AO cannot make changes in accounts certified under Companies Act for Computing book profit

Brief of the Case: In the cited case, ITAT held that the Assessing Officer does not have power to embark upon the fresh enquiry with regard to the entries made in the books of accounts of the Company when the accounts of an assessee Company is prepared in terms of Part II Schedule VI of the Companies Act scrutinized and certified by the statutory auditors, approved by the Company in general meeting and thereafter filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act.

Facts of the Case: The first dispute was relating to adjustment made by AO in computation of book profit under section 115JB. Under the provisions of section 115JB, in case, total income computed under normal provisions of the IT Act is less than certain percentage of book profit, the book profit is deemed to be total income of the assessee on which tax is payable on a specified rate. The book profit under the said provisions is computed on the basis of profit shown in the P&L Account prepared in accordance with provisions of Part-II and Part–III of Schedule-VI of Companies Act to which certain adjustments as provided in the Explanation-1 to Section 115JB(2) are required to be made.

The AO noted that the assessee had earned gross profit of Rs.1,68,95,500/- from sale of its rights in the immovable property which had not been shown in the P&L Account but had been taken directly to the balance sheet. AO referred to the sub-clause (xi) of clause-3 of Part-II of Schedule-VI as per which the assessee is required to show the amount of income earned from investment in the P/L Account, distinguishing between trade investments and other investments. It was thus mandatory for the company to show profit/loss on sale of assets in the P&L Account which had not been done. The AO thus concluded that the P/L account had not been prepared in accordance with Part-II and Part-III of Schedule-VI of the Companies Act. AO referred to the decision of the Tribunal in the case of M/s. Bombay Diamonds Co. P. Ltd. in ITA No.7488/Mum/07 in which it was held that the AO had power to re-work the book profit by re-casting the P/L account in the manner provided in Part-II and Part-III of Schedule-VI of the Companies Act. The AO, therefore, re-worked the book profit in which addition on account of sale of investment was made and tax computed accordingly.

The second dispute was regarding disallowance of expenses under section 14A of the IT Act in relation to income exempt from tax. The AO noted that the assessee had earned tax free dividend income of Rs.1,56,408/-. The AO therefore, allocated expenses relating to exempt income on proportionate basis and disallowed a sum of Rs.8,02,702/-.

On appeal by the Assessee, CIT (A) confirmed the adjustment made by AO to the book profit and directed the AO to re-compute the disallowance as per Rule-8D of Income tax Rules.

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