Ita/218/2008 Of The Jindal Aluminium Limited v. The Deputy Commissioner Of Income Tax

IN THB HIGH COURT OF KARNATAKA AT BANGALORE DATEKD THIS THE 16 DAY OF JUNE 2014 PRESENT THR HON BLE MR.JUSTICE N.KUMAR| AN D THR HON'BLBE MR..JUSTICBK B.MANOHA ITA NO.218/2008 BBRHIWEE The Jindal Aluminium Limited16[+"]KM, Tumkur Road,Bangalore — 73,Represented by its General Manager, Corporate Affair, Sri.M.Ravindaranath,Aged about 51 years|9/o Dr.S.Mayurnath.... Appellant(By Sri.S.Parthasarathi, Advocate) AN): The Deputy Commissioner of Income Tax(Asst)special Range IIBangalore.... Respondent(By Sri.K.V.Aravind, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out ofOrderdated20-11-2001.passedInITA.No.19/Bang/1994 for the Assessment Year 1990-1991,praying that for the reasons stated therein this Hon'bleCourt may be pleased to: 1.formulate the substantial questions of law|stated therein,stated therein, ll.allow the appeal and set aside the order passedby ITAT in ITA No. 19/Bang/1994 dated 20-11-2001, in the interest of justice and equity.by ITAT in ITA No. 19/Bang/1994 dated 20-11-2001, in the interest of justice and equity. This appeal coming on for hearing this day,N.KUMAR J.,delivered the following: JUDGMENT The assessee has preferred this appeal undersection 260A of the Income Tax Act, 1961 (hereinaiterreferred to as ‘the Act’ for short) against the order dated 20-11-2001 passed by the Income Tax AppellateTribunal, Bangalore Bench (hereinafter referred to asthe Tribunal’ for short) in ITA No.19/Bang/1994,.wherein the Tribunal has upheld the order of the Commissioner of Income Tax, Karnataka-II, Bangalore (for short ‘the Revisional Authority’) which held that theassessee Should have disclosed by way of debit thecustoms duty paid of Rs.32,22,0607/7/- according to tSixth Schedule. 2 |The assessee is a Company which is engaged inthebusinessoT|manufacturingoT|aluminium—extrusions. The relevant assessment year for thisappeal is the assessment year 1990-91. The assesseefiled its return of income on 29-10-1991 declaring thetotal income of Rs./0,75,210/-. The assessment cameto be completed under Section 143(3) of the Act on14-11-1991. The assessee claimed deduction under.section 32AB of the Act at 20% on Rs.1,43,62,298 /-amounting to Rs.28,72,480/-. However, the AssessingAuthority allowed only a sum of Rs.26,45,488/- underthis head. The Revisional Authority, by virtue of powerconterred to him under Section 263 of the Act initiated|proceedings on the ground that the assessment order was prejudicial to the interest of the Revenue insofar asthe Assessing Officer allowed excessive relief undersection 32AB of the Act. In pursuance of the noticeissued, the assessee appeared and submitted its reply. —The material on record discloses that the entire raw|material imported with respect to which customs dutyof Rs.32,22,00/7/- was paid was consumed in theproduction, within the accounting period. However,while computing the profit under Section 32AB of theAct, the assessee did not deduct this customs duty outof the profit. Therefore, the Revisional Authority wentinto the question whether the assessee ought to havedebited the customs duty of Rs.32,22,06//- to the profitand loss account and then it should have arrived at theprofit and out of the said profit, the assessee wasentitled to the benefit of 20% and the same beingdeposited under Section 32AB. It was also observedthat there was a valid order from the Department ofCustoms levying a duty of Rs.1,12,5,400/-. The| assessee did not agree with the levy and moved the HighCourt. The High Court did not set aside the orderlevying the duty, it merely stayed the recovery of thelevy subject to certain conditions, one of them was thedue payment of 25% of the duty. That 29% of the dutyamounts to Rs.32,33,060/7/-. The Revisional Authoritywas of the view that the assessee ought to have debitedto the profit and loss account this amount according tothe accountancy principles. assessee did not agree with the levy and moved the HighCourt. The High Court did not set aside the orderlevying the duty, it merely stayed the recovery of thelevy subject to certain conditions, one of them was thedue payment of 25% of the duty. That 29% of the dutyamounts to Rs.32,33,060/7/-. The Revisional Authoritywas of the view that the assessee ought to have debitedto the profit and loss account this amount according tothe accountancy principles. 3.|Part-II of the Sixth Schedule of the Companies Actenjoins on the assessee to disclose in the profit and lossaccount, the expenditure incurred on, among others,rates and taxes, excluding tax on income. The assesseeshould have disclosed by way of debit the Customs Dutypaid of Rs.32,33,067/- according to the Sixth Scheduleand therefore, the Revisional Authority rejected theclaim of the assessee and the Assessing Officer was.directed to modify the assessment by recomputing the relief under Section 32AB of the Act and withdrawingthe excess relief allowed. Aggrieved by the said order,the assessee preferred an appeal to the Tribunal. TheTribunal after considering Section 32AB of the Act heldthat the amount paid by the assessee towards thecustoms duty shall go to reduce the profits under thehead profit and gains of business or profession whichare eligible for deduction under Section 32AB. A.reference to the Companies Act and the auditedfinancial statements does not lead to the conclusion|that the basic principle enshrined in the computation ofincome in Part ‘D’ of Chapter IV is done away with. Inview of the explicit provisions as outlined above, thesame have to be interpreted to mean only the profits as"computed under the Income Tax law and not withreference to the Companies Act alone. Therefore, thedecision of the CIT in concluding that the assessmentwas erroneous insofar as to be prejudicial to the interestof the Revenue on account of the profits not being reduced.withtheamountoT|Customs|DutyoT|Rs.32,22,00/7/- paid is in accordance with law and iswell founded. Therefore, the appeal came to bedismissed. Aggrieved by the said order, the assessee is" in appeal before this Court. 4This appeal was admitted on 10-11-2010 to consider the following substantial questions of law: (1)Whether the customs duty paid underprotest in pursuance of the interim orderpassed by the Hon’ble High Court inwrit petition where the levy was underdispute, was to be charged off in theprofit and loss account under Part Il andIII of Schedule 6 of the Companies Actwhich would reduce the book profit tobe.computedfortheDUFPOSEof|deduction to be granted under SectionS2AB of the ActP (it)Whether the Tribunal was right in lawholding that the Companies Act and theaudited financial statements did not lead to the conclusion that the basic|principlesas|enshrinedin.the|computation of income in Part D ofChapter IV is done away with for thepurpose of deduction under SectionS2AB of the Act?| (itt)Whether the Tribunal was right in lawinterpreting the provisions of SectionS2AB to mean that the profits were tobe computed under the Income TaxLaws and not with reference to theCompanies Act alone?interpreting the provisions of SectionS2AB to mean that the profits were tobe computed under the Income TaxLaws and not with reference to theCompanies Act alone? 5.|Learned counsel for the assessee assailing theimpugned order contended that for the purpose ofsection S32AB of the Act, the profits of business orprofession of an assessee for the purposes of sub-section (1) shall be an amount computed in accordancewith the requirements of Part II and III of Schedule VI tothe Companies Act, 1956 and therefore the question ofcomputing the profits in accordance with the IncomeTax Act as held by the Tribunal is not correct. In terms 5.|Learned counsel for the assessee assailing theimpugned order contended that for the purpose ofsection S32AB of the Act, the profits of business orprofession of an assessee for the purposes of sub-section (1) shall be an amount computed in accordancewith the requirements of Part II and III of Schedule VI tothe Companies Act, 1956 and therefore the question ofcomputing the profits in accordance with the IncomeTax Act as held by the Tribunal is not correct. In terms of Part II of Schedule VI, what the assessee is expectedto do is to disclose the information regarding theexpenditure incurred on rates and taxes. If the saidrates and taxes are ascertained, the same shall bededucted from the profits if it is not an ascertainedliability. If it is disputed claim, there is no obligation todeduct the said amount out of the profits for thepurpose of getting benefit under Section 32AB. 6. Per contra, learned counsel appearing for theRevenue submitted that when the assessee in its profitand loss account as prescribed under the CompaniesAct has expressly mentioned about the liability ofpayment of customs duty and has also shown that asum of Rs.32,22,00//- has been paid in terms of theCourt order in ascertaining the profit for the purpose ofsection 32AB, the said amount is to be deducted and)then only the assessee is entitled to the benefit of 20%_of the profit being invested in terms of Section 32AB. [|Section 32AB of the Act deals with the investmentdeposit account, which reads as under: Investment deposit account. SQAB.(1) Subject to the other provisions of thissection, where an assessee, whose total incomeincludes income chargeable to tax under the head“Profits and gains of business or profession’, has,out of such income,—| (a)deposited any amount in an _ accoun(hereafter in this section referred to as depositaccount) maintained by him with the DevelopmentBank before the expiry of stx months from the endof the previous year or before furnishing thereturn of his income, which-ever is earlier; or (b)utilised any amount during the previousyear for the purchase of any new ship, newaircraft,he UmachineryOTplant,withoutdepositing any amount in the deposit accountunder clause (a), in accordance with, and for the purposesspecified in, a scheme (hereafter in this sectionreferred to as the scheme) to be framed by theCentral Government, or if the assessee is carryingon the business of growing and manufacturing tea in India, to be approved in this behalf by theTea Board, the assessee shall be allowed adeduction /(such deduction being allowed beforethe loss, if any, brought forward from earlieryears is Set off under section 72)/ of— (ja sum equal to the amount, or the aggregate ofthe amounts, so deposited and any amount soutilised; or (i)a sum equal to twenty per cent of the|profits of [***/ business or profession as computed|in the accounts of the assessee audited inaccordance with sub-section (5), whichever is less: :Providedthat where such assessee is a firm, or|any association of persons or any body ofindividuals, the deduction under this section shallnot be allowed in the computation of the income ofany partner, or as the case may be, any memberof such firm, association of persons or body ofindividuals:] :Provided further> that no such deduction shallbe allowed in relation to the assessment yearcommencing on the Ist day of April, 1991, or anysubsequent assessment year.|| (2) For the purposes of this section,—| (uy) [***/} [(w)“new ship” or “new aircraft’ includes a|ship or aircraft which before the date ofacquisition by the assessee was used by anyother person, lf it was not at any time previous to)the date of such acquisition owned by any personresident in India; (tt) |“NeWmachineryOTplant”includesmachinery or plant which before its installationby the assessee was used outside India by anyother person, tf the following conditions arefulfilled, namely :—| (a) such machinery or plant was not, at anytime previous to the date of such installation bythe assessee, used in India; :Provided further> that no such deduction shallbe allowed in relation to the assessment yearcommencing on the Ist day of April, 1991, or anysubsequent assessment year.|| (2) For the purposes of this section,—| (uy) [***/} [(w)“new ship” or “new aircraft’ includes a|ship or aircraft which before the date ofacquisition by the assessee was used by anyother person, lf it was not at any time previous to)the date of such acquisition owned by any personresident in India; (tt) |“NeWmachineryOTplant”includesmachinery or plant which before its installationby the assessee was used outside India by anyother person, tf the following conditions arefulfilled, namely :—| (a) such machinery or plant was not, at anytime previous to the date of such installation bythe assessee, used in India; (b) such machinery or plant is imported intoIndiafrom any country outside India; and| (c) no deduction on account of depreciation inrespect of such machinery or plant has beenallowed or 1s aqllowable under this Act incomputing the total income of any person for anyperiod prior to the date of the installation of themachinery or plant by the assessee; (tv)“TeqBoard”MeanstheTeq|Boardestablished under section 4 of the Tea Act, 1953(29 of 1953).] (3) [The profits of business or profession of anassessee for the purposes of sub-section (1) shall}be an amount arrived at after deducting anamount equal to the depreciation computed inaccordance with the provisions of sub-section (1)of section 32 from the amounts of profitscomputed in accordance with the requirements ofParts II and Ill of the [Schedule VI/ to theCompanies Act, 1956 (1 of 1956), [as increasedby the aggregate of—| (t)the amount of depreciation; (it)the amount of income-tax paid or payable, and provision therefore; (ttt)the amount of surtax paid or payable underthe Companies (Profits) Surtax Act, 1964 (7 of1964); (ww)the amounts carried to any reserves, bywhatever name called; (v)the amount or aqmounts set aside toprovisions made for meeting liabilities, other than)ascertained liabilities; (vi)the amount by way of provision for lossesof subsidiary companies; and (Vit)the amount or amounts of dividends paid or)proposed, yy any debited to the profit and loss account; andas|reducedbyamountOTamounts|withdrawn from reserves or provisions, tf suchamounts are credited to the profit and lossaccount [***/,|| (4) No deduction under sub-section (1) shall beallowed in respect of any amount utilised for thepurchase of—| (a)any machinery or plant to be installed inany office premises or residential accommodation,including any accommodation in the nature of aguest-house; (b)any office appliances (not being computers);(c)any road transport vehicles; (ad)any machinery or plant, the whole of the|actual cost of which is allowed as a deduction(whether by way of depreciation or otherwise) incomputing the income chargeable under the head“Profits and gains of business or profession” ofany one previous Year; /(e)any new machinery or plant to be installed|in an industrial undertaking, other than a small-scale industrial undertaking, as defined insection SOHHA, for the purposes of business ofconstruction, manufacture or production of any article or thing specified in the list in the Eleventh|ochedule./ (5) The deduction under sub-section (1) shall notbe admissible unless the accounts of the businessor profession of the assessee for the previousyear relevant to the assessment year for whichthe deduction ts claimed have been audited by anaccountant as defined in the Explanation belowsub-section (2) of section 288 and the assesseefurnishes, along with his return of income, thereport of such audit in the prescribed form dulysigned and verified by such accountant : /(e)any new machinery or plant to be installed|in an industrial undertaking, other than a small-scale industrial undertaking, as defined insection SOHHA, for the purposes of business ofconstruction, manufacture or production of any article or thing specified in the list in the Eleventh|ochedule./ (5) The deduction under sub-section (1) shall notbe admissible unless the accounts of the businessor profession of the assessee for the previousyear relevant to the assessment year for whichthe deduction ts claimed have been audited by anaccountant as defined in the Explanation belowsub-section (2) of section 288 and the assesseefurnishes, along with his return of income, thereport of such audit in the prescribed form dulysigned and verified by such accountant : Providedthat in a case where the assessee isrequired by or under any other law to get hisaccounts audited, it shall be sufficient compliance|with the provisions of this sub-section tf suchassessee gets the accounts of such business orprofession audited under such law and furnishesthe report of the audit as required under suchother law and a further report in the formprescribed under this sub-section. 8.|The said provision provides an incentive to anassessee who is carrying on business or profession, adeduction out of the total income 20% of the profits and gains of business or profession. If the said amount isdeposited with the Development Bank or utilized for thepurchase of any new machinery or plant withoutdepositing any amount in an account under clause (a),how the profits of business or profession to becalculated for the purpose of Section 32AB of the Act is"found under sub-Section (3), which is extracted above. QO From a reading of the aforesaid provision it is clearthat the profits of business or profession of an assesseefor the purposes of sub-Section (1) is to be arrived at onthe basis of the profits computed in accordance with therequirements of Part II of Sixth Schedule to theCompanies Act. Therefore, it is clear, the said profits ofbusiness or profession is not computed in accordancewith the provisions of the Income Tax Act. Further, itprovides, for deduction of an amount equal to thedepreciationcomputed|in.accordancewiththeprovisions of sub-Section (1) of Section 32 from the amounts of profits computed in accordance with therequirements of Part-II of Sixth Schedule to theCompanies’ Act. To that income, the amountsmentioned in clauses (1) to (vii) has to be added. Onesuch amount to be added is the amount or amounts setaside as the provisions made for meeting liabilities,other than ascertained liabilities. Therefore, the|contingent liability or unascertained liability has to beadded to the profits for the purpose of Section 32AB. 10.|Part II of Sixth Schedule to the Companies Actdeals with the requirements as to profit and lossaccount. Clause (3) of Part-II provides that the profitand loss account shall set out the various items relatingto the income and expenditure of the company arrangedunder the most convenient heads; and in particular,shall disclose the information mentioned therein in/respect of the period covered by the account. One suchinformation to be disclosed is the expenditure incurred on the items mentioned therein, separately for eachitem which includes rates and taxes, excluding taxes onincome.Therefore,the requirement of law is, profit andloss account should disclose the information regardingexpenditure incurred in respect of rates and taxes. Itdoes not provide that the rates and taxes incurred asexpenditure is to be deducted from the income. 11.)It was contended that in terms of Part-II, theprofit and loss account of the assessee shows a sum ofRs.32,22,06/7/- which is paid as customs duty. Thesaid amount has to be deducted out of the profit earnedfrom the business or profession. It is only alterdeducting the said amount, the assessee is entitled tobenefit of 20% of such profit being deposited in aDevelopment Bank in terms of Section 32AB.| on the items mentioned therein, separately for eachitem which includes rates and taxes, excluding taxes onincome.Therefore,the requirement of law is, profit andloss account should disclose the information regardingexpenditure incurred in respect of rates and taxes. Itdoes not provide that the rates and taxes incurred asexpenditure is to be deducted from the income. 11.)It was contended that in terms of Part-II, theprofit and loss account of the assessee shows a sum ofRs.32,22,06/7/- which is paid as customs duty. Thesaid amount has to be deducted out of the profit earnedfrom the business or profession. It is only alterdeducting the said amount, the assessee is entitled tobenefit of 20% of such profit being deposited in aDevelopment Bank in terms of Section 32AB.| 12.As the said amount was not deducted in arrivingat profit, the Revisional Authority and the Appellate Tribunal were justified in directing the addition of thesaid amount. 13.The scheme of the Income Tax Act read with Part-II of Sixth Schedule of the Companies Act makes it clearthat both of them are not dealing with the deductions atall. The provisions of the Companies Act expresslystates what the assessee is expected to do is to disclosethe intormation. What is deductable out of rates and/§taxes is the ascertained liability. If the liability isdisputed and still the amount is paid in terms of thecourt order, that is the amount to be added under sub-section (3) of Section 32AB tor the purposes ofdetermining the profits of business or profession for thepurposes of Section 32AB. Therefore, computation ofprofits under the Income Tax Act is totally different fromthe computation of profit under the Companies Act.The Tribunal was of the view that the profits as computed under the Income Tax Laws alone is to betaken into consideration. 14|The Apex Court in the case of|APPOLLO TYRES LTD. v/s COMMISSIONER OF INCOME TAXreported in(2002) 255 ITR 273- dealing with the object ofintroducing Section 115J in the Income Tax Act heldthat Section 115J makes the income reflected in the'company’s books of account the deemed income tor thepurpose of assessing the tax. The words “in accordancewith the provisions of Part II of Schedule VI to theCompanies Act” was made for the limited purpose ofempowering the Assessing Authority to rely upon theauthentic statement of accounts of the company. Whileso looking into the accounts of the company, anAssessing Officer under the Income-Tax Act has toaccept the authenticity of the accounts with reference tothe provisions of the Companies Act which obligates thecompany to maintain its account in a manner provided by the Companies Act and the same to be scrutinizedand certified by the statutory auditors and will have tobe approved by the company in its general meeting andthereafter to be filed before the Registrar of Companieswho has a statutory obligation also to examine andsatisfy that the account of the company are maintainedin accordance with the requirements of the CompaniesAct. In spite of all these procedures contemplatedunder the provisions of the Companies Act, they foundit difficult to accept the argument of the Revenue that itis still open to the Assessing Officer to rescrutinise thisaccount and satisfy himself that these accounts havebeen maintained in accordance with the provisions ofthe Companies Act. Sub-Section (1A) of Section 115J_do not empower the authority under the Income Tax Act.to probe into the accounts accepted by the authoritiesunder the Companies Act. If the statute mandates thatincome prepared in accordance with the Companies Actshall be deemed income for the purpose of Section 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 ofCompanies Act and another for the purpose of IncomeTax both maintained under the same Act. If the.legislature intended the Assessing Officer to reassessthe Company’s income, then it would have stated insection 115J that “income of the Company as acceptedby the Assessing Officer”. In the absence of the sameand on the language of Section 1105J, it will have to beheld that view taken by the Tribunal is correct and theHigh Court has erred in reversing the said view of theTribunal. The Assessing Officer while computing theincome under Section 115J has only the power ofexamining whether the books of account are certified bythe authorities under the Companies Act as having beenproperly maintained in accordance with the CompaniesAct. The Assessing Officer thereafter has the limitedpower of making increases and reductions as provided for in the|Explanationto the said Section. To put it|differently, the Assessing Officer does not have thejurisdiction to go behind the net profit shown in theprofit and loss account except to the extent provided intheExplanationto Section 115J. 15.Therefore, while deciding the benefit to which theassessee is entitled to under Section 32AB of the Act,the Assessing Officer has only power to examinewhether the books of account are certified by theauthorities under the Companies Act as having beenproperly maintained in accordance with the CompaniesAct. Therefore, he cannot apply the principles underthe Income Tax Act for the purpose of determining theprofit of the assessee from business or profession for thepurpose of Section 32AB. In other words, there cannotbe two incomes one for the purpose of Companies Actand another for the purpose of Income Tax Actmaintained under the same Act for the purpose of section 32AB. After arriving at profits of business orprofession of the assessee, as stipulated in sub-Section(3) of Section 32AB, the said provision also provides foraddition to such income as stipulated therein. Aftersuch additions, the authority has to determine theprofits of business or profession for the purpose ofextending the benefit under Section 32AB. 16.|Dealing with the provision for tax liability whenthe same is disputed, it 1s observed that where acompany disputes its liability on valid andbona fidereasons in regard to the tax demand raised, it is notprobable that a liability has been incurred on thebalance sheet date; and it is not necessary to provide forthe liability. A disclosure thereof by way of a note to theaccounts would be sufficient. A note regarding disputedtax liability can be explanatory in nature if the auditoris satisfied about the validity of the reasons of thecompany for contesting the hability. 1/7.In the instant case, even if in the profit and lossaccount a sum of Rs.32,22,060//- paid as customs dutyhad been deducted by virtue of sub-Section (3) ofsection 32AB as it is a contingent hability and notascertained liability, it has to be added. In the instantcase, as the said amount was not deducted, thequestion of adding would not arise. The AssessingAuthority was justified in upholding the claim of theassessee who had not excluded the same from the profitof business of profession. Hence, the orders passed bythe Revisional Authority as well as the AppellateAuthority are not in accordance with law and they arerequired to be set aside, accordingly set aside. All thethree substantial questions of law framed are answeredin favour of the assessee and against the Revenue. —Accordingly, we pass the following: ORDER The appeal is allowed. The impugned orders passed by the Appellate Authority as well as theRevisional Authority are hereby set aside and the orderpassed by the Assessing Authority is restored. © Parties to bear their own costs. od/-JUDGEsd/-JUDGE. | mpk/-