Gati Limited Vs ACIT (ITAT Hyderabad)
Conclusion: Once the financial statements were ratified by the shareholders, assessee had no right to modify the profit declared as per Companies Act and adopt differently for the purpose of MAT provisions. Therefore, the profit adopted by the company in the AGM overlooking the qualification of auditor was the final book profit for the purpose of section 115JB, assessee could not alter the same by claiming that it had not followed certain Accounting Standards.
Held: Assessee had prepared its financial statement without following one of the accounting standard, which was relevant for the transaction during this AY. Assessee brought this issue before AO and submitted that it was legally empowered to modify the book profit for the purpose of section 115JB. AO accepted the contention of assessee without discussing in his order. However, CIT by invoking power u/s 263, termed the assessment as erroneous as well as prejudicial to the interests of revenue. In the present case, assessee himself happily declared that it had not followed AS – 13 in finalizing the financial statement which was laid before the company at its annual general meeting in accordance with section 210 of the Companies Act, 1956. In the given case, assessee incured loss on sale of investment and adjusted the above loss in the special reserve. It did not route the above transaction through the profit or loss account. The same was also qualified by the statutory auditors. Even then, the company preferred to lay the same before the shareholders and the same was ratified by company in the annual general meeting.
The provisions of section 115JB is very clear that the profit or loss should be the same as laid before AGM. Therefore, the profit adopted by the company in the AGM overlooking the qualification of auditor was the final book profit for the purpose of section 115JB, assessee could not alter the same by claiming that it had not followed certain Accounting Standards. Assessee had no right to modify the profit declared as per Companies Act and adopt differently for the purpose of MAT provisions. Once the financial statements were ratified by the shareholders, assessee could not modify the book profit as per the first provision to section 115JB(2). Therefore, the wrong interpretation of law empowered CIT to invoke provisions of section 263.
FULL TEXT OF THE ITAT JUDGMENT
This appeal filed by the assessee is directed against the order of CIT – 2, Hyderabad, dated, 15/03/2018, passed u/s 263 of the Income-tax Act, 1961 (in short ‘the Act’) for AY 2013-14.
2. Brief facts of the case are, the assessee a Company filed its return of income for the A.Y. 2013-14 on 30/11/2013 admitting total income of Rs. 1,19,33,700/-. The case was selected for scrutiny under CASS. The Assessing officer completed the assessment vide order u/s 143(3) dated 31.03.2016 determining the taxable income at Rs.7,34,38,323/-. While completing the assessment, the AO made disallowance of Rs. 2,55,63,755/- u/s. 14A and a further sum of Rs. 3,59,40,868/- towards disallowance of pro-rata premium on FCCBs.
3. On perusal of assessment record, the CIT, vested powers u/s 263 of the Act, observed that an amount of Rs. 64.0 crores, being loss on sale of investments, was reduced from the total income in the statement of computation of total income and computation of book profit u/s 115JB, even though the same was not debited in the P&L account. Since the tax on the regular income was less than the book profit computed as per the provision of section 115JB of the Act, the book profit was deemed to be the taxable income of the assessee and while doing so, the book profit was computed by deducting the loss on sale of investments referred above. However, as per the provision of section 115JB no deduction of any amount of this nature is allowable and the action of the assessing officer in allowing the same is contrary to law and therefore rendered assessment order erroneous and the allowance of deduction resulted in prejudice to the interests of the revenue.
3.1 In view of the above observations, a show cause notice u/s 263 dated 04/12/2017 was issued to the assessee, calling for its objections, if any, as to why the impugned assessment order should not be revised or set aside.
4. In response to the said show cause notice, the assessee vide letter dated 13/12/2017 raised the issue of assumption of jurisdiction u/s 263 of the Act and also submitted the details of various explanations filed before the AO during the course of assessment proceedings, regarding the claim of deduction of loss on sale of investments, from the book profits.
5. The CIT rejecting the assessee’s contention of issue of assumption of jurisdiction u/s 263, observed as under:
11. The case laws cited by the assessee have been perused. The facts of the cases mentioned above are not applicable to the facts of the present case. In the case of ITA T A Bench, Kolkatta in J K Lakshmi Cement Ltd Vs ACIT dated 30/08/2011, the issue was whether, unadjusted brought forward losses were available for set off against the books profits within the meaning of clause (iii) to Explanation 1 to section 115 JB (2). further, when the profit and loss account was not prepared in accordance with part -II of schedule VI of the Companies Act, 1956, whether, the assessee had the liberty make adjustments to the books profits so as to bring it in conformity with the accounts prepared as per the provisions of Companies Act? In the case referred above, though the latter issue was settled in favour of the assessee, the fact remains that subject to the merits of the case, if there was a brought forward business or depreciation loss, whichever is less, as per the books of account, the same is deductible from the book profits. This is as per the provisions of clause (iii) to Explanation 1 of section 115JB(2). But in the present case, there is no provision for allowing the loss on sale of investments, as can be seen from the explanation reproduced above. Similarly the facts of the two other cases are also differing and hence cannot come to the rescue of the assessee. In the case of V & V Infotech Ltd, Vs ITO, the ratio emerging is when the profit and loss account is prepared as per schedule VI of the Companies Act, neither the AO nor the assessee, has any power to tinker with it nor the assessee is permitted to claim exclusion or inclusion of any item of expenditure, as the case may be, for the purpose of computing book profits u/s 115 JB except the permissible adjustments provided under the Explanation to section 115 JB. In the present case, admittedly, the profit and loss account is not prepared as per the relevant provisions of the Companies Act and therefore, the case law relied upon is not applicable.
12. In view of the above, the adjustment of loss on sale of investments amounting to Rs 64.00 Crores is not in conformity with the provisions of section 115 JB and therefore by allowing the same, the AO committed an error and caused prejudice to the revenue, by way taxing lesser amount of book profits. Thus the above order is not only erroneous but also prejudicial to revenue. Therefore, by virtue of the powers vested in me u/s 263 of the Income tax Act, I hereby set aside the order of the AO with a direction to disallow the claim of deduction of loss on sale of investments of Rs 64.00 crores and to recompute the book profits in line with the directions issued as above.”
6. Aggrieved by the order of CIT, the assessee is in appeal before us raising the following grounds of appeal:
1. That on the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income Tax (‘Pr.C1T’) erred in assuming jurisdiction under Section 263 of the Income-tax Act, 1961 (‘the Act’).
2. That on the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer for the assessment year 2013-14 was passed after making necessary enquiries or verification and is neither erroneous nor it is prejudicial to the interests of the Revenue and the learned Pr. CIT erred in assuming otherwise.
3. That for the purpose of computing book profit u/s. 115JB, the Profit & Loss account is required to be prepared in accordance with the provisions of Part II of Schedule -VI to the Companies Act, 1956 and where it was not so prepared, the profit & loss account has to be adjusted in accordance with said Part II of Schedule -VI, Hence it is contended that the assessing officer’s order allowing deduction of loss on sale of investments of RS.64 crores while computing book profits is neither erroneous nor prejudicial to the interest of revenue. The computation is in accordance with the applicable accounting standards and in accordance with law.
4. That the Learned Pr. Commissioner of Income-tax did not correctly appreciate the explanation (2) inserted to section 263 of the I.T. Act w.e.f.1.6.2015. The said explanation is not attracted to the facts of the case as the assessment order was passed after making enquiries and verification and after satisfying that the loss of Rs.64 crores on sale of investment has to be deducted from book profits as per Companies Act and Accounting Standards.
5. That the Learned Pr. CIT erred in setting aside the order of the assessing officer with a direction to disallow the claim of deduction of loss on sale of investments of Rs.64 crores in computing the book profit and to recompute the Book Profit in line with the directions in the order passed u/s.263.
6. It is therefore prayed that the order of learned principal Commissioner of Income-tax passed u/s. 263 be set aside and the order of the assessing officer be restored.
7. The Appellant craves leave to add to. alter or amend all or any of the above grounds of appeal at or before the hearing.”
7. Ld. AR filed written submissions wherein it was stated as under:
“a. There was full application of mind by the assessing officer while considering whether the loss of Rs.64 crores could be deducted from the profit shown in the P & L account. Merely because the CIT holds a different opinion he cannot exercise the power of revision.
b. The Commissioner initiated proceedings to revisit what should be the proper inference to be drawn by the assessing officer on the weight of facts and circumstances which is not permitted for initiating revision proceedings.
c. Where a matter is debatable or because either views are possible, revision does not lie.
d. Mere loss of revenue because more tax can be collected by increasing the book profits u/s.115JB does not justify initiation of revisionary proceedings.
e. In any case the reduction of loss – of Rs.64 Crores on the sale of shares is an item that should reflect in the P&L account and was correctly done to bring it in conformity with part II of Schedule VI read with Section 211(1),(2),(3A) and Accounting Standards as prescribed lCAl u/s. 211 (3C) or the Companies Act. The assessing officer was correct in permitting the deduction of this amount from profits shown in P&L account.
Reasoning of the Principal Commissioner given in the impugned order
14. The learned Principal Commissioner of Income tax – 2, Hyd. passed the impugned order u/s 263 of the I. T Act directing the Assessing Officer to disallow the claim of deduction of loss on the sale of investments of Rs.64 crores and to recompute the book profits. The said impugned order is passed on the basis that:
a) the Assessing Officer though called for the submissions/explanation of the assessee regarding the issue, yet the conclusion arrived at by the Assessing Officer in accepting the same is erroneous since such allowance is contrary to the provisions of law, and
b) the provisions of section of Section 115JB of the I.T. Act does not provide for the said deduction of loss from the book profit.
The entire discussion in the impugned order at paras 2 to 9 is on the jurisdiction whether the learned Principal Commissioner of Income tax has the power to initiate the proceedings uls 263 of the I. T Act in the facts of the case and paras 9 to 12 is on merits that such deduction from the book profits is not permitted.
Finding that the P&L account is not in accordance with provisions of Companies Act.
15. The finding given at para 11 of the impugned order by the learned Principal Commissioner of Income tax is ” in the present case admittedly the profit & Joss account is not prepared as per the relevant provisions of the Companies Act “. The learned Principal Commissioner of Income tax accepted the plea of the appellant that the profit’ and loss account prepared is not as per the relevant provisions of the Companies Act for the reason that it should have deducted the sum of Rs.64 crores as loss while drawing up its profit & loss account, which it failed to do and in consequence the profit & loss account is not prepared as per the relevant provisions of the Companies Act.
Reasons in support that the impugned order passed in erroneous and untenable
16. On both the aspects viz. (1) whether on the facts the learned Principal Commissioner of Income tax has jurisdiction to proceed uls 263 of the I.T. Act, and
2) on merits whether the deduction of the loss of Rs.64 crores from the profit is correct, the appellant submits as under:
Whether the initiation of proceedings uls 263 of the I. T Act on the facts is proper;
17. It is an admitted position that there was a pre-assessment enquiry on the deduction of the sum of Rs. 64 crores while arriving at the book profit. It is also an admitted position that the appellant filed a letter dt. 15-3-2016 explaining justification for making the deduction along with decided authorities (Paras 34 to 89 of paper book.)
18. The Assessing Officer after having gone through the letter dt. 15-3-2016 issued a show cause notice dt.21-3-2016 (Pages 90 and 91 of paper book). It is also admitted position that a detailed reply dt. 28-3-2016 was filed in response to the show cause notice (Pages 92 to 110 of paper book). After taking and considering the explanation on record, the book profit was computed by deducting the loss on the sale of investments amounting to Rs.64 crores from profit shown in the Profit & Loss account. However, the assessment order is silent because the explanation of the appellant was accepted and therefore it entailed no discussion. It is settled law that when a query was raised and there was a reply, but there is no discussion in the assessment order, it amounts to consideration of the explanation furnished. It is not necessary that the assessment order should contain any reference or discussion as the explanation was accepted. Attention is invited to the following cases on the subject:
a) MOIL Ltd. Vs. C.I.T, 396 ITR 244 @ 249-250 Bom)
b) CIT Vs. Aroni Commercial Ltd., 393 ITR 673 @ 676 (Bom)
c) CIT vs. Nirav Modi, 390 ITR 292 @ 301 (Bom.)
d) CIT vs. Fine Jewellery (India) Ltd., 372 ITR 303 @ 306-307 (Bom)
e) Aroni Commercial Ltd. Vs. DCIT 362 lTR 403 @ 414 (Bom.)
f) CIT Vs. Usha International Ltd. 348 ITR 485 @ 500 (Del.)
g) CIT vs. Vikas Polymers, 341 ITR 537 @548 (Del)
19. Where information was filed before the Assessing Officer that the assessment is completed after looking into the material. Kind attention is invited to the following decisions:’
a) ALA Firm V s. CIT, 189 nx 285 @ 299(SC)
b) CIT Vs. Kelvinator of India Ltd. 256ITR 1 (Del.) 0) 19 & 20(F.B)
20. It is therefore submitted that the Assessing Officer went into the issue relating to the deduction of loss of Rs.64 crores and after taking the explanation, applied his mind and accepted that the deduction of the above amount from the profits shown in the profit & loss account is appropriate and in order.
The profit or loss should be in accordance with Part-II of Schedule – VI and section 211(1), (2), (3A) and (3C) of the Companies Act, 1956.
21. It is an admitted position that the loss was sustained amounting to Rs.64 crores on the sale of investments, that such loss was not shown in the profit & loss account, that the statutory auditors commented that the said accounts are not in accordance with the Accounting Standard (AS)-13, that as per the Accounting Standards and the provisions of the Companies Act, the said amount should be shown as an expenditure in the pro fit& loss account which should be prepared in accordance with part II of Schedule VI of the Companies Act. Section 1 15JB of the IT Act which provides to tax book profits stipulates that the company should prepare a statement of profit & loss account in accordance with the provisions of Part II of Schedule VI to the Companies, Act, 1956. To the profit or loss so arrived at as per the profit & loss account, explanation-I provides such adjustments to be made in the form of increasing the profits or reduction of profits as computed in accordance with Part II of Schedule VI of the Companies Act.
22. It would therefore mean that the profit or loss determined should first be in accordance with Part II of Schedule VI as mandated by section 211(2) of the Companies Act. If the profit or loss arrived at is not in conformity with the Part II of Schedule VI and the other sub-sections of Section 211 of the Companies Act, necessary adjustments must first be made to bring the figure of profit or loss in conformity with Part II of Schedule VI of the Companies Act. Section 211(3A) of the Companies Act further requires that every profit & loss account should comply with the accounting standards. Sub section (3C) of section 2 of the Companies Act requires that the profit & loss account should confirm to the Accounting Standards prescribed by ICAI The Accounting Standards require that the profit & loss on the sale of investments should be charged or credited to the P&L account. Therefore, it is incumbent on the part of the appellant to make such adjustments to the profit or loss to bring it in conformity with the provisions of section 211, accounting standards and Part II of Schedule VI.
23. Since it is an admitted position that the loss was sustained and the said loss should have been charged to the profit & loss account which was not done so, the explanation offered for reduction of book profits was accepted and the Assessing Officer permitted the deduction of profit the loss of Rs. 64 crores sustained on the sale of investments from the profit shown in the P&L account.
24. The appellant referred before the Pr. CIT the following case law in support that where the profit or loss arrived at is not in conformity with the provisions of the Companies Act viz. Part-Il of Schedule-VI, read with section 211 of the Companies Act and the Accounting Standards, adjustments need to be made to bring the profit or loss in conformity with the statutory provisions:
a) Surner Builders (P.) Ltd v. DCIT, Central Circle-36, Mumbai in ITA Nos.2512 to 2514 of2009 order dated 13.01.2012 (reported in 50 SOT 198, ITAT “I” Bench, Mumbai.
b) Rain Commodities Ltd v. DCIT, Circle -3(1), Hyderabad in ITA No.673(Hyd) of 2009 dt 02.07.2010, Hyderabad Special Bench (reported in 40 SOT 265(Hyderabad)(SB).
c) K.Lakshmi Cement Ltd. & Batch Vs. A.C.I.T dt.30-8-2011 ITAT, A. Kolkata (Pages 34 to 42 of paper book)
d) DCIT Vs. Bombay Diamond Company Ltd. Reported in 33 DTR 59 Mumbai Tribunal, 2010
e) B&B Infotech Ltd. Vs. ITO, Ward-12(1), Bangalore, order d1,7-10-2015, Bangalore Bench 155 lTD 1040(Pages 77 to 8I of paper book)
f) CIT Vs. Karnataka Soaps & Detergents Ltd. Dt. 13-10-2014 reported in 59 com43 (Karnataka High Court) (Pages 84 to 89 of paper book)
g) Dismissal of SLP bearing No.19860 of 2015 dt.16-11-2015 by the Hon’ble Supreme Court upholding the judgment of the Karnataka High Court (Page 82 of paper book).
25. All the facts stated above, statutory provisions and the case law were referred to in the explanation dt. 153-2016 (filed on 16-3-2016) and 28-03-2016 filed by the appellant before the Assessing Officer. There was therefore full justification for reducing the profits as per the profit & loss account with the loss or Rs.64 crores sustained on the sale of investments. The learned Assessing officer applied his mind to the explanation offered and drew the inference that the loss could be deducted. It could definitely be said that the learned Assessing Officer accepted the view which appeared to him to be correct on the basis of explanation offered. On the basis of explanation furnished and the case law cited, it cannot be denied that the view taken by the Assessing Officer is plausible and reasonable.
Erroneous reasoning of the Principle Commissioner that the loss cannot be deducted
26. The learned Principal Commissioner of Income tax does not refer to the requirement whether the profit or loss arrived at should in conformity with the provisions of the Statute or Accounting Standards. He ignored this requirement and proceeded to state that whatever may be the profit or loss arrived at can be adjusted only in accordance with the explanation (1) and no further. The appellant submits that there are two stages spoken of in section 115JB of the I.T. Act for calculation of MAT profit or loss. The first stage is that the profit or loss should be in conformity, with Part II of Schedule VI. If it is not in conformity the tax payer or the revenue is required to make such adjustments to bring the figure in, conformity with the requirements of the Companies Act, 1956. The second stage is to the profit or loss so arrived at as per Part II of Schedule VI, further adjustments (‘MAT adjustments’) needs to be made as provided in the Explanation-I.
27. The learned Principal Commissioner of Income tax ignored Stage 1 adjustments completely and straightaway proceeded to Stage-2 viz MAT adjustments It would be appropriate to state here that Form No.29B issued under Rule 40B by the Chartered Accountant should specify whether the profit and loss account is in accordance with the provisions of Part II of Schedule VI of the Companies Act and if there is any variation to report the same. The learned Principal Commissioner of Income tax accepts at para 11 of the impugned order that the profit & loss account of the appellant is not prepared as per the relevant provisions of the Companies Act. Having said so, he ignored the Stage-I. He does not refer to section 211 of the Companies Act, does not refer to the Accounting Standards, does not refer to Part II of Schedule VI of the Companies Act in his impugned order. He merely goes by the explanation-T and ignored the requirement, that the profit/loss should confirm to the requirements of part II of Schedule VI and section 211 of Companies Act, 1956. The learned Principal Commissioner of Income tax wrongly understood the provisions of section 115JB of the I.T Act. The appellant contends that the learned Assessing Officer correctly interpreted section 1 15JB and permitted the deduction of loss of Rs.64 crores from the Income shown in the profit & loss account. Hence, no revision is warranted u/s 263 in relation to the deduction of loss of Rs. 64 crores from the profit shown in the P&L. There was no error in the assessment order and much less any prejudice was caused to the interests of revenue.
28. The following authorities are relied upon, in support that the Pr. CIT wrongly invoked proceedings u/s 263 of the IT Act.
a) Where the AO accepts a particular view merely because another view is possible, no power can be exercised to revise u/s 263 of the IT Act.
