Gujarat H.C : The CIT(A) directing not to charge interest under ss. 234B and 234C of the Act since the total income was determined under s. 115J of the Act

High Court Of Gujarat

DCIT vs. Farmson Pharmaceuticals Gujarat Ltd.

Assessment Year : 1989-90

Section : 115J

Ms. Harsha Devani And Ms. Bela Trivedi, JJ.

Tax Appeal No. 390 Of 1999

April 7, 2011

JUDGMENT

Ms. Harsha Devani, J. – In this appeal under s. 260A of the IT Act, 1961 (the Act), the appellant Revenue has challenged order dt. 7th May, 1999 made by the Tribunal, Ahmedabad Bench ‘A’ in ITA No. 4681/Ahd/1992 for asst. yr. 1989-90 [reported as Dy. CIT v. Farmson Pharmaceuticals Gujarat Ltd. (1999) 65 TTJ (Ahd) 617 —Ed.].

2. At the time of admitting the appeal, this Court had, by an order dt. 4th Sept., 2000 formulated the following two substantial questions of law :

“1.Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT(A) deleting the addition of Rs. 20,77,946 made by the AO to the book profit on account of additional depreciation debited in the accounts for the earlier years because of change in the method of providing depreciation retrospectively ?

2.Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT(A) directing not to charge interest under ss. 234B and 234C of the Act since the total income was determined under s. 115J of the Act ?”

3. The assessment year is 1989-90 and the relevant accounting period is the year ended on 31st March, 1989 (15 months). The AO computed the total income of the assessee company under s. 143(3) of the Act at Rs. 2,92,880 after adjusting brought forward losses and unabsorbed depreciation vide assessment order dt. 24th Feb., 1992. The AO separately computed the taxable profit of the company under s. 115J of the Act according to which, the chargeable profit under s. 115J came to Rs. 11,11,550. The AO negatived the assessee’s claim for additional provision of depreciation to the extent of Rs. 20,77,946. According to the assessee, it had changed the method of providing depreciation from straight line method (SLM) to written down value (WDV) method which has resulted in a shortfall in the depreciation provided as per the old method as compared to the new method and the shortfall was charged to the P&L a/c for the current asst. yr. 1989-90. The AO disallowed the claim of the assessee on the ground that s. 205 of the Companies Act, 1956 r/w s. 350 of the said Act does not entitle the assessee to claim depreciation for the earlier years placing reliance upon the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). Being aggrieved, the assessee preferred an appeal before the CIT(A) who upheld the contention of the assessee and directed the AO to recompute the book profit without disallowing the additional claim for depreciation. The CIT(A) found that the change in method adopted by the assessee was one which was permitted by the Accounting Standards prescribed and was not barred by the provisions of the Companies Act or by the provisions of s. 115J of the Act. He accordingly deleted the addition made by the AO. Being aggrieved, the Revenue carried the matter in appeal before the Tribunal but did not succeed.

4. Heard Mr. K.M. Parikh, learned standing counsel for the appellant and Mr. M.J. Shah, learned advocate appearing on behalf of the respondent assessee.

5. Mr. M.J. Shah, learned advocate for the respondent assessee drew the attention of the Court to the impugned order of the Tribunal. It was pointed out that before the Tribunal, on behalf of the assessee, the decision of the Tribunal in the case of Dy. CIT v. Rubamin (P) Ltd. in ITA No. 1544/Ahd/1993, dt. 12th Aug., 1998 had been relied upon wherein an identical issue had been decided in favour of the assessee. It was submitted that the decision of the Tribunal in the aforesaid case was carried in appeal before this Court and that this Court held in favour of the assessee by placing reliance upon the decision of the apex Court in the case of Apollo Tyres Ltd. v. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC). It was, accordingly, submitted that the controversy involved in the present case stands concluded by the aforesaid decisions of this High Court as well as the Supreme Court.

6. The facts are not in dispute. In the present case, the AO had made the addition in question on the ground that the assessee could not claim depreciation which was not provided for in the books of accounts of the assessee for the earlier years. However, as noticed hereinabove, the assessee in the present case had changed the method of providing depreciation from SLM to WDV method and the resultant shortfall in depreciation was charged to the P&L a/c for the current year. Both the CIT (A) as well as the Tribunal have taken note of the fact that the assessee’s change of method in accounting from SLM to WDV method was in accordance with the Accounting Standards issued by the Institute of Chartered Accountants. The Tribunal, accordingly, held that the disallowance made by the AO was not warranted by the provisions of the Companies Act or by the provisions of s. 115J of the Act as there was no bar for a change in the method of Accounting Standards recognised for the purpose of the Companies Act.

7. It is not in dispute that the shortfall in the depreciation was charged to the P&L a/c, which was computed in accordance with the provisions of the Companies Act. In the circumstances, the present case would stand squarely covered by the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra ) wherein the Court has held that the AO, while computing the income under s. 115J, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO, thereafter, has the limited power to make increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profits shown in the P&L a/c except to the extent provided in the Explanation to s. 115J. The Court held that sub-s. (1A) of s. 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its accounts in accordance with the requirements of the Companies Act which mandate is bodily liftedfrom the Companies Act into the IT Act for the limited purpose of making the said accounts so maintained as a basis for computing the company’s income for levy of income-tax. The Court also held that there cannot be two incomes, one for the purpose of the Companies Act and another for the purpose of income-tax maintained under the same Act.

8. This Court, in the case of CIT v. Rubamin (P) Ltd. [reported at (2008) 218 CTR (Guj) 162 : (2008) 10 DTR (Guj) 278—Ed.] was called upon to decide the question as to whether on the facts and in the circumstances of the case, the Tribunal was right in upholding the deletion of addition of Rs. 61,602 being the difference in the amount of depreciation as a result of changing the method of providing the depreciation from the SLM to the WDV method. The Court followed the decision of the apex Court in the case of Apollo Tyres Ltd. v. CIT (supra) and held in favour of the assessee. Thus, it is apparent that the controversy involved in the case of CIT v. Rubamin (P) Ltd. (supra) is similar to the controversy involved in the present case and as such the same stands concluded in favour of the assessee by the decision rendered in the said case.

9. In the circumstances, for the reasons stated in the decision of this Court in the case of CIT v. Rubamin (P) Ltd. ( supra), the question is answered in the affirmative, that is, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the deletion of addition of Rs. 20,77,946 made by the AO to the book profit on account of additional depreciation debited in the books for the earlier years because of change in the method of providing depreciation retrospectively.

10. Insofar as the second question which relates to charging of interest under ss. 234B and 234C is concerned, Mr. M.J. Shah, learned advocate for the respondent invited attention to the decision of the Supreme Court in the case of CIT v. Kwality Biscuits Ltd.(2006) 205 CTR (SC) 122 : (2006) 284 ITR 434 (SC) wherein the Supreme Court has confirmed the decision of the Karnataka High Court in Kwality Biscuits Ltd. v. CIT (2000) 159 CTR (Kar) 316 : (2000) 243 ITR 519 (Kar). It was submitted that the controversy involved in the present case stands concluded by the aforesaid decision in favour of the assessee.

11. The Karnataka High Court in the said decision which came to be affirmed by the Supreme Court held thus :

“Sec. 234B casts the liability for payment of interest for default in payment of advance tax if the assessee is liable to pay advance tax under s. 208 and has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of s. 210 is less than 90 per cent of the assessed tax, then he is liable to pay simple interest @ two per cent for every month to the date of determination of total income under s. 143(1) and, where the regular assessment is made, to the date of such regular assessment on the amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid has fallen short of the assessed tax. Under the Explanation, ‘assessed tax’ means the tax on the total income as declared in the return or the tax on the total income determined under s. 143(1) or on regular assessment, as reduced by the amount of tax deducted or collected at source in accordance with the provisions of Chapter XVII.

Under s. 234C also, if there is liability to pay advance tax under s. 208 and if there is failure to pay such tax or if it is not paid in instalments prescribed in the section, then the liability for interest arises.

Sec. 208 contemplates the liability to pay advance tax in every case where the amount of such tax payable by the assessee during that year, as computed in accordance with the provisions of this chapter is Rs. 1,500 or more. The computation of advance tax is provided under s. 209. Under s. 209(1)(a) firstly, the estimate of current income is to be made. If there is no current income there is no liability for making the estimate. It is not a case where the ITO has passed an order for payment of advance tax.

Under s. 115J, where the total income of the company is less than 30 per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. It is thus, by way of deeming fiction that this income has been considered to be the deemed income. The P&L a/c has to be prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. In the Explanation under s. 115J(1A) it is provided that for the purposes of this section “book profit” means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (1A) as increased by various amounts given in the section. Thus, for the purpose of assessing tax under s. 115J, firstly, the profit as computed under the IT Act has to be prepared and thereafter the book profit as contemplated by the provisions of s. 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax under s. 115J arises if the total income as computed under the provisions of the Act is less than 30 per cent of its book profits. This exercise for determining the total income in accordance with the provisions of the Act and that of book profit can be only after the end of the relevant assessment year. It is only the deemed income for which the provisions of s. 115J have been incorporated. When a deeming fiction is brought under the statute it is to be carried to its logical conclusion but without creating further deeming fiction so as to include other provisions of the Act which are not specifically made applicable. Since the entire exercise of computing the income or that of book profit could be only at the end of the financial year, the provisions of s. 207, 208, 209 or 210 cannot be made applicable, until and unless the accounts are audited and the balance sheet is prepared even the assessee may not know whether the provision of s. 115J would be applicable or not. The liability would be after the book profits are determined in accordance with the Companies Act. The words “for the purposes of this section” in the Explanation to s. 115J(1A) are relevant and cannot be construed to extend beyond the computation of liability of tax. Accordingly, we are of the view that the Tribunal was not justified in directing to charge interest under ss. 234B and 234C of the IT Act. This question No. 2 is therefore answered in favour of the assessee and against the Revenue.”

Thus, it is apparent that the controversy which is raised by virtue of the second question, stands concluded by the aforesaid decision. In the circumstances, it is not necessary to set out the facts and contentions in detail.

12. Following the decision of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT (supra ) as affirmed by the Supreme Court in the case of CIT v. Kwality Biscuits Ltd. (supra), the question is answered in the affirmative, that is, the Tribunal was right in law in upholding the order of the CIT(A) directing not to charge interest under ss. 234B and 234C of the Act since the total income was determined under s. 115J of the Act.

13. In the light of the aforesaid discussion, the appeal is dismissed with no order as to costs.

[Citation : 347 ITR 394]

Leave a Reply

Your email address will not be published. Required fields are marked *