Case Law Details
SETCO Automotive Ltd. Vs ACIT (ITAT Ahmedabad)
Held that the non-inclusion of surrendered income in the Book Profits of the assessee as per section 115JB of the Act, was not a patent error amenable to rectification u/s 154 of the Income Tax Act.
Facts- The rectification made by the AO in the impugned case was in relation to adjustment made to the book profits of the assessee by adding thereto amount of income surrendered by the assessee during survey of Rs.17 crores.
The AO had noted that while the assessee had included the surrendered income for the purpose of computing its income for taxation as per the normal provision of the Act, but had not done so for the purpose of paying tax under MAT regime on the book profits of the assessee as per the section 115JB of the Act. It was noted that the assessee, while so including surrendered income of Rs.17 crores in its income computed as per the normal provisions ,had claimed benefit of MAT credit against the taxes leviable on the income computed as per the normal provision on account of having paid taxes on the book profits in the preceding years. The AO noted that the assessee had paid taxes as per the normal provision of the Act, reflecting the taxes paid as per the book profits to be lesser and while doing so had not taken into consideration income surrendered during the survey. He noted that if this income surrendered during survey was included in the book profits, the taxes payable as per MAT would have exceeded taxes payable as per the normal provision and the assessee therefore would have been liable to pay taxes as per MAT.
Conclusion- In the absence of any incriminating material found, substantiating the surrender made, the same cannot invariably be said to represent the profit of the assessee for disclosure to its shareholders. If the surrender was corroborated with some undisclosed asset or incriminating document found, revealing the nature and manner of earning the income surrendered, it necessarily represented profits which needed to be disclosed in the profit and loss account also for the benefit of shareholders of the company. But without any incriminating material and without any clue about the nature of the disclosure also, the same could not be said to invariably represent undisclosed income/profits of the assessee to be included in its profit and loss account. The assessee at its discretion may include the surrender in its income for paying taxes thereon, but this fact ipsodixit will not mandate inclusion of the surrender in its Book Profits also.
Held that the non-inclusion of surrendered income in the Book Profits of the assessee as per section 115JB of the Act, was not a patent error amenable to rectification u/s 154 of the Act. The adjustment so made, therefore, is directed to be deleted.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
Present appeal has been filed by the assessee against order passed by the Commissioner of Income Tax (Appeals)-4, Vadodara [hereinafter referred to as “the ld.CIT(A)”] dated 30.8.2019 passed under section 250(6)of the Income Tax Act, 1961 [hereinafter referred to as “the Act” for short]for the Asst.Year 2011-12, by which the ld.CIT(A) confirmed the addition in a rectification order passed by the AO under section 154 of the Act.
2. Grounds raised by the assessee are as under:
1. The learned Commissioner of Income Tax (Appeals) -4, Vadodara [“CIT(A)”] erred in fact and in law in confirming the action of the learned Assistant Commissioner of Income Tax, Panchmahal Range, Godhra [“the AO”] in passing order u/s 154 of the Income Tax Act, 1961 [‘the Act’].
2. The learned CIT(A) erred in fact and in law in confirming the action of the Id. AO in exercising power u/s. 154 on the issue which is debatable and which cannot be rectified u/s. 154 of the Act.
Addition of Rs. 17,00,00,000 u/s. 115JB of the Act
3. The learned CIT(A) erred in fact and in law in confirming the action of the Id. AO in re-computing the book profits u/s. 115JB of the Act by making an addition of Rs.17,00,00,000/-
4. The learned CIT(A) erred in fact and law in confirming the action of the Id. AO in re-computing the book profits u/s.115JB of the Act by considering the adhoc disclosure of Rs.17,00,00,000/- made during the course of survey as income of the Appellant for the purpose of computation of book profits u/s. 115 JB of the Act.
5. The learned CIT(A) erred in fact and law in confirming the action of the Id. AO in re-computing the book profits u/s. 115JB without appreciating the facts of the case in proper perspective.
6. The learned CIT(A) erred in fact and law in confirming the action of the Id. AO in re-computing the book profits u/s. 115JB of the Act by relying upon irrelevant observations.
7. The learned CIT(A) erred in fact and law in confirming the action of the Id. AO in re-computing the book profits u/s. 115JB by making imaginary arguments without properly appreciating the provisions and position of the law in force.
8. Without prejudice to the above, the learned CIT(A) erred in fact and law in confirming the action of the Id. AO in making an addition of Rs.17,00,00,000/- to the book profits u/s. 115JB of the Act by going behind the net profits of the Appellant which is outside the purview of the provisions of section 115 JB of the Act.”
3. As transpires from the orders of the authority below, the rectification made by the AO in the impugned case was in relation to adjustment made to the book profits of the assessee by adding thereto amount of income surrendered by the assessee during survey of Rs.17 crores .The AO had noted that while the assessee had included the surrendered income for the purpose of computing its income for taxation as per the normal provision of the Act, but had not done so for the purpose of paying tax under MAT regime on the book profits of the assessee as per the section 115JB of the Act. It was noted that the assessee, while so including surrendered income of Rs.17 crores in its income computed as per the normal provisions ,had claimed benefit of MAT credit against the taxes leviable on the income computed as per the normal provision on account of having paid taxes on the book profits in the preceding years. The AO noted that the assessee had paid taxes as per the normal provision of the Act, reflecting the taxes paid as per the book profits to be lesser and while doing so had not taken into consideration income surrendered during the survey. He noted that if this income surrendered during survey was included in the book profits, the taxes payable as per MAT would have exceeded taxes payable as per the normal provision and the assessee therefore would have been liable to pay taxes as per MAT.
4. We have heard contentions of both the parties.
One of the arguments of the ld.counsel for the assessee before us against the adjustment was that this surrender made by the assessee during survey was an adhoc surrender, without any corroborative incriminating material found during the survey, and having been surrendered on the mere statement of the directors of the assessee-company made during survey. That therefore it was nota clear cut case of the said income being necessarily treated as part of the book profits of the assessee so as to effect the rectification in this regard under section 154 of the Act.
There is no dispute vis a vis the position of law with regards to section 154 of the Act, that the same is applicable only for rectifying mistakes which are obvious ,clear and patent and not involving two opinions or debate.
5. Having said so, it is necessary to consider the facts relating to the rectification made by the AO vide his order passed under section 154 of the Act which was upheld by the ld.CIT(A) also. As stated above, there was survey conducted on the assessee under section 133A of the Act on 23.6.2011 at its business premises. The impugned assessment year before us is Asst.Year 2011-12. This survey was thus conducted after close of the financial year relevant to the impugned assessment year i.e. after 31.3.2011 relevant to Asst.Year 2011-12, which is impugned before us. The surrender of Rs.17 crores by the assessee during survey has been detailed in the assessment order passed by the AO dated 25.2.2014. Copy of which was placed before us in PB No.61 to 64. A perusal of the same reveals that the AO noted in his assessment order that on account of survey action, major discrepancy was noted relating to the assessee diverting the expenses related to its exempt unit under section 80IC/10B of the Act to its taxable units; that in this regard, the assessee filed a revised calculation of profits of its exempt units for all three assessment years i.e. Asst.Year 2009-10, 2010-11 and 2011-12. The AO notes that the assessee submitted unit-wise computation of income during the assessment proceedings, and added an amount of Rs.1018.34 lakhs towards reallocation of raw-material prices and overheads from exempt units to taxable units and disclosed under the head “business income”; that in addition to the same, the assessee disclosed Rs.1700 lakhs as “income from other sources” and added the same to its total income. These facts are noted at para-4 of the assessment order which are reproduced hereunder:
Assessee has disclosed this income in the computation and has also submitted the unit wise computation of income during the course of the assessment proceedings. In this computation, the assessee has added Rs.1018.34 lacs towards reallocation of raw material prices and overheads from exempted units to taxable units under the head business income. In addition to this, the assessee also disclosed Rs.1700 lacs as income from other sources and added the same to total income.”
6. What emanates from the above therefore is that the assessee on account of survey action conducted on it disclosed/ surrendered two incomes;
(i) being in the nature of business income on account of discrepancy noticed through survey of diversion of expenses from its exempt units to its taxable units. Surrender of Rs.1018.34 lakhs in this regard was made by the assessee during the impugned.
(ii) The amount of Rs.1700 lakhs surrendered by the assessee as per the assessment order was over and above and in addition to this disclosure made on account of diversion of expenses as noted above. This Rs.1700 lakhs was disclosed by the assessee under the head “income from other sources”. This surrender was made by the director of the assessee-company in his statement recorded during the survey conducted on the assessee.
7. None of the orders of the authorities below i.e. the assessment order passed under section 143(3) or the rectification order passed under section 154 of the Act or for that matter even order of the ld.CIT(A) passed in appeal filed against the order passed under section 154 of the Act, we find, makes any mention of surrender of Rs.17 crores made by the assessee being in relation to any incriminating material or documents found during the survey at the assessee’s premises. Undoubtedly, the same was also surrendered not as “business income” but as “income from other sources”.
8. The question to be determined in the light of the above is, whether on the basis of these facts, this surrender of income of Rs.17 crores ought to have been invariably made part of the book profits of the assessee for the purpose of paying taxes under section 115JB of the Act.
9. The term “ Book Profits “ has been defined u/s 115JB of the Act as the profit as shown in the profit and loss account of the assessee as prepared in accordance with Schedule III of the Companies Act 2013, complying with all accounting standards, policies adopted for preparing the Profit and loss account for laying before the company at its annual general meeting. Section 115JB(2) and Explanation (1) to the said section bringing out the above is reproduced hereunder for clarity:
Section 115JB(2) Every assessee,—
(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or
(b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company:
Provided that while preparing the annual accounts including statement of profit and loss,—
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including statement of profit and loss;
(iii) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (18 of 2013) :
Provided further that where the company has adopted or adopts the financial year under the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,—
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including statement of profit and loss;
(iii) the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financial year falling within the relevant previous year.
Explanation 1.—For the purposes of this section, “book profit” means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by—
10. Thus briefly put the Book Profits refer to the profits shown to the shareholders of the company as earned during the year accounted for following prescribed accounting policies and standards.
11. The issue for consideration is whether the surrender of 17Crs made by the assessee during survey; adhoc and without being corroborated with any incriminating material, should have been invariably made part of its profit and loss account. That is, could the said surrender be treated as representing profits earned by the assessee to be disclosed to its shareholders in AGM, without any doubt.
12. We are in agreement with the ld.counsel for the assessee in this regard that it is surely not a clear case of the amount being invariably included in the book profits of the assessee on the basis of the facts before us. In the absence of any incriminating material found, substantiating the surrender made, the same cannot invariably be said to represent the profit of the assessee for disclosure to its shareholders. If the surrender was corroborated with some undisclosed asset or incriminating document found, revealing the nature and manner of earning the income surrendered, it necessarily represented profits which needed to be disclosed in the profit and loss account also for the benefit of shareholders of the company. But without any incriminating material and without any clue about the nature of the disclosure also, the same could not be said to invariably represent undisclosed income/profits of the assessee to be included in its profit and loss account. The assessee at its discretion may include the surrender in its income for paying taxes thereon, but this fact ipsodixit will not mandate inclusion of the surrender in its Book Profits also.
Therefore it is not plain and simple that the surrender made during survey, on adhoc basis without any incriminating material found, was to be necessarily included in its profit and loss account/ book profits. We agree with the Ld.Counsel for the assessee that to arrive at such a conclusion required a long drawn process of reasoning and debate.
For the above reasons therefore, we hold, that the non-inclusion of surrendered income in the Book Profits of the assessee as per section 115JB of the Act, was not a patent error amenable to rectification u/s 154 of the Act.The adjustment so made, therefore, is directed to be deleted.
13. In view of the above, the appeal of the assessee is allowed in above terms.
14. In the result, appeal of the assessee is allowed.
Order pronounced in the Court on 13th March, 2023 at Ahmedabad.
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