PCIT Vs Kansara Popatlal Tribhuvan Metal Pvt. Ltd. (Gujarat High Court)
Summary: The Gujarat High Court dismissed the Revenue’s appeal against the Income Tax Appellate Tribunal’s order dated 22.07.2022 in the case of Kansara Popatlal Tribhuvan Metal Pvt. Ltd. for Assessment Year 2010-11. The dispute concerned the exercise of revisional jurisdiction under Section 263 of the Income Tax Act, 1961, on two issues: depreciation claimed on a windmill while computing book profits under Section 115JB and payments made to related parties under Section 40A(2)(b). The Principal Commissioner had treated the assessment order as erroneous and prejudicial to the interests of the Revenue, alleging excess depreciation and inadequate verification of related-party transactions.
On the depreciation issue, the assessee had claimed depreciation of ₹3,40,20,000 at 80% on a windmill costing ₹4,25,25,000. The Revenue contended that depreciation should have been restricted to 15.33% under Schedule XIV of the Companies Act, 1956, resulting in alleged excess depreciation of ₹2,75,00,917. The Tribunal, however, relied on judicial precedents, including Malayala Manorama Co. Ltd. Vs CIT and DCIT Vs Vardhman Fabrics (P.) Ltd., supporting the treatment of depreciation charged in duly prepared and certified accounts. The High Court also considered the Supreme Court’s decision in Ashok Sadarangani Vs Union of India, which established that a judgment continues to operate as binding precedent despite a pending reference to a larger Bench, unless modified or overruled.
Regarding related-party transactions, the Principal Commissioner alleged that the Assessing Officer had failed to verify whether payments to M.C. Metal Pvt. Ltd. reflected fair market value under Section 40A(2)(b). The assessee maintained that details of related parties, payments and ledger accounts had been furnished during assessment proceedings and that the Assessing Officer had raised specific queries before accepting the transactions. The Tribunal found that the assessment had been completed after verification. The High Court relied on the principle affirmed in PCIT Vs Shreeji Prints (P.) Ltd. that an assessment cannot be revised merely because the Commissioner considers further inquiry desirable when the Assessing Officer has already examined the matter and adopted a plausible view.
The High Court upheld the Tribunal’s findings on both issues. On depreciation, it accepted that the judicial decisions supporting the assessee continued to hold the field notwithstanding the pending larger-Bench reference concerning Malayala Manorama. On related-party payments, it held that an assessment completed after verification could not be treated as erroneous and prejudicial to the Revenue merely because the revisional authority preferred further examination. Consequently, both substantial questions were answered against the Revenue, and the Tax Appeal was dismissed without any order as to costs.
Cases Discussed
- DCIT Vs Vardhman Fabrics (P.) Ltd. (Gujarat High Court); [2002] 122 Taxman 375. Followed in the Tribunal’s reasoning regarding depreciation charged at rates higher than those specified in Schedule XIV of the Companies Act.
- Apollo Tyres Ltd. Vs CIT (Supreme Court); [2002] 122 Taxman 562. Referred to in the quoted Tribunal order concerning computation of book profits.
- CIT Vs Sona Woollen Mills (P.) Ltd. (Punjab & Haryana High Court); [2007] 160 Taxman 22. Cited regarding higher depreciation charged in accounts for computing book profits.
- Malayala Manorama Co. Ltd. Vs CIT (Supreme Court); (2008) 300 ITR 251. Relied upon regarding the Assessing Officer’s power to substitute depreciation rates while computing book profits.
- Dynamic Orthopaedics (P.) Ltd. Vs CIT (Supreme Court); (2010) 321 ITR 300. Discussed concerning reconsideration of the Malayala Manorama decision by a larger Bench.
- Ashok Sadarangani and Another Vs Union of India and Others (Supreme Court); (2012) 11 SCC 321. Relied upon for the proposition that a judgment continues to hold the field while a larger-Bench reference remains pending.
- Deccan Tools Industries (P.) Ltd. (Andhra Pradesh High Court); [2014] 52 taxmann.com 55. Cited regarding the Assessing Officer’s authority to recalculate book profits by substituting depreciation rates.
- HAL Offshore Ltd. (ITAT Delhi); [2019] 108 taxmann.com 390. Cited regarding depreciation charged in the profit and loss account for Section 115JB computation.
- PCIT Vs Shreeji Prints (P.) Ltd. (Supreme Court); [2021] 130 taxmann.com 294. Relied upon regarding the limits of Section 263 revision where the Assessing Officer has conducted inquiries and adopted a plausible view.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. This Tax Appeal under the Income Tax Act has been filed challenging the order of the Income Tax Tribunal dated 22.07.2022 in ITA 1057/AHD/2015 for A.Y 2010-2011.
2. The following substantial questions of law have been raised:
“(a) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT has erred in holding the assessment order was not erroneous and prejudicial to the interests of the Revenue on the issue of excess depreciation claimed on windmill @80% as prescribed under IT Act instead of the rate of 15.33% for a continuous plant as per companies Act for the purpose of calculation of book profit u/s 115JB of the IT Act?
(b) Whether in the facts and circumstances of the case and in law, the Hon’ble ITAT has erred in holding the assessment order is not erroneous and prejudicial to the interests of the Revenue on the issue of determination of fair market value u/s 40A(2)(b) of the Act in respect of payments made to related parties during the year under consideration without appreciating the facts of the case?”
3. Facts in brief are that the company is engaged in the business of manufacturing SS Coil etc. E-returns of income was filed for Assessment Year 2010-2011 on 26.09.2010. On 22.03.2013, the Principal Commissioner of Income Tax-2, being of the opinion that determination of the Assessing Officer was erroneous insofar as it was prejudicial to the interest of revenue exercised powers under Sec.263 of the Act. The said exercise was undertaken on the relevant grounds as under:
(i) It is seen that in the profit and loss A/c for the A.Y under consideration, the assessee had claimed depreciation of Rs.3,40,20,000/- @ 80% on the addition to the assets being windmill costing Rs.4,25,25,000/-. However, the rate of depreciation in Schedule XIV of the Companies Act, 1956 for a continuous process plant is 15.33% and the asset in question i.e. windmill is covered under the said rate of depreciation only. Since assessee was eligible for depreciation @ 15.33% only which worked out to Rs.65,19,082/-, the assessee has been allowed excess depreciation of Rs.2,75,00,917/- on the windmill, while computing the book profit for the relevant period. As per the form 29B (read with rule 40B), filed with the Return of Income, the book profit u/s 115JB has been calculated at Rs.18,51,663/- and MAT at Rs.1,38,875/-.
(ii) Since the tax under regular provision of tax has been calculated at Rs. 5,92,063/- which is higher than MAT on book profit u/s 115JB of the Act, the income as per regular provision of Income Tax was adopted as total income of the Assessee.
(iii) However, in light of the facts narrated above, assessee’s book profit u/s 115JB of the Act had been under assessed at Rs.2,87,88,357/- and MAT on the same Rs.43,18,253/- as against tax paid Rs.5,92,063/- computed in the Assessment Order.
(iv) It is seen that assessee made related party payments to M.C. Metal Pvt Ltd on account of job-work payments Rs.48,49,883/- sales Rs.1,86,14,467/- & job-work receipt Rs.9,22,254/-. No verification regarding it being at ‘Fair Market Value’ as per the provisions of sec. 40A(2)(b) has been done by the A.O., although vide point No.14 of the notice dtd. 15.02.2014, specific query was raised.
3.1 Firstly, according to the Principal C.I.T, it was seen that the assessee had claimed depreciation of 80% whereas the rate of depreciation as per schedule XIV of the Companies Act, 1956, for a continuous process plant was 15.33%. Accordingly, the assessee had been allowed excess depreciation.
3.2 Secondly, during the assessment proceedings the assessee had submitted details of related parties along with amount of payments and ledger accounts of the respective parties without any supporting documents as comparable evidence with any other party to justify its case under Section 40A(2)(b) of the Income Tax Act. As the Assessing Officer had not examined the issue of payment made to related party and verification of fair market value as per provision of Section 40A(2)(b) of the Act, it was erroneous and prejudicial to the interest of the revenue.
4. Mr.Varun Patel, learned Senior Standing Counsel appearing with Mr.Dev Patel, learned counsel for the petitioner, would submit that the ITAT had erred in holding that the assessment order was not erroneous and prejudicial to the interest of the revenue on the issue of depreciation for a continous process plant as per Companies Act for the purpose of calculation of book profit u/s. 115 JB of the Act. Reliance placed on the decisions was erroneous where there were views of other High Courts in favour of revenue. The High Court of Kerala had on the same question of law allowed the Appeal of the revenue in the case of CIT vs. Dynamic Orthopaedics Limited, taking a view similar as that of the one in the case of Malayala Manorama Co. Ltd vs. CIT, reported in (2008) 300 ITR 251. The Hon’ble Supreme Court had in the case of Malayala Manorama Co. Ltd vs. CIT, reported in (2008) 300 ITR 251, reversed the view of the Kerala High Court which judgement was pending reconsideration of the larger Bench as observed in the case of Dynamics Orthopaedics P. Ltd vs. CIT., reported in (2010) 321 ITR 300. Hence, ITAT had erred in relying on the case of Malayala Manorama (supra).
5. Mr.Manish Shah, learned counsel appearing on caveat would submit that in the case of Ashok Sadarangani and Anr vs. Union of India & Ors., reported in (2012) 11 SCC 321, the Hon’ble Supreme Court had held that till the judgement of the Supreme Court which is referred to the larger Bench is decided, the law pronounced in the judgement which is referred for reconsideration is binding. Therefore, the case of Dynamic Orthopaedics(supra), would not dilute the precedential value in the case of Malayala Manorama (supra).
5.1 Mr.Manish Shah, learned counsel, would further submit that on the aspect of applicability of Sec.40A(2)(b), a specific query was raised by the Assesing Officer on 04.01.2023 and when answered, the Assessing Officer had accepted payments. Therefore, exercise of revisional jurisdiction was not warranted.
6. Having heard learned counsels appearing for the respective parties, what is evident is that on the question of treatment of depreciation, the ITAT in para 6, held as under:
“6. We have heard the rival contentions and perused the material on record on this ground. In the case of Malayala Manorama Co. Ltd v. CIT [2008] 169 Taxman 471 (SC), the facts were that in the profit and loss account for the relevant assessment year, the assessee had debited depreciation at the rates prescribed by the Income-tax Rules, 1962. However, the Assessing Officer was of the view that for purposes of section 115J, depreciation should have been calculated in terms of the Companies Act, 1956 and Schedule XIV thereof. Accordingly, he disallowed the assessee’s claim of depreciation charged at the rates prescribed by the Income-tax Rules. The Commissioner (Appeals) as well as the Tribunal allowed the assessee’s claim and directed the Assessing Officer to allow the claim of depreciation as per the Income-tax Rules for the purposes of computing the book profit under section 115J by substituting the rates of depreciation prescribed in Schedule XIV of the Companies Act, 1956. In appeal, the Supreme Court held that where assessee was consistently charging depreciation in its books of account at rates prescribed in Income-tax Rules and accounts of assessee had been prepared and certified as per provisions of 1956 Act, Assessing Officer would not have any jurisdiction under Section 115J to rework net profits of assessee by substituting rates of depreciation prescribed in Schedule XIV to 1956 Act. We further note that the jurisdictional Gujarat High Court in the case of DCIT v. Vardhman Fabrics (P) Ltd. [2002] 122 taxman 375 (Gujarat) has also adjudicated on this issue in favour of the assessee. The brief facts of the case were that assessee calculated depreciation on plant and machinery at 33.33 percent as permissible under the Income-tax Rules, 1962 as against 30 percent depreciation required to be calculated under Schedule XIV of the Companies Act. The Commissioiner, acting under section 263, held that rate of depreciation claimed was in excess of the rate under the Companies Act and that excess was to be disallowed. The Tribunal held that Circular of Company Law Board lays down minimum rate of depreciation for purpose of distribution of dividend and company may decide to claim higher depreciation on basis of bona fide technological evaluation and proper disclosure is to be made by way of a note forming part of annual accounts. The Tribunal further held that, in instant case, proper disclosure was made by way of a note to annual statement of accounts and rates claimed on basis of income-tax records were based on bona fide information of Board of Directors as contained in aforesaid minutes of meeting of Board of Directors. In appeal, the High Court held that the Tribunal was right in holding that depreciation worked out by assessee on basis of income-tax records and debited to profit and loss account was not violative of provisions of Companies Act and ITAT has not erred in cancelling order passed by Commissioner under section 263 of the Act. Again, in the case of CIT Ludhiana v. Sona Woollen Mills (P) Ltd. [2007] 160 Taxman 22 (Punjab & Haryana), assessee claimed depreciation as per provisions of income tax Act for computing quantum of income under section 115J. The Assessing Officer rejected claim of assessee on ground that depreciatin for purposes of section 115J was permissible as per Schedule XIV of Companies Act. The Commissioiner (Appeals) allowed claim of assessee holding that depreciation provided under Companies Act was minimum but there was no bar to higher depreciation being claimed by assessee and, thus, for purposes of section 115J, depreciation actually debited could be allowed. The High Court held that in view of Supreme Court decision in Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562, Commissioner (Appeals) was justified in holding that the assessee is eligible to claim higher rate of depreciation and Income Tax Act. The Delhi ITAT in the case of HAL Offshore Ltd [2019] 108 taxmann.com 390 (Delhi – Trib.) held that where depreciation provided in profit and loss account is at same rate as provided for purpose of profit and loss account being laid before Annual General meeting (AGM), no addition could be made to assessee’s income on ground that while calculating total income as per section 115JB, assessee had adopted rate of depreciation as per Income-tax Act instead of Companies Act in profit and loss account. The Andhra Pradesh High Court in the case of Deccan Tools Industries (P.) Ltd [2014] 52 taxmann.com 55 (Andhra Pradesh) held that where for purpose of section 115J, assessee claimed depreciation at rates provided under Income-tax Rules, action of Assessing Officer in redrawing profit and loss account and adopting rates prescribed under Companies Act, was totally unauthorized.
6.1 In view of the various decisions cited above, we are of the considered view that in the instant facts, PCIT erred in facts and law in holding that the assessment order was erroneous and prejudicial to the interests of the revenue so far as ground number 3 of the assessee’s appeal is concerned.”
7. Though, as per Mr.Patel’s submission the case of Malayala Manorama (supra) is pending reconsideration before the larger Bench of the Hon’ble Supreme Court, which took the view supporting the assessee, in light of the decision of the Supreme Court in Ashok Sadarangani (supra) during the pendency of reference, other proceedings involving the same issue would not remain stayed. Para 29 in the case of Ashok Sadarangani (supra), read as under:
“29. As was indicated in Harbhajan Singh case, the pendency of a reference to a larger bench, does not mean that all other proceedings involving the same issue would remain stayed till a decision was rendered in the reference. The reference made in Gian Singh case need not, therefore, detain us. Till such time as the decisions cited at the Bar are not modified or altered in any way, they continue to hold the field.”
8. Accordingly, no fault can be found and therefore on the first question of law, there is no merit.
9. On the second issue too, the Tribunal has observed that once the Assessing Officer had passed an order after carrying out the verification such cannot be held to be erroneous and prejudicial to the revenue. In the case of Principal Commissioiner of Income Tax, Surat-2 vs. Shreeji Prints (P) Ltd., reported in (2021) 130 taxmann.Com 294 (SC), the Hon’ble Supreme Court had confirmed the view of the High Court which had held that since the Assessing Officer had made inquiries and accepted the genuineness a plausible view so taken could not be held to be erroneous and prejudicial to the revenue.
10. For the aforesaid reasons, this question is also answered against the revenue. The Tax Appeal is, accordingly dismissed with no orders as to costs.
