Case Law Details
Section 50C of the Act prescribes for adoption of full value of consideration in certain cases. It is provided that where the consideration received or accruing as a result of the transfer of a capital asset being land or building or both is less than the value adopted by an authority of the State Government for the purposes of payment of Stamp duty in respect of such transfer, then the value so adopted by the State Government authority shall be deemed to be the full value of consideration received or accruing as a result of such transfer.
The said provisions of sub-section (1) of section 50C are further circumscribed by sub-section (2) of section 50C. In terms of clause (a) of sub-section (2) of section 50C, it is provided that where an assessee claims before the Assessing Officer that the value adopted or assessed by the Stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer, then the Assessing Officer may refer valuation of the capital asset to the Valuation Officer. In this case, factually it is evident that the assessee had claimed in the return of income itself that the value adopted by the Stamp valuation authority exceeded the fair market value as on the date of transfer as provided in section 50C(2)(a) of the Act. In our view, under these circumstances the Assessing Officer ought to have referred the matter to the Valuation Officer instead of straightaway deeming the value adopted by the Stamp valuation authority as the full value of consideration. The point made out by the Revenue that it is only discretionary on the part of the Assessing Officer to refer the matter to the Valuation Officer, in our view, is quite untenable. The discretion vested in the Assessing Officer, in our considered opinion, in such a situation is required to be used in a judicious manner. Section 50C of the Act is a deeming provision and ostensibly involve creation of an additional tax liability on the assessee and, therefore, notwithstanding the presence of the expression “may” in section 50C(2)(a), in our view, the Assessing Officer in this case ought to have referred the matter to the Valuation Officer for ascertaining the value of the capital asset in question. Therefore, in this view of the matter without going into further merits of the dispute, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to adopt the course mentioned in section 50C(2)(a) of the Act and thereafter proceed to determine capital gain on sale of land and building. Needless to mention, the Assessing Officer shall give a reasonable opportunity of being heard to the assessee in this regard and adjudicate the issue afresh. Thus, on this Ground the assessee succeeds for statistical purposes.
IN THE ITAT PUNE BENCH ‘A’
K.K. Nag Ltd.
v.
Additional Commissioner of Income-tax
IT Appeal Nos. 1304 & 1305 (PuNe) of 2010
[assessment years 2005-06 & 2006-07]
May 25, 2012
ORDER
2. We shall first take up cross-appeals of the assessee and Revenue pertaining to assessment year 2005-06. Both these appeals, i.e. ITA No 1304/PN/10 by assessee and cross-appeal No 1298/PN/10 of Revenue arise out of the order of the Commissioner of Income-tax (Appeals)-V, Pune dated 7.7.2010, which in turn, have arisen from the order under section 143(3) of the Income-tax Act, 1961 (in short “the Act”) passed by the Assessing Officer for the assessment year 2005-06.
3. In the appeal of the assessee, the first Ground raised is with regard to the manner of determination of capital gain on sale of land and building. The limited grievance of the assessee is that the lower authorities have erred in adopting the Stamp duty value of land and building at Rs 60,75,500/- as he total sale consideration for the purpose of computing the capital gain. On this aspect, a preliminary objection raised by the appellant is that the Assessing Officer proceeded to adopt the value adopted by the Stamp valuation authority without referring the matter to the Valuation Officer, especially when the assessee had objected to the value adopted by the Stamp valuation authority. In this connection, our attention was invited to page 33 of the Paper Book wherein is placed a copy of the computation of income annexed with the return of income in which the assessee had claimed that in terms of section 50C(2)(a) of the Act, the value adopted by the Stamp valuation authority under section 50C exceeded the fair market value of the property as on date of transfer. In terms thereof, the Assessing Officer was expected to refer the matter to the Valuation Officer to ascertain the valuation and thereafter proceed in the matter as contained in section 50C(2)(a) of the Act.
4. On the other hand, the learned Departmental Representative, appearing for the Revenue has contended that it was not mandatory for the Assessing Officer to refer the matter for valuation inasmuch as the word in section 50C(2)(a) used is “may” which clearly shows the discretion on the part of the Assessing Officer in referring the matter for valuation purpose. Therefore, according to the learned Departmental Representative, the preliminary objection of the assessee has no merit.
5. We have carefully considered the rival stands and find that the plea of the assessee is quite justified. Section 50C of the Act prescribes for adoption of full value of consideration in certain cases. It is provided that where the consideration received or accruing as a result of the transfer of a capital asset being land or building or both is less than the value adopted by an authority of the State Government for the purposes of payment of Stamp duty in respect of such transfer, then the value so adopted by the State Government authority shall be deemed to be the full value of consideration received or accruing as a result of such transfer. The said provisions of sub-section (1) of section 50C are further circumscribed by sub-section (2) of section 50C. In terms of clause (a) of sub-section (2) of section 50C, it is provided that where an assessee claims before the Assessing Officer that the value adopted or assessed by the Stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer, then the Assessing Officer may refer valuation of the capital asset to the Valuation Officer. In this case, factually it is evident that the assessee had claimed in the return of income itself that the value adopted by the Stamp valuation authority exceeded the fair market value as on the date of transfer as provided in section 50C(2)(a) of the Act. In our view, under these circumstances the Assessing Officer ought to have referred the matter to the Valuation Officer instead of straightaway deeming the value adopted by the Stamp valuation authority as the full value of consideration. The point made out by the Revenue that it is only discretionary on the part of the Assessing Officer to refer the matter to the Valuation Officer, in our view, is quite untenable. The discretion vested in the Assessing Officer, in our considered opinion, in such a situation is required to be used in a judicious manner. Section 50C of the Act is a deeming provision and ostensibly involve creation of an additional tax liability on the assessee and, therefore, notwithstanding the presence of the expression “may” in section 50C(2)(a), in our view, the Assessing Officer in this case ought to have referred the matter to the Valuation Officer for ascertaining the value of the capital asset in question. Therefore, in this view of the matter without going into further merits of the dispute, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to adopt the course mentioned in section 50C(2)(a) of the Act and thereafter proceed to determine capital gain on sale of land and building. Needless to mention, the Assessing Officer shall give a reasonable opportunity of being heard to the assessee in this regard and adjudicate the issue afresh. Thus, on this Ground the assessee succeeds for statistical purposes.
6. The second Ground in this appeal relates to the action of the income-tax authorities in holding that the provision for leave encashment of Rs 8,35,447/- could not be reduced from “book profits” while computing tax liability under section 115JB of the Act. The issue is as to whether the assessee can be permitted to deduct Provision for leave encashment of Rs 8,35,447/-, which is not debited to the Profit & Loss account, while arriving at the “book profits” for the purposes of section 115JB of the Act.
7. The Assessing Officer and thereafter, the Commissioner of Income-tax (Appeals) has held that the amount of Rs 8,35,447/- stated to be on account of leave encashment provision is not liable to be deducted while computing the “book profits” under section 115JB of the Act, because the same has not been debited in the Profit & Loss account. According to the Revenue, the assessee did not account for this liability in the Profit & Loss account and since only specific items mentioned in clauses (i) to (vii) of the Explanation to second Proviso to section 115JB are to be reduced from the “net profit” shown in the Profit & Loss account, the said amount of leave encashment provision could not be allowed to be deducted for the purposes of determining “book profits” under section 115JB of the Act.
8. The stand of the assessee, on the other hand, is that the incremental liability towards leave encashment is to be provided on accrual basis having regard to the Accounting Standard – 15 issued by the Institute of Chartered Accountants of India. In terms of the said Accounting Standard (AS 15), every corporate entity is required to make a provision for retirement benefits which specifically includes incremental liability towards leave encashment. The case set-up by the assessee is that though it did not account for this liability in its Profit & Loss account, however, in the Notes forming part of the accounts, which are accompanying the financial statements, it had clearly mentioned that the incremental liability towards leave encashment in this year was Rs 8,35,447/-. The learned Counsel for the assessee further pointed out that such liability was liable to be reduced from the net profit depicted in the Profit & Loss account while determining the book profits, because section 115JB(2) of the Act itself provides that book profits should be computed as per the accounting standards adopted. It was, therefore, submitted that non-debit in the Profit & Loss account cannot be fatal so as to dis-entitle the assessee from such deduction while computing the “book profits” under section 115JB of the Act. In this connection, the learned Counsel for the assessee relied heavily on the judgment of the Hon’ble Delhi High Court in the case of CIT v. Sain Processing & Weaving Mills P. Ltd. 325 ITR 565 (Del) wherein in an almost similar circumstances the claim of the assessee for deduction of depreciation while computing book profits under section 115J was found to be tenable, inspite of the fact that the amount was not debited to the Profit & Loss account and due cognizance was given to the fact that the amount of depreciation was otherwise disclosed in the Notes to accounts accompanying the financial statements. Therefore, it was contended that having regard to the obligation to comply with Accounting Standard 15 and the disclosure of the amount of Rs 8,35,447/- in the Notes to accounts as an incremental liability towards leave encashment, would entitle the assessee to deduct the same while determining the “book profits” for the purpose of section 115JB of the Act.
9. We have carefully considered the rival submissions. The pointed controversy on this ground has already been noted by us in the earlier part, which is to the effect as to whether the assessee is correct in asserting that the incremental liability towards leave encashment amounting to Rs 8,35,447/-which is not debited to the Profit & Loss account, is liable to be deducted while arriving at the “book profits” under section 115JB of the Act. Quite clearly, the issue that is liable to be addressed is the manner in which the “book profits” are required to be calculated for the purposes of section 115JB of the Act. In this connection, we may refer to sub-section (2) of section 115JB of the Act which obligates every corporate assessee to prepare its Profit & Loss account for the relevant previous year in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956. The proviso thereof further contains a prescription that while preparing the annual accounts including the Profit & Loss account, accounting policies, accounting standards adopted for preparing such accounts (including Profit & Loss account) and the method and rates adopted for calculating depreciation, shall be the same as have been adopted for the purposes of preparing such accounts laid before the Company at the annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956. It would suffice to observe here that an obligation is put on a corporate assessee to prepare its Profit & Loss account for the relevant previous year in accordance with the provisions of Parts II and III to Companies Act, 1956. In so far as this aspect of the matter is concerned, there is no dispute in this case. The dispute is that while preparing such Profit & Loss account, the assessee company did not enter in the Profit & Loss account the incremental liability towards leave encashment amounting to Rs 8,35,447/- and instead, the same formed a part of the Notes forming part of the accounts, which was annexed to its annual accounts. In this regard, we find that at page 74 onwards is placed copy of the Notes forming part of the annual accounts for the year ending 31.3.2005 and in terms of Note No. 2 thereof, it is stated that the Company follows mercantile system of accounting and recognizes income and expenditure on an accrual basis except in the case of leave encashment. By way of Note No. 8, it is clarified that encashment of leave is at the option of the employees and is accounted for as and when the option is exercised by them. Thus, in the Notes to accounts, the accounting policy as also the non-provision of the incremental liability towards leave encashment has been stated.
10. At this stage, we may refer to the provisions of section 211 of the Companies Act, 1956 which is the fountain head of the requirements contained in the Companies Act, 1956 regarding the form and content of the Balance Sheet and Profit & Loss account. In terms of sub-section (1) of section 211 of the Companies Act, 1956, the balance sheet of a company is to be prepared so as to give a true and fair view of the state of affairs of the company at the end of the financial year and is to be in a form set out in Part I of Schedule VI to Companies Act, 1956. Similarly sub-section (2) of section 211 requires that every Profit & Loss account of a company shall give a true and fair view of the profit or loss of a company for the financial year and shall comply with the requirements of Part II of Schedule VI to the Companies Act, 1956. Sub-section (3A) of section 211 provides that every Profit & Loss account and Balance sheet of the company shall comply with the Accounting Standards. Sub-section (3C) of section 211 of Companies Act, 1956 further clarifies that the expression ‘Accounting Standards’ means standards of accounting recommended by the Institute of Chartered Accountants of India.
11. Now, we may examine the requirements as to Profit & Loss account contained in Part II of Schedule VI to the Companies Act, 1956. The relevant portion of Clause 3 reads as under:
“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 accounts:
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(x) Expenditure incurred on each of the following items, separate for each item:
| (a), (b), (c), (d) and (e)** |
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(f) (1) Salaries, wages and bonus,
(2) Contribution to provident and other funds,
(3) Workmen and staff welfare expenses 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. ”
Therefore, on a conjoint reading of sub-sections (2), (3A) of section 211 and Part II of Schedule VI to the Companies Act, 1956 and the Accounting Standard – 15, it was imperative for the assessee to set out the incremental liability towards leave encashment in the annual accounts. Now the point is that such setting out is by way of a disclosure in the Notes forming part of the annual accounts and not by way of an entry in the Profit & Loss account. The moot question is as to whether such Notes are a part of the accounts and whether the fact that incremental liability towards leave encashment provision has not been debited to the Profit & Loss account would dis-entitle the assessee of its claim for deduction from the “net profit” for the purposes of determining “book profits” under section 115JB of the Act. Precisely, this aspect of the controversy has been elaborately dealt with by the Hon’ble Delhi High Court in the case of Sain Processing & Weaving Mills P. Ltd (supra). In the case before the Hon’ble Delhi High Court, the issue related to non-charging of depreciation in the Profit & Loss account, which was claimed by the assessee as deductible while computing the “book profits” for the purposes of section 115J of the Act on the ground that the same was otherwise disclosed in the Notes to accounts as required under the Companies Act, 1956. The Hon’ble High Court considered the aforesaid aspect of the controversy in the following words:
“The answer to this poser is found in sub-section (6) of section 211 of the Companies Act, which provides that except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents by the Companies Act. As already noted it is obligatory under clause 3(iv) of Part II to Schedule VI to the Companies Act to give information with regard to depreciation, which has not been provided for alongwith the quantum of arrears. According to us, once this information is disclosed in the notes to the accounts it would clearly fall within the ambit of the Explanation to section 115J of the Act which defines “book profit” to mean “net profit” s “shown” in the profit and loss account for the relevant assessment year.
To our minds, as long as the depreciation which is not charged to the profit and loss account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression “shown” in the profit and loss account, as notes to the accounts, form part of the profit and loss account by virtue of sub-section (6) of section 211 of the Companies Act, 1956. This is quite evident if the provisions of subsection (6) of section 211 of the Companies Act, are read in conjunction with subsection (1A) as well as the Explanation to section 115J of the Act.”
12. In our view, the aforesaid parity of reasoning is squarely applicable in the present situation also, inasmuch as the provisions of section 115J of the Act and 115JB of the Act which are before us, are pari materia in so far as it relates to the obligation on a corporate assessee to prepare its Profit & Loss account for the relevant previous year in accordance with the provisions of Part II & III of Schedule VI to Companies Act, 1956. Therefore, having regard to the aforesaid parity of reasoning, once it is clear that the information towards incremental liability of leave encashment, which has not been provided in the Profit & Loss account, is otherwise disclosed in the Notes to the accounts, it would clearly fall within the ambit of Explanation 1 to the second Proviso to section 115JB of the Act which defines “book profits” to mean “net profit” as “shown” in the Profit & Loss account for the relevant previous year prepared under sub-section (2) of section 115JB of the Act. Notably, sub-section (2) of section 115JB of the Act imposes an obligation on every assessee to prepare a Profit & Loss account in the relevant previous year in accordance with the provisions of Part II & III to Schedule VI of Companies Act, 1956. At this stage, it would also be pertinent to emphasis the provisions of sub-section (6) of section 211 of the Companies Act, which were referred to by the Hon’ble Delhi High Court in the aforesaid judgment. Subsection (6) of section 211 provides that any reference to a Balance Sheet or Profit & Loss account shall include any Notes thereon giving information required by this Act or is allowed by this Act to be so given. Therefore, in view of the aforesaid statutory provision contained in Companies Act 1956, the impact is that the net profit as shown in the Profit & Loss account for the purposes of Explanation 1 to the second Proviso to section 115JB of the Act is to be understood with reference to the Notes to accounts accompanying the annual accounts also. In this view of the matter, the use of the expression ‘net profit’ in Explanation 1 to the second Proviso to section 115JB of the Act makes it clear that the impugned incremental liability towards leave encashment not debited to the Profit & Loss account but otherwise disclosed in the Notes to Accounts will have to be taken into account while determining the “book profits” under section 115JB of the Act. In other words, the liability of Rs 8,35,447/- towards leave encashment has to be considered to determine net profit as the information was disclosed in the Notes appended to accounts, which have been held to be part of the accounts of the assessee company. Therefore, we find ample force in the plea of the assessee which, in our opinion, is allowable having regard to the parity of reasoning laid down by the Hon’ble Delhi High Court in the case of Sain Processing & Weaving Mills P. Ltd (supra).
13. In so far as the plea of the Revenue to the effect that the aforesaid item is not mentioned in Clauses (i) to (vii) of the Explanation 1 to the second Proviso to section 115JB of the Act is concerned, the same in our view is liable to be dismissed as misconceived. At no stage it has been the claim of the assessee that it was claiming deduction in terms of clauses (i) to (vii) of Explanation 1 to the second Proviso to section 115JB of the Act. The plea of the assessee has been that net profit as referred to in Explanation 1 to the second Proviso to section 115JB of the Act was to be computed on the basis of net profit shown in the Profit & Loss account, which in turn was required to be prepared and understood in accordance with the provisions of Part II & III of Schedule VI to Companies Act. Further, the liability towards leave encashment was to be considered as an item of expense in terms of Accounting Standard 15 issued by the Institute of Chartered Accountants of India and, therefore, on a conjoint reading of sub-section (6) to section 211 of the companies Act, 1956 and sub-section (2) of section 115JB of the Act, the impugned sum was liable to be considered in determining the “net profit” as shown in the Profit & Loss account referred to in Explanation 1 to the second Proviso to section 115JB of the Act.
14. In view of the aforesaid discussion, we therefore uphold the plea of the assessee and accordingly the order of the Commissioner of Income-tax (Appeals) is set aside the Assessing Officer is directed to allow the deduction. Thus on this Ground, the assessee succeeds.
15. The only other Ground in this appeal relates to the charging of interest under sections 234B and 234C of the Act. As per the appellant, the total income was computed under section 115JB of the Act and in such a situation interest under sections 234B and 234C are not leviable. However, at the time of hearing it was fairly brought out that the said issue is covered against the assessee by the judgment of the Hon’ble Supreme Court in the case of Jt. CIT v Rolta India Ltd 330 ITR 470 (SC). In this view of the matter, on this Ground the assessee fails.
16. In the result, the appeal of the assessee (ITA No 1304/PN/10) is partly allowed.
17. We shall now take up Revenue’s cross-appeal, vide ITA No.1298/PN/10 for the assessment year 2005-06.
18. Ground No. 1 of appeal relates to the deletion of the addition of bad debts of Rs 1,22,502/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee had claimed an amount of Rs 1,22,502/- as bad debts. According to the assessee, the debts had arisen due to debit notes raised on the party and credited to the expenditure accounts, which had automatically been offered as income in the earlier years, but were written-off in the current year as bad debt. As per the Assessing Officer, under section 36(2) of the Act an amount can be claimed as bad debt only if the said amount has been taken into account in computing the income of the assessee for the previous year or for an earlier previous year. In the opinion of the Assessing Officer, since the said amount was a reimbursement and not income, there was no question of taking the same into account while computing the income of the assessee for any previous year. He accordingly disallowed the claim of the assessee of bad debt of Rs 1,22,402/-. Against the said decision, the assessee went in appeal before the Commissioner of Income-tax (Appeals).
19. Before the Commissioner of Income-tax (Appeals), assessee explained that the amount in question represented cost of corrugated boxes charged by the assessee to M/s Voltas Ltd, to whom certain goods were sold in financial year 2000-01. As the assessee did not receive this amount from the said concern, the same was claimed as bad debt in the current year. It was further submitted that since the cost of boxes as charged to M/s Voltas Ltd. constituted a part of income of the assessee company for financial year 2000-01, the condition for claiming bad debt had been fulfilled. In support thereof, assessee company submitted ledger extracts of M/s Voltas in its account books for the relevant financial year along with details of income disclosed. After considering the above submissions, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee of bad debt and deleted the disallowance of Rs 1,22,502/- against which the Revenue is in appeal before us.
20. The learned Departmental Representative, appearing for the Revenue, submitted that the Assessing Officer was justified in disallowing the claim of the assessee for bad debts and placed reliance on the order of the Assessing Officer in support of Revenue’s case.
21. On the other hand, the learned Counsel for the assessee placed reliance on the order of the Commissioner of Income-tax (Appeals) in support of assessee’s claim and submitted that the order of the Commissioner of Income-tax (Appeals) on this issue be affirmed.
22. Having considered the rival submissions, in our opinion, no interference is required in the order of the Commissioner of Income-tax (Appeals). In our considered opinion, the assessee has been able to demonstrate before the Commissioner of Income-tax (Appeals) as well as before us that the reason cited by the Assessing Officer for making the disallowance that the amount was in the nature of reimbursement which had not been included in the income of the assessee for any previous year, was not factually correct. We therefore affirm the order of the Commissioner of Income-tax (Appeals) on this issue Revenue also on this Ground of appeal.
23. In so far as Ground No 2 is concerned, the same relates to the determination of capital gain on sale of land and building, which was also the subject-matter of consideration in the cross appeal of the assessee by way of Ground No. 1. While considering the said issue in the cross appeal, the preliminary objection of the assessee regarding non-reference to the Valuation Officer in terms of section 50C(2)(a) of the Act has been found to be untenable and the matter has been restored back to the file of the Assessing Officer. As a consequence, on this aspect also which is intertwined with the issue considered in Ground No. 1 in the appeal of the assessee, we set aside the order of the Commissioner of Income-tax (Appeals) and restore the matter to the file of the Assessing Officer to be decided afresh as directed in the appeal of the assessee. Thus, on this ground, Revenue succeeds for statistical purposes.
24. In the result, appeal of the Revenue is dismissed.
25. In the appeal of the assessee for the assessment year 2006-07 (ITA No 1305/PN/10), in so far as the first Ground is concerned, the same is identical to Ground No. 2 considered by us in the appeal of the assessee for assessment year 2005-06 and, therefore, our decision therein applies mutatis mutndis herein also. Thus, on this Ground the assessee succeeds.
26. Ground No. 2 relates to charging of interest under sections 234B and 234C where the total income has been computed under section 115JB of the Act. This Ground is covered against the assessee by the judgment of the Hon’ble Supreme Court in the case of JCIT v. Rolta India Ltd. 330 ITR 470 (SC) as conceded by the assessee in the course of hearing. Hence, on this issue, the Ground is dismissed.
27. In the result, whereas the appeals of the assessee are partly allowed, that of the Revenue is dismissed.
