Pr.commissioner Of Income Tax-2 v. Varun Corporation Limited

TRUSHATUSHARMOHITEDigitally signed byTRUSHA TUSHARMOHITEDate: 2023.07.1114:25:17 +0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.367 OF 2018 Pr.Commissioner of Income Tax-2 ….. Appellant Vs. Varun Corporation Limited ….. Respondent Mr.Suresh Kumar for the appellant Mr.Tanmay Varadkar for the Liquidator of Varun CorporationLimited Mr.Prakash K. Pandya – Liquidator present CORAM:K.R. SHRIRAM, J &FIRDOSH P. POONIWALLA, J. DATED :5TH JULY, 2023 P.C. 1.Mr.Tanmay Varadkar undertakes to file Vakalatnama forrespondent during the course of this week. Undertaking accepted. 2.Respondent was called Khatau International Limited till04.01.2009. Respondent was carrying on business activitiesthrough three divisions, viz., (1) Resort Division, (2) TravelDivision, and (3) Investment Division. 3.Under the Resort Division, respondent was running a resortnamely “Infinity Resort” at Corbett, Ramnagar, w.e.f., 15[th] July 2008. Respondent demerged its resort division to a company called“Khatau Resorts Pvt.Ltd. in accordance with section 391 to 394 ofthe Companies Act, 1956. The demerged scheme was approved byCompany Court on 19[th] September 2008. 4.Pursuant to the demerger, respondent transferred its resortdivision along with all assets and liabilities, except, remainingbusiness. As part of remaining business, respondent retainedcertain investments in shares of companies and borrowings fromfinancial institutions. As per the scheme approved, respondentreduced the book value of all the assets and liabilities relating to thehospitality business from its books of accounts. The difference beingthe excess of the book value of the assets transferred over the bookvalue of liabilities transferred was to be adjusted by respondent inits profit and loss account. While approving the demerger, theCompany Court also noted that no party has come forward to opposethe scheme and the Regional Director has also stated that thescheme as proposed is not prejudicial to the interest of shareholders,creditors and the public. The Court also has noted that all requisitestatutory compliances have been fulfilled. 5.Respondent, in its annual accounts prepared for year ending31[st] March 2009, interalia, debited loss of Rs.145,23,56,165/- whicharose on transfer of asset on demerger. This loss was fully disclosed by respondent as extraordinary item in its profit and loss account.This loss was arrived at by reducing the book value of the assettransferred to the tune of Rs.146,93,56,165/-. The book value of theliabilities transferred was Rs.1,70,00,000/-. The treatment given byrespondent to the loss arising on demerger, it appears from theannual accounts, was in accordance with the provisions of theCompanies Act and as well as accounting standards 5 dealing with“net profit or loss for the period prior period items and changes inthe accounting policies” issued by the Institute of CharteredAccountants of India (ICAI). 6.On 05[th] October 2010, respondent declared nil income forAssessment Year 2009-2010, in regular computation of income andloss of Rs.64,21,12,555/- was computed under section 115JB of theAct. This computation of income was based on the annual accountsprepared for the year ending 31[st] March 2009, which was audited byits statutory auditors and approved by share holders. Audit reportdoes not contain any adverse observation regarding treatment givenin the accounts for this item. Auditors have accepted the booktreatment in respect of loss arising on account of demerger. Whileframing the assessment under section 143(3), the Assessing Officer(AO) accepted the income as NIL, as per the regular computation ofincome, but, on computation of book profit under section 115JB of 6.On 05[th] October 2010, respondent declared nil income forAssessment Year 2009-2010, in regular computation of income andloss of Rs.64,21,12,555/- was computed under section 115JB of theAct. This computation of income was based on the annual accountsprepared for the year ending 31[st] March 2009, which was audited byits statutory auditors and approved by share holders. Audit reportdoes not contain any adverse observation regarding treatment givenin the accounts for this item. Auditors have accepted the booktreatment in respect of loss arising on account of demerger. Whileframing the assessment under section 143(3), the Assessing Officer(AO) accepted the income as NIL, as per the regular computation ofincome, but, on computation of book profit under section 115JB of the Act, Assessing Officer started with the net profit as reflected inthe profit and loss account of Rs.78,37,68,201/-, i.e., such profitbefore provisions of fringe benefit tax, prior period adjustment andextraordinary adjustment. 7.It was respondent’s case that such computation should startwith net loss of Rs.66,86,13,773/- being loss as shown in the Profitand Loss Account after extraordinary adjustment. Assessing Officertook a stand that such loss ought to be adjusted against reserves ofrespondent and cannot be debited to the profit and loss account. TheAssessing Officer also observed that the accounting treatment wasnot in accordance with the provisions of the Companies Act. 8.On Appeal, the Commissioner of Income Tax (Appeal) upheldthe findings of the Assessing Officer. Respondent, aggrieved by theorder of the Commissioner of Income Tax (Appeal), approached theIncome Tax Appellate Tribunal (ITAT) which by the impugned orderdated 22[nd] April 2016 allowed the appeal. The admitted position isthat as per explanation to section 115JB(2) of the Act, onlyadjustment as permitted to the book profit are those as provided inthe explanation thereto. 9.It is respondent’s case that there is no adjustment prescribedin the said explanation with respect to increasing the book profit byloss arising on transfer of assets and liabilities upon demerger. But the Assessing Officer as also Commissioner of Income Tax (Appeals)took the starting point for the purpose of section 115JB of the Act asthe net profit as disclosed before provision for fringe benefit tax,prior period adjustment and extraordinary adjustment which is notprovided in Explanation 1. 10.Having heard the counsel and having considered the impugnedorders and the memo of Appeal, we have to observe that thetreatment given by respondent in its accounts have been approvedby the Company Court while approving the scheme of demerger.Moreover, the statutory auditors have accepted the book treatmentin respect of loss that arise on account of demerger. 11.It is well settled that as per Explanation 1 below section115JB(2) of the act, only adjustment as permitted to the book profitare those as provided in the said explanation. The purpose ofsection 115JB of the Act is to provide an alternative method ofcomputation of tax by accepting the book profits as shown byRespondent, after certain adjustments as specified in Explanation 1of section 115JB(2) and levying tax thereon as alternative to thetax computed under the other provisions of the Act. Further theApex Court in the case of Apollo Tyres Ltd. vs. Commissioner ofIncome Tax, Kochi[1] has held that the only power the AssessingOfficer has is the power of examining whether the books of account1(2002) 255 ITR 273 (SC) are certified by the authorities under the Companies Act as havingbeen properly maintained in accordance with the Companies Act.Thereafter, the Assessing Officer has a limited power of makingincrease and reduction as provided for in the explanation to section115JB. The Assessing Officer does not have jurisdiction to go behindthe net profit shown in the profit and loss account except to theextent provided in the explanation. are certified by the authorities under the Companies Act as havingbeen properly maintained in accordance with the Companies Act.Thereafter, the Assessing Officer has a limited power of makingincrease and reduction as provided for in the explanation to section115JB. The Assessing Officer does not have jurisdiction to go behindthe net profit shown in the profit and loss account except to theextent provided in the explanation. 12.The Apex Court in the case of Apollo Tyres (Supra) also heldthat while so looking into the accounts of the company, an assessingofficer has to accept the authenticity of the accounts with referenceto the provisions of the Companies Act which obligates the companyto maintain its accounts in a manner provided by that Act, the sameto be scrutinised and certified by statutory auditors and approved bythe company in its General Meeting and, thereafter to be filed beforethe Registrar of Companies who has a statutory obligation also toexamine and be satisfied that the accounts of the company aremaintained in accordance with the requirements of the CompaniesAct. It does not empower the Assessing Officer to mark upon a freshenquiry in regard to the entries made in the books of account of theCompany. 13.Section 115JA was changed to 115JB pursuant to FinanceAct, 2000, w.e.f., 1[st] April, 2001. We also find that the conditions given in explanation 1 in section 115JB is the same as explanation 1in section 115JA, barring few minor differences. But theundisputable position is once the accounts of the company have beenscrutinized and certified by statutory auditors and approved by theCompany in general meeting and the Registrar of Company is alsosatisfied that the accounts of the Company are maintained inaccordance with the requirement of the Companies Act, theAssessing Officer cannot embark upon a fresh enquiry in regard tothe entries made in the books of account of the company. This isexactly what the ITAT has also held in the impugned order. 14.In the circumstances, we see no reason to entertain theAppeal. Appeal dismissed. (FIRDOSH P.POONIWALLA, J.) (K.R. SHRIRAM, J.)