Case Law Details
DCIT Vs Luxmi Tea Company Ltd (ITAT Kolkata)
The issue under consideration is whether income from sale of tea manufactured and sold from tea leaves purchased from third parties was from non-agricultural activity and therefore, was not eligible for deduction of 60%?
In the Assessee-company was engaged in business of cultivation, manufacturing and sale of tea. It was also engaged in purchasing tea leaves from third parties and after carrying out manufacturing process was selling the tea so manufactured. While computing the book profit under section 115JB, the assessee deducted 60% of composite profit, which comprised of profit from growing, manufacturing and selling of tea as well as profit from sale of tea manufactured from tea leaves purchased from third parties. AO accepted the said claim of assessee. However, CIT invoked his revision power under section 263 and held that the income from sale of tea manufactured and sold from tea leaves purchased from third parties was from non-agricultural activity and the same, therefore, was not eligible for deduction of 60%.
ITAT states that on perusal of CBDT Circular No. 495 dated 22-9-1987, it was clear that there was no provision for bifurcating income from growing, manufacturing and sale of tea and income from manufacturing and sale of tea out of leaves purchased from third parties. Therefore, the proposed adjustment in the impugned order under section 263 was beyond the scope of determining of book profit under section 115JB read with CBDT Circular No. 495 dated 22-9-1987. The AO has to accept the profit as per the profit and loss account prepared in accordance with the companies Act and thereafter he can proceed to make the additions and deletions set out in the Explanation to Sec.115JB of the Act. He cannot make any adjustment which is not permitted under Explanation to Sec.115JB of the Act. The interpretation as above by the Hon’ble Supreme Court will equally apply to the provisions of Sec.115JB of the Act as well, as those provisions are identical to the provisions of Sec.115J of the Act with certain variations, which does not in any way alter the starting point of computation of book profit u/s.115J of the Act. If the CBDT Circular referred to above and the decision of the Hon’ble Supreme Court in the case of Apollo Tyres (supra) are read together, the only conclusion that can be reached that the computation of book profit as done by the Assessee is correct and cannot be termed as erroneous and prejudicial to the interest of the revenue.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals are preferred by the Revenue against two separate orders passed by the Ld. CIT(A) – 21, Kolkata both dated 09.02.2018 and the common grounds raised therein read as under:
“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in computing book profit by considering 60% of adjusted income instead of 60% of composite income.
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in appreciating Rule 8(1) of I.T. Rules, 1962, as eligible for computation of agricultural income.”
2. The assessee in the present case is a company which is engaged in the business of cultivation, manufacturing & sale of tea. It also purchases tea leaves from third parties and carries out manufacturing process and sales tea so manufactured. While computing the book profit u/s 115JB of the Act for A.Y. 2009-10, the assessee had deducted Rs. 9,84,06,438/- being 60% of composite profit of Rs. 16,40,10,729/- which comprised of profit from growing, manufacturing & selling of tea as well as profit from sale of tea manufactured from tea leaves purchased from third parties. In the assessment completed u/s 143(3) vide an order dated 24.09.2012, the AO allowed this deduction as claimed by the assessee while computing the books profit u/s 115JB. The records of the said assessment came to be examined by the Ld. CIT and on such examination, he was of the view that the assessee was entitled for deduction while computing book profit u/s 115JB only to the extent of Rs. 2,09,11,766/- being 60% of the proportionate profit of Rs. 3,48,52,944/- relating to the activity of growing, manufacturing and selling of tea made from its own grown tea leaves. According to him, the income from sale of tea manufactured and sold from tea leaves purchased from third parties was from non-agricultural activity and the same, therefore, was not eligible for deduction of 60% in terms of Rule 8(1). The order passed by the AO u/s 143(3) dated 24.09.2012 thus, was held to be erroneous and prejudicial to the interest of the Revenue by the Ld. CIT vide an order dated 26.03.2015 passed u/s 263 with the direction to the AO to make the assessment afresh after calling for the necessary details and examining the matter in accordance with law.
3. As per the direction of the Ld. CIT given vide an order passed u/s 263, the fresh assessment was completed by the AO vide an order dated 18.02.2016 passed u/s 263/154/143(3) of the Act for A.Y. 2010-11 wherein he restricted the deduction claimed by the assessee while computing the book profit u/s 115JB of the Act to Rs. 2,89,77,274/- as against the deduction originally allowed to the extent of Rs. 9,84,06,438/-. The AO also completed the assessment for A.Y. 2013-14 vide an order dated 19.02.2016 wherein a similar deduction of Rs. 12,37,61,310/- claimed by the assessee being 60% of the adjusted profit while computing the book profit u/s 115JB was restricted by the AO to Rs. 7,63,71,381/- being 60% of the composite profit.
4. Against the orders passed by the AO for AY 2010-11 u/s 263/154/143(3) of the Act and for AY 2013-14 u/s 143(3) of the Act, appeals were preferred by the assessee before the Ld. CIT(A). Meanwhile the appeal filed by the assessee against the order passed by the Ld. CIT(A) u/s 263 dated 03.02.2017 came to be disposed of by the Tribunal vide an order dated 03.02.2017 in ITA No. 731/Kol/2015 wherein the claim of the assessee for deduction on adjusted profit while computing the book profit u/s 115JB was allowed by the Tribunal on merit and following the said decision of the Tribunal, the Ld. CIT(A) vide his impugned orders passed for AY 2010-11 & 2013-14 directed the AO to allow the claim of the assessee for deduction of 60% of adjusted profit. Aggrieved by the same, the Revenue has preferred these appeals before the Tribunal.
5. We have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the learned representative of both the sides, the common issue involved in this appeal of the assessee is squarely covered in favour of the assessee by the order of the Tribunal dated 03.02.2017 (supra) wherein a similar issue as involved in the present appeals was decided by the Tribunal on merit in favour of the assessee vide paragraph no. 20 to 24 which read as under:
“20. We have given a very careful consideration to the rival submissions. It is no doubt true that the assessee had income from growing, manufacturing and sale of tea as well as income from tea leaves purchased from third parties which were processed /manufactured and sold by the assessee. In so far as the first category of income is concerned, the same has to be regarded as part of the composite income for the purpose of applying Rule 8(1) of the Rules. In so far as the second category of income is concerned it cannot be regarded as part of the composite income under rule 8(1) of the Rules. This position has been accepted by the assessee itself in the computation of the total income under the normal provisions of the Act. We have referred to the computation of the total income by the assessee under the normal provisions of the Act in the earlier part of this order.
21. Now the question is whether the position will change when it comes to computation of book profit u/s 115JB of the Act. In the context of section 115J of the Act, the CBDT in Circular No.495 dated 22.09.1987 has set out the manner of computation of book profits and composite income in the case of an Assessee to which Rule 8(1) of the Rules, for the purpose of Sec.115J of the Act. This tribunal in the case of M/s. Kanco Enterprises Ltd. (supra) has taken a view that the aforesaid circular would be applicable in the context of section 115JB of the Act also. The following are the relevant observations of the tribunal :-
“20. We have heard the rival submissions. Section 115JB of the Act in Explanation 1
(ii) which gives the list of amounts that has to be reduced from the book profits, provides as follows :-
“(ii) the amount of income to which any of the provisions of [section 10 (other than the provisions contained in clause (38) thereof)] or section 11 or section 12apply, if any such amount is credited to the profit and loss account; or “
Section 295 (2) (b) provides as follows :-
“295 Power to make rules.
(1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out of the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters :-
(a) The ascertainment and determination of any class of income;
(b) The manner in which and the procedure by which the income shall be arrived at in the case of –
(i) income derived in part from agriculture and in part from business;
(ii) persons residing outside India;
[(iii) an individual who is liable to be assessed under the provisions of sub- section (2) of section 64;”
Pursuant to the aforesaid provision of Rule 8 of IT Rules 1962 provides that in the case of income derived from sale of tea grown and manufactured by the seller in India, the income shall be computed as if they were income derived from business and 40% of such income shall deemed to be income liable to tax. It is thus clear from the reading of Rule 8(1) that 60% of the income computed as aforesaid is to be treated as agricultural income exempt u/s 10(1) of the Act. Since 60% of the income is exempt u/s 10(1) of the Act. The Assessee’s claim is that 60% of the income which is exempt in terms of Rule 8 of the Rules, is nothing but income exempt u/s.10(1) of the Act and hence the same should be reduced from the book profits under Explanation 1 clause (ii) listing amounts to be reduced u/s 115JB of the Act. We are of the view that the stand taken by the revenue deserves acceptance. The CBDT in the context of Sec.115J of the Act had in CIRCULAR NO. 495 DATED 22ND SEPTEMBER, 1987 in para 36.4 taken the same view:
“36.4 In the case of a tea company where income is derived from the sale of tea grown and manufactured by the seller, only 40 per cent of such income is liable to tax under r. 8 of the IT Rules, 1962. Sixty per cent of the income, which is disregarded for the purposes of taxation is considered to be agricultural income and is, therefore, exempt under the provisions of Chapter III. The net profit determined in accordance with Schedule VI to the Companies Act, 1956, has to be adjusted, inter alia, in accordance with cl. (f) and sub- cl. (ii) of the Explanation to s. 115J(1). In the case of the tea companies, the book profit should be computed by making all the adjustments referred to in the Explanation. However, no adjustment in respect of cl. (f) and sub-cl. (ii) of the Explanation is to be made for the agricultural income earned by tea companies from tea business. 40 per cent of the adjusted amount arrived at in this manner will be the book profit of the tea company in accordance with r. 8 of the IT Rules.”
The provisions of Sec.115JB of the Act are on the same basis as that of Se.115J of the Act. There is no reason why the aforesaid principle laid down in the CBDT Circular, which is in tune with the provisions of law referred to above, should not be applied to the computation of books profits u/s.115JB of the Act. We therefore hold that the determination of books profits u/s.115JB of the Act should be worked out by the AO on the lines indicated in the Circular. We hold that the determination of books profits u/s.115JB of the Act should be worked out as done by the Assessee and in accordance with the directions laid down in the Circular referred above. We hold and direct accordingly and allow grounds raised by the assessee.”
22. It is clear from the CBDT Circular that there is no provision for bifurcating income from growing, manufacturing and sale of tea and income from manufacturing and sale of tea out of leaves purchased from third parties. In other words, the proposed adjustment in the impugned order u/s 263 of the Act was beyond the scope of determining of book profit u/.s 115JB of the Act r.w. CBDT Circular No.495 dated 22.09.1987 as well as the decision of the Hon’ble Supreme Court in the case of Apollo Tyres (supra). In Apollo Tyres Ltd. (supra), the Hon’ble Supreme Court had to decide the following question of law:
“Can an Assessing Officer while assessing a company for income tax under Section 115-J of the Income Tax Act question the correctness of the profit and loss account prepared by the assessee company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act ?”
The Hon’ble Supreme Court after extracting the provisions of Sec.115J of the Act found that the intent and purpose of Sec.115J of the Act, as explained by the Hon’ble Finance Minister when he introduced the relevant Bill containing the said provisions, was that highly profitable companies were showing nil income for the purpose of income tax calling them as “zero-tax” companies and that the provisions of Sec.115J were being inserted so that all profitable companies pay some tax and hence a provision whereby every company will to have to pay a “minimum corporate tax” on the profits declared by it in its own accounts was being introduced. The Hon’ble Court thereafter held that for the said purpose, Section 115-J makes the income reflected in the companies books of accounts as the deemed income for the purpose of assessing the tax. The books of accounts of the company is prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The Hon’ble Court held that while so looking into the accounts of the company, an assessing officer under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. It was also held that if the legislature intended the assessing officer to reassess the company’s income, then it would have stated in Section 115-J that “income of the company as accepted by the assessing officer”. The final conclusion of the Hon’ble Supreme Court on the issue was:
“9. Therefore, we are of the opinion, the assessing officer while computing the income under Section 115-J has only the power of examining whether the books of account are certifies by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J.”
23. Therefore the AO has to accept the profit as per the profit and loss account prepared in accordance with the companies Act and thereafter he can proceed to make the additions and deletions set out in the Explanation to Sec.115JB of the Act. He cannot make any adjustment which is not permitted under Explanation to Sec.115JB of the Act. The interpretation as above by the Hon’ble Supreme Court will equally apply to the provisions of Sec.115JB of the Act as well, as those provisions are identical to the provisions of Sec.115J of the Act with certain variations, which does not in any way alter the starting point of computation of book profit u/s.115J of the Act. If the CBDT Circular referred to above and the decision of the Hon’ble Supreme Court in the case of Apollo Tyres (supra) are read together, the only conclusion that can be reached that the computation of book profit as done by the Assessee is correct and cannot be termed as erroneous and prejudicial to the interest of the revenue.
24. We also find that similar computation has been accepted by the revenue even in A.Y.2012-13 to 2014-15. Orders of assessment for A.Y.2013-14 and 2014-15 have been passed after order passed u/s 263 of the Act. We therefore are of the view that the CIT was not justified in invoking the provision u/s 263 of the Act, in so far as it relates to determination of book profit u/s 115JB of the Act”
6. The common issue involved in these two appeals thus is squarely covered in favour of the assessee by the order of the Tribunal dated 03.02.2017 passed in ITA No. 731/Kol/2015 and respectfully following the same, we uphold the impugned orders of the Ld. CIT(A) allowing the claim of the assessee for deduction of 60% of adjusted income while computing the book profit u/s 115JB of the Act for both the years under consideration.
7. In the result, both the appeals of the Revenue are dismissed.
Order Pronounced in the Open Court on 20th November, 2019.
