Case Law Details
Mumbai bench of Income Tax Appellate Tribunal (the Tribunal) in the case of DCIT Vs. Bombay Diamonds Co. Ltd. (ITA No. 7488/Mum/07) held that if the books of accounts of the taxpayer which are not prepared in accordance with part II and part III of schedule VI to the Companies Act, 1956, the Assessing Officer (AO) can make adjustment in the book profits under section 11 5JB of the Income-tax Act, 1961 (the Act) even if the books of accounts are audited or certified by the auditors and accepted by the shareholders.
Further, the Tribunal also held that the decision of the Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT [2002] 255 ITR 273 (SC)were not applicable to the facts of the present case since in that case the books of accounts were prepared in accordance with the requirements of part II and part III of schedule VI to the Companies Act.
Facts of the case
The taxpayer during the year under concern earned profits of INR 104 million from the sale of its rights in booked premises. Such profit from sale of rights was entered directly to Balance Sheet as “capital reserve” without routing the same through the Profit and Loss Account (P and L Account). The taxpayer did not consider the above amount while calculating book profits under section 11 5JB of the Act. However, the AO held that the taxpayer clearly violated the provisions of Part II of the Schedule VI to the Companies Act and the Profit and Loss Accounts prepared by the taxpayer were not in accordance with the provisions of Schedule VI to the Companies Act. Accordingly, the AO recomputed the book profit under section 1 15JB of the Act.
The CIT(A) following the decision of Supreme Court in the case of Apollo Tyres Ltd. and Kinetic Motor Co. Ltd. v. DCIT [2002] 262 ITR 330 (Bom) held that the AO does not have the jurisdiction to go beyond the net profit shown in the audited Profit and Loss Account which was accepted by shareholders and filed with Registrar of Companies, except to the extent provided in explanation to section 11 5JB of the Act.
Tax department’s contentions
The effect of direct credit to “capital reserve” of a material amount without routing the same through P and L Account was not in accordance with the provisions of part II and part III of Schedule VI to the Companies Act.
Merely because the auditors have certified the P and L Account which were in violation of the provisions of Companies Act cannot prevent the AO to make adjustments in the book profits. The decisions relied by the taxpayer dealt with an issue whether the AO has power to make adjustments to the book profit when the accounts are prepared in accordance with the provisions of the Companies Act and are certified by the auditors. Accordingly, the decisions relied by the taxpayer was not applicable in the current case.
Taxpayer’s contentions
The taxpayer contended that the profit earned from sale of booked premises was a capital profits and not trading profit. Accordingly, such capital profit was not required to be credited to the P and L Account.
The accounts of the taxpayer were duly certified by the auditors and the same was accepted by shareholders in the Annual General Meeting which was filed with Registrar of Companies.
As per the decision of the Supreme Court in the case of Apollo Tyres Ltd. and Bombay High Court in the case of Kinetic Motor Co. Ltd. the AO cannot make any adjustments to the book profits of the taxpayer once it was certified by the auditors.
Tribunal’s ruling
The Tribunal observed that it is clear that the Profit and Loss Account of a company shall disclose every material item including receipts and expenditure in respect of non-recurring transactions or transactions of exceptional nature also. Further, the company is also required to prepare for the transactions which are of material amount and which are not ordinarily undertaken by the taxpayer.
The taxpayer did not route the profits from sale of rights in an immovable property through the Profit and Loss Account and has directly credited to the Balance Sheet. Accordingly, the Tribunal held that the accounts are not prepared in accordance with the manner provided in part II and part III of schedule VI to the Companies Act.
The decisions relied by the taxpayer in the case of Apollo Tyres Ltd. and Kinetic Motor Co. Ltd. were not applicable to the facts of the present case since in that case the books of accounts were prepared in accordance with the requirements of part II and part III of schedule VI to the Companies Act. Merely because the auditors certified the accounts and the shareholders accepted the books of accounts which apparently were not prepared in accordance with Part II and Part III of Schedule VI to the Companies Act cannot prevent the AO to make adjustments while calculating book profits.
Accordingly, the Tribunal held that the AO was right in making adjustment to the book profits under section 11 5JB of the Act.
Our Comments
This is a very important ruling by the Mumbai Tribunal where the principles laid down by the Supreme Court in the case of Apollo Tyres have been dealt with. The Tribunal held that even though the books of accounts of the taxpayer which are audited and certified by the auditor and accepted by the shareholders in the AGM, does not prevent AO to make adjustment in the book profits under section 11 5JB of the Act if it is not prepared in accordance with part II and part III of schedule VI to the Companies Act, 1956.
It has been held that the profit on sale of assets should be included in the profit and loss account and accordingly forms part of the book profits for the computation of Minimum Alternate Tax under section 115JB of the Act.
