Rc/78/1998 Of M/S Deccan Cements Ltd. Hyd v. Commissioneer Of Income Tax Ap.i Hyd

* HON’BLE SRI JUSTICE G. CHANDRAIAH AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM + REVISION CASE No.78 of 1998 th%28November, 2013 M/s Deccan Cements Ltd., Hyderabad … Applicant AND $ Commissioner of Incometax, AP-I, Hyderabad … Respondent ! Counsel for the Applicant : Sri C.V. Narasimham ^ Counsel for the respondent : Sri S.R. Ashok, Standing Counsel for Department of Income Tax assisted bySri N.P. Sunil Reddy. < Gist: > Head Note: ? Cases referred: 1) 174 ITR 200 2) 258 ITR 770 3) (1997) 223 ITR 713 HON’BLE SRI JUSTICE G. CHANDRAIAHAND HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.78 OF 1998 ORDER:- (per Hon’ble Sri Justice G.Chandraiah) At the instance of the Revenue, the Income Tax Appellate Tribunal, HyderabadBench-‘A’ (in short “the Tribunal”) had referred the following questions of law asarising from the Tribunal’s Order dated12.06.1996 made in I.T.A.No.460/H/92,for the assessment year 1989-1990: “1) Whether, on the facts and in the circumstances of the case,the Income Tax Appellate Tribunal was correct in law in holdingthat the computation of the loss to be carried forward cannot bean extension of determination of the profit u/s 115J of theIncome Tax Act and accordingly upholding the order of the CIT(A)? 2) Whether on the facts and in the circumstances of the case,the Income Tax Appellate Tribunal was correct in law in holdingthat since the assessment order contained only a working fordetermination of book profit U/s. 115J, there is no infirmity in theorder of the CIT (A) declining to deal with the other groundsraised by the appellant in relation to determination of loss inaccordance with the other provisions of the Act? 3) Whether on the facts and in the circumstances of the case,the Income Tax Appellate Tribunal was correct in law in holdingthat there is no infirmity with regard to interpretation of theprovisions of Sec.115J in respect of determination of carryforward losses and consequently the CIT(A) was correct inconcluding that interpretation of Sec.115J(2) would not conflictwith the provisions of Sec.115J(1) of the Act? 2) Having regard to the facts and circumstances of the case, both the counselthough three questions have been referred for the opinion of the Court, theyconfined to only seeking reference to the Question No.2. Therefore, this Courtis not required to answer the Question Nos.1 and 3. In that view of the matter,the Question No.2 as set out hereunder is being considered. “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that sincethe assessment order contained only a working for determination ofbook profit U/s. 115J, there is no infirmity in the order of the CIT (A)declining to deal with the other grounds raised by the appellant inrelation to determination of loss in accordance with the other provisionsof the Act?” 2) Having regard to the facts and circumstances of the case, both the counselthough three questions have been referred for the opinion of the Court, theyconfined to only seeking reference to the Question No.2. Therefore, this Courtis not required to answer the Question Nos.1 and 3. In that view of the matter,the Question No.2 as set out hereunder is being considered. “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that sincethe assessment order contained only a working for determination ofbook profit U/s. 115J, there is no infirmity in the order of the CIT (A)declining to deal with the other grounds raised by the appellant inrelation to determination of loss in accordance with the other provisionsof the Act?” 3. Before answering the above question, it is appropriate to make areference to brief facts of the case. Assessee is a company, in which thepublic are substantially interested. The assessee is engaged in thebusiness of manufacture and sale of cement. Assessee filed its return ofincome disclosing ‘nil’ income after setting off of unabsorbed investmentallowance of Rs.22,44,298/- and disclosing an income of Rs.30,56,600/-under the provisions of Section 115 J of the Income Tax Act, 1961 (inshort “the Act”). The Assessing Officer while framing the assessmentadded back certain deductions claimed by the assessee. The AssessingOfficer finally determined the income of the assessee at ‘nil’ after allowingthe set off of investment allowance for the Assessment year 1988-1989and 1989-1990 to the extent of Rs.51,16,367/-. In so far as thecomputation of book profit under Section 115J of the Act is concerned, hecomputed the total book profit at Rs.1,06,65,939/- by adding the provisionfor doubtful debts as well as prior period expenditure debited to the profitand loss account and 30% thereof is determined at Rs.31,99,780/-. Theassessee carried the matter in appeal to the Commissioner of Income Tax(Appeals). 4. Before the Commissioner, Income Tax (Appeals), the assessee raised theissues relating to the disallowance of the deductions claimed by theassessee. The Commissioner (Appeals), did not go into the other claims,but determined the computation of the book profit under Section 115J ofthe Act. After considering all the contentions of the assessee, the CIT(Appeals) upheld the book profit as determined by the assessing officer.The CIT (Appeals) also observed while refusing to deal with the othergrounds that the two processes are separate and independent and cannotbe integrated as canvassed by the assessee. This was contested by theissues relating to the disallowance of the deductions claimed by theassessee. The Commissioner (Appeals), did not go into the other claims,but determined the computation of the book profit under Section 115J ofthe Act. After considering all the contentions of the assessee, the CIT(Appeals) upheld the book profit as determined by the assessing officer.The CIT (Appeals) also observed while refusing to deal with the othergrounds that the two processes are separate and independent and cannotbe integrated as canvassed by the assessee. This was contested by the assessee before the Tribunal. The Tribunal after considering theassessee’s contention upheld the order of the Commissioner of Incometax (Appeals). The Tribunal also observed that since the assessmentorder appealed against contained only a working for determination of bookprofits under Section 115J of the Act, the CIT (Appeals) declined to dealwith the other grounds raised by the assessee in relation to determinationof loss in accordance with the other provisions of the Act. According tothe Tribunal there is no infirmity in the order of the CIT (Appeals). In so faras the addition of Rs.2,00,000/- being provision for doubtful debts to thebook profits, the Tribunal confirmed the addition relying upon the decisionof the jurisdictional High Court in the case of CIT Vs. Sileman KhanMahabub Khan as well as the amended provisions of Section 36, whichwere amended with effect from 01.04.1989. 5. Sections 115J, 115J(1), 115J(1A) and 115J(2) read as under: Section 115J - Special provisions relating to certain companies: (1) Notwithstanding anything contained in any other provision of thisAct, where in the case of an assessee being a company (other than acompany engaged in the business of generation or distribution ofelectricity), the total income, as computed under this Act in respect ofany previous year relevant to the assessment year commencing on orafter the 1st day of April, 1988 but before the 1st day of April, 1991(hereafter in this section referred to as the relevant previous year), isless than thirty per cent of its book profit, the total income of suchassessee chargeable to tax for the relevant previous year shall bedeemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of thissection, prepare its profit and loss account for the relevant previousyear in accordance with the provisions of Parts II and III of Schedule VIto the Companies Act, 1956 (1 of 1956). 155J(2) Nothing contained in sub-section (1) shall affect thedetermination of the amounts in relation to the relevant previous year tobe carried forward to the subsequent year or years under theprovisions of sub-section (2) of Section 32 or sub-section (3) ofSection 32A or clause (ii) of sub-section (1) of Section 72 or Section 73or Section 74 or sub-section (3) of Section 74A or sub-section (3) ofSection 80J. 6. Interpreting Section 115 J of the Act, the Hon’ble Supreme Court in a caseo f Karnataka Small Scale Industries Development Corporation Ltd.,Vs. Commissioner of Income-Tax had observed as follows: “Section 115J, therefore, involves two processes. Firstly, an assessingauthority has to determine the income of the company under theprovisions of the Income-tax Act. Secondly, the book profit is to beworked out in accordance with the Explanation to section 115J(1) andit is to be seen whether the income determined under the first processis less than 30 per cent of the book profit. Section 115J would beinvoked if the income determined under the first section (1) of section115J gives the definition of ‘book profit’ by incorporating therequirement of section 25 of the Companies Act in the computation ofthe book profit. Brought forward loss or unabsorbed depreciationwhichever is less would be reduced in arriving at the book profits. Sub-section (2), however, provides that the application of this provisionwould not affect the carry forward of unabsorbed depreciation,unabsorbed investment allowance, business losses to the extent notset off, and deduction under section 80 J, to the extent not set off ascomputed under the Income-tax Act. A Division Bench of this Court in Suryalatha Spg. Mills Ltd., hadconstrued section 115J in favour of the Revenue, inter alia, because,“the very object of the provision of section 115 J is to tax suchcompanies which are making huge profits and also declaringsubstantial dividends but are managing their affairs in such a way as toavoid payment of income-tax, as a result of various tax concessionsand incentives and for that purpose, the taxable income is determinedunder sub-section (1) of Section 115J, if any loss equal to the incomethus determined is allowed to be adjusted, then that would frustrate andnullify the very object of enacting the provision.” The reasoningappears to us to be unexceptionable. 7. As a matter of fact, the Commissioner, Income-tax (Appeals) in his orderhad recorded as follows: “Definitely, such determination of amounts to be carried forward has tobe under the normal provisions of the I.T. Act and not under Section115J(1). Accordingly, there has to be a separate determination of thesame in accordance with the other provisions of the I.T. Act, either inthe form of a separate order or note to be communicated to the 8. In spite of having observed as above, the Commissioner dismissed theappeal which was merely confined by the Tribunal. Now, in view of thesettled law as enunciated by the Supreme Court, in the case of Karnatakaappeal which was merely confined by the Tribunal. Now, in view of thesettled law as enunciated by the Supreme Court, in the case of Karnataka Small Scale Industries Development Corporation Ltd., (2[nd] supra) thequestion of law is required to be answered in favour of assessee andagainst the revenue. 9. Having observed so, the Appellate authority failed to consider the samewith reference to the application of Section 115J of the Act. In that view ofthe matter, the Question No.2, referred to, is answered in favour of theassessee and against the revenue.with reference to the application of Section 115J of the Act. In that view ofthe matter, the Question No.2, referred to, is answered in favour of theassessee and against the revenue. 10. Accordingly, the question is answered in favour of the assessee andagainst the revenue. No order as to costs. Miscellaneous Petitions, if any,pending shall stand disposed of.against the revenue. No order as to costs. Miscellaneous Petitions, if any,pending shall stand disposed of. ____________________ G. CHANDRAIAH,J ____________________________ SSV HON’BLE SRI JUSTICE G. CHANDRAIAHANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.78 OF 1998 Date:28.11.2013.