THE COMMISSIONER OF INCOME TAX, COCHIN vs. KERALA CHEMICALS & PROTEINS LTD.,

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS MONDAY, THE 19TH DAY OF JULY 2021 / 28TH ASHADHA, 1943 ITA NO. 943 OF 2009 AGAINST THE ORDER/JUDGMENT IN ITA 326/2006 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT: THE COMMISSIONER OF INCOME TAX, COCHIN BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT: KERALA CHEMICALS & PROTEINS LTD., PANAMPILLY NAGAR,COCHIN. BY ADVS. SRI.JOSEPH KODIANTHARA SRI.TERRY V.JAMES THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 19.07.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

IT Appeal No.943/2009 2 JUDGMENT S.V.Bhatti, J. Heard learned Standing Counsel Mr.Jose Joseph and learned Senior Adv.Mr.Joseph Markose. 2. Revenue is the appellant. Kerala Chemicals and Proteins Ltd., Kochi/Assessee is the respondent. The instant Tax Appeal is filed by the revenue aggrieved by the order dated 23.11.2007 in ITA No.326/Coch/2006 of the Inome Tax Appellate Tribunal (for short 'ITAT'), Cochin Bench. The subject matter deals with the controversies in the finalisation of return of assessee for the assessment year 2002-2003. 3. The assessee is a company engaged in the business of manufacturing and trading of Ossein, Compound Glue, Gelatine etc. The assessee, on 31.10.2002 filed the income tax return for the assessment year 2002-03 declaring total loss of Rs.3,59,10,946/-. The Assessing Officer (AO) through assessment order dated 3.3.2005 made under Sec.143(3) of the Act computed the total income of assessee at Rs.2,99,81,060/-. The assessee filed appeal before the Commissioner of Income Tax (Appeals) (for short 'CIT') in ITA No.1/R-I/CIT-II/05-06 and the CIT (Appeals) through order dated 30.3.2006 partly allowed the appeal. Since the CIT (Appeals) partly allowed the appeal and the assessee pursuaded the further remedy of appeal before ITAT in Appeal No.326/Coch/2006, the ITAT through

IT Appeal No.943/2009 3 the order impugned in the appeal allowed the appeal of the assessee in part. Hence the appeal by the revenue and the following questions of law are raised for consideration. 1. Whether, on the facts and in the circumstances of the case and also in the light of Section 80AB the Tribunal is right in holding that while computing the book profit under Section 115JB, the deduction under Section 80HHC is to be computed as per MAT provisions and not as per the normal provisions of the Income Tax Act, 1961? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law and fact i) in presuming that the Assessing Officer has considered clause (c) of Explanation to Section 115JA in the Asst.year 1997-98 & 1998-99; ii) in holding that merely because proper working is not available on record it cannot be said that the Assessing Officer has not considered the same and are not the approach and the conclusion based presumptions and supposition perverse, arbitrary and illegal? 3. (a) Whether on the facts and in the circumstances of the case, the Tribunal is justified in directing the Assessing Officer to reduce the net profit by the sum of Rs.3,29,27,056/- in place of Rs.1,42,02,335/- as has been done by the Assessing Officer? (b) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in directing the Assessing Officer to allow an amount of Rs.1,87,24,721/- being the provision for excise duty written back on the "presumption" that even though the provision of MAT were not considered as the assessment were completed applying normal provisions of the Act; "the assessing officer has considered clause (c) of Explanation to Section 115JA in the assessment year 1997-98 and 1998-99? 4. The learned counsel appearing for the parties state that substantial

IT Appeal No.943/2009 4 question Nos.1 and 2 are covered in favour of the assessee by the reported judgments of the Apex Court in Ajanta Pharma Ltd. v Commissioner of Income- Tax [2010]327 ITR 305(SC). Hence the questions are answered by following the principle laid down in Ajanta Pharma in favour of the assessee and against the revenue. 5. Substantial question No.3 deals with the provision made by the assessee towards the disputed central excise demand raised against the assessee. The details concerning the said claim are stated thus: 6. The Central Excise Department during the assessment years 1997-98; 1998-99 and 1999-2000 demanded and levied excise duty on Dicalcium phosphate. The demand was disputed and contested by the assessee before the CESTAT. The assessee, keeping in view the levy and demand of excise duty by the Central Excise Department, has made the provision towards disputed levy of excise duty as follows: Sl.No. Asst.Year Provision made (Rs.) 1 1997-98 1,86,77,820 2 1998-99 1,21,70,475 3 1999-2000 2,33,97,825 Total 5,42,46,120 7. The assessee succeeded in the appeal filed before CESTAT against the levy and demand of excise duty on dicalcium phosphate. The assessee, therefore,

IT Appeal No.943/2009 5 has written back in the previous year corresponding to the present assessment year and as follows: Sl.No. Assessment year Amount credited (Rs.) (written back) 1 2001-02 2,12,27,493 2 2002-03 3,29,27,056 6. The assessee while working the book profit under Section 115JB reduced the sum of Rs.3,29,27,056/- claiming reduction under clause 1 of explanation to Section 115JB of the Act. The AO noted that reduction for provision written back is available if at the time of creation of provision, the provision was added to the net profit under Section 115JA or 115JB of the Act. The provisions of Section 115JA were not applied to the case on hand by the A.O. in computing the total income and tax payable for assessment years 1997-98 and 1998-99 yet was determined. The total income charged to tax for both the years was the income computed under the normal provisions of the Act. In other words, the speical provisions under Sections 115JA or 115JB were not applied to the computation of income. The provisions created were disallowed in the assessment year under the normal provisions of the Act. For the assessment years 1997-98, 1998-1999 the income computed was under the normal provisions of the Act or more than 30% of the book profit. Special provisions under Section 115JB were not attracted to the case on hand. Thus considering the controversy from the

IT Appeal No.943/2009 6 said perspective, AO restricted the deduction under second proviso to sub section 2 of Section 115JB amounting to Rs.1,42,02,335/- and not 3,29,27,056/- rupees as claimed by the assessee. This disallowance to the income of the assessee resulted in addition of Rs.1,87,24,721/-. The CIT (Appeals) examined the claim of assessee by referring to the normal assessment made by A.O. resulting in levying tax at 30% on the total income for these two assessment years. CIT (Appeals) finds that the assessee did not file computation of income under Section 115JA. From the assessment orders it is clear that computation under Section 115JA has not been carried out or undertaken by the AO while passing the orders dated 15.3.2000 and 29.1.2001. It is further held that assessee cannot reduce the provision written back unless the appellant was assessed under Section 115JA or 115JB relating to the year in which the provision was debited by the assessee. The CIT (Appeals) flatly rejected the additional grounds raised by the assessee. The assessees claims that the AO ought to have ensured that the computation was done under Section 115JA for the assessment year 1997-98 and 1998-1999 also. The two reasons given for rejecting the additional grounds are that the additional ground is not relevant for deciding the appeal and the assessee is asking for the impossible and no AO can ensure while completing the assessment for the assessment year 2002-03 that computation under Section 115JA was made for the assessment years 1997-98 and 1998-99. Thus it is clear

IT Appeal No.943/2009 7 the CIT (Appeals) was in substantial agreement with the reasons recorded by the AO and rejected the case of assessee. The Tribunal accepted the case of assessee for writing back in the assessment year 2002-03 and allowed the appeal. 7. The Tribunal considered the issue and recorded the following conclusions. "Section 115JB is a deeming provision and it overrides the other provisions under which the total income is computed in respect of the company which is an assessee. If income-tax payable is less than 7 1/2% of its book profit in that case, the assessee which is a company is liable to pay income-tax as per the provisions of section 115JB. Sub section (2) to section 115JB provides the method for computation of the book profit. Explanation is also provided to the said sub section but from the language used by the legislature, the said explanation is applicable to section 115JB as such, more particularly in the context of book profit. The explanation is divided into two parts. Part I consists of clauses (a) to (g) and it is provided that book profit means the net profit as shown in the profit and loss account which shall be increased by the amount specified in clauses (a) to (g). In part 2 of the said Explanation, book profit is to be reduced by certain amounts as specified in clauses (i) to (vii). As per clause (i), more particularly in respect of the provision made earlier and amount written back by crediting th same to the profit and loss account and in consequence of which the net profit as shown in the profit and loss account is increased, then the said amount is to be reduced from the net profit in the process of computing the book profit. By virtue of proviso to clause (i) to the Explanation, even if the amount is written back from the provision and credited to the profit and loss account, the same shall not be reduced unless in respect of the provision made in the previous year relevant to the assessment year commencing on or after 1997-98, unless while computing the book profit u/s.115JA as then it was applicable, the said amount so added. In the present case, for the asst. years 1997-98 and 1998-99, the assessments are framed by adopting the normal provisions of the Act. As admitted by the AO himself, the income computed under the

IT Appeal No.943/2009 8 deeming provisions of section 115JA. So our presumption would be that the AO has considered clause (c) of Explanation to section 115JA in the asst. Years 1997-98 and 1998-99. Merely because proper working is not available on record, it cannot be said that the AO has not considered the same. By virtue of provisions of section 115JA as they were applicable in the asst. Years 1997-1998 and 1998-99, the AO was under the statutory obligation to consider the said provisions. In our opinion, there was no justification to disallow the claim of the assessee either wholly or on pro-rata basis. We, therefore, direct the AO to reduce the net profit by the sum of Rs.3,29,27,056/- in place of Rs.1,42,02,335/- as has been done by the AO. This issue is decided in favour of the assessee and against the revenue." 8. Hence the appeal at the instance of revenue. 9. The learned standing counsel has reframed the substantial question Nos.2 and 3 as follows and made his submissions. 2. Whether on the facts and circumstances of the case, the Tribunal is correct in law in directing the Assessing Officer to recompute the 'book profit' for the purpose of levy of tax under Section 115JB by reducing the entire provision written back of Rs.3,29,27,056/- from the net profit in terms of clause (i) of the Explanation in Section 115JB? 3. Is not the order of the Tribunal without any basis and on assumptions and presumptions perverse? 9. It is argued for revenue that the assessee firstly made provision in the assessment years 1997-98 and 1998-99 towards disputed demand of excise duty. The assessments were finalised under Section 143(3) of the Act. The tax of 30% as applicable in normal provisions of the Act has been levied and demanded from the assessees. The assessee failed to establish that the computation statement under Section 115JA or Section 115JB has been, firstly, filed by the

IT Appeal No.943/2009 9 assessee and secondly, considered by the AO in any manner. In the absence of consideration of book profits for the purpose of Sec.115JB, unless and until it is shown that in the corresponding applicable previous year to the assessment year the provision has been added, the provision now sought to be written back cannot be deducted while computing the book profit of the assessee under section 115JB of the Act. The Tribunal has presumed and assumed that the normal computation and finalisation of the return of the assessee is by taking note of the effect of the provision made towards disputed levy and demand of excise duty. Therefore the finding recorded by the Tribunal is perverse and presumptuous. Hence it is argued that substantial question No.3 and reframed question Nos.2 and 3 may be answered in favour of revenue and against the assessee. 10. Senior Adv.Joseph Markose prefaces his argument, by keeping in view the authoritative pronouncement of the Supreme Court in Ajanta Pharma Ltd., that Section 115JB is a self contained code. The assessment has been made under Sec.143(3) of the Act. Computation of book profit for the purposes of special provisions and comparing such computation with the income arrived at in the normal provisions is on the AO. Once an order under Section 143(3) is made, it is now not available to revenue to contend that the AO, firstly, did not refer to the computation for the purposes of Section 115JB of the Act, and that the

IT Appeal No.943/2009 10 assessee was called upon to pay income tax at 30% pre-supposes that the tax payable is more under the normal provisions than under special provisions. Therefore tax has been collected as per the normal provisions for the A.O. is under obligation to collect tax under applicable higher rate to wit if normal provision at 30% and special provision at applicable rate in the previous year. The absence of reference to these details by A.O. at that point of time is easily understandable because the special provisions have come into force with effect from 1.4.1997. The very fact that income tax has been collected at 30% as per normal provisions shows that the AO has not committed a mistake and the non- reference in the respective assessment orders shall not be put against the assessee or disallow the claim of writing back. There is no presumption or assumption by the Tribunal. He further argued that the objection now raised by the revenue is a verifiable circumstance. To deny the benefit of writing back in this assessment year the revenue ought to show one circumstance which would support the claim that in the previous year in which the provision was made it was not debited in the P&L account of the assessee. In the absence of such material the conclusion drawn by the Tribunal is a pure finding of fact and the substantial questions as orginally framed and as reframed do not come within the scope of Section 260A of the Income Tax Act. He prays for answering the questions in favour of assessee and dismissing the appeal.

IT Appeal No.943/2009 11 11. We have perused the record and noted the submissions made by the learned Advocates appearing for the parties. The controversy arises in a very limited compass. Before expressing our view on the substantial questions of law, let us take note of the following the circumstances. 12. We directed the assessee to place before us the assessment orders made by the AO for the assessment years 1997-98; 1998-99 and 1999-2000 i.e. the years during which provision for disputed excise duty was made by the assessee. The assessment orders for the first two years has been made by referring to normal provisions of the Act and the necessity to refer to special provisions was not noticed by the AO. The AO, as is clear from the respective assessment orders, did not find a case for applying minimum alternate tax i.e. Special Provisions as applicable to the assessee for the first AY 1997-98; 1998-99 referred to above. The AO as well as the CIT have proceeded on the reasoning that unless and until book profits under section 115JA or 115JB are established as duly computed by the AO, the claim for writing back cannot be allowed in the subject assessment years. The reasoning of the primary authority and the first appellate authority is untenable in our consideration of the circumstances of the case and scheme of the Act. We are of the view that once the return was filed by the assessee, it is the responsibility on the AO to compute the income of assessee under normal provisions and special provisions. The income tax is collected on the income

IT Appeal No.943/2009 12 whichever is higher in these two methods i.e. either normal provision or special provision. Had it been a case where the AO has omitted or failed to do comply with Section 115JB the remedy available to revenue is different to work out the grievances vis-à-vis the respective assessment orders allegedly made by A.O. without reference to the applicability of Section 115JA/115JB of the Act. However the omission on the part of the AO in referring to Special Provisions ought not to deny the writing back provision available under second proviso to sub section 2 of Section 115JB. The argument that the assessee gets double advantage by allowing it to write back the provision now is equally incorrect for the Tribunal has rightly found that proper working is not reflected in the respective assessment orders or the record cannot lead to the conclusion that AO has not considered the applicability of special provision as well. The assessment order, in our view, has the presumption of having been made in accordance with the requirements of law and obligations fastened on the A.O. It cannot now be gain said that the AO failed to discharge the statutory obligation while computing the income of assessee for the assessment years in which the provision towards disputed excise duty was made by the assessee. The first and foremost objection of revenue on actual verification of provision made in respective assessment years is that the Tribunal presumed and pre-supposed that the contemperaneous effect would have been given in the books of accounts without

IT Appeal No.943/2009 13 material on record. The argument is contrary to the orders made by the AO in this behalf. The contention at the first blush though appears to be persuasive. With the help and assistance of learned counsel appearing for revenue and assessee, we have verified the assessment orders for the years 1997-98; 1998-99 and 1999-2000 and the assessment order in which the present appeal arises and we are of the view that the primary and first appellate authority have, as matter of fact, presumed a circumstance against assessee which is not in the control of assessee. We appreciate and accept the conclusion recorded by the Tribunal by taking note of the fact that the assessee was subjected to the slab rate of 30% for the assessment years 1997-1998 and 1998-1999 and computed the tax payable thereon under normal provisions. The denial of writing back benefit to the assessee in these assessment years are illegal and the finding recorded by the Tribunal is valid and correct in the circumstances of this case. Hence the reframed question is answered in favour of the assessee and against the revenue. The appeal fails and accordingly dismissed. No order as to costs. Sd/- S.V.BHATTI Judge sd/- BECHU KURIAN THOMAS Judge css/