Case Law Details

Case Name : CIT Vs Binani Cement Ltd. (Calcutta High Court)
Appeal Number : ITA No. 7 of 2004
Date of Judgement/Order : 04/03/2016
Related Assessment Year : 2006-07

Brief of the Case

Calcutta High Court held In the case of CIT vs. Binani Cement Ltd. that AS-13 – Accounting of Investment issued by the ICAI provides for recognition of the profit or loss arising out of investment in the profit and loss account. The disclosure made in the financial statements is in pursuance of the requirement of Accounting Standard and is also in pursuance of Schedule VI to the Companies Act, 1956 which is not to be construed as any qualification indicating any inaccuracy in the accounts. There was, thus no mistake on the part of the assessee in debiting the loss on account of investment to the profit and loss account. Once it is clear that the assessee had correctly debited the profit and loss account for the loss arising out of the transfer of investment division, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position. Hence revision is not valid.

Facts of the Case

The assessee is an Indian Company engaged in manufacture and sale of clinker and cement.  The assessee filed its return of income for the assessment year 2006-07 disclosing total income at nil and book profit under Section 115JB of the Act at Rs.48,62,96,592/-.  The same was processed under Section 143(1). Subsequently, the scrutiny assessment proceeding was initiated and notice was issued under Section 143(2).  The scrutiny assessment was completed under Section 143(3) by an order dated 5th November, 2008  whereby the total income was determined to be ‘nil’ and book profit u/s.115JB was found to be Rs.47,21,87,057/-.  Furthermore, a claim for deduction of Rs.70,48,242/- u/s.35E of the Act was disallowed.

The CIT by an order dated 20th January 2011 u/s.263 observed that the assessee had debited an amount of Rs. 919.52 lakhs to the Profit and Loss Account in accordance with a scheme of arrangement for the transfer of its investment division to Daisy Commercials Pvt. Ltd (DCPL). He further observed that the aforesaid amount of Rs 919.52 lakhs was not added back in computing the book profit u/s.115JB of the Act, and as such the assessment order dated 5th November, 2008, u/s.143(3) of the Act was erroneous and prejudicial to the interest of the revenue. Therefore the CIT set aside the order of assessment and directed the assessing officer to decide the issue in accordance with law.

Contention of the Assessee

The ld counsel of the assessee submitted that according to the mandate of s.115JB(2)(a) the assessee company had maintained its accounts as per the provisions of Part II and Part III of Schedule VI of the Companies Act 1956. The same was scrutinized and certified by the statutory auditors and was approved by the assessee company in its annual general meeting. As such the assessing officer had no jurisdiction to question the correctness of the accounts. In support of his submission he relied on the judgement of the Apex Court in the case of Apollo Tyres Ltd. –Vs- CIT reported in (2002) 255 ITR 273. The Registrar of Companies, Statutory auditors and share-holders are the only authorities to check whether accounts are in accordance with Part II and III of Schedule – VI of the Companies Act 1956.

He further submitted that in view of accounting treatment expressly laid down in the scheme of arrangement sanctioned by this Hon’ble Court it was obligatory on the part of the assessee to debit the amount of Rs 919.52 lakhs towards loss on account of the transfer of the Investment Division of the assessee company to the Profit and Loss account. The CIT by his order u/s.263 did not disclose any provision of Part II and III of Schedule VI of the Companies Act 1956 which was allegedly contravened. The jurisdiction u/s.263 was wrongly exercised on an erroneous reading of the judgement in Hari Machines (2009) 311 ITR 285 which has no manner of application to the facts of this case. The CIT in his order u/s.263 did not disclose any material on the basis of which he could arrive at the conclusion that the assessment order under consideration is “erroneous in so far as it is prejudicial to the interests of the revenue.

He further submitted that the revisional jurisdiction u/s.263 cannot be exercised where two views are possible and the assessing officer has taken one of the possible views. In support of his submissions he relied on a judgement in the case of Malabar Industrial Company -Vs- CIT reported in (2000) 243 ITR 83.

Contention of the Revenue

The ld counsel of the revenue submitted that the loss could not have been debited to the P/L account. Therefore, it is not in accordance with the provisions of Section 115 JB hence it is erroneous and prejudicial to the Revenue.  Therefore, exercise u/s.263 was proper.

Held by ITAT

The ITAT allowed the appeal of the assessee. It was held that unless it is pointed out that the book profit is not arrived at on the basis of profit and loss account computed in accordance with Part II and III of Schedule VI to the Companies Act, or unless there are no Specific enabling provisions for adjustment in Section. 115JB itself, the book profit as per profit and loss, duly approved by the auditor and duly adopted by the Company, cannot be tinkered with Hon’ble Supreme Court’s judgment in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) holds so.

Held by High Court

 High Court held that it is a fact that the assessee incurred loss of a sum of Rs.9.20 crores by resorting to transfer of its investment division to Daisy Commercials Private Ltd.  The loss was debited to the profit and loss account.  The assessment was under Section 115JB of the Act.  The assessing officer did not question the act of debiting loss arising out of the transfer to the P/L account. Only CIT was of the opinion that the loss could not have been debited to the P/L account and the amount was required to be added back for computation of book profit under Section 115JB.

The accounting standards laid down by the institute however provide for recognition of the profit or loss arising out of investment in the profit and loss account. The disclosure made in the financial statements is in pursuance of the requirement of Accounting Standard and is also in pursuance of Clause 2(b) of Part II of Schedule VI to the Companies Act, 1956 which is not to be construed as any qualification indicating any inaccuracy in the accounts. There was, thus no mistake on the part of the assessee in debiting the loss to the profit and loss account. Once it is realized that the assessee had correctly debited the profit and loss account for the loss arising out of the transfer of investment division, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position.

Accordingly, appeal of the revenue dismissed.

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