M/S RAJAPALAYAM MILLS LTD vs. THE ASSISTANT COMMISSIOER OF

T.C.A.Nos.969 and 973 of 2019 IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 21.07.2020 Coram THE HONOURABLE Mr. JUSTICE T.S.SIVAGNANAM AND THE HONOURABLE Mrs. JUSTICE V.BHAVANI SUBBAROYAN T.C.A.Nos.969 and 973 of 2019 M/s Rajapalayam Mills Ltd., PAC Ramaswamy Raja Salai, Rajapalayam - 626 117 .. Appellant in both the appeals Vs. The Assistant Commissioner of Income Tax Circle - I Virudhunagar ..Respondent in both the appeals Tax Case Appeals filed under Section 260-A of the Income Tax Act, 1961, are directed against the Orders passed by the Income Tax Appellate Tribunal “C” Bench in I.T.A Nos.3282/Mds/2004 and 3292/MDS/2004 dated 07.07.2006 for the assessment year 2001-02 and 2000-2001 respectively. For Appellant

: Mr.P.J.Rishikesh For Respondent : Mr.M.Swaminathan, Sr.Standing Counsel assisted by Ms.S.Premalatha and

Ms.V.Pushpa, Standing Counsel 1/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 C O M M ON J U D G M E N T [Common Judgment of the Court was delivered by T.S.SIVAGNANAM, J.] These appeals have been filed by the assessee challenging the common order dated 07.07.2006 passed by the Income Tax Appellate Tribunal, Chennai “C” Bench in I.T.A.Nos.3282 and 3292 /Mds/2004 for the assessment years 2001-2002 and 2000-2001 respectively. 2. The appeals are entertained on the following Substantial Questions of Law: T.C.A.No.969 of 2019 : '1. Whether in facts and circumstances of the case the tribunal was right in holding that the income earned out of sale of Waste Cotton would form part of total income? 2. Whether in facts and circumstances of the case the Tribunal was right in holding that the Assessee is not eligible for deduction for the interest paid against the interest received to deduct 90% of net interest while computing deduction under Section 80 HHC of the Income Tax Act, 1961? 3. Whether in facts and circumstances of the case the Assessing Officer can disturb the net profit as worked out by the Assessee in accordance with the provisions of the Companies Act? 2/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 4. Whether in facts and circumstances of the case, Appropriation Account would form part of Profit and Loss Account? T.C.A.No.973 of 2019 : 1. Whether in facts and circumstances of the case the Assessing Officer can disturb the net profit as worked out by the Assessee in accordance with the provisions of the Companies Act? 2. Whether in facts and circumstances of the case, Appropriation Account would form part of Profit and Loss Account?' 3. We have heard Mr.P.J.Rishikesh, learned counsel appearing for the appellant / assessee and Mr.M.Swaminathan, learned senior standing counsel for the respondent / Revenue assisted by Ms.Premalatha and Ms.V.Pushpa, learned standing counsel for the Revenue. 4. So far as the Substantial Question of Law No.1 in T.C.A.No.969 of 2019 is concerned, the question has been decided in favour of the assessee in the Assessee's own case in T.C.A.No.342 of 2009 dated 02.01.2009 for the assessment year 2005-2006. The 3/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 Revenue does not dispute the said position. Consequently, the Substantial Question of Law No.1 in T.C.A.No.969 of 2019 is answered in favour of the assessee. 5. With regard to the Substantial Question of Law No.2 in T.C.A.No.969 of 2019 is concerned, the issue was considered by the Hon'ble Supreme Court in ACG Associated Capsules (P) Ltd., Vs. C.I.T reported in (2012) 3 SCC 321 and the operative portion of the Judgment reads as thus: '24. The facts of this case very briefly are that Bharat Rasayan Ltd. (for short “the assessee”) filed a return of income tax claiming a deduction of Rs 72,76,405/- under Section 80-HHC of the Act. In the assessment order, the assessing officer held that ninety per cent of the gross interest has to be excluded from the profits of the business of the assessee under Explanation (baa) to Section 80-HHC of the Act and deducted ninety per cent of the gross interest of Rs.50,26,284 from the profits of the business of the assessee. The assessee preferred an appeal contending that only ninety per cent of the net interest should have been deducted from the profits of the business of the assessee under Explanation (baa) to Section 80-HHC, but the 4/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 Commissioner of Income Tax (Appeals) rejected this contention of the assessee. 25. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal (for short “the Tribunal”) and the Tribunal allowed the appeal of the assessee and held that the assessee was entitled to deduct the expenses from the interest received and only ninety per cent of the net amount of interest could be excluded under Explanation (baa) to Section 80-HHC and remitted the matter to the assessing officer to examine whether there is factually an excess between the interest paid and interest received and take a fresh decision. The Revenue filed an appeal against the order of the Tribunal before the High Court, but by the impugned order the High Court following its decision in CIT v. Shri Ram Honda Power Equip [(2007) 289 ITR 475 (Del)] sustained the order of the Tribunal and dismissed the appeal. 26. We have held in our judgment in ACG Associated Capsules (P) Ltd. v. CIT that ninety per cent of not the gross interest but only the net interest, which has been included in the profits of the business of the assessee as computed under the head “Profits and Gains of Business or Profession” is to be deducted under clause (1) of Explanation (baa) to Section 80-HHC for determining the profits of the business. Since the view taken by the High Court in the impugned order is consistent with our aforesaid 5/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 view, we find no merit in this appeal and we accordingly dismiss the same. There shall be no order as to costs. 6. In the light of the above decision, the matter requires to be remanded to the Assessing Officer to take note of the legal position and decide the issue afresh. Accordingly, the Substantial Question of Law No.2 is left open and the matter is remanded to the Assessing Officer to decide the matter in accordance with law after reasonable opportunity of being heard granted to the assessee. 7. The Substantial Question of Law Nos.3 and 4 in T.C.A.No.969 of 2019 are identical to the Substantial Questions of Law in T.C.A.No.973 of 2019, therefore, taken up together for consideration. 8. The Assessing Authority while completing the assessment under the said head, made an observation that "Donation accounted below the net profit line" and accordingly, adjusted the book profit. The assessee's contention is that while computing book profits under Section 115JA, the jurisdiction of the assessing officer is limited to examine whether the books of accounts are certified by the authorities 6/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 under the Companies Act as having properly maintained in accordance with the Companies Act. Therefore, it is the submission of the assessee that the assessing officer has very limited power of making increase and reductions as provided in Explanation 2 of Section 115JA. Further, it is contented that once the assessment is sought to be made under Section 115JA, the proviso contained therein does not empower the assessing officer to embark a fresh enquiry in determining the book profit so as to arrive at a re-computation. In support of such contention, the learned counsel placed reliance on the decision of the Division Bench of this Court in Tamilnadu Cements Corporation Limited V. JCIT [(2012) 349 ITR 58/209 Taxman 58], which was rendered following the decisions of the Hon'ble Supreme Court in 255 ITR 273 [Apollo Tyres Limited Vs. Commissioner of Income Tax, Kochi] 300 ITR 251 [Malayala Manorama Co., Ltd., Vs. C.I.T.] and 321 ITR 300 [Dynamic Orthopedics P.Ltd., Vs. C.I.T.] 9. On the merits of the case, the learned counsel for the assessee submitted that the assessee made a donation and this donation forms part of Profit and Loss Appropriation Account and the assessing officer 7/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 did not allow the assessee to deduct the donation from the net profit computed under Section 115JA on the ground that the assessee has shown this only in the Appropriation Account and not in the Profit and Loss Account. 10. It is the case of the assessee that Profit and Loss Appropriation Account is a separate account that shows how funds transferred from Profit and Loss Account will be spent. Therefore, it is submitted that once the amount is shown in the appropriation account, then, the same would be an expenditure, more so, when the donation itself is an ascertained liability. This contention was accepted by the Commissioner of Income Tax (Appeals) II Madurai, the 'CIT(A)', for brevity. However, elaborate reasons were not assigned except to follow the decision in Apollo Tyres [cited supra] and holding that the assessing officer is not empowered to make adjustment in the book profits, except as provided in the explanation below under Section 115JB. 11. The Revenue preferred appeal to the Tribunal, which 8/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 reversed the finding of the CIT[A], on the ground that in the assessee's case, the donation does not form part of Profit and Loss Account. In other words, it is stated that from the net profit worked out as per Part II and III of Schedule VI of the Companies Act for the purpose of Section 115JA, the items referred to in Appropriation Account cannot be reduced. The assessee is aggrieved by such a finding, firstly, by placing reliance on the decision of the Apollo Tyres and other decisions referred above. On merits also, it is contented that the Profit and Loss Appropriation Account is a separate account that shows how funds are transferred from Profit and Loss Account will be spent. 12. Per contra, Mr.M.Swaminathan, learned senior standing counsel assisted by Ms.V.Pushpa and Ms.S.Premalatha, learned standing counsel sought to sustain the findings of the Tribunal and in support of their contention placed reliance on the decision of the Division Bench of this Court in CIT Vs. W.S Industries India Limited [(2012) 21 Taxman.Com 440 (Madras)]. In the said decision, it was held that if revaluation reserve is not created by way of appropriation of Profit and Loss Account, benefit of reduction from book profit will not be 9/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 available on withdrawal from the said reserve. In support of their contention, reliance was also placed on the decision of the Hon'ble Supreme Court in Indo Rama Synthetics (I) Ltd., V. CIT, New Delhi [[2011] 196 Taxman 539 SC] and the Division Bench decision of this Court in VGP Housing Private Limited Vs. ACIT [2017 77 TAXMAN.com 62 (Madras)]. 13. By way of reply, it is submitted by the learned counsel for the Appellant / Assessee, that the very same issue was considered by the High Court of Delhi in Commissioner of Delhi V. Kaithan Chemicals and Fertilizers Limited [2008 Vol.307 ITR 0150]. This decision was considered by the Division Bench of this Court in Tamilnadu Cements Corporation Limited V. JCIT [[2012] 349 ITR 58] and the operative portion of the decision reads as follows: '14. Thus, the Delhi High Court held that whether the prior period expenses were shown separately or not, the assessee would nevertheless be entitled to have the adjustment of the prior period expenses in the matter of computing the net profit of the assessee. Thus on mere fact 10/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 that the assessee had shown its prior period expenses in the extra ordinary items separately, did not mean the net profit was arrived at de hors these items. The Delhi High Court further pointed out that the assessee had not claimed any deduction with the net profit on the basis of any clauses given in the explanation to Section 115JA(2). Consequently, the question was answered in favour of the assessee. We are in agreement with the view expressed by the Delhi High Court and we do not have any hesitation in applying the said decision to the case before us'. 14. After giving our anxious consideration to the elaborate submissions by either side as well as the various decisions cited by the learned counsel, we are of the view that the issue needs to be re-adjudicated by the assessing officer and the reasons have to be assigned by the assessing officer in an independent manner. We find from the assessment orders that this issue was not dealt with by the assessing officer and no reasons have been given by the assessing officer as to why he had adjusted the book profit by stating that the donation, which has been accounted, is below the net profit line. Therefore, it is a fit case where the matter should be remanded to the 11/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 assessing officer for fresh consideration on these two issues. In the result, (i) the Substantial Question of Law No.1 in T.C.A.No.969 of 2019 is answered in favour of the Assessee following the Assesee's own case for the assessment year 2005-2006 in T.C.A.No.349 of 2009 dated 02.01.2019. (ii) the Substantial Question of Law No.2 in T.C.A.No.969 of 2019 is remanded to the assessing officer for fresh consideration, who shall redo the entire matter on this aspect and take note of the decision of the Hon'ble Supreme Court in ACG Associated Capsules (P) Ltd., Vs. C.I.T reported in [(2012) 3 SCC 321]. (iii) the Substantial Question of Law Nos.3 and 4 in T.C.A.No.969 of 2019 and Substantial Question of Law Nos.1 and 2 in T.C.A.No.973 of 2019 are remanded to the Assessing Officer for fresh consideration, who shall afford an opportunity of personal hearing to the assessee / authorised representative of the assessee and take a reasoned decision on merits and in accordance with law after taking note of the legal 12/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 decision, as may be pointed out on either side. No costs. (T.S.S.J.) (V.B.S.J.) 21.07.2020 Index :Yes / No Internet :Yes / No Speaking Judgment / Non Speaking Judgment ssd / ars To The Income Tax Appellate Tribunal “C” Bench 13/14 http://www.judis.nic.in T.C.A.Nos.969 and 973 of 2019 T.S.SIVAGNANAM,J., AND V.BHAVANI SUBBAROYAN, J., ssd / ars T.C.A.Nos.969 and 973 of 2019 21.07.2020 14/14 http://www.judis.nic.in