), or the deduction under that provision together with the deduction allowed under the provision referred to in the said Clause (i), is less than seventy per cent, of the pre-incentive total income, deduction shall next be allowed under the provision specified in Clause (iii) of Sub-section (2) and so on until the aggregate deduction so allowed is equal to seventy per cent, of the pre-incentive total income.
(4) To the extent to which full deduction cannot be allowed in the assessment year in respect of any provision specified in Sub-section (2), by virtue only of the restriction under Sub-section (1) (and not by virtue of anything contained in any other Section), the amount remaining unallowed shall be added to the amount, if any, to be allowed to the assessee under the said provision for the next following assessment year and be deemed to be part of the deduction admissible to the assessee under the said provision for that year or, if no such deduction is admissible to the assessee for that year, be deemed to be the deduction admissible to the assessee for that year, and so on for succeeding assessment years. "
35. In the Budget Speech for 1987-88 on February 28, 1987, the Finance Minister observed [1987] 165 ITR (St.) 1, 14 :
" 80. It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly profitable companies deserves attention. In 1983, a new Section 80WA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a 'minimum corporate tax' on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent, of its book profit. In other words, a domestic widely held company will pay tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately Rs, 75 crores."
36. Consequently, Section 80WA was omitted by Section 40 of the Finance Act, 1987, and Section 115J was introduced by Section 43 of the Finance Act, 1987 [1987] 166 ITR (St.) 26.
37. The provisions of Section 115J are as follows :
" (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after April 1, 1988 (hereafter in this Section referred to as the relevant previous year), is less than thirty 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 thirty per cent, of such book profit.
Explanation. -- For the purposes of this Section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by --
(a) the amount of income-tax paid or payable, and the provision therefor ; or
(b) the amounts carried to any reserves, by whatever name called ; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities ; or
(d) the amount by way of provision for losses of subsidiary companies ; or
(e) the amount or amounts of dividends paid or proposed ; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies, if any such amount is debited to the profit and loss account, and as reduced by,--
(i) the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account ; 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 ; and
(iii) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956), are applicable.
(2) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or Clause
(ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or subSection (3) of Section 74A or Sub-section (3) of Section 80J."
38. The Notes on Clauses stated [1987] 165 ITR (St.) 137 :
" Clause 43 seeks to insert a new Chapter XIIB containing special provisions relating to certain companies.
Under the proposed amendments, in the case of any company, whose total income as computed under the other provisions of the Income-tax Act in respect of any previous year is less than thirty per cent, of its book profit, the total income of such assessee chargeable to tax shall be deemed to be an amount equal to thirty per cent, of such book profit.
For the purposes of the aforesaid provision, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956, subject to certain adjustments.
It has also been provided that the aforesaid provision shall not affect the determination of the amounts to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32, or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3) of Section 74A or sub Section (3) of Section 80J.
This amendment will take effect from April 1, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years."
39. The memorandum explained the provisions in the Bill at [1987] 165 ITR (St.) 152, 167 :
" New provisions to levy minimum tax on 'book profits' of certain companies.
37. Under the existing provisions of the Income-tax Act, certain deductions are allowed in the computation of profits and gains of business or profession. Various deductions are also allowed under Chapter VI-A of the Income-tax Act in computing total income. As a result of these concessions, certain companies making huge profits are managing their affairs in such a way as to avoid payment of income-tax.
With a view to making the tax system more progressive, a new Chapter XIIB is proposed to be inserted in the Income-tax Act.
Under the proposed amendment, in the case of any company whose total income as computed under the other provisions of the Income-tax Act in respect of any previous year is less than 30 per cent, of its book profit, the total income of such taxpayer chargeable to tax shall be deemed to be the amount equal to 30 per cent, of such book profit.
For the purposes of the aforesaid provisions, 'book profit' means the net profit as shown in the profit and loss account in the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956, subject to adjustments in respect of any amount of income-tax paid or payable, any amount carried to any reserve set aside to meet any provision, or provision for loss of subsidiary companies or any amount set apart for declaration of dividends which are taken into the profit and loss account prepared in accordance with the Sixth Schedule as above.
However, the expenditure relating to incomes as well as the receipts relating to incomes to which the provisions of Chapter III of the Income-tax Act apply, will be excluded from the computation of the 'book profit'. Thirty per cent, of such 'book profit' shall be treated as the total income of the company to which the provisions of this new Chapter (Section 115J) apply. It has also been provided that the aforesaid provisions shall not affect the determination of the amount to be carried forward to the subsequent years under the provisions of Sections 32(2), 32A(3), 72, 73, 74, 74A and 80J relating to unabsorbed depreciation, unabsorbed investment allowance, unabsorbed loss and unabsorbed deduction relating to tax holiday.
As a consequential amendment, Chapter VIB of the Income-tax Act relating to restriction on certain deductions in the case of companies, is proposed to be omitted.
These amendments will take effect from April 1, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. (Clauses 40 and 43)."
40. There was an amendment in Section 115J by Section 19 of the Finance Act, 1989 [1989] 177 ITR (St.) 180, as follows :
" 19. Amendment of Section 115J --In Section 115J of the Income-tax Act, --
(i) after Sub-section (1) and before the Explanation, the following Sub-section shall be inserted, namely :--
(1A) Every assessee, being a company, shall, for the purposes of this Section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).' ;
(ii) in the Explanation, --
(a) in the opening portion, for the words and figures 'prepared in accordance with the provisions of Parts II .and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956)', the words, brackets, figure and letter 'prepared under Sub-section (1A)' shall be substituted ;
(b) in Clause (i), for the words 'profit and loss account; or', the following shall be substituted and shall be deemed to have been substituted with effect from April 1, 1988, namely :--
' profit and loss account :
Provided that, where, this Section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after April 1, 1988, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation ; or'"
41. The memorandum explained this amendment as follows : see [1989] 176 ITR (St.) 112, 128 :
"MEASURE TO COUNTER TAX AVOIDANCE Amendment of the provisions relating to levy of minimum tax on 'book profits' of certain companies.
30. Under the existing provisions of Section 115J of the Income-tax Act, where the total income of a company is less than 30 per cent, of its book profits for that year, the total income chargeable to tax is deemed to be 30 per cent, of such book profits. For the purposes of the aforesaid provision, 'book profit' means the net profit as shown in the profit and loss account in the relevant previous year prepared accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956, subject to certain adjustments which increase or decrease the book profits.
It has been observed that a large number of companies have interpreted the term 'book profit' to mean that in case they are following an accounting year (under the Companies Act, 1956) which is different from the previous year under the Income-tax Act (i.e., the period ending on March 31) then the provisions of Section 115) do not apply to them. The reason advanced is that the aforesaid Section does not make it mandatory for a company to prepare its profit and loss account on March 31 of any year in case it is following an accounting year which ends on a different date. As this is against the legislative intent, it is proposed to make it mandatory for all companies to prepare their profit and loss account for the previous year ending on March 31, for the purposes of working out the 'book profit' for this Section.
This amendment will take effect from April 1, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years.
Under the existing provisions certain adjustments are made to the net profit as shown in the profit and loss account. One such adjustment stipulates that the net profit is to be reduced by the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account. Some companies have taken advantage of this provision by reducing their net profit by the amount withdrawn from the reserve created or provision made in the same year itself, though the reserve when created was not added to the book profit. Such adjustments lead to undue lowering of profit and consequently the quantum of tax payable gets reduced.
With a view to counteract such tax avoidance device, it is proposed to reduce the 'book profit' by the amount withdrawn from reserves or provisions only in two situations, namely :--
(i) if the reserves have been created or provisions have been made before April 1, 1988 ; or
(ii) if the reserves have been created or provisions have been made after April 1, 1988, and have gone to increase the book profits in any year when the provisions of Section 115J of the Income-tax Act were applicable.
This amendment will take effect from April 1, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. (Clause 19)."
42. Relevant provisions of the Companies Act. -- Since Section 115J refers to book profit as the net profit shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of the Companies Act. We have to see the relevant provisions of that Act. The relevant provisions in Part II of the Sixth Schedule to the Companies Act are as follows :
" PART II REQUIREMENTS AS TO PROFIT AND LOSS ACCOUNT
1. The provisions of this Part shall apply to the income and expenditure account referred to in Sub-section (2) of Section 210 of the Act, in like manner as they apply to a profit and loss account, but subject to the modification of references as specified in that Sub-section.
2. The profit and loss account --
(a) shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account ; and
(b) shall disclose every material feature, including credits or receipts and debts or expenses in respect of non-recurring transactions or transactions of an exceptional nature.
3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads ; and, in particular, shall disclose the following information in respect of the period covered by the account -- ...
(xi) (a) the amount of income from investments, distinguishing between trade investments and other investments.
(b) Other income by way of interest, specifying the nature of the income.
(c) The amount of income-tax deducted if the gross income is stated under sub-paragraphs (a) and (b) above :
(xii) (a) Profits or losses on investments showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm to the extent not adjusted from any previous provision or reserve.
Note: --Information in respect of this item should also be given in the balance-sheet under the relevant provision or reserve account.
(b) Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount.
(c) Miscellaneous income ..."
43. Is capital profit part of book profit for the purpose of profit and loss account ? -- A reference to the requirements of the Companies Act shows that it is concerned with the result of the working of the company. Consequently, it cannot be directly concerned with changes in the capital structure. In particular, the profit and loss account is concerned with items of income and expenditure and, therefore, any profit derived by realisation of the capital asset would not be an item of income. The Revenue sought to bring the capital profit within items (xi) and (xii) of Part II, extracted above. However, item (xi) refers only to income from investment and, therefore, it cannot be taken as profit derived by sale of investments. The Revenue then relied upon item (xii) to contend that profit on investment would have to be exhibited in the profit and loss account under that item. The contention of the assessee was that that item related to trade investments only and not other investments. In the alternative, it was submitted that, even a disclosure of a profit on investment under that item would be confined to the extent not adjusted from any previous provision or reserve. The rejoinder of the Revenue was that it will refer only to the provisions or reserve created in the year itself and not with reference to a provision or reserve of the earlier year. We find that item (xi) makes a distinction between trade investment and other investments. Item (xii) refers only to profits or losses on investments but requires the display of the profits and losses incurred on account of membership of a partnership firm separately. According to the assessee, this was an indication that this item was confined to trade investments. This contention of the assessee does not appear to be sound because, the expression " profit on investment" takes within its sweep the profit realised on the realisation of the investments, namely, sale. Otherwise, there cannot be any profit on investment other than interest. There is already a provision to show the interest realised on investments in the profit and loss account separately. The expression " profit on investment ", therefore means the profit earned on the sale of the investment as well. This is further fortified by the addition of words " to show the profit on the membership of a firm ", which indicates that the profit realised from the membership of the firm has to be separately indicated, without mixing it with the profit on sale of investments. No doubt, item (xi) also refers to income from investment but that item also refers to income by way of interest indicating that item (xi) is concerned with risk-free income which accrues regularly, such as interest, whereas item (xii) refers to variable income which is subject to risk, such as profit or loss. Therefore, we are of the opinion that both these items do take into account any profit derived by sale or realisation of an investment. But, item (xii) refers to the profit to the extent not adjusted from any previous provision or reserve. The Note requires that information about this item should also be given in the balance-sheet under the relevant provision or reserve account. The contention of the Revenue that this refers to an adjustment of the provision or reserve created in the same year is untenable because the balance-sheet is a statement of account on a particular day and it can have reference only to the opening balance and not to a variation during the accounting period. In the circumstances, even if this item (xii) is to be understood as taking into account profit derived by the sale of an investment, it will have to be shown in the profit and loss account only to the extent it is not absorbed by the amount standing to the credit in the reserve account. In this context, our attention was drawn to the statement in Spicer and Pegler's Book-keeping and Accounts (Seventeenth edition), page 311, indicating that the realised capital surplus could be passed through the profit and loss account or alternatively directly charged to the account in which the surplus is credited in the balance-sheet. We find that the assessee has consistently followed the practice of crediting the sale proceeds of capital assets to the asset account and showing them in the balance-sheet directly--Rs. 4,67,361 as on March 31, 1987 and Rs. 2,434 as on March 31, 1988. In the present case, the shares having been already revalued in the earlier year at Rs. 34,21,94,376, and the price fetched being Rs. 33,77,71,220 being less than that, the shortfall of Rs. 44,23,157 was deducted from the revaluation reserve account. Thus it is clear that entries made by the assessee in the capital reserve account with reference to the realisation by the sale of shares were correct and in accordance with the requirements of item (xii) of Part II of Schedule VI to the Companies Act. As a matter of sound accepted accounting practice, the assessee was entitled to treat the accretion to a fixed asset when realised as a capital reserve particularly when the realised amount has been reinvested in another asset and was not available for distribution as profit. We are, therefore, of the opinion that the profit realised by the sale of the shares by the assessee could not form part of the book profit as required to be shown in the profit and loss account under the provisions of the Companies Act.
44. Purposive construction of Section 115J. --The alternative contention of the Revenue was that the expression "book profit" in Section 115J cannot be confined to income from business but would include whatever income is derived by the company keeping in view the legislative history and the intention of Parliament to bring to tax the income of the companies which reduced their taxable income to nil by claiming various deductions. But we do not find any support for this contention from the legislative history as outlined above. When Section 80WA was introduced in 1983-84, the intention was to restrict the various tax incentives and concessions available in computing the income from business to 70 per cent, thereof. Significantly, the deduction under Section 80T in respect of capital gains was not one of the items of concession or tax rebate which was to be restricted under that Section. This shows that exemption of capital gains was not intended to be restricted. Subsequently also, when that Section was replaced by Section 115J, the object was to introduce a provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own 'accounts. These profits can only be those which are assessable as income under the Act. It is now 'well-settled that, in the interpretation of statutes, we have to adopt such a construction as will promote the general legislative purpose underlying the provision. In the present case, as can be seen from the Finance Minister's Speech and the Memorandum explaining the provisions, the intention was to make the company pay tax on income which would otherwise be reduced by reason of certain deductions available under the Act. Even the adjustments specified in Section 115} refer only to appropriation from the profits of the business. We are, therefore, convinced that the expression "book profit" was intended to be confined to business profit and was not intended to include profit on realisation of any asset.
45. Can the Assessing Officer recast the book profit ? -- The contention of the Revenue was that if the book profit shown by the assesses is not in accordance with the provisions of the Companies Act or if it had been manipulated to show less than the amount which was required to be shown in the profit and loss account, the Assessing Officer had the power to recast the profit and loss account. The contention of the assessee was that the tax was on the book profit as shown by the assessee and whatever is shown has to be accepted without question. This proposition is too widely stated, for, obviously, it cannot take into account a case of fraud or misrepresentation or a case where the profit and loss account was not prepared in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956. If the profit and loss account prepared by the assessee is fraudulent or misleading giving figures which are found to be false and even though such profit and loss account was approved by the board of directors of a company, still the Assessing Officer would be entitled to verify and satisfy himself as to whether the profit and loss account so prepared was in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, 1956. The mandate given by Section 115J to the Assessing Officer is implied in the words " prepared in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act " and the " net profit as shown in the profit and loss account". These two expressions convey an idea of an implied mandate given to the Assessing Officer to verify and satisfy himself as to whether the net profit was as shown in the profit and loss account for the relevant previous year and as to whether the profit and loss account was prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act. If the Assessing Officer finds that the net profit was not as shown by the profit and loss account or the profit and loss account was not prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, he is entitled to adjust the profit. To this extent, we are of the opinion that the power to adjust the book profit will have to be conceded to the Assessing Officer, but not beyond that with a view to adjust the book figures to bring out even a fraudulent or misleading statement given in the accounts in which case, he would be competent to compute the income by applying the provisions of Section 145 of the Income-tax Act which he cannot do for the purposes of ascertaining the book profit when they were as shown by the profit and loss account prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act. But, in a case where there is no allegation of fraud or misrepresentation but only a difference of opinion as to the question whether a particular amount should be properly shown in the profit and loss account or in the balance-sheet, the provisions of Section 115J do not empower the Assessing Officer to disturb the profit as shown by the assessee. As the intention of Section 115J was only to extract some tax in spite of the companies being eligible for certain concessions in computing the income from business, it is the book profit which is the starting point for the computation of the income of the assessee which could be the basis for the tax under Section 115) also. It would, therefore, be anomalous to concede to the Assessing Officer the power to disturb the starting point itself in a case other than a case where the profit and loss account was not prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act. In a case where the profit and loss account was prepared in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, the Assessing Officer will have no power to disturb the book profit except as stated in Section 115J. We are, therefore, of the opinion that the Assessing Officer is bound to proceed with the computation only on the basis of the book profit as shown in the profit and loss account, unless it is discovered that the profit and loss account is not drawn up in accordance with the provisions of the Companies Act, 1956.
46. The accounting practice of the assessee.-- The Revenue reiterated the view of the authorities below that the assessee has changed its method of accounting only in the preceding year and, therefore, the Assessing Officer was entitled to recast the accounts. There appears to be some confusion in the minds of the authorities below on this aspect which was probably due to the inaccurate wording used by the assessee in the published accounts for the accounting year 1986-87. It was stated in the notes that the " method " of valuation of investments had been changed to market rate in the case of quoted investments. This is not an accurate description of what has happened. The assessee had only revalued the quoted investment from what was shown as cost to market value as on March 31, 1987. The question of " method of accounting" is relevant only in respect of valuation of closing stock where the assessee has a choice of the valuation " at cost" or " at market value" or " at cost or market value, whichever is less". Such a method of accounting is required for ascertaining the profit or loss in respect of stock-in-trade. On the contrary, in respect of investments, the profit is only with reference to the cost and realisable value when realised. As explained by the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481, it is a misconception to think that any profit arises out of the valuation of the closing stock and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading result of that period. On the other hand, as far as the fixed assets and investments are concerned, the valuation of such assets is not a necessary part of the process of determining the trading result since they do not form part of the stock-in-trade. Any revaluation of fixed assets or investments does not indicate the accrual of any profit because profit or loss will arise only on sale or disposal and not on revaluation and such unrealised profit on revaluation cannot be brought to tax. However, it is well-recognised that, in cases of unrealised appreciation of fixed assets, they are written up on revaluation on the assets side of the balance-sheet to give a true and fair view of the company's affairs on a particular date, i.e., the balance-sheet date and the net surplus is shown as a capital reserve. (See International Accounting Standards 16). This is not a regular annual feature but an exercise undertaken at appropriate junctions in the career of a company. In contrast, in the case of stock-in-trade, if the assessee had been following the method of valuing at cost and changes to the method of valuation at market value, such a valuation has to be made thereafter every year at market value on the valuation date. But, in the case of fixed assets, if the investments have been shown at cost for some year and the value is written up or written down on revaluation at market rate on a particular date, there is no change in the method of accounting so as to require the company to again revalue the investments at market rate on subsequent annual valuation dates. What will be shown in the subsequent years will be only the revised book value. The method of accounting is an essential and integrated process to ascertain the income or loss after the end of the previous year within the meaning of Section 145 of the Income-tax Act, and it does not apply to revaluation of fixed assets or investments. Thus, in the present case, the assessee had revalued the fixed assets as on March 31, 1986, and the quoted investments as on March 31, 1987. Consequently, the revised value was shown as the book value in the subsequent years. The authorities below were in error in mixing up revaluation of investments with the change in the method of accounting for a particular year and assuming that the assessee had gone back to the earlier method in the subsequent years. They were also in error in proceeding on the basis that only the shares which were sold have been revalued, for, we find, as a matter of fact, that all the fixed assets have been revalued as on March 31, 1986, and all the quoted investments have been revalued as on March 31, 1987, even though only the shares in three companies were sold in the year ended March 31, 1988. Thus, the assessee was on a scheme of revaluing all its assets.
47. Can the Assessing Officer change the opening balance showing the value of investments in the balance-sheet ?-- The attempt of the Revenue was to rope in the capital gain as part of the book profit in this year. The assessee had revalued the shares in the preceding year and, since the sale price fetched was less than the value as on March 31, 1987, the shortfall was adjusted against the revaluation reserve. If the accounts of the assessee were to be disturbed, it would be done only by reversing the entries in the preceding year because, as long as the revaluation in the preceding year stands, the profit of this year can be worked out only with reference to the figures of opening balance as reflected in the accounts. That was the reason why the Assessing Officer sought to reject the revaluation in the assessment for the preceding year itself. Unless the assessment for the preceding year is reopened validly, these entries cannot be questioned. Besides, as pointed out by the Supreme Court in the case of Chainrup Sampatram [1953] 24 ITR 481, no profit can arise on a mere revaluation unless there was sale and, therefore, there was no escapement of any income in the assessment for the preceding year. Therefore, that assessment for the preceding year having been completed on the basis of the accounts as presented by the assessee, any disturbance of the amount of revaluation will be academic to the computation of the income of that year, it may not be possible for the Revenue to reopen the same, much less while making the assessment for this year. Interestingly, the Department was aware of this position as can be seen from the Memorandum explaining the amendment introduced by the Finance Act, 1989. At para 9.6 above (see page 191 supra), we have set down the amendment providing for the adjustment of amounts transferred from the book profit to any reserve in computing the book profit. Explaining this, it was stated that some companies had sought to reduce the net profit by the amount withdrawn from the reserve created in the same year to lower the profit. It was stated that, where an amount is transferred from the book profit to the reserve, an equal amount was to be added except in a situation where the reserve had been created before April 1, 1988, or where the reserve has been created after April 1, 1988, but, had gone to increase the book profit in any year when the provisions of Section 115J were applicable. It will be seen that the revaluation reserve was created by the assessee before April 1, 1988, and is, therefore, saved by this amendment. Thus, we find that not only because the opening balance depends upon the assessments of the earlier year but also because of the amended provisions of Section 115), the Assessing Officer cannot disturb the value of the revaluation reserve in the balance-sheet.
48. It is also to be noted that item 3(xii)(a) of Part II of Schedule VI to the Companies Act provided that profits or losses on investments should be shown, i.e., credited to the profit and loss account only to the extent that remained unadjusted from any previous provision or reserve. Since, in this case, reserve had been validly created in the preceding year, and approved by the shareholders as well as by the authorities under the company law, the profit on sale of investments cannot but be credited to the capital reserve account. Crediting it to the profit and loss account will, therefore, amount to the preparation of the profit and loss account not in conformity with the provisions of Parts II and III of Schedule VI to the Companies Act.
49. It would follow that no part of the profit could be transferred to the profit and loss account.
50. Tax planning. --The burden of the song of the Revenue was that the assessee; by revaluing and creating a reserve in the earlier year, adopted a scheme or device for avoiding the tax imposable under Section 115J. Reliance was placed on the decision of the Supreme Court in the case of McDowell [1985] 154 ITR 148. On the other hand, it was contended on behalf of the assessee that, apart from the fact that the decision given in McDowell's case [1985] 154 ITR 148 (SC) was pending reconsideration, the Supreme Court in the case of Playworld Electronics Pvt. Ltd., [1990] 184 ITR 308 has stated that tax planning may be legitimate provided it is within the framework of the law. The Revenue relied on the same decision to say that a colourable device cannot be part of tax planning. Both these statements can be summed up in a sentence, namely, that, if it is a pretence then it cannot be tax planning. (See CJR v. Challenge Corporation Lid. [1987] 1 AC 155 (PC)). As we have seen above, the assessee was well within its rights in revaluing the shares in the preceding year and admittedly there was nothing illegal in the action taken by the assessee. According to the Revenue, the sole purpose of that action was to avoid the imposition of tax under Section 115J and, therefore, it was a colourable action. We are unable to accept this proposition. It is one thing to say that the assessee had carried out a transaction without any intention to stick to it as such for the purpose of avoiding tax in which case the transaction could be ignored as a sham or a make-believe one. But, if the transaction is genuine and within the framework of the law but incidentally results in a tax advantage, surely it cannot be ignored. The tax mitigation in such an event cannot be said to be a device. It can be considered to be part of the commercial expediency of the assessee, inasmuch as, being a cost of the enterprise from a commercial point of view, a businessman should be recognised as having the right to mitigate that cost so that he has larger funds available for the enterprise, provided it is not a device or subterfuge, but genuine and permissible under the relevant laws. We also find as a matter of fact that the assessee had revalued all the assets in a scheme of revaluation in which the fixed assets were revalued first in the earlier year and the shares were valued in the next year. Much was made of the fact that the revaluation was made after the shares have been sold and after the Finance Act had come into force indicating that the assessee was well aware of the implications of the fresh impost under Section 115J. Apart from the fact that it is a mere surmise and a pure conjecture, there is, on the other hand, significantly, the amendment providing that reserves created prior to April 1, 1988, should not be adjusted which came into the statute much after the revaluation was made by the assessee. Hence, we are unable to accept the proposition that the revaluation made by the assessee in the earlier year could be ignored as a scheme or a colourable device.
51. Treatment of capital accretion in accounting practice. -- Even if we accept the claim of the Revenue that the assessee should not have revalued the assets in the earlier year but should have brought the sale proceeds into account in the current year, a different result could not follow. It has been pointed out by the Calcutta High Court in the case of CIT v. N. Guin and Co, (P) Ltd. [1979] 116 ITR 475 that, when a company disposes of any of its capital assets and realises a price higher than its cost price resulting in a surplus, it will be for the directors to decide whether such surplus should be treated as part of the profit of the company and included in the distributable surplus. It was pointed out that, where the entire surplus is channelled into reserves, it is not for the Income-tax Officer to lay down that it should be treated as part of the business profit of the assessee-company. Thus, according to the well-recognised accountancy practice, the assessee had brought the receipt on sale of the shares not into the profit and loss account but to the reserve account and showed it in the balance-sheet and, therefore, that amount would not have formed part of the book profit. However, the Explanation to Section 115J provides for the book profit to be increased by the amounts carried to any reserves, by whatever name called, in item (b), that is to say, if the reserve is created out of the current year's book profits. If out of the current year's profit, any amount is transferred to the reserve account it would diminish the book profit. Therefore, the Explanation provided that the book profits be shown at their original level, by bringing back to the profit and loss account the amount transferred to the reserve account. The Revenue, when it insisted on bringing back to the profit and loss account, the amount transferred to the reserve account, it postulates that the reserve was a transfer out of current profits which was not a fact.
52. Treatment of capital gain in the Income-tax Act, -- It is unnecessary to give any authority for the proposition that the capital accretion is not really income but is made taxable only by the provisions of the Act. ( See CIT v. Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290 (SC)). Therefore, but for the provisions of Section 45, the amount realised by sale of the investment will not be chargeable to tax. Section 45 provides :
"45. Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54D, 54E and 54F, be chargeable to income-tax under the head ' Capital gains ', and shall be deemed to be the income of the previous year in which the transfer took place."
53. This charge is, however, waived where the consideration for the transfer of the asset is reinvested as provided in Section 54E, which is as follows :
" 54E. Capital gains on transfer of capital assets not to be charged in certain cases. --(1) where the capital gains arises from the transfer of capital asset, not being a short-term capital asset (the capital asset so transferred being hereafter in this Section referred to as the original asset), and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any specified asset (such specified asset being hereafter in this Section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this Section, that is to say,--
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under Section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under Section 45."
54. Reading these two Sections together, it will be seen that, firstly, capital gains is not income. Secondly, it is chargeable to capital gains tax only by the provisions of Section 45 by deeming it to be the income of the previous year and, thirdly, if the conditions under Section 54E are satisfied, such a deeming fiction would not apply and, to that extent, there will be no charge to tax. In the present case, admittedly, the assessee had reinvested the entire proceeds in capital gains units and has satisfied the conditions in Section 54E. It would follow that no income has resulted on the realisation of investments made and, consequently, no income is to be charged under Section 45. Thus, in computing the income under the provisions of the Income-tax Act, the Assessing Officer herself had excluded the capital gain arising from the transfer of the shares from the total income of the assessee.
55. Can tax under Section 115J be imposed on capital gains not chargeable under Section 45 ? -- As we have seen above, according to the standard accounting practice, a capital receipt cannot be part of profit and, according to the provisions of the Income tax Act, where the entire proceeds are reinvested, the capital gains cannot be taxed as deemed income. But the Revenue contends that, since the sale proceeds should be routed through the profit and loss account and carried to the balance-sheet, it should be added" back to the book profit and assessed to tax under Section 115J. In other words, the contention is that what is specifically exempted under Section 45 read with Section 54E could yet be taxed under Section 115J. We are unable to appreciate this proposition for the following reasons.
56. First, with regard to the scheme of the Act itself, it will be seen that the pattern of the Income-tax Act is that certain receipts are not to be taken as income at all, while, in respect of certain receipts, there is an exemption from tax on fulfilling certain conditions and in respect of certain other incomes, certain concessions or deductions are given. To illustrate this, under Chapter III, under Section 10, agricultural income is not chargeable at all. Under Section 11, the income of a public charitable trust is exempt on fulfilling certain conditions. Under Chapter VI, certain deductions are given in respect of incomes which are chargeable. Under Part D of Chapter IV, certain allowances are given, such as investment allowance or allowance for scientific research. It will thus be seen that there is a basic dichotomy between receipts which are not taxable at all and receipts which are taxable but subject to exemption on fulfilling certain conditions. (See also A.V. Fernandez v. State of Kerala [1957] 8 STC 561 (SC)).
57. In the case of capital gains, it is a receipt which is not taxable at all, but for a deeming provision. Even the deeming provision is subject to exclusion in respect of certain receipts which fulfil certain conditions such as reinvestment, etc. Therefore, capital receipts which do not have the character of income cannot be made liable to income-tax by adding them to the book profit. To understand this proposition, let us take the case of a company which has got agricultural income. In drawing up its profit and loss account, it is bound to show the profit from the agricultural operations also as part of its profits. But can a tax be levied under Section 1I5J on the agricultural income which is not to form part of the total income under Section 10 ? Section 115J has recognised this and has provided in the Explanation, Clause (f), item (ii), that the amounts falling under Chapter III are to be excluded. When an amount which forms part of the book profit itself cannot be taxed under Section 115J when it does not have income character, it has to be accepted that, when what is routed through the profit and loss account and carried to reserve is a capital receipt and does not have income character, it cannot be added back to the book profits merely because of the enabling provision in the Explanation to Section 115J for the purpose of imposing a tax thereon. Apart from the fact that capital gains are deemed to be income under Section 45, we also have to keep in mind that even Section 115J deems 30 per cent, of the book profit to be the total income chargeable to tax. If we adopt the approach of the Revenue, there will be a double deeming which cannot be accepted unless specifically provided for. The non obstante Clause by which this Section begins could only mean that the other Sections which impose tax on book profit alone are to be ignored and not that Section which deems a capital receipt as income should be taken as part of the book profit for the purpose of the Section, more so when Section 45 declares that it cannot be taken as income if Section 54E is attracted. The attempt of the Revenue is to levy tax on an amount which the law declares to be exempt by stretching the meaning of the word " book profits " to unreasonable lengths. In other words, in our considered opinion, the expression in Clause (b) of the Explanation to Section 115J, namely," the amounts carried to any reserves, by whatever name called ", could only refer to reserves out of the book profit having the character of taxable income. In this context, we may recall the observations of the Supreme Court in the case of Express Newspapers Ltd. [19641 53 ITR 250 (at page 260) :
" Now turning to Section 12B (Indian Income-tax Act, 1922 (43 of Income-tax Act, 1961)), it provides for capital gains. Under that Section, the tax shall be payable by the assessee under the head ' Capital gains ' in respect of any profits or gains arising from the sale of a capital asset effected during the prescribed period. It says further that such profits or gains shall be deemed to be income of the previous year in which the sale, etc., took place. This deeming Clause does not lift the capital gains from the sixth head in Section 6 and place it under the fourth head. It only introduces a limited fiction, namely, that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make them the profits or gains of the business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field."
58. Secondly, capital gain is deemed to be income only under Section 45. A deeming provision can be applied only to the extent to which the Legislature had intended it and cannot be extended to any other provision. What is deemed to be income under Section 45 cannot be deemed to be income for the purpose of Section 115J, for the simple reason that 'book profits ' cannot include the deemed income. More so, when, because of the operation of Section 54E, the item in question is saved from that deeming provision.
59. Thirdly, the legislative history shows that the tax under Section 115J was with reference to the business profit as it was in replacement of Section 80WA which sought to reduce the deductions available in computing the income from business. In that, Section 80T which refers to computation of capital gains was omitted, thus indicating that the provision was not intended to withdraw the concession granted in respect of computation of capital gains. A reference to the speeches of the Finance Minister would show that the concept of " zero-tax " company was only with reference to deductions and concessions availed of by a company in computing its income from business. The approach of the Revenue to add the capital receipt to the book profit would mean that the capital gains is also treated as business income, which it is not and that the exemption granted under Section 54E is to be withdrawn. We see no indication of such an intention, particularly when Section 54E provides for a lock-in-period of three years for the reinvested proceeds, on an interest rate which is lower than the market rate.
60. Lastly, the proceeds by way of a sale of an investment not being income, it is not liable to tax under Section 115J unless there is a clear intendment. It is well-recognised that there cannot be a charge by implication. This case presents a strange phenomenon where, unlike an assessee trying to take advantage of a lacuna in the Act, the Revenue seeks to tax an amount which is admittedly not income, on the ground that it has not been specifically excluded from the deeming provisions of Section 115J.
61. We are convinced that capital gains which is not chargeable even as deemed income because of Section 54E could not be brought to tax as part of the book profit under the Explanation to Section 115J.
62. We, therefore, hold that the book profits have been worked out in accordance with Parts !I and III of Schedule VI to the Companies Act and the adjustment made by the Assessing Officer to rework is not correct and not warranted. We delete the computation so made by the Assessing Officer and hold that the provisions of Section 115J have been erroneously applied. It follows that the total income chargeable to tax can be only Rs. 45,71,490 as computed under Section 143(3) of the Act.
63. Levy of interest under Section 215. -- The Assessing Officer having determined the total income chargeable to tax at 30 per cent, of the book profit as computed by him, charged interest under Section 215, amounting to Rs. 1,94,83,252. The assessee appealed and contended that the fiction created by Section 115J cannot be extended to the levy of interest under Section 215 and relied on the decision of the Delhi Bench of the Tribunal in the case of Steel Authority of India Ltd. v. Dy. CIT [1991] 38 ITD 193. The Commissioner of Income-tax (Appeals), however, held that the Act nowhere stated that the income determined under Section 115) will not form part of the income subject to advance tax and, accordingly, confirmed the levy of interest. In the further appeal before us, it was contended on behalf of the assessee that since this issue has been decided in favour of the assessee by a Bench of the Tribunal, it should be followed. On the other hand, it was contended on behalf of the Revenue that since the matter is before a Special Bench, that decision of the Tribunal should be reconsidered. According to the Revenue, the definition of " assessed tax " in Section 215 clearly referred to the total income determined in the assessment and, therefore the levy of interest should be upheld.
64. The Revenue which had initially objected to the hearing of the appeal by a Special Bench strangely requires the Special Bench to reverse the decision of the Delhi Bench of the Tribunal on this point when it is against the Revenue. As it is, since we have already decided that the income in this case cannot be determined under Section 115J, the question of levying interest under Section 215 in respect of the income determined under Section 115J becomes academic. However, since the issue has been argued on both sides, for the sake of completeness, we shall deal with the same.
65. Section 215 reads as follows :
" 215. Interest payable by assessee. - (1) Where, in any financial year, an assessee has paid advance tax under Section 209A or Section 212 on the basis of his own estimate (including revised estimate), and the advance tax so paid is less than seventy-five per cent, of the assessed tax, simple interest at the rate of fifteen per cent, per annum from April 1, next following the said financial year up to the date of the regular assessment shall be payable by the assessee upon the amount by which the advance tax so paid falls short of the-assessed tax :
Provided that in the case of an assessee, being a company, the provisions of this Sub-section shall have effect as if for the words ' seventy-five per cent.', the words ' eighty-three and one-third per cent.' had been substituted.
(2) Where before the date of completion of a regular assessment, tax is paid by the assessee under Section 140A or otherwise,--
(i) interest shall be calculated in accordance with the foregoing provision up to the date on which the tax is so paid ; and
(ii) thereafter, interest shall be calculated at the rate aforesaid on the amount by which the tax as so paid (in so far as it relates to income subject to advance tax) falls short of the assessed tax.
(3) Where as a result of an order under Section 147 or Section 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 263 or Section 264, the amount on which interest was payable under Sub-section (1) has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly, and --
(i) in a case where the interest is increased, the Income-tax Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be a notice under Section 156 and the provisions of this Act shall apply accordingly ;
(ii) in a case where the interest is reduced, the excess interest paid, if any, shall be refunded.
(4) In such cases and under such circumstances as may be prescribed, the Income tax Officer may reduce or waive the interest payable by the assessee under this Section.
(5) In this Section and Sections 217 and 273, 'assessed tax', means the tax determined on the basis of the regular assessment (reduced by the amount of tax deductible in accordance with the provisions of Sections 192 to 194, Section 194A, Section 194C, Section 194D and Section 195) so far as such tax relates to income subject to advance tax and so far as it is not due to variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made.
(6) Where, in relation to an assessment year, an assessment is made for the first time under Section 147, the assessment so made shall be regarded as a regular assessment for the purposes of this Section and Sections 216, 217 and 273."
66. This Section provides for an automatic levy of interest wherever the advance tax paid is less than 75 per cent, of the assessed tax. Consequently, no appeal has been provided against the levy of interest under this Section. But the Supreme Court has held in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT[1986] 160 ITR 961 that, where the assessee denies the liability to pay interest, an appeal would lie. But, if the computation of interest alone is in question, no appeal would lie. In the present case, the assessee denies the liability on the ground that this Section would refer only to the income computed under the provisions of the Act and not the deemed income substituted by Section 115J. The Delhi Bench of the Tribunal in the case of Steel Authority of India Ltd. [1991] 38 ITD 193 had held that the legal fiction created by Section 115} could apply only for the purpose of that Section and could not be extended beyond that. It was pointed out that, unless the books of account are completed and the book profits are determined, one cannot decide as to whether the assessee is liable to pay any tax under Section 115J and it would, therefore, be unfair to extend the fiction beyond the purpose for which it was created. In other words, the rationale of the decision seems to be that since the assessee could not anticipate the book profit, he would not be liable to pay advance tax on the deemed income under Section 115J.
67. We find that this reasoning is not sound. Section 207 provides that advance tax shall be paid on current income which is the total income of the assessee which would be chargeable to tax for the relevant assessment year. "Assessed tax" is also defined in Section 215(5) to mean the tax determined on the basis of the regular assessment. In other words, both the estimation of the current income as well as the determination of the assessed income have to be in accordance with the provisions of the Act which includes Section 115J. In the circumstances, it is not possible to say that the assessee cannot anticipate that he will be liable to tax under Section 115J, taking 30 per cent, of the book profit as the deemed income instead of the income determined in accordance with the provisions of the Act. Actually, as pointed out earlier, the book profit would be the starting point for the computation of the income for allowing the various deductions and concessions allowed and hence it is an untenable proposition to say that the assessee could estimate the net amount after the deductions but not the gross amount or 30 per cent, thereof from which the current income is to be derived. Moreover, the levy of interest under this Section is automatic unlike Sections 216, 217 and 139(8) where any underestimate of the current income can be condoned for sufficient cause shown. In the circumstances, on a combined reading of the pro visions of Sections 208 and 215, it is clear that the assessee is required to pay advance tax taking into account the application of Section 115J. The decision of the Delhi Bench appears to be incorrect and we must hold that, in case the assessment is to be completed by applying the provisions of Section 115J and if there is a shortfall in the payment of advance tax with reference to the income so determined, the assessee would be liable to pay interest under Section 215.
68. Disallowance of interest. --In computing the total income, the Assessing Officer has disallowed the following interest payments :
Rs.
(i) Interest payable to Customs Department on import of raw material 6,85,066
(ii) Interest payable to Customs Department on ESSW yarn 3,06,922
(iii) Interest payable to Excise Department on fancy yarn 54,534
(iv) Interest payable on fuel surcharge to RSBB 94,845
69. According to the Income tax Officer, the assessee had challenged certain levies made by the Customs and other departments before the High Court and interim orders were passed by the High Court, stating that, if the matter is finally decided against the assessee, the amounts due should be paid along with interest. The assessee had provided for payment of such interest which the Assessing Officer thought was a contingent liability and, accordingly, disallowed the claim. This was confirmed in appeal. The assessee does not dispute these facts. Therefore, it is clear that if the assessee wins the case, there should be no liability to pay interest and such a liability would arise only when the cases are decided against the assessee. We, therefore, agree with the Assessing Officer that the liability to pay interest was a contingent liability and cannot be allowed as a deduction.
70. Deduction under Section 80G. -The assessee had given a donation of Rs. 7 lakhs to Vishwa Mangal Trust. The Income-tax Officer noted that in the case of CIT v.' Upper Ganges Sugar Mills Ltd. [1985] 154 ITR 308, the Calcutta High Court had held that Vishwa Mangal Trust was not eligible for exemption under Section 80G. He, accordingly, disallowed the claim. The assessee is faced with the decision of the High Court which clearly states that Vishwa Mangal Trust was not eligible for exemption. Hence, the disallowance is confirmed.
71. Expenditure for drilling of tube-well, -- The Assessing Officer noted that the assessee had incurred a sum of Rs. 6,720 for laying a tube-well. Since no water was found, this expenditure was written off. According to the Assessing Officer, this was a wasteful capital expenditure and, accordingly, disallowed the same. This was confirmed on appeal. It is pointed out on behalf of the assessee that for the earlier year 1981-82, a similar issue came up before the Tribunal in the assessee's own case and by an order dated February 15, 1985, in ITA No. 1970/83, a similar disallowance was upheld, following the decision in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1983] 142 ITR 1 (All). In the circumstances, we have to uphold the disallowance for this year also.
72. Depreciation on diesel generator set. -- The Income-tax Officer noted that the assessee had received subsidy of Rs. 1,50,800 from the Government of Jammu and Kashmir for the purpose of installing a diesel generator set. She, therefore, reduced the cost of the asset by the amount of the subsidy for calculating the depreciation. This was confirmed on appeal. It is stated before us that the subsidy was a direct grant for the purchase of the diesel generator set. In the circumstances, it is not possible for the assessee to avoid the reduction of the cost of the set by the amount of the subsidy within the meaning of Section 43(1) of the Act. The action of the Assessing Officer in this regard is confirmed.
73. Payment made to Cricket Association of Bengal.-- The assessee did not press the ground relating to the claim for deduction of Rs. 1 lakh paid to the Cricket Association of Bengal.
74. In the result, the appeal is partly allowed.