Itta/317/2003 Of Commissioner Of Income Taxii v. M/S Ncl Industries Ltd

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A. No.317 of 2003 %Date: 09.12.2014 The Commissioner of Income Tax, Hyderabad. .. Appellant. and $M/s. N.C.L. Industries Limited, Hyderabad. .. Respondent. ! Counsel for Appellant: Sri S.R.Ashok ^ Counsel for Respondent : Sri S.Ravi < GIST: > HEAD NOTE: ? Cases referred1. AIR 2002 SC 2131 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A. No.317 of 2003 JUDGMENT:(Per the Hon’ble Sri Justice L.Narasimha Reddy) This appeal is by the Revenue, challenging the order, dated30.08.2002, passed by the Hyderabad Bench ‘B’ of the Income TaxAppellate Tribunal (for short ‘the Tribunal’) inI.T.A.No.247/Hyd/2001. The facts, that gave rise to the filing of the appeal, are asunder: The respondent is a Company incorporated under theCompanies Act and is an assessee under the Income Tax Act, 1961(for short ‘the I.T. Act’). For the purpose of its business, it borrowedquite large amount from the Bank. By 31.03.1996, the proposals forOne Time Settlement (OTS) in respect of the amount due, were inexistence, but the effort made by the respondent in that behalf did notmaterialise. Another proposal was mooted on 30.05.1996. It wasonly on 08.07.1996, that the proposal was accepted and the Bankhas agreed to waive interest to the extent of Rs.5.37 Crores. The respondent has been claiming deduction of the amountrepresenting the interest on the loan, year after year and the samewas permitted. In its returns for the assessment year 1996-97, therespondent has reflected the amount of Rs.5.37 Crores, the waivedinterest as its income, and the same was dealt with, in accordancewith law by the Assessing Officer in the order passed by him. In thesubsequent assessment year 1996-97, no component of the waivedinterest was shown. While passing the return for the year 1997-98, the AssessingOfficer felt that the accrual of income of Rs.5.37 Crores is referable tothe assessment year 1997-98, but was wrongly shown and dealtwith in the returns for the assessment year 1996-97. On 29.03.2000, he passed an order of assessment with reference to the assessmentyear 1997-98 adding the amount of Rs.5.37 Crores as income forthat assessment year. On the same day, he passed an order inexercise of power under Section 154 of the I.T. Act, rectifying theorder of assessment for the year 1996-97 to the extent of removingthe sum of Rs.5.37 Crores from the purview of the assessment of thatyear. The respondent filed an appeal before the Commissioner ofIncome Tax (Appeals), feeling aggrieved by the order of assessment,dated 29.03.2000. The Commissioner dismissed the appeal,through order, dated 27.02.2001. Feeling aggrieved by that, therespondent filed the I.T.A., raising the following questions of law: 1.“Whether the Appellate Tribunal is justifiedin holding that the profit and loss accountprepared by the assessee and certified by aChartered Accountant even in violation ofaccounting standards, is binding on the Revenuein the context of determining the book profit U/s.115JA(6) of the I.T.Act?in holding that the profit and loss accountprepared by the assessee and certified by aChartered Accountant even in violation ofaccounting standards, is binding on the Revenuein the context of determining the book profit U/s.115JA(6) of the I.T.Act? 1.“Whether the Appellate Tribunal is justifiedin holding that the profit and loss accountprepared by the assessee and certified by aChartered Accountant even in violation ofaccounting standards, is binding on the Revenuein the context of determining the book profit U/s.115JA(6) of the I.T.Act?in holding that the profit and loss accountprepared by the assessee and certified by aChartered Accountant even in violation ofaccounting standards, is binding on the Revenuein the context of determining the book profit U/s.115JA(6) of the I.T.Act? 2.Whether the Appellate Tribunal is justified innot holding that the benefit of waiver of interestas part of acceptance of OTS proposal by thefinancial institutions accrues to the assessee onacceptance and not on mere initiation and henceliable to be taken into account for determiningbook profit U/s.115JA(6) of the I.T.Act?not holding that the benefit of waiver of interestas part of acceptance of OTS proposal by thefinancial institutions accrues to the assessee onacceptance and not on mere initiation and henceliable to be taken into account for determiningbook profit U/s.115JA(6) of the I.T.Act? 3.Whether the finding of the Tribunal in thisbehalf that income, on account of acceptance ofwaiver of interest granted by financialinstitutions, does not accrue in the year ofacceptance is just and proper and is based onmaterial on record?” The same was allowed by the Tribunal. Sri S.R.Ashok, learned Senior Counsel for the appellant,submits that though the negotiations for OTS have been going on forquite sometime, it ultimately materialised only on 08.07.1996, and the same could have been reflected only in the returns for theassessment year 1997-98. He contends that realising the mistake inpermitting that amount to be dealt with in the assessment year 1996-97, the Assessing Officer has taken corrective steps and passed theorder of assessment for 1997-98, in accordance with law. Hesubmits that the Assessing Officer as well as the Commissionerhave taken correct view of the matter and the Tribunal has farexceeded the scope of adjudication. He further submits that thoughonce the respondent was claiming deduction of interest, year afteryear, the waiver thereof should have been treated as incomesimplicitor, but the Tribunal treated it as the capital receipt, contraryto law. Sri S.Ravi, learned counsel for the respondent, on the otherhand, submits that though it is a fact that the decision as to waiver ofinterest was taken by the Bank on 08.07.1996, the benefit thereofhas accrued to the respondent for the assessment year 1996-97,since it was following the mercantile system of accounting. Hesubmits that the Assessing Officer did not raise any objection forinclusion of the income of Rs.5.37 Crores, on account of waiver ofinterest, in the returns for the assessment year 1996-97, and thefacility created under Section 154 of the I.T. Act was misused just tolift that amount for inclusion in the subsequent assessment years. Learned Counsel submits that the very fact that the orders ofassessment for the year 1996-97 as well as the order of rectificationunder Section 154 of the I.T. Act, in respect of the assessment year1996-97, were passed on one and the same day, discloses thearbitrariness of exercise undertaken by the Assessing Officer. Hefurther submits that the plea of the respondent that the sum ofRs.5.37 Crores deserves to be treated as capital receipt was only inthe context of the accounts maintained under the Companies Act, and it has nothing to do with the assessment to be made under theI.T. Act. Learned counsel submits that the view taken by the Tribunalaccords with the judgment of the Hon’ble Supreme Court in Apollo Tyres Ltd. v. Commissioner of Income Tax, Kochi[[1]]. Learned Counsel submits that the very fact that the orders ofassessment for the year 1996-97 as well as the order of rectificationunder Section 154 of the I.T. Act, in respect of the assessment year1996-97, were passed on one and the same day, discloses thearbitrariness of exercise undertaken by the Assessing Officer. Hefurther submits that the plea of the respondent that the sum ofRs.5.37 Crores deserves to be treated as capital receipt was only inthe context of the accounts maintained under the Companies Act, and it has nothing to do with the assessment to be made under theI.T. Act. Learned counsel submits that the view taken by the Tribunalaccords with the judgment of the Hon’ble Supreme Court in Apollo Tyres Ltd. v. Commissioner of Income Tax, Kochi[[1]]. The entire discussion undertaken by the Assessing Officer,the Commissioner and the Tribunal was about connecting thewaived interest of Rs.5.37 Crores to the profit and loss accountsmaintained under the Companies Act, in the context of Section115JA of the I.T. Act. It is too well-known that where an assessee isa company incorporated under the Companies Act, and it maintainsseparate books of account as required under the said Act, theincome of the company under the I.T. Act, can be treated as only30%, of the one reflected in the books of account, in case the incomethat is arrived at under the I.T. Act is less than that figure. Thisnaturally encourages or introduces the assessee to ensure that theincome assessed under the I.T. Act, referable to a particular year, isless than 30% of what is posted in the books of account, so that thetax liability is restricted to that extent. The endeavour of thedepartment, on the other hand, would be to ensure that the figures,that emerge as a result of the exercise under the I.T. Act would farexceed 30% of those reflected in the books of account maintainedunder the Companies Act, so that the higher liability can be fastenedon the assessee. This tussle is constant and one has to proceed bythe settled principles of law, in this behalf. The respondent borrowed amount on interest, from a Bankand year after year it was deducting the component of interesttowards expenditure. On 08.07.1996, the benefit of OTS wasextended to it and a sum of Rs.5.37 Crores representing the interest,was waived. Since the appellant has availed the benefit ofdeduction of the amount, over the years, it was under obligation to show that figure, as income. The question was as to whether itshould be posted in the returns for the year 1996-97, or thesubsequent year 1997-98. It is not as if the returns for both theassessment years, referred to above, were dealt with at one and thesame point of time. For the assessment year 1996-97, in which theamount of Rs.5.37 Crores was reflected, the order of assessmentwas passed, on 30.03.1998. It is a different matter that, it is in theform of a prima facie adjustment under Section 143(1) (a) of the I.T.Act. It only connotes that the Assessing Officer did not find anythingwrong in such an exercise and accorded his seal of approval. The returns for the assessment year 1997-98 were dealt with,sometime in the year 2000. The Assessing Officer felt that theamount of Rs.5.37 Crores ought to have been reflected in the returnsof that year, because the benefit has accrued in the financial yearrelevant to the assessment year 1997-98. He realised that, that veryamount was dealt with under the assessment year 1996-97. Therefore, he has taken recourse to Section 154 of the I.T. Act forlifting that figure, so that it can be made part of the subsequentassessment year. The returns for the assessment year 1997-98 were dealt with,sometime in the year 2000. The Assessing Officer felt that theamount of Rs.5.37 Crores ought to have been reflected in the returnsof that year, because the benefit has accrued in the financial yearrelevant to the assessment year 1997-98. He realised that, that veryamount was dealt with under the assessment year 1996-97. Therefore, he has taken recourse to Section 154 of the I.T. Act forlifting that figure, so that it can be made part of the subsequentassessment year. The Tribunal has undertaken fairly extensive discussion onvarious points urged before it. One of the views expressed by it wasthat though Section 154 of the I.T. Act empowers an AssessingOfficer to rectify the orders of assessment, it cannot be exercised insuch a way that one facet of it can be selectively lifted and in thename of rectification, the mater be left at that. It cannot be keenlysaid that the filing of return is a comprehensive exercise and that inturn is proceeded by a fairly extensive accounting process. Anassessee bestows its attention in respect of each and every amountand once a comprehensive return is filed, taking away of one facetwould have its own cascading effect, on others. In a given case it may disturb the entire edifies of accountancy and may prove to bedisastrous for an assessee. Therefore, whenever the power underSection 154 of the I.T. Act is exercised, it should be done in such away that no violence is done to the order of assessment passed inrespect of different years. The manner in which the Assessing Officer has used such apower under Section 154 of the I.T. Act, in the instant case is evidentfrom the fact that he has chosen that device, just to pick up theamount of Rs.5.37 Crores from the previous assessment year, and toput it in the subsequent assessment year, without even recordingany findings as to whether the process has gone wrong at all. Thepassing of orders of assessment for the year 1996-97 and the orderof rectification for under Section 154 of the I.T. Act for the earlierassessment year, on one and the same day, is a clear indication ofthis. The point urged by the Revenue before the Tribunal was thatthe amount of Rs.5.37 Crores was being treated as capital receiptand that cannot be sustained, since the assessee has availed thebenefit of deduction towards expenditure over the years. Thecontention could have been accepted, if only the respondentintended to treat the account of Rs.5.37 Crores as capital receiptunder the I.T. Act. That was not at all the case. He has only postedthat amount as capital receipt, in its accounts maintained under theCompanies Act. It is too well-known that the Companies Actprovides a detailed mechanism of verification of accounts and thereare also statutory auditors under that Act scrutinise them. Nobodypointed out any defect in the exercise undertaken by therespondent. Howsoever wider the powers of an Assessing Officerunder the I.T. Act, may be he does not have any power whatever, totouch or comment upon the books of account, maintained under the Companies Act. I n Apollo Tyres Ltd.’s case (supra), the Supreme Courtexplained the power of the Assessing Authority under the I.T. Act vis-a-vis the accounts maintained under the Companies Act, in thecontext of Section 115J of the I.T. Act. Their Lordships observed atpara 9 as under: “Therefore, we are of the opinion, the assessingofficer while computing the income under Section 115Jhas only the power of examining whether the books ofaccount are certifies by the authorities under theCompanies Act as having been properly maintained inaccordance with the Companies Act. The assessingofficer thereafter has the limited power of makingincreases and reductions as provided for in theExplanation to the said section. To put it differently, theassessing officer does not have the jurisdiction to gobehind the net profit shown in the profit and loss accountexcept to the extent provided in the Explanation toSection 115J.” “Therefore, we are of the opinion, the assessingofficer while computing the income under Section 115Jhas only the power of examining whether the books ofaccount are certifies by the authorities under theCompanies Act as having been properly maintained inaccordance with the Companies Act. The assessingofficer thereafter has the limited power of makingincreases and reductions as provided for in theExplanation to the said section. To put it differently, theassessing officer does not have the jurisdiction to gobehind the net profit shown in the profit and loss accountexcept to the extent provided in the Explanation toSection 115J.” The Tribunal took note of the judgment of the Hon’bleSupreme Court and held that accounts referable to Section 115J ofthe I.T. Act must be taken on their face value and once it becomesclear that the income of an assessee determined under the I.T. Act isless than 30% of the book profits reflected in the books of accountmaintained under the Companies Act, the tax leviable would be only30%. We do not find any basis to interfere with the order passed bythe Tribunal. The appeal is accordingly dismissed. There shall be no orderas to costs. The miscellaneous petitions filed in this appeal shall alsostand disposed of. Date:09.12.2014 L.R. copy to be marked.GJ [1]AIR 2002 SC 2131 ____________________ L.NARASIMHA REDDY, J. _____________________ CHALLA KODANDA RAM, J.