D.b. Income Tax Reference v. M/S. Aravali Minerals & Chemicals India (P) Ltd

D.B. INCOME TAX REFERENCE NO.57/1998(Commissioner of Income Tax Vs. M/s. Aravali Minerals & Chemicals India (P) Ltd.) Date of order : 13.10.2006 HON'BLE MR. JUSTICE RAJESH BALIAHON'BLE MR. JUSTICE GOPAL KRISHAN VYAS Mr. K.K. Bissa, for the appellant.Mr. Dinesh Mehta, for the respondent. Heard learned counsel for the parties. Following questions of law have been referredby the Tribunal for assessment year 1990-91 : 1.“Whether on the facts and in thecircumstances of the case, the Tribunal wasjustified in holding that the assessee wasjustified in claiming higher depreciationon account of re-valuation of fixed assets,inspite of the fact that the assessee hasnot brought out any justified purpose forre-valuation of assets even before theTribunal.circumstances of the case, the Tribunal wasjustified in holding that the assessee wasjustified in claiming higher depreciationon account of re-valuation of fixed assets,inspite of the fact that the assessee hasnot brought out any justified purpose forre-valuation of assets even before theTribunal. 2.Whether the Tribunal was justified inholding that the guide-lines issued by theInstitute of Chartered Accountants of Indiashould be followed inspite of the fact thatthe Hon'ble Karnataka High Court in thecase of CIT vs. Cap Steel Ltd., 162 ITR 533has held that the assessee cannot be giventhe advantage of the principle recommendedby the Institute if it is contrary to thestatutory provisions.”holding that the guide-lines issued by theInstitute of Chartered Accountants of Indiashould be followed inspite of the fact thatthe Hon'ble Karnataka High Court in thecase of CIT vs. Cap Steel Ltd., 162 ITR 533has held that the assessee cannot be giventhe advantage of the principle recommendedby the Institute if it is contrary to thestatutory provisions.” The questions framed do not bring outpointedly the controversy that arise for considerationin this reference and need to be re-framed in thelight of facts and circumstances of the case as under: “Whether on the facts and in thecircumstances of the case, the Tribunal wasjustified in holding that for the purposesof applying Section 115J of the Act to acompany, recomputation of depreciation byrejecting the revalued book value of assetsis not permissble to increase the bookprofits shown in the audited book ofaccounts.” The facts emerging from the statement of thecase and the orders annexed there with are that theassessee is a private limited company and filed areturn of a loss of Rs.1,25,860/-. The assessmentunder Section 143 (3) was completed and the totalincome of the assessee as per the return was computedas Nil after setting off earlier years' businessloss/depreciation. However, the assessee being a Company, theassessing officer resorted to Section 115J for levyingminimum tax as per the book profits shown in itsaudited books of accounts for the purpose of declaringdividends. While considering the book profits, theassessing officer re-computed the book profits and indoing so, he re-computed the depreciation bydisallowing the re-valuation of the assets shown inthe books of accounts. Though the audited accounts ofthe assessee company had shown the loss ofRs.28,986/-, by recomputing the depreciation and disallowing, the amount of depreciation whichaccording to the assessing officer was wronglyaccounted for and recomputed book profits at profit ofRs.1,43,538/- and levied tax on 30% thereof byconsidering it to be the taxable income of theassessee for the assessment year in question in termsof Section 115J of the Act. The assessee challenged the order of theassessing officer, recomputing the books of profitsand reaching it to a different figure by contendingthat the depreciation as appearing in the auditedbooks of company could not have been altered by theassessing officer while resorting to Section 115 J. disallowing, the amount of depreciation whichaccording to the assessing officer was wronglyaccounted for and recomputed book profits at profit ofRs.1,43,538/- and levied tax on 30% thereof byconsidering it to be the taxable income of theassessee for the assessment year in question in termsof Section 115J of the Act. The assessee challenged the order of theassessing officer, recomputing the books of profitsand reaching it to a different figure by contendingthat the depreciation as appearing in the auditedbooks of company could not have been altered by theassessing officer while resorting to Section 115 J. The CIT (Appeals) upheld the assessment orderin this regard while granting other reliefs with whichwe are not concerned in this reference. The Tribunal upheld the contention of theassessee and set aside the assessment order byresorting to Section 115J. Hence the aforesaid twoquestions have been referred. The assessment relates to Section 115J of theAct of 1961, the provisions contained under thatSection governs the present case. As noticed abovethe profits of a Company under Section 115J can bebasis of assessment only if the total income of a Company computed in accordance with the provisions ofthe Act is less then 30% of its book profits. In thatevent, the total income of such assessee-companychargeable to the tax for the relevant previous periodshall be deemed to be an amount equal to the 30% itsbook profit. Sub-section 1A defines what is to bebook profit for the purpose of assessment underSection 115J. It means, the net profit as shown bythe Company in the P&L account for the relevantprevious period prepared in accordance with theprovisions of Part II and III of Schedule VI of theCompanies Act, 1956. The Explanation appended toSection 115J (1A) also provides what adjustments arepermissible to be made in book profit declared as perProfit & Loss Account of the Company. The ground on which the book profits of theCompany, which has been re-computed by the assessingOfficer, was by way of re-determining the depreciationclaimed by the assessee because the assessing officerwas of the opinion that the re-valuation of the assetsin the books of Company for the purposes of computingits book profit was not permissible and depreciationought to have been on the basis of written down valuebefore revaluation of the assets. Firstly, Explanation to Section 115J (1A)clearly enumerates the adjustments which can be madein the net profit disclosed in the P&L account of the relevant previous period. No other adjustments arepermissible to be made for the purpose of resorting tominimum level of tax on admitted profits. Re-computing of depreciation charged to the P&L accountof the Company are not included in the enumeratedadjustments. Moreover, Part II and III of Schedule VI ofthe Companies Act reffered to in sub-section 1A ofSection 115J do not prohibit the re-valuation of thebook assets of the Company for the purposes ofcharging depreciation to the P&L account. Sub-para IVof Para III of Part II requires that the P&L account,setting out the other items relating to the income andexpenditure of the Company arranged under the mostconvenient heads; and in particular, shall disclosethe amount provided for depreciation, renewals ordiminution in value of fixed assets. Para-7 of PartIII also envisages that for the purpose of Parts I andII of this Schedule, unless the context otherwiserequires the expression “provision” shall, subject tosub-clause (2) of this Clause, mean any amount writtenoff or retained for providing depreciation, renewalsor diminution in value of assets, or retained by wayof providing for any known liability, of which theamount cannot be determined with substantial accuracy. Significantly, sub-para (2) of Para 7 of PartIII leaves it to the Directors to consider whether the Significantly, sub-para (2) of Para 7 of PartIII leaves it to the Directors to consider whether the provision by way of depreciation, renewals ordiminution in value of assets is excessive or not. Itunequivocally provides that where any amount writtenoff or retained by way of providing for depreciation,renewals or diminution in value of assets, not beingan amount written off in relation to fixed assetsbefore the commencement of this Act is in excess ofthe amount, which in the opinion of the directors isreasonably necessary for the purpose the excess shallbe treated for the purposes of this Schedule as areserve and not as a provision. Therefore, increaseand decrease by way of providing depreciation,renewals or diminution in value of assets in the P&Laccount and its reasonableness is within the domain ofdecision by the Directors and that decision is notliable to be questioned while considering the bookprofits for the purposes of finding out the 30% ofsuch book profit to be compared with the total incomeassessed in accordance with the provisions of the Acton the basis of the return submitted by the assesseecompany. There is no room for Income Tax Officer tomeddle with the provision of the depreciation providedin the P&L account by re-valuing the assets which hasbeen approved by the Director as well as AnnualGeneral meeting in terms of Section 210 of theCompanies Act. Significantly, under Section 115JA whichapplies to the assessment year 1997-98 onwards until assessment year 2000-01 while requiring that everyassessee being a company shall for the purposes ofthis Section prepare its P&L account for the relevantprevious year for the purpose of Parts II and III ofSchedule VI of the Companies Act and considering thenet profits as shown in the P&L account for therelevant previous year, prepared as aforesaid as bookprofit for the purpose of Section 115J (1A) clarifiedthat while preparing P&L account, the depreciationshall be calculated on the basis of same method andrate which has been adopted for calculating thedepreciation for the purpose of preparing the P&Laccount laid before the Company in its annual generalmeeting in accordance with the provisions of Section210 of the Companies Act. This provision clearly put the question ofproviding depreciation on the assets of the Companywhether on its increased or decreased value beyond thepale of exercise by Assessing Officer. Therefore,depreciation approved by and P&L account approved byits Directors at Annual General Meeting is not liableto be tempered with by the assessing officer for thepurposes of levying minimum level of tax under Section115J and 115JA which has limited object of holding,the assessee falling under Section 115J and 115JA,liable to pay minimum tax at the level of admittedprofits by them through their P&L account. Whilehaving recourse to Section 115J, the assessing officer is not empowered to embark on enquiring into P&Laccount of the Company by invoking its power forcomputing its total income in accordance with theprovisions of this Act. The only permitted adjustmenthaving been identified under Explanation to Section115J no other adjustment in the book profit or to sayin profit disclosed in the P&L account is permissibleto be made by resorting to one or another principle. is not empowered to embark on enquiring into P&Laccount of the Company by invoking its power forcomputing its total income in accordance with theprovisions of this Act. The only permitted adjustmenthaving been identified under Explanation to Section115J no other adjustment in the book profit or to sayin profit disclosed in the P&L account is permissibleto be made by resorting to one or another principle. Apparently, under various heads stated inClause (a) to (ha) of Explanation to sub-section (1)of Section 115J does not permit the assessing officerto inter-meddle with the depreciation provided in thebooks of accounts for the purposes of arriving at bookprofits different than from what has been stated inthe audited books of accounts for the purposes ofpresenting before Annual General Meeting under Section210 of the Companies Act in order to declare dividend.Section 115 J is to provide a minimum tax liability onthe admitted profits for the purpose of distributionof dividends and it is not to be substituted by re-computing the Profit and Loss Accounts on generalprinciples. Only such adjustments are permissible aspermitted in Explanation. This Court had occasion to consider the scopeof computation of the book profits by the AssessingOfficer while resorting to levy minimum tax underSection 115-S in Rajasthan Spinning & Weaving Mills Vs. DCIT, decided on 21.7.2005 (DB I.T. AppealNo.1/2003). This was a case in which the assessingofficer while resorting to procedure under Section115J had recomputed the depreciation shown in thebooks of account by the assessee by taking uponhimself the exercise to find out what should be thecorrect and true basis to claim to depreciation forworking out book profit through P&L Account. Thiscontention was negatived by the Court afterconsidering the relevant provisions of the Income TaxAct, the Companies Act and the precedents, the Courtheld as under :- “It may be noticed that Section 115Jis to be resorted to in alternative to aregular assessment by computing taxableincome of a Company in accordance with theprovisions of the Income Tax Act. It isonly where the result arrived at byregular assessment of the company bycomputing its income in accordance withthe provisions of Income Tax Act, if theAssessee's total taxable income to be lessthan the 30% of the income admitted by theassessee through declaration of BookProfits in its Profit and Loss Accountpresented before the A.G.M. for thepurpose of distributing the dividends.This is with the object that the Companyis at least held liable to pay tax on 30%of such admitted profits, which has beenplaced before A.G.M. for the purposeof distributing its dividends. The objectof insertion of Section 115J initiallyw.e.f. 1.4.1988 by Income Tax Act, 1961and later on by introducing Section 115J-Aw.e.f. 1.4.1997 vide Finance Act, 1996 wasto secure minimum Tax on the basis ofadmitted profits earned by the Company forthe purpose of distributing the dividendsif the computation of income in accordancewith the provisions of Income Tax Actyields lesser income. The provision wasthus not introduced as an alternate regular procedure to be gone into fordetermining the maximum tax to becollected from the Company, but it was theprocedure provided in alternative to ensuethat minimum tax is paid by the Company onits book profits as admitted by it beforedistributing the dividends to its shareholders.” In the aforesaid decision, the Court furtherheld as follows : regular procedure to be gone into fordetermining the maximum tax to becollected from the Company, but it was theprocedure provided in alternative to ensuethat minimum tax is paid by the Company onits book profits as admitted by it beforedistributing the dividends to its shareholders.” In the aforesaid decision, the Court furtherheld as follows : “That there is no room for re-determiningthe net profit as shown in the Profit andLoss Account of the Company containingrelevant declarations as incorporated inthe light of Part III of Schedule VI. TheAssessing Officer had to accept the resultshown in the Profit and Loss Account asbook profit subject to the adjustment byadditions or reductions, as detailed inExplanation. The enquiry by the AssessingOfficer into the conceptual “true and fairresult” of the working of the Company tobe adverted to by the Tribunal is alien toenquiry under Section 115J. As such it isnot a substitute procedure laid down forre-computing the income of the assessee indifferent manner by the Assessing Officerhimself, as he thinks proper, then he hasalready computed under the provisions ofthe Income Tax Act. He is not required toembark upon the detail requirement intothe different aspects of the matter andre-compute the net profit shown in thebooks of Accounts for applying basis torevive as Book Profit which he thinksought to be fair and true result byresorting to conceptual theory of true andfair result, by foraying into variousother provisions of the Companies Act,that may provide many other matters to betaken into account for various otherpurposes.” The principle is no more res-integra inasmuchthe Supreme Court has considered the scope ofassessing officer's authority in re-determining the net-profit disclosed in the P&L account of a companywhich have been audited and duly approved by AGM inApollo Tyres Ltd. Vs. Commissioner of Income Tax,reported in (2002) 255 ITR 273. In this case, theappellant assessee company while determining its netprofit for the relevant accounting year has providedfor arrears of depreciation in its Profit and LossAccounts. According to the Revenue, this claim wasnot in accordance with Parts II and III of Schedule VIof the Companies Act and the same was added to thebook profits shown by the assessee. Allowing theassessee's appeal, the Supreme Court held that theAssessing Officer has no authority to reopen theaccounts of a company which is certified by theauditors of the company as having been maintained inaccordance with the provisions of the Companies Actand which account has been accepted in the generalmeeting of the company as well as by the Registrar ofCompanies. In view of aforesaid decision, the Tribunalwas justified in coming to the conclusion that theassessing officer could not have re-computed the bookprofit by discarding the re-valuation of the assetsfor the purpose of arriving at books profits otherthan which has been presented before the A.G.M. fordeclaration of dividend as per the audited accounts. Accordingly, we answer the question re-framed arun by us in affirmative that is to say in favour of theassessee and against the revenue. No costs. (GOPAL KRISHAN VYAS), J. (RAJESH BALIA), J.