Commissioner of Income TaxII vs. M/s NCL Industries Ltd.

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY

AND

THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM

+ I.T.T.A. No.317 of 2003

%Date: 09.12.2014

#The Commissioner of Income Tax, Hyderabad. .. Appellant.

and

$M/s. N.C.L. Industries Limited, Hyderabad. .. Respondent.

! Counsel for Appellant: Sri S.R.Ashok

^ Counsel for Respondent : Sri S.Ravi

< GIST:

> HEAD NOTE:

? Cases referred 1. AIR 2002 SC 2131 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY

AND

THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM

I.T.T.A. No.317 of 2003

JUDGMENT: (Per the Hon’ble Sri Justice L.Narasimha Reddy)

This appeal is by the Revenue, challenging the order, dated 30.08.2002, passed by the Hyderabad Bench ‘B’ of the Income Tax Appellate Tribunal (for short ‘the Tribunal’) in I.T.A.No.247/Hyd/2001.

The facts, that gave rise to the filing of the appeal, are as under:

The respondent is a Company incorporated under the Companies Act and is an assessee under the Income Tax Act, 1961 (for short ‘the I.T. Act’). For the purpose of its business, it borrowed quite large amount from the Bank. By 31.03.1996, the proposals for One Time Settlement (OTS) in respect of the amount due, were in existence, but the effort made by the respondent in that behalf did not materialise. Another proposal was mooted on 30.05.1996. It was only on 08.07.1996, that the proposal was accepted and the Bank has agreed to waive interest to the extent of Rs.5.37 Crores.

The respondent has been claiming deduction of the amount representing the interest on the loan, year after year and the same was permitted. In its returns for the assessment year 1996-97, the respondent has reflected the amount of Rs.5.37 Crores, the waived interest as its income, and the same was dealt with, in accordance with law by the Assessing Officer in the order passed by him. In the subsequent assessment year 1996-97, no component of the waived interest was shown.

While passing the return for the year 1997-98, the Assessing Officer felt that the accrual of income of Rs.5.37 Crores is referable to the assessment year 1997-98, but was wrongly shown and dealt with in the returns for the assessment year 1996-97. On 29.03.2000,

he passed an order of assessment with reference to the assessment year 1997-98 adding the amount of Rs.5.37 Crores as income for that assessment year. On the same day, he passed an order in exercise of power under Section 154 of the I.T. Act, rectifying the order of assessment for the year 1996-97 to the extent of removing the sum of Rs.5.37 Crores from the purview of the assessment of that year.

The respondent filed an appeal before the Commissioner of Income Tax (Appeals), feeling aggrieved by the order of assessment, dated 29.03.2000. The Commissioner dismissed the appeal, through order, dated 27.02.2001. Feeling aggrieved by that, the respondent filed the I.T.A., raising the following questions of law:

The same was allowed by the Tribunal.

Sri S.R.Ashok, learned Senior Counsel for the appellant, submits that though the negotiations for OTS have been going on for quite sometime, it ultimately materialised only on 08.07.1996, and

the same could have been reflected only in the returns for the assessment year 1997-98. He contends that realising the mistake in permitting that amount to be dealt with in the assessment year 1996- 97, the Assessing Officer has taken corrective steps and passed the order of assessment for 1997-98, in accordance with law. He submits that the Assessing Officer as well as the Commissioner have taken correct view of the matter and the Tribunal has far exceeded the scope of adjudication. He further submits that though once the respondent was claiming deduction of interest, year after year, the waiver thereof should have been treated as income simplicitor, but the Tribunal treated it as the capital receipt, contrary to law.

Sri S.Ravi, learned counsel for the respondent, on the other hand, submits that though it is a fact that the decision as to waiver of interest was taken by the Bank on 08.07.1996, the benefit thereof has accrued to the respondent for the assessment year 1996-97, since it was following the mercantile system of accounting. He submits that the Assessing Officer did not raise any objection for inclusion of the income of Rs.5.37 Crores, on account of waiver of interest, in the returns for the assessment year 1996-97, and the facility created under Section 154 of the I.T. Act was misused just to lift that amount for inclusion in the subsequent assessment years.

Learned Counsel submits that the very fact that the orders of assessment for the year 1996-97 as well as the order of rectification under Section 154 of the I.T. Act, in respect of the assessment year 1996-97, were passed on one and the same day, discloses the arbitrariness of exercise undertaken by the Assessing Officer. He further submits that the plea of the respondent that the sum of Rs.5.37 Crores deserves to be treated as capital receipt was only in the context of the accounts maintained under the Companies Act,

and it has nothing to do with the assessment to be made under the I.T. Act. Learned counsel submits that the view taken by the Tribunal accords with the judgment of the Hon’ble Supreme Court in Apollo Tyres Ltd. v. Commissioner of Income Tax, Kochi[1].

The entire discussion undertaken by the Assessing Officer, the Commissioner and the Tribunal was about connecting the waived interest of Rs.5.37 Crores to the profit and loss accounts maintained under the Companies Act, in the context of Section 115JA of the I.T. Act. It is too well-known that where an assessee is a company incorporated under the Companies Act, and it maintains separate books of account as required under the said Act, the income of the company under the I.T. Act, can be treated as only 30%, of the one reflected in the books of account, in case the income that is arrived at under the I.T. Act is less than that figure. This naturally encourages or introduces the assessee to ensure that the income assessed under the I.T. Act, referable to a particular year, is less than 30% of what is posted in the books of account, so that the tax liability is restricted to that extent. The endeavour of the department, on the other hand, would be to ensure that the figures, that emerge as a result of the exercise under the I.T. Act would far exceed 30% of those reflected in the books of account maintained under the Companies Act, so that the higher liability can be fastened on the assessee. This tussle is constant and one has to proceed by the settled principles of law, in this behalf.

The respondent borrowed amount on interest, from a Bank and year after year it was deducting the component of interest towards expenditure. On 08.07.1996, the benefit of OTS was extended to it and a sum of Rs.5.37 Crores representing the interest, was waived. Since the appellant has availed the benefit of deduction of the amount, over the years, it was under obligation to

show that figure, as income. The question was as to whether it should be posted in the returns for the year 1996-97, or the subsequent year 1997-98. It is not as if the returns for both the assessment years, referred to above, were dealt with at one and the same point of time. For the assessment year 1996-97, in which the amount of Rs.5.37 Crores was reflected, the order of assessment was passed, on 30.03.1998. It is a different matter that, it is in the form of a prima facie adjustment under Section 143(1) (a) of the I.T. Act. It only connotes that the Assessing Officer did not find anything wrong in such an exercise and accorded his seal of approval.

The returns for the assessment year 1997-98 were dealt with, sometime in the year 2000. The Assessing Officer felt that the amount of Rs.5.37 Crores ought to have been reflected in the returns of that year, because the benefit has accrued in the financial year relevant to the assessment year 1997-98. He realised that, that very amount was dealt with under the assessment year 1996-97. Therefore, he has taken recourse to Section 154 of the I.T. Act for lifting that figure, so that it can be made part of the subsequent assessment year.

The Tribunal has undertaken fairly extensive discussion on various points urged before it. One of the views expressed by it was that though Section 154 of the I.T. Act empowers an Assessing Officer to rectify the orders of assessment, it cannot be exercised in such a way that one facet of it can be selectively lifted and in the name of rectification, the mater be left at that. It cannot be keenly said that the filing of return is a comprehensive exercise and that in turn is proceeded by a fairly extensive accounting process. An assessee bestows its attention in respect of each and every amount and once a comprehensive return is filed, taking away of one facet would have its own cascading effect, on others. In a given case it

may disturb the entire edifies of accountancy and may prove to be disastrous for an assessee. Therefore, whenever the power under Section 154 of the I.T. Act is exercised, it should be done in such a way that no violence is done to the order of assessment passed in respect of different years.

The manner in which the Assessing Officer has used such a power under Section 154 of the I.T. Act, in the instant case is evident from the fact that he has chosen that device, just to pick up the amount of Rs.5.37 Crores from the previous assessment year, and to put it in the subsequent assessment year, without even recording any findings as to whether the process has gone wrong at all. The passing of orders of assessment for the year 1996-97 and the order of rectification for under Section 154 of the I.T. Act for the earlier assessment year, on one and the same day, is a clear indication of this.

The point urged by the Revenue before the Tribunal was that the amount of Rs.5.37 Crores was being treated as capital receipt and that cannot be sustained, since the assessee has availed the benefit of deduction towards expenditure over the years. The contention could have been accepted, if only the respondent intended to treat the account of Rs.5.37 Crores as capital receipt under the I.T. Act. That was not at all the case. He has only posted that amount as capital receipt, in its accounts maintained under the Companies Act. It is too well-known that the Companies Act provides a detailed mechanism of verification of accounts and there are also statutory auditors under that Act scrutinise them. Nobody pointed out any defect in the exercise undertaken by the respondent. Howsoever wider the powers of an Assessing Officer under the I.T. Act, may be he does not have any power whatever, to touch or comment upon the books of account, maintained under the

Companies Act.

I n Apollo Tyres Ltd.’s case (supra), the Supreme Court explained the power of the Assessing Authority under the I.T. Act vis-a-vis the accounts maintained under the Companies Act, in the context of Section 115J of the I.T. Act. Their Lordships observed at para 9 as under:

“Therefore, we are of the opinion, the assessing officer while computing the income under Section 115J has only the power of examining whether the books of account are certifies by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J.”

The Tribunal took note of the judgment of the Hon’ble Supreme Court and held that accounts referable to Section 115J of the I.T. Act must be taken on their face value and once it becomes clear that the income of an assessee determined under the I.T. Act is less than 30% of the book profits reflected in the books of account maintained under the Companies Act, the tax leviable would be only 30%. We do not find any basis to interfere with the order passed by the Tribunal.

The appeal is accordingly dismissed. There shall be no order as to costs.

The miscellaneous petitions filed in this appeal shall also stand disposed of.

____________________ L.NARASIMHA REDDY, J.

_____________________ CHALLA KODANDA RAM, J. Date:09.12.2014

L.R. copy to be marked.

[1] AIR 2002 SC 2131