Rc/44/1996 Of I.t.w.signodia India Ltd v. The Commissioiner Of Income Tax.hyd

THE HON'BLE SRI JUSTICE V.V.S.RAOANDTHE HON'BLE SRI JUSTICE RAMESH RANGANATHAN R.C. No.44 of 1996 ORDER:(Per Hon’ble Sri Justice V.V.S.Rao) The two questions referred to this Court under Section 256(1) of the Income Tax reads as under: 1.Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the AssessingOfficer was justified in making adjustments for decapitalisation of interest and/or extra shift allowance and re-castingthe profit and loss account to arrive at the profit in accordance with the provisions of Parts II and III of Schedule VI tothe Companies Act, 1956, for the purpose of determining “Book Profits” as provided in Sub-Sec. (1A) of sec.115J ofthe Income-tax Act, 1961?Officer was justified in making adjustments for decapitalisation of interest and/or extra shift allowance and re-castingthe profit and loss account to arrive at the profit in accordance with the provisions of Parts II and III of Schedule VI tothe Companies Act, 1956, for the purpose of determining “Book Profits” as provided in Sub-Sec. (1A) of sec.115J ofthe Income-tax Act, 1961? For asst. Year 1990-91: 2.Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest underSecs.234B and 234C of the Income-tax Act, 1961, are attracted for non-payment of advance tax on “Book Profits”under sec.115J of the Act?Secs.234B and 234C of the Income-tax Act, 1961, are attracted for non-payment of advance tax on “Book Profits”under sec.115J of the Act? The brief background leading to the reference, after the order was passed by the Learned Income-taxAppellate Tribunal, is as follows:- For the assessment years 1989-90 and 1990-91, the assessee filed its returns –Rs.1,53,45,695/- forthe former and Rs.2,50,42,293/- for the later year. The Assessing Officer recomputed the assessment forboth the years adding an amount of Rs.93,16,176/- for the assessment year 1989-90. While doing so, theassessing officer allowed interest expenditure of Rs.60,29,519/- debited to the p & l account, but disallowedRs.60,96,787/- representing extra shift depreciation for earlier years and Rs.32,19,389/- representing aportion of the interest expenditure of earlier years. Similarly, for the assessment year 1990-91, theassessing officer recomputed the profit under Section 115J refusing to accept the assessee’s computationof business loss of Rs.3,64,54,240/-. The Commissioner of Income-tax (Appeals) (CIT(A)), in his order dated 24.01.1994, observed thatSchedule VI of the Companies Act, which relates to preparation of profit and loss account, in Note IVrequires the amount, provided for as depreciation, renewal or diminution in the value of fixed assets, to beshown and, if provision is not made, its effect to be indicated on the quantum of arrears of depreciationcomputed in accordance with Section 205(2) of the Act, and to be disclosed by way of a note; Section 115J(1A) requires the accounts to be in accordance with Parts II and III of Schedule VI of the Companies Act; inthe earlier years, as well as in the current year, the accounts were not in accordance with the provisions ofParts II and III of Schedule VI; once the accounts are required to be in accordance with Schedule VI,notional effect has to be given in the respective earlier years also in view of the set offs permitted underSection 115J(1A)(iv) and, for this purpose, notionally the accounts needs to be recast by makingadjustments to the revenue account by deducting the actual interest payable, and adding to that the excessdepreciation claimed. On the question of charging interest, under Section 234 (B) and (C), the CIT (A) heldthat charging of interest thereunder was correct. Aggrieved thereby the assessee carried the matter in appeal to the Income-tax Appellate Tribunal. The Learned Tribunal observed that the profit and loss account is to be so made as to clearly disclose theresults of the working of a company during the period covered by the account; the transactions of non-recurring and exceptional nature are to be disclosed specifically; depreciation, renewals or diminution in thevalue of fixed assets is to be provided; if such provision is not made by means of depreciation charge, the method adopted for making such provision is to be disclosed; the entries for decapitalisation of interest andextra-shift allowance of the broken period, shown as expenditure in the profit and loss account of the twoyears, were not in accordance with any principle of accountancy and, therefore, the Assessing Officer wasjustified in making adjustment thereof and recasting the profit and loss account to arrive at the book profit inaccordance with the provisions of Parts II and III of Schedule VI of the Companies Act. On the question ofcharging of interest, under Section 243(B) and (C) of the Income-tax Act, the Tribunal followed the earlierorder of the Special bench of the Tribunal in the case of Sutlej Cotton Mills Ltd where, in similarcircumstances, liability to interest under Section 215 was upheld. Consequent thereupon the aforesaid twoquestions were referred for our opinion at the behest of theassessee. Though notices are served, the assessee did not appear. Therefore this Court requested Ms. AnjaliAgarwal to assist the Court as amicus curiae. She made her submissions relying on the decisions of theSupreme Court in Apollo Tyres Ltd. v. Commissioner of Income-tax[[1]]and Malayala Manorama Co.Ltd. v. Commissioner of Income-tax[[2]]. According to the Learned Amicus Curiae, these two decisionscover question No.1 and has to be answered in favour of the assessee. In so far as question No.2 isconcerned, the Learned Amicus Curiae relies on the decision of the Karnataka High Court in KwalityBiscuits v. Commissioner of Income-tax[[3]]which was confirmed by the Supreme Court inCommissioner of Income Tax v. Kwality Biscuits Ltd.[[4]]. Per contra, the Junior Standing Counsel forIncome-tax department relies on Explanation –I to sub-section (1) of Section 43 and submits that, whilecalculating depreciation, the actual cost of the asset as stipulated under the said provision should be takeninto consideration. After perusing the orders of the assessing authority, the CIT(A) and the Learned Tribunal, and ongoing through the precedents cited, we are convinced that the two questions have to be answered in thenegative and in favour of the assessee. The reasons are as follows. Section 115J of the Income-tax Act stipulates that, while assessing the income of a company whichhas submitted its audited accounts in accordance with the provisions of Parts II and III of Schedule VI of theCompanies Act, 1956, for the purpose of levying tax, 30% of the book profit should be taken intoconsideration. Once the company has filed its audited accounts, the assessing officer cannot recomputethe accounts since, as held by the Supreme Court in Apollo Tyres Ltd.[1],the same would amount toreckoning two accounts one for the purpose of the Income-tax Act and the other for the purposes of theCompanies Act. I n Apollo Tyres Ltd.[1], the Supreme Court considered the question whether, whileassessing a company under Section 115J, the correctness of the p & l accounts, prepared by the assesseecompany and certified by statutory auditors of the company, could be examined. Answering the question inthe negative it was held as follows: “While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act hasto accept the authenticity of the accounts with reference to the provisions of the Companies Act whichobligates the company to maintain its account in a manner provided by the Companies Act and the same tobe scrutinized and certified by the statutory auditors and will have to be approved by the company in itsgeneral meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligationalso to examine and satisfy that the accounts of the company are maintained in accordance with therequirements of the Companies Act. Inspite of all these procedures contemplated under the provisions ofthe Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to theAssessing Officer to rescrutinise this account and satisfy himself that these accounts have been maintainedin accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue onsub-section (1A) of section 115J of the Income-tax Act in support of the above contentions is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiryin regard to the entries made in the books of account of the company. The said sub-section, as a matter offact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for thelimited purpose of making the said account so maintained as a basis for computing the company’s incomefor levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority underthe Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If thestatute mandates that income prepared in accordance with the Companies Act shall be deemed income forthe purpose of section 115J of the Act, then it should be that income which is acceptable to the authoritiesunder the Companies Act. There cannot be two incomes one for the purpose of the Companies Act andanother for the purpose of income-tax both maintained under the same Act. If the Legislature intended theAssessing Officer to reassess the company’s income then it would have stated in section 115J that “incomeof the company as accepted by the Assessing Officer”. In the absence of the same and on the language ofsection 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred inreversing the said view of the Tribunal.” The above view was reiterated by the Supreme Court in Malayala Manorama Co. Ltd.[2.] The 2[nd] question is also no longer resintegra. The Karnataka High Court, in Kwality Biscuits[3],considered the question whether in an assessment year, where the assessee company’s income iscomputed as per the provisions of Section 115J, interest under Section 234-B and 234-C can be levied. It was held as follows: “Section 234B casts the liability for payment of interest for default in payment of advance tax if theassessee is liable to pay advance tax under section 208 and has failed to pay such tax, or where theadvance tax paid by such assessee under the provisions of section 210 is less than 90 per cent. Of theassessed tax, then he is liable to pay simple interest at the rate of two per cent. For every month to the dateof determination of total income under section 143(1) and, where the regular assessment is made, to thedate of such regular assessment on the amount equal to the assessed tax or, as the case maybe, on theamount by which the advance tax paid has fallen short of the assessed tax. Under the Explanation,“assessed tax” means the tax on the total income as declared in the return or the tax on the total incomedetermined under section 143(1) or on regular assessment, as reduced by the amount of tax deducted orcollected as source in accordance with the provisions of Chapter XVII. Under Section 234C also, if there is liability to pay advance tax under section 208 and if there is failureto pay such tax or if it is not paid in instalments prescribed in the section, then the liability for interestarises.” When the revenue carried the matter in appeal to the Supreme Court, the same was dismissed inKwality Biscuits[4]. In Deputy Commissioner of Income-tax (Asstt.) v. Bhopal Motors Ltd.[[5]], theDivision bench of the Madhya Pradesh High Court, following the decision of the Supreme Court inKwality Biscuits[4],concurred with the Karnataka view. We are bound by the decision of the SupremeCourt and, therefore, these references are answered accordingly in favour of the assessee. Before we part with the case, we must place on record our appreciation of the valuable assistancerendered by the learned amicus curiae. ______________ V.V.S.RAO, J Date: 27.09.2010MRKR ____________________________ RAMESH RANGANATHAN,J [1](2002) 255 ITR 276[2](2008) 300 ITR 251 (SC)[3](2000) 243 ITR 519 (Karnataka) [4](2006) 248 ITR 434 (SC)[5](2010) 323 ITR 684 (MP).