High Court Of Rajasthan
Rajasthan Spinning & Weaving Mills vs. DCIT
Sections 115J, 263
Asst. Year 1990-91
Rajesh Balia & R.S. Chauhan, JJ.
IT Ref. No. 1 of 2003
22nd July, 2005
Counsel Appeared
Sanjay Jhanwar, for the Petitioner : K.K. Bissa, for the Respondent
JUDGMENT
By the court :
The Tribunal, Jodhpur, has submitted the statement of case and referred the following questions of law arising out of the appellate order dt. 10th Jan., 1995 passed in IT Appeal No. 1047/Jp/1994 for asst. yr. 1990-91 at the instance of assessee on an application for assessment (reference) under s. 256(1) of the IT Act, 1961.
“Q. No. 1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the order passed by the CIT under s. 263 was correct and thereby upholding the same ?
Q. No. 2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue ?”
2. Facts giving rise to this appeal are as under : That the assessee is a public limited company carrying on the business of textiles. For the asst. yr. 1990-91 the assessee returned a net loss of Rs. 5,72,56,454. The assessment was completed under s. 143(3) of the Act on 22nd Oct., 1991 and the total income was assessed at nil. Thereafter, the CIT issued a notice under s. 263 calling upon the assessee as to why book profit may not be computed under s. 115J in accordance with the provisions of the Act at Rs. 3,26,16,000 and consequently 30 per cent of the same be not taken as taxable income as subject to tax. The Annex. 2 submitted on 22nd Oct., 1991 shows that in computing the total income, the assessee has shown net loss as per P&L a/c at Rs. 31,65,800 and had claimed adjustment on account of depreciation at Rs. 8,29,95,990. The AO after considering claim to depreciation in respect of different assets finally allowed the depreciation at Rs. 8,71,81,294 and after making some adjustments, disallowed certain part of the claim made by the assessee in this regard. However, no additions were made on account of depreciation provided for by the assessee in his books of account, on newly installed plant and machinery. Determination of depreciation and its allowance in computing taxable income of the assessee in accordance with IT Act, 1961, was not found to be erroneous. The AO in assessment order dt. 20th Oct., 1991 had referred to s. 115J.
After the assessment was completed, the CIT was of the opinion that the order dt. 22nd Oct., 1991 passed by the AO was erroneous and prejudicial to the interest of Revenue in considering the entire claim of depreciation on new machinery as provided in P&L a/c which were duly audited, approved by AGM and certified by Registrar of Companies to be erroneous and prejudicial to interest of Revenue resorted to his jurisdiction under s. 263 of the IT Act and recomputed the book profit of company by disallowing the claim to depreciation. From the order dt. 21st March, 1994 passed by the CIT, it is revealed that the AO while making assessment under s. 143(3) and computing the total income under the provisions of the IT Act has not considered the applicability of s. 115J of the IT Act by way of reasoned order. So far as consideration of applicability of s. 115J is concerned, the AO has observed that applicability of s. 115J was also considered. The AO has further considered that certain additions are required to be made in the return of the assessee in its correct perspective and on the basis of which he has made certain modifications in computing the total income of assessee and also computing the amount for carrying forward of losses/unabsorbed depreciation to subsequent years with which we are not concerned here. The power of the CIT under s. 263 was exercised in respect of finding that the computation of book profit made under s. 115J by the AO was erroneous. For this purpose, he referred to following table about the information furnished by the assessee in his return regarding applicability of s. 115J(4) : By referring to foot note 4(b) to Sch. XIII of the balance sheet, it came to the conclusion that it appears that P&L a/c of the assessee did not reflect the correct book profit. The AO ought to have recomputed the book profit by reducing the inflated claim of depreciation to the extent of Rs. 436.35 lakhs and obviously the book profit would have come to Rs. 3,26,16,000 which according to the CIT ought to have been computed as book profit in terms of s. 115J and accordingly for 30 per cent of this recomputed book profit, the assessee ought to have been subjected to tax in terms of the provision which is popularly known as MAT.
The principal ground for passing the order by CIT was that in terms of the Sch. XIV, the depreciation ought to have been allowed on pro rata basis and not in respect of complete year. Therefore, excess depreciation of Rs. 436.35 lakhs has been made and to that extent, the book profits are to be reduced. As a result of this conclusion, the CIT held the order of the AO relating to applicability of s. 115J to be erroneous and prejudicial to the interest of the Revenue and directed the AO to recompute the book profit as above and levy tax. On further appeal, the Tribunal has affirmed the order of the CIT overruling the objection of the assessee that book profit shown in P&L a/c of the company prepared in terms of Part II and Part III of the Sch. VI of the Companies Act was not open for recomputation by any authority under IT Act except the permissible adjustments under Explanation to s. 115J(1A). The CIT was in error in holding the assessment orders to be erroneous and prejudicial to interest of Revenue. The Tribunal found that the order of the AO if read in the light of applicability of s. 115J, no reference is found to s. 115J. In the entire order only observation is made about s. 115J, however, there is no discussion whatever in the order that s. 115J is not applicable. Sec. 115J being an important provision, some discussion in the order would not have been out of place. This sort of passing reference by the AO may lead a superior officer to think as to whether the subordinate officer must have considered all the aspects of law as well as facts or not in arriving at a particular conclusion. On these premises, the Tribunal found that the CIT was right in holding that the order of the AO was erroneous to that extent.
The other objection of the assessee was that there was nothing on the basis of which the CIT could also find the order to be prejudicial to the interest of Revenue. The Tribunal went into various provisions of the Companies Act to find what is the purpose of maintaining accounts and what ought to be fair book profit in its opinion. The Tribunal was of the view that the condition laid down in sub-s. (1A) of s. 115J that the company has prepared its P&L a/c in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956, has to be read conjoined with the provisions of s. 211(2) and other provisions of the Companies Act. The principal ground was that as per Sch. XIV the depreciation on new machines ought to have been allowed on pro rata basis and not for the whole year. In not adhering to Sch. XIV the profits declared by the company are not fair and true as per s. 212(2) of the Act. With this premise, the Tribunal held that what is fair and correct result is essence of finding book profit within the meaning of sub-s. (1A) of s. 115J. It said “substantial provision of s. 212(2) is the true and fair result concept. Sec. 212(2) not only requires a company to show a true and fair view of profit or loss, but further, it also requires that while complying with requirement of Parts II and III of the Sch. VI of the Companies Act, the end result shall be subject to true and fair result concept. While applying s. 115J, enquiry into question whether book profit shown by the company is true and fair is permissible.” The AO according to the Tribunal is required to probe into the P&L a/c of the company while considering the acceptability of book profit shown in P&L a/c while applying the provisions of s. 115J(1). The Tribunal embarked on the discussion of other provisions of Companies Act rather than confine to Part II and Part III of Sch. VI to find out whether the book profit shown by the assessee satisfied the test of declaring “true and fair result”. The Tribunal referred to the report of the auditors regarding P&L a/c and balance sheet that the account of the company gives true and fair value result subject to the various notes appended to it, which included Note 4(b) under Sch. 13, which inter alia, reads as under :
“Depreciation on additions to fixed assets acquired and put to use after 1st Oct., 1987 together with existing looms in Sulzer Weaving Unit except temporary construction at Banswara, wherein the rate applied is 20 per cent has been provided on written down value method at the rates specified in Sch. XIV of the Companies Act, 1956, for the whole year instead of pro rata for the period of use. As a result of above, charge on account of depreciation for the year is higher by Rs. 426.35 lakhs, the resultant profit for the year is lower to this extent and came to the conclusion that by considering the various aspects of the accounting and the different requirements of the Companies Act for the purpose of providing of depreciation under s. 350 and the general guidelines issued by the Institute of Chartered Accountants, it came to the conclusion that by not providing pro rata depreciation in the new acquired assessment during the previous year relating to the assessment year. The books of account do not give true and fair value of the P&L a/c of the company in terms of s. 211(2). This addition made in the book profit on account of depreciation charged referred to above added back to the book profit, otherwise shown in the P&L a/c of the company and affirmed the order of the CIT passed under s. 263 of the IT Act.”
The two questions which have been referred to us, in our opinion, are the aforesaid two aspects of the exercise of jurisdiction by the CIT under s. 263 namely, whether the order passed by AO is erroneous and secondly if it is erroneous, whether it is also prejudicial to the interest of the Revenue, as these are the two cumulative conditions, satisfaction of which alone gives the CIT to invoke s. 263 of the IT Act, 1961. It would require inquiry into the question through scope and ambit of the provisions related to s. 115J, which was then in force in the context of the object with which the provision had been enacted and the scope of the enquiry, which the AO can make into the book profits, disclosed in the books of account by the assessee in accordance with Part II and Part III to the Sch. VI of the Companies Act. One more important fact, which we may notice at this juncture is that Tribunal has said that though the auditor’s report does not say that “book profit” shown in the P&L a/c is not in accordance with Part II and Part III of the Sch. VI of the Companies Act or that “book profit” declared for the purpose of s. 115J, does not disclose true and fair result as per Companies Act, yet by referring to very many other provisions of Companies Act, regulating different matters to be taken into consideration for different purposes, more particularly Sch. XIV, that book profits shown by the assessee in his audited accounts which were duly approved by annual general meeting and duly certified by Registrar of Companies with whom such accounts were filed, did not disclose true and correct results. For this reason it upheld rejection of admitted book profits and substitution of recomputed book profits as per CIT in his order under s. 263 as correct for the purposes of invoking s. 115J. This common ground that prevailed with CIT while exercising jurisdiction under s. 263 and on appeal by the Tribunal was that the book profit disclosed as per P&L a/c and balance sheet prepared in accordance with Part II and Part III of the Sch. VI, did not disclose true and fair result relating working of the company and the matter whether the book profit declared by the assesseecompany reflects true and fair result for the relevant period is a matter which is open to be enquired into and is required to be inquired into by the AO, while considering the applicability of s. 115J in respect of any company.
It may be noticed that s. 115J is to be resorted to in alternative to a regular assessment by computing taxable income of a company in accordance with the provisions of the IT Act. It is only where the result arrived at by regular assessment of the company by computing its income in accordance with the provisions of IT Act, if the assessee’s total taxable income to be less than the 30 per cent of the income admitted by the assessee through declaration of book profits in its P&L a/c presented before AGM for the purpose of distributing the dividends. This is with the object that the company is at least held liable to pay tax on 30 per cent of such admitted profits, which has been placed before AGM for the purpose of distributing its dividends. The object of insertion of s. 115J initially w.e.f. 1st April, 1988 by IT Act, 1961 and later on by introducing s. 115JA w.e.f. 1st April, 1997 vide Finance Act, 1996, was to secure minimum tax on the basis of admitted profits earned by the company for the purpose of distributing the dividends if the computation of income in accordance with the provisions of IT Act yield lesser income. The provision was thus not introduced as an alternate regular procedure to be gone into for determining the maximum tax to be collected from the company, but it was the procedure provided as alternative to ensure that minimum tax is paid by the company on its book profits as admitted by it before distributing the dividends to its shareholders. The Part II and Part III of the Sch. VI really do not concern with how and in what manner the accounts are to be prepared, but they deal with what disclosure has to be made in the books of account prepared by the company about the matters detailed in the accounts. It is silent about how and in what manner the accounts are to be prepared and whatever expenses, credits or tax benefits were taken into account, the P&L a/c has found their way into the books of account. Part II and Part III of the Sch. VI do not direct whether they are concerned nor these provisions envisage any directions to the companies to provide for any matters in the books in a particular manner. It is significant that sub-s. (1A) of s. 115J was inserted w.e.f. 1st April, 1989 vide Finance Act, 1988 to eliminate the possible inquiry by the AO in the matter of computation of minimum tax on profits as disclosed by the company in its P&L a/c except to make specific adjustments, if any, enumerated in Explanation attached to said provision, by way of additions to or deductions from such disclosed book profits. It is like acceptance of self-disclosures. Sub-s. (1A) directed not in general way to prepare P&L a/c for the previous year in accordance with general provisions of the Companies Act which are relevant for the various purposes, but it defined what book profit means for the purpose of s. 115J. The book profit for the purposes of s. 115J means the profit and loss mentioned in the P&L a/c, which has been prepared in accordance with the provisions of Part II and Part III of the Sch. VI to the Companies Act, 1956. It did not rest merely with that requirement, but further ordained that net profit shown in the P&L a/c for the relevant previous year prepared as per sub-s. (1A) is to be increased by such items specifically detailed under cl. (a) to cl. (ha) of Explanation and further ordained that after the book profit is augmented by additions made as per cls. (a) to (ha), it be reduced by items shown in cls. (i) to cl. (iv) relating to the amounts to be reduced from book profits so derived.
Therefore, for the purpose of s. 115J, a complete code was laid to take the net profit as shown in the P&L a/c of the company and not net profit as computed by AO as per his opinion of true and correct result of working of company as basis for making the adjustment, which have been specified in the Explanation. No additional adjustments are permissible whether by way of addition or by way of reduction other than one enumerated in Explanation. One fact which may be noticed in this connection is that even before insertion of sub-s. (1A), the position was made clear by using the expression in the Explanation which came into existence along with the insertion of s. 115J. The Explanation which was existing prior to insertion of sub-s. (1A) read as under : “Explanation : For the purpose of this section, “book profit” means the net profit as shown in the P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956.” After the amendment, with the insertion of sub-s. (1A) read with the Explanation it reads as under : “(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI of the Companies Act, 1956 (1 of 1956). Explanation : For the purposes of this section, “book profit” means the net profit shown in the P&L a/c for the relevant previous year prepared under sub-s. (1A), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves (other than the reserves specified in s. 80HHD by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or (g) the amount withdrawn from the reserve account under s. 80HHD, where it has been utilised for any purpose other than those referred to in sub-s. (4) of that section; or (h) the amount credited to the reserve account under s. 80HHD, to the extent that amount has not been utilised within the period specified in sub-s. (4) of that section; (ha) the amount deemed to be the profits under sub-s. (3) of s. 33AC; and as reduced by (i) the amount withdrawn from reserves (other than the reserves specified in s. 80HHD) or provisions, if any, such amount is credited to the P&L a/c: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the first day of April, 1988 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (ii) the amount of income to which any of the provisions of Chapter III applies, if any, such amount is credited to the P&L a/c; or (iii) the amounts [as arrived at after increasing the net profit by the amounts referred to in cls. (a) to (f) and reducing the net profit by the amounts referred to in cls. (i) and (ii)] attributable to the business, the profits from which are eligible for deduction under s. 80HHC or s. 80HHD; so however, that such amounts are computed in the manner specified in sub-s. (3) or sub-s. (3A) of s. 80HHC or sub-s. (3) of s. 80HHD, as the case may be; o(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of cl. (b) of the first proviso to sub-s. (1) of s. 205 of the Companies Act, 1956 (1 of 1956), are applicable.”
Therefore, for the purpose of finding the book profit in order to determine the 30 per cent of its profits in terms of s. 115J(1) as minimum income chargeable to tax in a particular assessment year, where the chargeable income assessed in accordance with the provisions of IT Act, 1961, is less than 30 per cent of book profit so arrived at, the 30 per cent of the book profit so arrived at under sub-s. (1A) may be taken as the chargeable income to the tax by this deeming provision. Apparently, there is no room for redetermining the net profit as shown in the P&L a/c of the company containing relevant declarations as incorporated in the light of Part III of Sch. VI. The AO had to accept the result shown in the P&L a/c as book profit subject to the adjustment by additions or reductions, as detailed in Explanation. The enquiry by the AO into the conceptual “true and fair result” of the working of the company to be adverted to by the Tribunal is alien to enquiry under s. 115J. As such it is not a substitute procedure laid down for recomputing the income of the assessee in different manner by the AO himself, as he thinks proper, then he has already computed under the provisions of the IT Act. He is not required to embark upon the detailed requirement into the different aspects of the matter and recompute the net profit shown in the books of account for applying basis to revive as book profit which he thinks ought to be fair and true result by resorting to conceptual theory of true and fair result, by foraying into various other provisions of the Companies Act, that may provide many other matters to be taken into account for various other purposes. For example, s. 49 requires determination of profit for the purpose of determining permissible limit of remuneration that could be paid to managing agents. That part of the exercise is always open to be made to the extent it is permissible under law while computing the P&L a/c of the company in accordance with the provisions of the IT Act. It is open to disallow any claim to specific deductions or exemptions or benefit of tax concessions by resorting to regular computation of income at that stage.
It is open to the AO while computing the income of any company in accordance with the provisions of the IT Act to find whether the depreciation or other adjustments permissible to be made under the IT Act, while computing taxable income of the company. In fact assessment order itself shows that AO has gone in detail of acceptable WDV, the claim to depreciation on specific assets and has also gone into reason for claim to enhanced depreciation amount. Many of assessee’s claim have been denied while determining finally how much depreciation is entitled to be deducted from assessee’s income. It would be pertinent to mention that while computing the assessee’s income in accordance with the provisions of the IT Act, the claim of depreciation to which the subject-matter of controversy relates, had fully been held to be allowable in computing the taxable income of the company and on that premise, the assessment had been made. The order of the AO computing the income of the company in accordance with the provisions of the IT Act has neither been found erroneous nor prejudicial to interest of Revenue by CIT. If claim to depreciation in respect of assets in question was found to be justified while computing the income in accordance with the provisions of IT Act, one fails to find reason how the same could be found to be erroneous for the purpose of arriving at book profit as per assessee’s admission under s. 115J on the concept of “fair and true result” of the company for the same period. There can hardly any occasion arise to make adjustment of book profit on that account. In the present case, this position is obvious from the computation of income in terms of the provisions of the IT Act, in which the claim to depreciation had not been found to be erroneous because that claim has resulted in nil income while computing the income of the assessee. The same cannot be found to be not resulting in giving true and fair picture of the assessee’s book profits in terms of s. 115J. This is apart from our conclusion that no such inquiry is permissible for the purpose of recomputing book profit by the AO in the absence of any note by auditors or AGM or Registrar of Companies that the books of account or P&L a/c and balance sheet has not been prepared in accordance with Part II and Part III of the Sch. VI of the Companies Act. As a matter of fact, the issue is now no more res integra.
The Kerala High Court and Andhra Pradesh High Court had taken the view that while applying s. 115J for the purpose of determining alternative tax in order to fix a minimum tax liability on the companies the book profit shown as per P&L a/c and balance sheet of the company is not open to scrutiny by the AO. The view taken by the Kerala High Court and Andhra Pradesh High Court in this regard has since been affirmed by the Supreme Court in Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC).
21. In Apollo Tyres Ltd. vs. CIT (supra), the Supreme Court was concerned with a case in which the appellant assessee-company while determining its net profit for the relevant accounting year has provided for arrears of depreciation in its P&L a/c which according to the Revenue was not in accordance with Parts II and III of Sch. VI to the Companies Act. Hence, the AO while considering the case of the assessee-company under s. 115J of the IT Act recomputed the said P&L a/c of the company so as to exclude the provisions made for arrears of depreciation. The said action of the AO in questioning the correctness of the accounts maintained by the company was challenged by the company before the Tribunal which among other things held that the AO has no authority to reopen the accounts of a company which is certified by the auditors of the company as having been maintained in accordance with the provisions of the Companies Act and which account has been accepted in the general meeting of the company as well as by the Registrar of Companies. This view of the Tribunal was not accepted by the High Court which held that the AO has the authority to examine whether the accounts of the company have been maintained in accordance with the requirement of sub-s. (1A) of s. 115J and in that process if he finds that the accounts of the company are not in accordance with the provisions of the Companies Act, he could make the necessary changes before proceeding to assess the company to tax under the Explanation to s. 115J of the IT Act. The apex Court referred to the object of introducing s. 115J in the IT Act deduced from the Budget speech of the then Finance Minister of India made in Parliament while introducing the said section, which was as follows : “It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called “zero-tax” highly profitable companies deserves attention. In 1983, a new s. 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a “minimum corporate tax” on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent of its book profit. In other words, a domestic widely-held company will pay tax of at least 15 per cent of its book profit.”
The above speech shows that the IT authorities were unable to bring certain companies within the net of income- tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net, that s. 115J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, s. 115J makes the fixed percentage of income reflected in the company’s books of account the deemed taxable income for the purpose of assessing the tax. Viewed in this context, the Supreme Court further held that : “The use of the words ‘in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act’ was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an AO 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 the 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. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the AO to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act.” The Court further held that : “Reliance placed by the Revenue on sub-s. (1A) of s. 115J of the IT Act in support of the above contention is misplaced. Sub-s. (1A) of s. 115J does not empower the AO to embark upon a fresh inquiry 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 account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under the IT Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of s. 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes, one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the legislature intended the AO to reassess the company’s income, then it would have stated in s. 115J that “income of the company as accepted by the AO”.
With this conclusion, the Court answered the question referred by the Tribunal by holding that the AO cannot question the correctness of the P&L a/c prepared by the assessee-company and certified by the statutory authorities as having in accordance with the requirements of Part II and Part III of the Sch. VI. The Court clearly stated that 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 has the limited power of making 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 beyond the net profit shown in the P&L a/c which have been statutorily audited, approved by AGM and filed with the Registrar of Companies who has certified its correctness except to the extent adjustments provided in the Explanation to s. 115J. This proposition of the Supreme court in our opinion should put quietus to the controversy of questioning the book profit shown in the P&L a/c which have been duly audited, approved by AGM of the company and has been filed before Registrar of Companies who had no objection to the correctness to be beyond the scrutiny of the AO. If that is so, then the CIT was apparently in error in going through the book profit shown by the assessee and taking upon himself to examine whether any amount has been wrongly taken into consideration while preparing the P&L a/c declaring the book profits to be contrary to the provisions of the Companies Act by resorting to its own view of true and fair result of company’s working, whereas the company’s accounts have been certified by its auditors to be in accordance with the provisions of the Act and approved in annual general meeting of the company and thereafter have also been certified by the Registrar of the Companies. This enquiry being beyond the jurisdiction of the AO under the IT Act, the assumption of jurisdiction by CIT on the ground that assessment order was erroneous and prejudicial to interest was not sustainable.
It may further be noticed that the Supreme Court decision in Apollo Tyres case (supra) was rendered in relation to the asst. yr. 1990-91 when s. 115J only was in force at relevant time. Sub-s. (2) of s. 115JA has been inserted w.e.f. 1st April, 1997 which provides a clear provision in this regard in sub-s. (2) which reads as under: “(2) Every assessee, being a company, shall, for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI of the Companies Act, 1956 : Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act, 1956.” A perusal of the aforesaid provision goes to show beyond any doubt that any such scrutiny into claim of depreciation while resorting to alternative tax is not permissible by the AO under proviso to sub-s. (2) of s. 115JA, who has to accept the claim of depreciation which has been adopted for the purpose of preparing P&L a/c laid before AGM in accordance with the provisions of s. 210 of Companies Act, 1956, and approved by AGM. We may notice that w.e.f. 1st April, 1997 the assessments are governed by s. 115JA and not by s. 115J. The applicability of s. 115JA stopped after asst. yr. 1990-91. As a matter of fact, the order of CIT as affirmed by the Tribunal is founded on wholly erroneous view of object of s. 115J and scope of enquiry by AO into finding book profit on the basis of “true and fair result” concept of company’s working, divorced from the mandate that the alternate basis of finding a minimum base to levy tax is not to arrive at different computation of profits as per the own view of AO what ought to be book profit, but is to be founded on admitted profits shown in the books of account to its shareholders for declaring dividends, subject to additions or deductions envisaged under Explanation to s. 115J(1A). An alternative which is founded on admission of assessee, cannot be considered to find out whether such admission is acceptable or not. The provision does not give any authority to any instrumentality functioning under the Act to probe into finding book profit de hors what has been shown in the audited books of account which are placed before AGM and approved by the shareholders and certified by the Registrar of Companies when the same is filed with him. That is the acceptance by the shareholders and statutory authorities to be the result of company’s affairs. Such accepted book profit has to be accepted by AO to find whether income computed by him in accordance with IT Act is more than or less than such admitted income. It is only if as a result of company’s total taxable income in accordance with IT Act by the AO, it is found to be less than 30 per cent of admitted book profits as discussed above, that resort has to be had to s. 115J and not otherwise. If the computation in accordance with provisions of IT Act gives better tax results, it is not at all required to go to s. 115J.
The CIT has obviously exceeded its jurisdiction to find the order of AO to be erroneous, not on the basis of declared book profit, but on the basis of book profit computed by him and the Tribunal too fell in like error in accepting the position. The view about scope and enquiry into book profits as per audited P&L a/c duly approved by the AGM and certified by Registrar of Companies is settled by the decision of the Supreme Court in Apollo Tyres case (supra). Hence, the orders of CIT under s. 263 as well as of Tribunal is contrary to it, must be held to be erroneous and not sustainable. In view of our aforesaid discussion, question Nos. 1 and 2 are answered against the Revenue and in favour of the assessee by holding that the Tribunal was in error in holding that the assessment order passed by the AO was erroneous and prejudicial to the interest of Revenue and, therefore, CIT could pass the order under s. 263 of IT Act by recomputing the book profit by adding the amount of depreciation claimed by the assessee in his P&L a/c which has been audited, approved by AGM and certified by Registrar of Companies.
Hence, exercise of jurisdiction by CIT under s. 263 was not sustainable nor its affirmance by the Tribunal. There shall be no order as to costs.
[Citation : 281 ITR 177]
