CIT vs. FEDERAL-LOGUL GOETZE (INDIA) LTD

i * IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No. 1366/2010 Reserved on: 22"'' October, 2013 Date of decision: P'** December, 2013 (Assessment Year 2000-01) THE COMMISSIONER OF INCOME TAX (CENTRAL-II) Appellant Through Mr. Rohit Madan, Advocate. versus FEDERAL-MOGUL GOETZE (INDIA) LIMITED Respondent Through Mr. S. Ganesh, Sr. Advocate with Ms. Geetanjali Mohan and Ms. Mansi Gautam, Advocates. + INCOME TAX APPEAL No. 1979/2010 (Assessment Year 2001-02) THE COMMISSIONER OF INCOME TAX (CENTRAL-II) Appellant Through Mr. Rohit Madan, Advocate. versus FEDERAL MOGUL GOETZE (INDIA) LIMITED Respondent Through Mr. S. Ganesh, Sr. Advocate with Ms. Geetanjali Mohan and Ms. Mansi Gautam, Advocates. ITA No. 2106/2010 (Assessment Year 2001-02) THE COMMISSIONER OF INCOME TAX (CENTRAL-II) Appellant Through Mr. Rohit Madan, Advocate. 2013:DHC:7798-DB

versus MOGUL GOETZE (INDIA) LIMITED Respondent Through Mr. S. Ganesh, Sr. Advocate with Ms. Geetanjali Mohan and Ms. Mansi Gautam, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJIV KHANNA, J.; For detailed order see ITA 1179/2010, The Commissioner of Income Tax (Central-II) Vs. Goetze (India) Limited pronounced today. DECEMBER 9'^ 2013 NA -^-7/ L (SANJIV KHANNA) JUDGE (SANJEEV SACHDEVA) JUDGE 2013:DHC:7798-DB

'•V-v- 9^ * • IN THE HIGH COtl|?-T OF DELHI AT NEW DELHI + TNCOME TAX APPEAL No. 1179/2010 Reserved on; 22"'^ October, 2013 Date of decision: December, 2013 i (Assessment Year 2000-01) THE COMMISSIONER OF INCOME TAX (CENTRAL-Q) Appellant Through Mr. Rohit Madan, Advocate. versus GOETZK (INDIA) LIMITED Respondent Through Mr. S. Ganesh, Sr. Advocate with Ms. Geetanjali Mohan and Ms. Mansi Gautam, Advocates. IT A No. 1366/2010 (Assessment Year 2000-01) • THE COMMISSIONER OF INCOME TAX (CENTRAL-II) ' Appellant Through Mr. Rohit Madan. Advocate. versus FFDFRAL-MOGUI, GOETZE (INDIA) LIMITED Respondent Through Mr. S. Ganesh, Sr. Advocate with Ms. Geetanjali Mohan and Ms. Mansi Gautam, Advocates. i . INCOME TAX AP'PEAT, No. 1979/2010 (Assessment Year 2001-02) THE COMMISSIONER OF INCOME TAX (CF,N'I-RAL4I) •^ Appellant Through Mr. Rohit Madan, Advocate. 2013:DHC:7798-DB

versus Gautam, Advocates. 2001-02) •the commissioner of incometax ^ppjjUant (CENTRAL-II) Advocate. • versus Respondent Gautam, Advocates. • cORAM: SANJIV KHANNA SSMR.Sc«SANWV SACroEVA SATWVKHAfflAilil T Ti1366/2010 . oAHAofthe • xhese two appeals by .he Reve..eunae.SecUon ^ , ,,..ActI96I(Act,fo.s.on)t.e.atetoAssess™e„tYeat.000 IncomeTax Act, Qoetze (India) Limited 0, we note that the name of the assessee-Goe . and ,s now-known as Federal-Mogul Goetze underwent aname change an A bv order dated , vtaNos 1179/2010 and 1366/2U1U > •(India)Um.ted. InlTANos. 11 16". May. 2012, the following substantial question 2013:DHC:7798-DB

Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961?" 2. The rcspondent-assessee for the assessment year 2000-01 had filed return of income oil 31'' November, 2000 declaring loss of Rs.3,05,26,654/- under normal provisions and positive book profit of R&.2,86,09,379/- under Section 115JA of the Act. This return was subsequently revised on 28"' March, 2002 and the positive book profit declared under Section 115JA was reduced to Rs.1,92,73,285/-. By assessment order dated 28^'^ February, 2003, income declared under Section 115JA was accepted but some additions were made on income computed under the normal provisions and it was enhanced to Rs.2,45,57,950/-. 3. . Commissioner of Income Tax, thereafter passed an order under Section 263 of the Act observing that income computed' under Section 115JA by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue on two accounts; (a) the Assessing officer had wrongly allowed deduction of Rs.1.53 crores made in the revised return and excluded this figure from the book profits; (b) expenditure of Rs.183.63 lacs was incurred for earning of exempt dividend income under Section 14A of the Act but this expenditure was not disallowed though the respondent-assessee had earned dividend income of. Rs.157.85 lacs, which was exempt under Section 10(33) of theAct. 2013:DHC:7798-DB

Nagesh KnitwearsFrivaU Limited(Supra) "10. Revenue does not have any right to appeal to the first appellate authority against an order passed by the Assessing Officer. Section 263 has beein enacted to empower the CIT to exercise power of revision and revise any order passed by the Assessing Officer, if two cumulative conditions are satisfied. Firstly, the order sought to be revised should be eiToneous and secondly, it should be prejudicial to the interest of the Revenue. The expression 'prejudicial to the interest of the Revenue' is of wide import and is not.confined to merely loss of tax. The term 'erroneous' means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an .order unsustainable in law. 11. Thq Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required' to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word 'erroneous' includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or^verification has not been made and not because a wrong order has been passed on merits. | 12. Delhi High Court in Gee Vee Enterprises v. Additional Commission of Income~Tax, Delhi-1, (1975) 99 ITR 375, has observed as under:- 2013:DHC:7798-DB

"The reason is obvious. The position and function of the Incomp-tax Officer is very , different from that of a civil court^ The statements made in a pleading proved by the minimum amount of evidence may be accepted bv a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income- tax Officer is not only an adjudicator but also an investigator. He cannot remain passive mthe face of areturn which is apparently in order but calls for forther inquiry. It is his ^irty o ascertain the truth of the facts stated mfte return when the circumstances of the case are such as to provoke an inquiry. The meamng to be given to the word "erroneous" msection ^63 emerges out of this context. It is because it is incumbent on the Income-tax Officer to forther investigate the facts stated in the return when circumstances would make such^^an inqmry prudent that the word "erroneous msection 263 includes the failure to make such an inquiry. The order becomes eiToneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct." 7, Reference was also made to decisions of the Supreme Court m Ran.pyan Den Saraogi CIT, (1968) 67 ITR 84 (SC) and Tara DevlAggar^al (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the Assessing Officer had accepted a .particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two d i i l d i th fDG H i P j t Li U d 2013:DHC:7798-DB

(supra)- in the following words;- "These two decisions show that it is not necessary for thp Commissioner to make further inquiries befor| cancelling the assessment order of the Incomltax Officer. The Commissioner can regard th^'order as erroneous on the ground that in the /circumstances of the case the Income-tax Officer should have made further inquiries bejlDre accepting the statements made by the asse5j|ee in his retLirn. 14 The aforesaid observations have to be understood Mn the factual background and matrix involved in the said two cases before the Supreme Court. In the said cases, the Assessing Officer had not conducted any enquiry oi examined evidence whatsoever. There was total absence oi enquiry or verification. These cases have to be distinguished from other cases (i) where thire is enquiry but the findings are incorrect/en-oneous; and (ii) where there is failure to make proper or full verification or enquiry." 8. In Nagesit Knitwears Private Ltd. (supra), reference was made to CIT Vs. Sunbeam Auto Ltd. (2011) 332 ITR •167.\vith the foUowing quote from the later decision;- "15 In the case of CIT v. Sunbeam Auto Ltd (2011) 332 ITR 167 (Delhi), the Delhi High Court was considering the aspect, when there is no proper or full verification and it was held as under(page 179) "We have considered the rival, submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income tax 2013:DHC:7798-DB

under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative ofthe fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item ofdeduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiiy". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 ofthe Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. [1993] 203 ITRT08 (Bom), law on this aspect was discussed in the following manner (page 113): .... From a rending of sub-section (1) of section. 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. If is not an bit h t d it b 2013:DHC:7798-DB

exercised only on folfilment of the requirements laid down in sub-section (1). Fhe consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests ofthe Revenue, must, be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis ofwhich it can be said that the Commissioner acting in a ^ reasonable manner could have come to such a G' conclusion, the very initiation of proceedings by him will be .illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well- accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. (See Parashurain Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) at page 10) ... From the aforesaid definitions it is clear, that an order, cannot be termed as erroneous unless it is not^ in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be bianded as eiToneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution ofthe judgment ofthe Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income^ax Officer while making an assessment examines the accounts, malces enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the t b ki ti t hi lf 2013:DHC:7798-DB

The Commissioner, on perusal of the records. may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one.determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi- judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be formed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion ... There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete intei-pretation a lesser tax than what was just has been imposed ..." 9. Thereafter, it was observed and elucidated in Nagesh Knitwears Private Limited (Supra), when and how power under Section. 263 can be exercised where there was no proper or full verification and when the twin pre-conditions are satisfied:- "Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are I h h i i d 2013:DHC:7798-DB

enquiry but not lack of enquiiy, again the CIT must give and record a finding that tlie order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the. Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on recordper se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter carmot be. remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction . under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not 'examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question. This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous'and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of' alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on hi d b l h h d i 2013:DHC:7798-DB

eiToneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is eiToneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The iurisdictional precondition stipulated is that the CIT must come to the conclusion that the ordei is eiToneous and is unsustainable in law. We may notice that the material which the CIT can relY includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time ofexamination by the Lii fsee CITv Shree Manjunathesware Packing. Products: 2?>\ ITR 53 (SC)] Nothing bars/prohibits the CIT from collectog and relying upon new/additional material/evidence to show and state that the order of the AssessingOfficeris erroneous. It is in this context that the Supreme Court in Molabar Industrial Co. Ltd v. Cornmissiomr of Income Tax, (2000) 243 ITR 83 (SC), had obsei-ved that the phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss ofRevenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree, the said orders cannot be treated as an erroneous order prejudicial to the interest ol R l th i t k b th 2013:DHC:7798-DB

Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue." Id. In the facts of the present case, as we examine the factual position, the Commissioner in her. order under Section 263 has recorded specific findings as to why and for what reason she felt that the order passed by the Assessing Officer on two accounts was erroneous and prejudicial to the interest of Revenue. For the reasons set out in the order, which we need not at this stage elaborate as this is a question of merits, we reject the contention of the respondent- assessee and also the findings and reasoning of the tribunal that the Commissioner could not have invoked power and jurisdiction under Section 263 of the Act, because the Assessing Officer had taken a probable view, which may be debatable and not acceptable to the Revenue. When an Assessing Officer takes a view but the said view is not coiTect, erroneous as per the findings recorded by the Commissioner, along with the finding that the order passed by the Assessing Officer was prejudicial to the interest of the Revenue, then the order of the Commissioner cannot be set aside on the ground that 2013:DHC:7798-DB

by the Commissioner talcing the particular view, whether on facts or in law, is wrong or incorrect or the orderof the Assessing Officer was not •prejudicial to the interest ofthe Revenue. The first aspect is essentially a question of merits and not a question relating to whether or not two views were possible. Commissioner can examine the issue on merits even when the same issue was examined by the assessing officer. •Principles of change of opinion do not apply. If an order of the assessing officer is held to be erroneous and prejudicial to the interest of the revenue, it can be revised. The contention of the assessee and the reasoning of the tribunal in this regard is clearly fallacious as Revenue does not have any right to appeal against the order of the Assessing Officer. It is in these circumstances that power of revision has been conferred on the Commissioner under Section 263 of the Act to correct erroneous orders which are also prejudicial to the interest of Revenue. Observations of the Supreme Court in the case of Malabar Industrial Company Limited (supra) have to be understood in the context in which they were made. An order will not be erroneous, if the Commissioner does not decide whether the order of the assessing officer is erroneous but observes that two views are possible and yet remits the issue for fresh decision by the Assessing Officer. However, it would be incorrect to state as a broad proposition that an order of the 2013:DHC:7798-DB

taken one of the two views possible. In such cases the order of the assessing officer is erroneous provided the Commissioner holds and is able to demonstrate that the view taken by the Assessing Officer was not plausible, being legally unsustainable and incorrect. But the said finding must be recorded. This would satisfy the statutory requirement that the order passed and made subject matter of revision was erroneous, subject to the second condition that the order under review should also be prejudicial to the interest ofthe Revenue. 11. This brings us to the question of computation under Section 115JA of the Act and the order passed by the Commissioner on merits directing that Rs.1.53 crores should be added to the book profits on account of transfer from the -revaluation reserve. The question is whether the Commissioner was right in holding that the order of the assessing officer on the said aspect was erroneous on merit? The following facts may be noticed: (i) Respondent-assessee had passed entries in the books of accounts on 30^'^ June, 1986 debiting Rs.40.84 crores to the asset revaluation account and crediting the same to capital reserve. This entry was not routed through the profit and loss account. Thus, the profit and loss account did not reflect this entry. 2013:DHC:7798-DB

1986 by Rs.40.84 crores. (iii) In the year in question, Rs.1.53 crores was withdrawn from this reserve and was credited to the depreciation account. Thus reducing the enhanced value ofthe assets and increasing the book profits. (iv) As per the annual report and audit report filed with the Registrar of Companies by the respondent-assessee, Rs.1.53 crores was credited to the profit and loss ,account and this enhanced the profits by this figure. The book profits calculated and audited in accordance with the provisions of Companies Act included this amount ofRs.l .53 crores. (v) In the return filed on 30"^ November, 2000, Rs.1.53 crores was included in the computation sheet' declaring the book profits as per Section 115JA of the Act. (vi) In the revised return filed on 28"^ March, 2002, book profits were recalculated for the purpose of the income tax return, and not for the purpose of the return or statements filed before Registrar of 'Companies, by reducing this amount of Rs.1.53 crores from the book •profits on which tax under section 115JA was payable. , 12. Before the Commissioner, , the respondent-assessee had submitted that the reserve was created prior to 1^' day of April, 1997 and, therefore, withdrawal from the reserve was required to be reduced •from the profit and loss account in terms of clause (i) of proviso of 2013:DHC:7798-DB

r Finance Act, 2000 with effect from 1®' April, 2001 to exclude reserves created on or after 1^' day of April, 1997 but ending before the 1^' day of April, 2001, othei-wise than by debit to the profit and loss account. Reliance was placed upon the decision of the tribunal in the case of SRFLimited versus ACIT, reported in (1993) 47 ITD 504. 13. The Commissioner rejected the said contentions observing that clause (i) was applicable only when the amounts were withdrawn from any reserve which had been credited to profit and loss account. Once sub-clause (i) was not applicable, book profits calculated in accordance with the provisions of the Companies Act cannot be disturbed or recalculated in terms of the judgment of the Supreme Court in Apollo Tyres Limited versus Commissioner ofIncome Tax, (2002) 255 ITR 273 (SC). It was observed that the respondent had claimed depreciation on enhanced value and as per accounting standards, withdrawal from the capital reserve was to be debited to the depreciation account and credited to the profit and loss account. Withdrawals from the reserve were required to be credited to profit and loss account, as at the time of creation of reserve it was not routed through the profit and loss account. Judgment of the tribunal in the case of SRF Limited (supra) was not applicable as it was not in •consonance with the law declared by the Supreme Court in Apollo 2013:DHC:7798-DB

(2) Every assessee, being acompany, shall, for the purposes of this section prepare its profit . :;d losT accoum for the relevant P-v.ons year , in accordance with the provisions of Parts 1 ; and mof Schedule VI to the Companies Act, 1956 (1 of 1956); 2013:DHC:7798-DB

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the pui-pose of preparing the profit and loss account laid before the company at its annual pnera meeting in accordance with flte provsions of section 210 of the Compames Act, 1956 (1 ol 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act the method and rates for calculation o depreciation shall con'espond to the me hod and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling withm the relevant previous year. Explanation.--For the purposes of this section, "book profit" means the net profit as shown m the profit and loss account for the relevan previous year prepared under sub-section (-), as increased by-- (a) the amount of income-tax paid or payable, and the provision therefor ; or (b) the amounts canied to any reserves by whatever name called; or (c) the amount or amounts set _aside to provisions made for meeting liabilities other than ascertained liabilities, oi (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or 2013:DHC:7798-DB

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions ofChapter III apphes; if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by,-- (i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount .withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing onor after the 1st day of April, 1997, but ending before the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) underthis Explanation; or (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account." 16. Sub-section (1) begins with a non-obstante expression, which gives overriding effect to the provisions of Section 115JA. Sub- Section 2 states that the assessee being a company shall prepare protit and loss accounts for the previous year in accordance with the i i f P II d III f S h d l VI f h C i A 2013:DHC:7798-DB

/J o 1956. First and the second proviso to Section 115JA need not be examined as they are not relevant. Explanation in the first part refers to increase of the book profits by the amounts specified in sub-paras (a) to (g). Thereafter, the Explanation states that, it shall be reduced under clauses (i) to (iii). Clause (i) states that the book profit shall be reduced by the amount withdrawn from the reserve or provision if any such amount was credited to the profit and loss account. The proviso to the said clause states that such reduction shall not be made if the amount was withdrawn from the reserves or provisions during the period l'' April, 1997 and 31'' March, 2001, unless the book profit of such year was increased by the reserve or provision out ofwhich the said amount was withdrawn. The core dispute and issue relates to clause (i) and the proviso appended to it. 17. The contention of the respondent-assessee is simple that the amount withdrawn from the reserve or provision must be reduced once the said amount was credited to the profit and loss account. It is stated that Rs.1.53 crores was withdrawn from the reserve and credited to the profit and loss account and, therefore, this reduction is mandated and required and we need not go into the question whether such reduction is justified and equitable or even the reason/purpose behind the 2013:DHC:7798-DB

1997 and 3T' March, 2001 but was created earUer on 30"' June, 1986. 18. The said contention though attractive and appealing has been specifically rejected by this Court in CIT versus SRF Limited, ITR No. 164/1995 decided on 4"' August, 2011. We note that the High Court reversed the decision of the tribunal in the case of SRF Limited (supra) on the said aspect. In the impugned order in the present case, tribunal followed their decision in the case of SRF Limited. The reasoning given by the Division Bench in the case of SRF Limited, which dealt with Sections 115J and 115IB is as under:- "20. As would be evident on a bare perusal of both section 115JB and Section 115J the explanation defines as to the manner in which book profit for the purposes of levy of MAT is to be calculated. Broadly, in both Sections, book profit means net profit as shown in the profit and loss account which is to be increased and reduced in terms of provisions contained therein. Book profits are required to be calculated bearing in mind the provisions part II and III of Schedule VI of the Companies Act, 1956. 21. Before we proceed further we may notice the relevant distinction in clause (i) of the Explanation appended to Sections 115JB and 115J, respectively. In clause (i) of the explanation in Section 115JB, in the bracketed portion, the following words appear "excluding a reserve created before the 1st day of April, . 1997 th i th b f d bit t th 2013:DHC:7798-DB

proviso appended to clause (i) to the explanation in Section 115JB, there is a reference to the effect that where the section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in the previous year relevant to the assessment year commencing on or after 1st April, 1997, shall not be reduced from the book profit unless the book profit of such year has been increased by the reserves ofprovisions. As against this in the proviso to,clause (i) of the explanation contained in. Section 115J, the wording is identical save and to the, extent date mentioned in the proviso is: "on or after 1st day of April, 1998". A conjoint reading of clause'(i) to the explanation appended to Section 115JB, read with, the proviso gives a clear clue that it covers period both prior to 01.04.1997 as well as that which commences ' on or after 01.04.1997. As indicated above, the bracketed portion, which appears in clause (i) to the explanation appearing in Section 115JB, does not find mention in Section 115J. 21.1 This is in so far as the distinction in the two Sections goes. The issue, therefore is, whether the assessee ought to be allowed to deduct the amount withdrawn from the revaluation reserves by invoking the provisions of clause (i) of the explanation given in Section 115J. It is not disputed that when the revaluation reserves were first created in 1983 and 1986, the increase in the value of the assets was reflected by debiting the asset account and , crediting the revaluation reserve account. The profit and loss account by this methodology was kept undisturbed. In these circumstances, can it be said that when the amount is withdrawn from the reserves it reflects the difference in the depreciation calculated on the revalued or the enhanced value of the assets and lhat which is calculated on the historical cost. 2013:DHC:7798-DB

reduce the amount withdrawn from the revaluation reserve if in the first instance was created not by crediting any amount to the profit and loss account but to the revaluation resei-ve account. 22. Mr Ganesh has argued that clause (i) appended to the explanation appearing in Section 115J would have to be given its full play. As noticed above, it was his contention y thatthe only situation in whichsuch a reduction - is not permissible where reserves are created by an assessee on or after 01.04.1988. Therefore, his contention is, that since, the revaluation reserves were created in 1983 and 1986 the assessee ought to be allowed a reduction of the •amounts drawn from the revaluation reserve. In I, our view at first blush this argument appears to be both plausible and attractive as well. However, a closer scrutiny would show that clause (i) appended to the explanation appearing in Section 115J would get triggered only if amount is withdrawn from reserves or provisions, if such reserve or provision was created by crediting the amount to the profit and loss account. Admittedly, such is not the situation in the instant case. The intention of the legislature in inserting clause (i) appended to the explanation to Section 115J is to counter a situation where credit is made to the profit and loss account in the first instance at the time of ; creation of the reserve. When such a situation arises the book profit would stand increased and thus consequently, any withdrawal from the revaluation reserve would stand squared off by reducing the amount from the book profit. Since such a situation did not arise in the instant case, the assessee in our view cannot be allowed reduction in the amount. To that extent the Assessing Officer is right in his conclusion. We are fortified in our view by the observations made in this regard by the Supreme Court. The Supreme Court has considered the matter from 2013:DHC:7798-DB

/C^ matter has been considered and the resultant view and the observations made by the supreme court completely negate, in our opinion, the submissions made by Mr Ganesh before us. We can do no better than extract the observation of the Supreme Court in that regard; "The matter could be examined fi:om another angle. To recapitulate the facts, the fixed assets of the assessee were revalued in the earlier \ assessment year 2000-01 (i.e., ^nandal ending March 31, 2011), (sic March 29, 2000) and amount of enhancement in valuation was 288,58,19,000 which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of Rs 288,58,19,000 was added to the historical cost of assets on the assets side of the balance sheet and in order to equalize both sides of the balance sheet the revaluation reserve to that extent was created on the liabilities side. Thus, the figure of profit remained untouched so far as the revaluation of assets to the tune of Rs 288,58,19,000 is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year m question, i.e., the assessment year 2001-02, an amount of Rs 26,11,74,000, being the differential depreciation, was transferred out ol the said revaluation reserve of Rs 288,58,19,000 and credited to the prolit and loss account which the Assessing Officer disallowed by placing reliance on the proviso to clause (i) of the Explanation to Section 115JB(2). Consequently, the Assessing officer added back the said amount ofRs 26,11,74,000 to the net profits. We agi-ee with the Assessing Officer. Under the provisions, as •they then existed certain adjustments were required to be made to the net profit as shown in the profit and loss account. One such adjustment stipulated' that the net profit shall be reduced by the t( ) ithd f if 2013:DHC:7798-DB

such amount is credited to the profit and loss account. Thus, if the reserves created had gone to increase the book profits in any year when the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal iscredited to the profit and loss account. Now, from the above facts, it is clear that neither the said amount of Rs 288,58,19,000 nor Rs 26,11,74,000 had ever gone to increase the book profits in the said year ending march 31, 2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of resei-ve(s), there is no question of reducing the amount transferred from such revaluation reserves to the profit and loss account. Thus, the proviso to clause (i) of the Explanation to section 115JB(2) comes in the way of the claim for reduction made by the assessee. In our view, the reduction under clause (i) to the Explanation could have been availed of only if such revaluation reserve had goneto increase the book profits." (emphasis is ours) 23. Mr Ganesh had tried to take advantage of the fact that in the observations extracted hereinabove there is a reference to the proviso appended to clause (i) of the explanation to Section 115JB. A closer scrutiny of the observations made by the Supreme Court would show that the main burden of the rationale supplied by the Supreme Court is not pivoted on the proviso. As noticed by us hereinabove clause (i) of the explanation appearing in Section 115JB read with the proviso covers the period both before and after 01.04.1997. Even though this is not specifically mentioned in clause (i) to the explanation to Section 115J, the plain reading ofthesaidclause would show that it only applies inthose situations where credit is made to the profit and loss account at the time 2013:DHC:7798-DB

i reserves or provisions, if any, such amount is i credited to the profit and loss account " i (emphasis is ours) 26. Therefore, the submission of Mi" Ganesh that it is only when the proviso is attracted that the assessee would be disabled from seeking reduction in terms of clause (i) to the explanation appended to Section 115J even '4^ though the reserves when created or provision made did not get reflected in the profit and loss • account, is a submission, according to us, that cannot be accepted." 19. Learned counsel appearing for the respondent-assessee tried to distinguish the said judgment on two grounds. It was submitted that book profits computed in the case of SRF Limited filed under Section 115J showed loss of Rs. 10.50 crores, but the Assessing Officer had calculated the book profits at a positive figure of Rs.2.15 crores. Thus, substantial addition was made to the book profits. Secondly, the Assessing Officer had observed that transfer from the valuation reserve . was essentially an equalisation device meant to ensure that the depreciation continued in the books at the original cost, prior to such valuation and that the accounts presented a true and coiTect picture of net profits. The amount withdrawn from the valuation reserve was, therefore, not covered under clause (i) of the Explanation. It was also highlighted that in the case of Indo Rama Synthetics India Limited 2013:DHC:7798-DB

year ending 31'' March, 2000 (wrongly mentioned as fmancial year ending 31'' March, 2011). The assessment year involved in the case of Indo Rama Synthetics India Limited (supra) was Assessment Year 2001-02 and differential amount of Rs.26,11,74,000/- being the differential depreciation was transferred out of the revaluation reserve and credited to the profit and loss account. 20. In SRFLimited (supra) the attempt to distinguish decision ofthe Supreme Court in the case of Indo Rama Synthetics India Limited (supra) was as the reserve was created during the fmancial year ending •31'^ March, 2000 and in the next year amount of Rs.26,11,74,000/- being differential depreciation was transferred out of revaluation .reserve and taken to the profit and loss account, was specifically rejected. The Supreme Court it was observed had held that under clause (i) to Explanation the said amount shall not be reduced from the profit and loss account. This could be only reduced when reserves were created by increasing book profits in any year when the MAf provisions were applicable. Rs.26,11,74,000/- had never reflected in increase of the book profits in the year ending 31'' March, 2000 and, therefore, there was no question of reducing the said amount and the proviso to clause (i) of the Explanation was fully applicable. The said judgment as held in SRF Ltd. (supra) indicates, explains and elucidate h h h L i l h d i i f 2013:DHC:7798-DB

reserves or provisions in the proviso. The proviso is appUcable not only when the reserve or provision was created during this period on 1'' April, 1997 to ST' March, 2001, but whenever reserve/provision was created unless the book profits had been increased by those reserves or provisions at the time of creation and out of the said '4 increase, the amount has been withdrawn. 21. Literal interpretation inthe manner suggested bythe appellant of clause (i) to Explanation 115JA and specially its proviso will lead to absurdities and incongruities. Minimum alternation taxation on book profits became a part of the Act, i.e., Income Tax Act, 1961, by Finance Act, 1987 with effect from 1"''April, 1988 with insertion of Section 115J. The said Section became applicable with effect from 1^^ April, 1989 and was applicable till 1®' April, 1991. Clause (i) of the Explanation and the proviso thereto, which was introduced by Finance Act, 1989 with retrospective effect from April, 1988 were as under:; "i) the amount withdrawn from reserves (other than the reserves specified in •section. 80HHD) or provisions, if any such amount is credited to the profit and loss account; Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after, the 1^' day of April, 1988 shall not be reduced from the book profit unless the 2013:DHC:7798-DB

r\ those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or'' •22. Reading ofthe proviso to Section 115J elucidates that reference to the date 1'^ April, 1988 is not with reference to the date on which reserve or provision was created but with reference to the date on ^ which an amount was withdrawn from reserves created or provision '-0- .made. Thus, amount withdrawn from the reserves created or provision made after day of April, 1988 as per the proviso to clause (i) of Explanation could be adjusted only if the book profit had been •increased at the time of creation ofthose reserves or provision made and not otherwise. Section 115JA was inserted by Finance (No,2) Act, 1996 with effect from 1^^ April, 1997. The words "f' day of April, 1997" in the proviso to clause (i) of the Explanation is not with .reference to the date on which resei-ve was created or provision was made but with reference to the amount withdrawn from the reserve created or provision made. The proviso specifically stipulates that reduction under clause (i) would not be allowable unless book piofits .were increased by the reserves or provisions made at the time of increase. The increase may relate to any period and even can be before 1'' day of April, 1997. The words-"but ending before the 1'' day of April, 2001" are the cause of confusion but these words were inserted b i i h ff f f il d ld 2013:DHC:7798-DB

accordingly be applicable to the Assessment Year 2001-02 and not the assessment year in question. These words were introduced as the Legislature had inserted a new provision for minimum alternative tax by inserting Section 115JB with effect from 1^ April, 2001. Ihe original clause (i) to Explanation 1to Section 115JB was as under;- "(i) the amount withdrawn from any reserves or provisions, ifany such amount is credited to the profit and loss account; Provided that, wherethis section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1^' day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the saia amount was withdrawn) under this Explanation; or" ZJ. As there was possibility of ambiguity and doubt, the said clause (i) and the proviso was substituted by Finance Act, 2002 but with retrospective effect from T'' April, 2001 as under:- "(i) the amount withdrawn from any reserve or provision (excluding a resei-ve created before the l" day of April, 1997 otherwise than by way of a debit to theprofit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves 2013:DHC:7798-DB

-1 year relevant to the assessment year commencing on or after the 1®' day ofApril, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to Section 115JA, as the case may be; or" 24. In view of the aforesaid discussion, it is crystal clear that under proviso to clause (i) ofthe Explanation to Section 115JA reserve or provision made may relate to any period and not during the period between 1'' April, 1997 and 31'' March, 2001. These two dates are relevant as Section 115JA is appHcable during this .period. Clause (i) operates when an amount is withdrawn from provision made or reserve created but as per the proviso adjustment can be made only when at the time ofcreation ofreserve orthe provision, \he amount inquestion was duly accounted for by increasing the book profits by the said reseive or provision. 25. Thus, the respondent-assessee is clearly misreading the said proviso and the purport and the purpose behind the proviso of clause (i) to the explanation ofSection 115JA. 26. The distinction and facts pointed out, as far as case of SRF Limited (Supra) is concerned, are not the basis or the foundation ofthe 2013:DHC:7798-DB

. ' The contention that the Assessing Officer had given afinding that the transfer from the reserve was essentially an equalisation device, i.e., to ensure that depreciation to be provided in the books at the original cost prior to revaluation and, therefore, the amount withdrawn should not be covered under clause (i) of the Explanation cannot be accepted as the basis or the foundation ofthe decision in SRF case. The Assessing Officer in the said case had recorded that transfer from revaluation reserve either should have been credited to the profit and loss account or reduced from the depreciation provided in the books. 27. In the facts ofthe present case, it is apparent that the respondent- assessee had credited the same amount to the depreciation account and also the profit and loss account in the year in question. On bemg asked why both the heads were duly credited, learned counsel for the respondent-assessee could not give any explanation or answer. It could not be also answered why the revaluation or reduction of Rs.1.53 crores was made to the revaluation reserve. Commissioner mher order .has specifically recorded that enhanced depreciation on re-valued reserve was claimed intheearlier assessment yeais. 28. Commissioner in her order under Section 263 on the second aspect has recorded that the Assessing Officer had failed to disallow expenditure in respect of exempt income as per the mandate of Section 14A f h A C i i h ld h h id i i 2013:DHC:7798-DB

applicable and the Assessing Officer had erred and had passed an eiToneous order prejudicial to the interest of the Revenue as the respondent-assessee had earned gross exempt dividend income of Rs.1.34 crores and Rs.23.43 lacs, but no disallowance under Section 14A was made. She worked out and calculated the disallowance of expenditure under Section 14A to be Rs.183.63 lacs. 29. It is accepted and admitted that the Assessing Officer had not applied Section 14A and no deduction under the said Section was made. In respect ofthe present assessment year, i.e.. Assessment Year 2000-01, the contention of the respondent-assessee is that in view of the proviso to Section 14A, the said provision could not have been invoked in arevision. It is not possible to accept the said contention. Section 14A was introduced by Finance Act, 2001, which was tabled in the Parliament on 28^'^ February, 2001. The said provision was introduced with retrospective effect from 1'' April, 1962 and reads as under;- "14-A. Expenditure incurred in relation to income not includible in total income.-For the ' purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to income which does not fomi part of the total income under this Act; Provided that nothing contained in this section shall empower the Assessing Officer either to 2013:DHC:7798-DB

reassess under Section HZor pass an order enhancing the assessment or reducing are&nd already made or otherwise mcreasmg the liability of the Assessee under sectionm f any assessment year beginmng on or before the 1st day ofApril, 2001." 30. Interpreting the said provision in Bond. Siel Po.e. Products Limited versus Deputy Commissioner ofIncome Tax and Anotha, (2012) 340 ITR 53 (Delhi), it has been held as under;- "8 The Petitioner has relied upon the proviso to Section 14A ofthe Act. The proviso according to ut not applicable in view ofthe factual matrix rfAe present case and does not protect or come to the aid of the Petitioner. In the presert eas after return of income for the 2000-01 was filed on November 30, 2000, th •case was taken up in scrutiny. Assessment order , under Section 143(3) of the Act was °n March 7, 2003. The pfoyso reassessment/rectification and not origr assessr^l on the basis of the retrospective amendment. The proviso does not stipulate ^nj state that Section 14A ofthe Act cannot be lehed uponduring the course ofthe origin^ proceedings. The Assessing Officer was therefore, required to disallow expenses mc^ for earning exempt or tax free income, r^'h. eo" the part of the Assessing Officer to apply Section 14A when he passed the assessment order under Section 143(3) of the ^ited March 7, 2003 has prima facie resulted m escapement of income. The proviso is no intended to apply to the cases of the present Mature. The object and purpose of the proviso is to ensure that the retrospective amendment is not made as atool to reopen past cases, which have attained finality. ' 2013:DHC:7798-DB

/ Section 14A of the Act. However, on tite question of quantum of deduction to be made under Section 14A. the matter is remanded to the tribunal. IXA 7.106/2010 andl979Z2MQ •34. These appeals by the Revenue relates to Assessment Year 2001- 02. . The respondent-assessee, as noticed above, namely, Federal- Mogul Goetze (India) Limited, had filed return of income on 3l" October, 2001 declaring 'nil' income after setting for brought forward losses and depreciation. Tax payable under Section U5JB was also corr>puted at 'nir. The return was talcenup for scrutiny assessrrrent and ' assessment order under Section 143(3) dated 29'" March, 2004 was passed. Total income imder the normal provisions mspite of various +A Q+ 'nil' hut income taxable undei disallowances etc. was computed at ml but moo Section U5JB was computed atRs.90,40,4,412/-. 35. In this year, i.e., the Assessment Year 2001-02, the Assessing Officer had noticed that there was withdrawal ofRs.1,49,55,335/- from the valuation reserve, but the amount had not been added to the profit •and loss accounts filed with the income tax return for computing book profits under Section 115JB. The assessee had placed rehance on clause (i) of Explanation below Section 115JB (2) but the Assessing 2013:DHC:7798-DB

' ,,eorde.ofthetnbuna,fo.theAssess.entYea.2000-01inITANo. 208/De./2005 was distinguishable as it related to the jurisdiction ofthe Connuissioner under Section 263 ofthe Act. In other words, tribunal / did not accept the plea ofthe respondent-assessee. 36.. .By order dated 16'^ May, 2012, the following substanUal questions oflaw were franaed in the present appeals:- "Ci") Whether the Income Tax Tribunal was right in holding tot whUe computing book profit underSecttonU ^^ Sectron U5JB) - . disallowance under Section be made? (ii) Whether the Income Tax ^^^^^^"2340 was right in deleting " m'^r Section ofthe Income Tax Act, 1961. 37 Lear-ned counsel for the respondents-assessee, during the course of hearing, has fairly conceded that the first question has to be specific provisions in the Explanation1below Section U5JB(2) clause (0 The Assessing Officer it is stated had made an addrtron of 88 292/- to the boolc profits towards expenditrrre incurred havmg 2013:DHC:7798-DB

-/ I '•i 38. Question No. (ii)'is required to be answered in favour of the appellant-Revenue and against the respondent-assessee in view of Explanation 2to Section 234D. which was inserted by Finance Ac, 2012 with retrospective effectto assessments made on or after June, ' 2003 We clarify that we are not required to examine the constitutibnal .aiidity of ti>e said amendment with retrospective effect in the present appeals. (]• , , .—1=. — (SANJEEV SACHDEVA) JUDGE 2013:DHC:7798-DB