Madras High Court
M/S. Ramakrishna Mills (Cbe) Ltd vs The Joint Commissioner Of Income-Tax on 22 November, 2024
Author: Anita Sumanth
Bench: Anita Sumanth
2025:MHC:482
T.C.A.No.185 of 2012
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 22.11.2024
CORAM :
THE HONOURABLE DR.JUSTICE ANITA SUMANTH
and
THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.A.No. 185 of 2012
M/s. Ramakrishna Mills (CBE) Ltd.,
1403, Sathyamangalam Road,
Ganapathy,
Coimbatore – 641 006 .. Appellant
vs
The Joint Commissioner of Income-Tax,
Range-IV, Coimbatore
.. Respondent
Prayer : Appeal filed under Section 260A of the Income-Tax Act, 1961
against the order of the Income Tax Appellate Tribunal, ‘D’ Bench,
Chennai dated 05.08.2005 in ITA No.750/Mds/02 for the assessment year
1998-99.
For Appellant : Mr.R.Vijayaraghavan
For M/s.Subbaraya Aiyar
Padmanabhan & Ramamani
For Respondents : Mr.Karthik Ranganathan
Senior Standing Counsel
JUDGMENT
(Delivered by Dr. ANITA SUMANTH.,J) The substantial questions of law admitted for resolution are as follows:
https://www.mhc.tn.gov.in/judis 1/13 T.C.A.No.185 of 2012 "1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the prior period expenses amounting to Rs.29,16,167/- cannot be reduced from the book profits computed under Section 115 JA of the Income Tax Act even if such expenses have been debited to the Profit and Loss Account in the books and have been allowed in the assessment order for computing the income under the normal provisions of the Income Tax Act 1961 for the assessment year in appeal?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that Profit and Loss appropriation account does not form part of the Profit and Loss account and as such any amounts displayed under the Profit and Loss appropriate accounts has to be excluded while computing Book Profits for the purpose of Section 115 JA of the Income Tax Act?
3. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the ratio of the decision of the Supreme Court in the case of Apollo Tyres Ltd. V. CIT (255 ITR 273)?"
2. We have heard Mr.Vijayaraghavan, learned counsel for the appellant and Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for the respondent.
3. The petitioner is a Public Limited Company incorporated under the provisions of the Companies Act, 1956. It carries on the business of spinning. The assessment year (AY) in question is 1998-99. Return of income had been filed with computation of income, both under the regular provisions as well as computing Minimum Alternate Tax (MAT) under https://www.mhc.tn.gov.in/judis 2/13 T.C.A.No.185 of 2012 Section 115JA of the Income Tax Act, 1961 (in short ‘Act’).
4. An intimation was issued under Section 143(1)(a) of the Act and the matter was taken up for assessment. The assessment was completed on 13.11.2000 accepting the return filed, both under regular provisions as well as under MAT. While so, a show cause notice/proposal dated 29.11.2001 was received for suo motu revision under Section 263 of the Act. The Commissioner of Income Tax (CIT) was of the view that the assessing authority ought to have added back prior period expenses as far as the computation of MAT was concerned and hence proposed to revise the assessment as being both erroneous and prejudicial to the interests of the revenue.
5. The appellant had explained that the prior period expenses were, in fact, not incurred in the prior period but were incurred only in the previous year in question. There were two components of the expenses. The first was of a sum of Rs.26,59,755/-, representing bonus which became payable on the basis of a settlement agreement entered into in financial year (FY) 1997-98. Hence, it was the appellant’s case that the liability had crystallised during the present assessment year only.
6. The second component related to internal audit fees and power https://www.mhc.tn.gov.in/judis 3/13 T.C.A.No.185 of 2012 charges. In both instances, there had been an upward revision of the amount/additional demand made by the electricity department during the relevant financial year though relating to earlier years. Hence, though categorised as prior period expenses, the expenditure had incurred only in the relevant financial year, as the liability had been crystallised only then.
7. Overriding the objections raised, the CIT passed an order on 26.02.2002 disallowing the amounts only in the computation of book profits under Section 115JA. As the computation under normal provisions of the Act had not been disturbed, the assessment under Section 143(3) in so far as it related to computation of income under normal provisions has attained finality.
8. The CIT had also opined that the judgment of the Supreme Court in the case of Apollo Tyres Ltd., V. CIT1 and of the Bombay and Gujarat High Courts in CIT vs. Echjay Forgings Pvt. Ltd.2 and Saurashtra Cement & Chemical Industries Ltd. v. CIT3 which had been relied upon by the appellant would be of no avail to it.
9. The assessee filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’/’Tribunal’) assailing the assumption of jurisdiction as 1 255 ITR 273 2 251 ITR 15 3 213 ITR 523 https://www.mhc.tn.gov.in/judis 4/13 T.C.A.No.185 of 2012 well as the direction of the CIT to modify the order of assessment dated 13.11.2000 adding back the expenses amounting in toto to a sum of Rs.29,16,167/-. The Tribunal concurred with the CIT.
10. The Tribunal was of the view that the adjustment of prior period expenses from the net profit of the current year was in contravention of accounting norms. It was also of the view that as the prior period expenses had been certified by the auditor and approved by the Company in the Annual General Meeting (AGM) prior to filing before the Registrar of Companies (ROC), the ratio of the judgment in Apollo Tyres4 should apply to the assessee also.
11. Hence, the assessee could not approbate and reprobate, meaning that the books of accounts could not be accepted for the purpose of Companies Act and rejected for the purpose of Income Tax Act. Hence, the Tribunal concluded stating that the adjustment in book profit providing for prior year expenses was not permitted under the provisions of Section 115JA of the Act and that the judgment of the Supreme Court in Apollo Tyres (supra) stood in the way of the appellant’s claim.
12. Learned counsel for the appellant would reiterate the position that the expenditures, though under the nomenclature ‘prior period 4 Foot Note Supra (1) https://www.mhc.tn.gov.in/judis 5/13 T.C.A.No.185 of 2012 expenses’, had been incurred only in the current year. He would emphasize that the preparation of the accounts had been in consonance with the Accounting Standards. Moreover, Section 115JA of the Act contain an explanation defining ‘book profit’ to mean the net profit as shown in the profit and loss account for the relevant year.
13. This is the starting point for the computation and it is this amount that would have to be either increased or reduced by various amounts as stipulated in the clauses under the Explanation to Section 115JA. According to him, this is exactly how the appellant has also proceeded to compute the book profits and hence there is no infirmity in the manner of its computation.
14. Per contra, learned Standing Counsel would point out that the assessee was blowing hot and cold. While on the one hand it argues that it is the accounts as presented before the shareholders in the AGM and filed with the ROC that form the basis of computation and that should be accepted for the purposes of the Companies Act, it takes a different stand as far as the income tax proceedings are concerned seeking adjustment of certain expenses from the net profit.
15. According to him, this approach is precisely what has been https://www.mhc.tn.gov.in/judis 6/13 T.C.A.No.185 of 2012 rejected per the judgement of the Supreme Court in the case of Apollo Tyres (supra). Hence, the order of the Tribunal confirming the order under Section 263 of the Act is valid in law.
16. In order to understand and appreciate the rival contentions of the parties, it is necessary for us to see the presentation of the profit and loss account by the assessee which is as follows:
https://www.mhc.tn.gov.in/judis 7/13 T.C.A.No.185 of 2012
17. The account reveals that the appellant has computed net profit at a sum of Rs.114,88,29,121/- for the year ended 31.03.1998. This, according to the Department, must be the net profit for the purposes of income tax. Any adjustment made to this figure, according to them, would be an adjustment below the line, impermissible both in terms of the Explanation to Section 115JA as well as the ratio of the judgment in Apollo Tyres (supra).
18. What the appellant has done, is to reduce Rs.34,250/- (being donations and charity) plus Rs.2,56,412/- (being internal audit fees and power charges) plus Rs.32,67,502/- (bonus paid in the current year relating to the prior year being Rs.74,62,839/-) less provision made in the earlier year which was allowed in the assessment for that year (being Rs.41,95,337/-, in all amounting to a sum of Rs.32,67,502/-) from the net profit.
19. In our view, the flaw committed by the appellant is in the presentation of the profit and loss account where the expenditure in question has been presented after arriving at the net profit. Perhaps in the interests of transparency, the appellant has classified the expenses in https://www.mhc.tn.gov.in/judis 8/13 T.C.A.No.185 of 2012 question as prior year expenses insofar as they relate to expenditure in connection with bonus and other expenses that arose in connection with prior years. However, the amounts have, in fact, admittedly, been crystallised and expended only in the financial year relating to assessment year 1998-99.
20. Had this amount been taken into account prior to the computation of net profit, the Department might not have put up any resistance in accepting the claim. An important point to note is that neither the allowability of the claim, incorrectness of the expenditure nor quantification of the same have been doubted by the Department in the regular computation of income.
21. Hence, while the argument of the Department to the effect that there should be no adjustment to net profit after determination of the profit is technically correct, in the present case, the adjustments made are allowable adjustments that impact the net profit for the assessment year in question. The true picture should not be lost by virtue of a quirk of presentation of the financials.
https://www.mhc.tn.gov.in/judis 9/13 T.C.A.No.185 of 2012
22. The order of the Tribunal confirming the proposal is also, in our view, hyper technical. The Tribunal has proceeded on the assumption that there is a profit and loss appropriation account which is erroneous as there is no such account in the financials produced before us. Substantial question No.2 hence is returned as unanswered in the present facts and circumstances of the case.
23. The Appellant has relied upon the decisions in the case of Commissioner of Income Tax v Khaitan Chemicals & Fertilizers Ltd [307 ITR 0150] and Tamil Nadu Cements Corporation Ltd v Joint Commissioner of Income-Tax, Special Range II, Chennai [2012 (23) Taxmann.com 145(Mad].
24. The Respondent, for its part has relied upon the decision of the Karnataka High Court in Commissioner of Income Tax, Bangalore v GMR Industries Ltd., [2020 (122) taxmann.com 8 (Karnataka)].
25. In the case of Tamil Nadu Cements Corporation Ltd.(supra), this Court has considered the treatment of prior period accounts in arriving at the book profit under Section 115JA of the Act. The assessee in that case had prepared its case on net profit as per profit and loss account after reducing the prior period expenses/extraordinary items. This was https://www.mhc.tn.gov.in/judis 10/13 T.C.A.No.185 of 2012 contested by the revenue on the ground that reduction of prior period expenses did not find mention in clause (i) to (ix) of Explanation to Section 115JA(2) of the Act.
26. Referring to the Accounting Standards (AS) and to the judgment of the Delhi High Court in Khaitan Chemicals & Fertilizers Ltd. (supra) and to the other cases relied upon by that assessee, this Court holds that AS – 5 stipulates that prior period items are income or expenses which arise ‘in the current period’, as a result of errors or omissions in the preparation of financial statement of one or more prior periods.
27. In the present case, the components of bonus, internal audit fees and power charges had, admittedly, been crystallized only in the relevant previous year. In such circumstances, it is all the more necessary that these amounts must be taken into account for the proper determination of net profit or loss.
28. In GMR Industries Ltd. (supra), relied upon by the revenue, the decision of this Court in Tamil Nadu Cements Corporation Ltd. (supra) has not been taken note of.
29. Substantial question of law No.3 is incomplete both in the Tax Case (Appeal) and in the order of admission dated 20.06.2012. We are of https://www.mhc.tn.gov.in/judis 11/13 T.C.A.No.185 of 2012 the view that the substantial issue arising for decision in this case has been encompassed in substantial question of law No.1 and that the same would suffice to provide a proper resolution of that issue.
30. In light of the above discussion, we are of the view that the proposal for revision does not hold any merit and substantial question of law No.1 is answered in favour of the Assessee. This Tax Case (Appeal) is allowed as indicated above.
[A.S.M., J] [G.A.M., J]
22.11.2024
Index:Yes
Neutral Citation:Yes
sl
To
The Joint Commissioner of Income-Tax,
Range-IV, Coimbatore
https://www.mhc.tn.gov.in/judis
12/13
T.C.A.No.185 of 2012
DR. ANITA SUMANTH.,J.
and
G. ARUL MURUGAN.,J.
sl
T.C.A.No.185 of 2012
22.11.2024
https://www.mhc.tn.gov.in/judis
13/13