Ita v. Ita

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE HARUN-UL-RASHID THURSDAY, THE 3RD MARCH 2011 / 12TH PHALGUNA 1932 ITA.No. 74 of 2010() -------------------- AGAINST THE ORDER IN MP 08/COCH/2009 IN ITA.240/COCH/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- M/S.SREE BHAGAWATHY TEXTILES LTD., PALAKKADU, REPRESENTED BY ITS EXECUTIVE DIRECTOR. BY ADV. SRI.R.VIJAYA RAGHAVAN ADV. SRI.SAJI VARGHESE RESPONDENT/APPELLANT ------------------------ THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I, PALAKKADU. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/01/2011, THE COURT ON 03/03/2011 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &HARUN-UL-RASHID, JJ. .................................................................... I.T. Appeal No.74 of 2010 ....................................................................Dated this the 3rd day of March, 2011. C.R. JUDGMENT Ramachandran Nair, J. Appeal by the assessee is against the order of the Tribunal issuedunder Section 154 of the Income Tax Act (hereinafter called "the Act")rectifying and reversing an order in appeal that was decided in favourof the appellant-assessee. We have heard Adv. Sri.R.Vijaya Raghavanappearing for the appellant-assessee and Standing Counsel for therespondent-Revenue. 2. The assessment involved is for the year 1997-98. TheAssessing Officer accepted the loss return submitted by the assesseeand, therefore, proceeded to make MAT assessment on 30% of thebook profit under Section 115JA of the Act. The assessee disclosed abook profit of Rs.78,43,643/- and accepting the same the AssessingOfficer completed the assessment on 30% of the book profit i.e. fixingthe income at Rs.23,53,093/-. However, later the Assessing Officer ITA No.74/2010 noticed that the Profit and Loss Account prepared by the assessee underParts II and III of Schedule VI of the Companies Act disclosed a profitof Rs.1,01,37,664/-, wherefrom the assessee had made a deduction ofRs.23,29,726/- towards prior period expenses which is impermissibleunder the statute and this mistake was rectified in proceedings initiatedunder Section 154 of the Act by disallowing deduction claimed by theassessee from the profit available under the Profit and Loss Accountabovereferred. The assessee challenged the rectification order beforethe first appellate authority namely, the Commissioner of Income Tax(Appeals). However, the CIT(Appeals) verified the Profit and LossAccount prepared under Parts II and III of Schedule VI of theCompanies Act and noticed that the profit available in the said P&LAccount was Rs.1,01,37,664/-. The debit made towards prior periodexpenses was not in the P&L Account prepared under the CompaniesAct as stated above but the deduction was shown in the Profit and LossAppropriation Account which is not relevant for the purpose ofassessment under Section 115JA of the Act. Even though assesseerelied on decision of the Supreme Court in APPOLLO TYRES LTD. ITA No.74/2010 ITA No.74/2010 VS. COMMISSIONER OF INCOME TAX reported in 255 ITR 273,the CIT (Appeals) held that assessee has claimed a deduction from theprofit available in the P&L Account prepared under the aboveprovisions of the Companies Act which is not authorised under clauses(i) to (ix) of Explanation to Section 115JA of the Act. Therefore, heheld that the mistake in the original assessment which is a patentdeviation from the statutory provision is a mistake apparent whichcould be corrected under Section 154. When the assessee filed secondappeal, Tribunal initially allowed the same without considering the caseon merits, but by holding that admissibility of item of expendituretowards deduction in the computation of book profit under Section115JA is a debatable point on which no rectification can be made underSection 154 of the Act. The appeal filed by the assessee wasaccordingly allowed by the Tribunal. However, department filed arectification application pointing out the scheme of assessment underSection 115JA to the Tribunal wherein the basis to be adopted is theprofit as shown in the Profit and Loss Account prepared under theabove provisions of the Companies Act and therefrom the adjustments ITA No.74/2010 permissible are limited to the nine items provided in clauses (i) to (ix)of Explanation to Section 115JA. The Tribunal after verifying the factsfound that the assessee has returned the book profit not based on Profitand Loss Account prepared under the Companies Act, but based on theprofit available under the Profit and Loss Appropriation Account whichis against Section 115JA of the Act and, therefore, the Tribunalrectified their earlier order and upheld the order of the CIT(Appeals)confirming the rectification order passed by the Assessing Officerunder Section 154 of the Act. It is against this order of the Tribunalpassed under Section 154 the assessee has filed the appeal. 3. There is no dispute on the factual position in as much as theprofit available as per Profit and Loss Account prepared by the assesseein terms of Parts II and III of Schedule VI of the Companies Act basedon which assessment under Section 115JA has to be made wasRs.1,01,37,664/-. The only question to be considered is whetherassessee is entitled to deduction of prior period expenditure which isex-gratia payments made to employees for the services rendered for thelast several years which is a debit made by the assessee under the Profit ITA No.74/2010 and Loss Appropriation Account and if the same was wrongly allowedbased on assessee's claim, the Assessing Officer could rectify the samein proceedings initiated under Section 154 of the Act. Counsel for theassessee relied on several decisions including that of the SupremeCourt in APPOLLO TYRES' case referred above. The other decisionsrelied on by the assessee's counsel are that of Delhi High Court inCOMMISSIONER OF INCOME TAX VS. KHAITAN CHEMICALSAND FERTILIZERS LTD. reported in 307 ITR 150, that of MadrasHigh Court in COMMISSIONER OF INCOME TAX VS. INDENBISELERS reported in 181 ITR 69 and decisions of the Supreme Courtin T.R.F. LTD. VS. COMMISSIONER OF INCOME TAX reported in323 ITR 397 and in COMMISSIONER OF INCOME TAX VS. HCLCOMNET SYSTEMS AND SERVICES LTD. reported in 305 ITR409. Standing Counsel appearing for the Revenue on the other handcontended that Section 115JA is a self contained scheme of assessmentand the basis for assessment is the Profit and Loss Account preparedunder the abovereferred provisions of the Companies Act. 4. After hearing both sides and after going through the judgments ITA No.74/2010 4. After hearing both sides and after going through the judgments ITA No.74/2010 abovereferred, we are unable to uphold the assessee's contentionbecause what the Supreme Court has held in APPOLLO TYRES' caseabovereferred is that the Assessing Officer is bound to accept the Profitand Loss Account prepared in terms of the above provisions of theCompanies Act. The assessee also does not dispute the fact that theprofit available under the P&L Account prepared under the CompaniesAct is Rs.1,01,37,664/-. However, the assesssee's contention is that thedebit of prior period expenses made in the Profit and LossAppropriation Account should also be allowed as a deduction. We areunable to accept this contention because MAT assessment has to becompleted strictly in terms of the statutory provision which is asfollows: "S.115JA. Deemed income relating to certaincompanies:- (1) Notwithstanding anything contained in anyother provisions of this Act, where in the case of anassessee, being a company, the total income, as computedunder this Act in respect of any previous year relevat to theassessment year commencing on or after the 1st day ofApril, 1997 (hereafter in this section referred to as therelevant previous year) is less than thirty per cent, of itsbook profit, the total income of such assessee chargeable totax for the relevant previous year shall be deemed to be anamount equal to thirty per cent, of such book profit. (2) Every assessee, being a company, shall, for thepurposes of this section prepare its profit and loss accountfor the relevant previous year in accordance with theprovisions of Parts II and III of Schedule VI to theCompanies Act, 1956 (1 of 1956); .................. Explanation:- For the purposes of this section, "bookprofit" meas the net profit as shown in the profit and lossaccount for the relevant previous year prepared under sub-section (2), as increased by-- (a) ............ ..................... (f) ............ if any amount referred to in clauses (a) to (f) is debited tothe profit and loss account, and as reduced by,-- (i) the amount withdrawn from any reserves orprovisions if any such amount is credited to the profit andloss account: ............ (ii) the amount of income to which any of theprovisions of Chapter III applies, if any such amount iscredited to the profit and loss account; or (iii) the amount of loss brought forward orunabsorbed depreciation, whichever is less as per books ofaccount. Explanation:- For the purposes of this clause, the loss ITA No.74/2010 shall not include depreciation; or (iv) the amount of profits derived by an industrialundertaking from the business of generation or generationand distribution of power; or (v) the amount of profits derived by an industrialundertaking located in an industrially backward State ordistrict as referred to in sub-clause(b) or sub-clause(c) ofclause (iv) of sub-section (2) of section 80-IA, for theassessment years such industrial undertaking is eligible toclaim a deduction of hundred per cent, of the profits andgains under sub-section (5) of section 80-IA; or (vi) the amount of profits derived by an industrialundertaking from the business of developing, maintiningand operating any infrastructure facility as defined undersub-section (12) of section 80-IA, and subject to fulfillingthe conditions laid down in sub-section (4A) of section 80-IA; or (vii) the amount of profits of sick industrial company for theassessment year commencing from the assessment yearrelevant to the previous year in which the said company hasbecome a sick industrial company under sub-section (1) ofsection 17 of the Sick Industrial Companies (SpecialProvisions) Act, 1985 (1 of 1986), and ending with theassessment year during which the entire net worth of suchcompany becomes equal to or exceeds the accumulatedlosses. (vi) the amount of profits derived by an industrialundertaking from the business of developing, maintiningand operating any infrastructure facility as defined undersub-section (12) of section 80-IA, and subject to fulfillingthe conditions laid down in sub-section (4A) of section 80-IA; or (vii) the amount of profits of sick industrial company for theassessment year commencing from the assessment yearrelevant to the previous year in which the said company hasbecome a sick industrial company under sub-section (1) ofsection 17 of the Sick Industrial Companies (SpecialProvisions) Act, 1985 (1 of 1986), and ending with theassessment year during which the entire net worth of suchcompany becomes equal to or exceeds the accumulatedlosses. Explanation:- For the purposes of this clause, "networth" shall have the meaning assigned to it in clause (ga)of sub-section (1) of section 3 of the Sick IndustrialCompanies (Special Provisions) Act, 1985 (1 of 1986). ITA No.74/2010 (viii) the amount of profits, eligible for deduction undersection 80HHC, computed under clause (a), (b) or (c) ofsub-section (3) or sub-section (3A), as the case may be, ofthat section and subject to the conditions specified in sub-sections (4) and (4A) of that section; (ix) the amount of profits eligible for deduction undersection 80HHE, computed under sub-section (3) of thatsection." What is clear from the above is that the Assessing Officer should startwith the profit available in the Profit and Loss Account prepared interms of Parts II and III of Schedule VI of the Companies Act. Theprofit under the said P&L Account admittedly is Rs.1,01,37,664/-. Theway assessee has claimed deduction based on the P&L AppropriationAccount is detailed in the order of the CIT(Appeals). What is clearfrom the said order is that the assessee made a further deduction fromthe profit available under P&L Account prepared under the CompaniesAct. Obviously unless the deduction made by the assessee ispermissible in terms of clauses (i) to (ix) of Explanation to Section115JA above stated, the same is inadmissible. Assessee has no casethat the prior period expenses is an item that could be deducted fromthe profit in terms of any of the clauses covered by Explanation to ITA No.74/2010 Section 115JA. So much so, the claim is not a deduction allowablefrom the profit taken from the P&L Account prepared under theCompanies Act. When the deduction is admittedly not admissibleunder the provisions of the Act, assessee wants to bank on thetechnicality that the deduction, though wrongly allowed in theassessment based on the wrong claim made by the assessee, cannot berevised in rectification proceedings under Section 154. We are unableto accept this contention because it is the settled position as revealedfrom the decisions of the Supreme Court relied on by the assessee itselfthat the Assessing Officer has to start assessment by adopting the profitavailable in the P&L Account prepared in terms of Parts II and III ofSchedule VI of the Companies Act. If the assessee has made a claim ofdeduction from this profit not enumerated in the clauses (i) to (ix)covered by Explanation to Section 115JA, the assessment so completedbased on the profit taken from the Profit and Loss AppropriationAccount submitted by the assessee happens to be an apparent mistakewhich could be rectified in proceedings to be initiated under Section154. The Tribunal having satisfied on the factual mistake committed ITA No.74/2010 by the Assessing Officer in the original assessment, rightly upheld therevised assessment issued under Section 154 by reversing their earlierorder. We, therefore, do not find any merit in the appeal and the sameis accordingly dismissed. Sd/-C.N.RAMACHANDRAN NAIRJudge Sd/-HARUN-UL-RASHIDJudge True copy P.S. to Judge pms