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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER D.S. SUNDER SINGH, Accountant Member:
This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-1, Guntur vide I.T.A.No.21/2016- 17/CIT(A-1)/GNT dated 31.01.2017 for the Assessment Year (A.Y.)2013- 14.
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In this appeal, the assessee has raised as many as 12 grounds. The Ld.AR during the appeal hearing submitted that the effective ground is 12(a) which is related to adjustment of book profit for working out MAT tax and the resultant profit on sale of assets was not carried to profit and loss account, but directly carried to the balance sheet. The assessee filed return of income declaring Nil income for the A.Y. 2013-14 on 30.03.2014. The assessee also declared the long term capital loss of Rs.73,36,264/- and claimed the same to be allowed to be carried forward u/s 74 of the Act to the subsequent assessment years. The assessee has paid taxes under the provisions of section 115JB on the book profit arrived at Rs.79,743/-. During the course of assessment proceedings from the notes on accounts, forming part of financial statements, the Assessing Officer (AO) found that for the year ending 31.03.2013, the assessee has shown profit of Rs.4,33,66,168/- relating to sale of the land at sale price of Rs.4,33,85,000/- reduced by proportionate cost of Rs.18,832/-. The site sold was located at head office at Mangalagiri Road, Guntur (Vaishnavi Wholesale Cloth Merchants Society, Guntur) and the entire profit on sale of the site was taken to capital reserve in the balance sheet without routing it through the profit and loss account. The AO has asked the assessee as to why such profit on sale of asset was not taken to Profit & Loss account and
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taken to Capital Reserve and why the same should not be considered for MAT u/s 115JB of the Act. The assessee filed explanation stating that the company became sick industrial company as the accumulated losses as per balance sheet and Profit and Loss account balance as on 31.03.2013 are more than the net worth of the company( i.e. assets – liabilities) and thus, as per clause (2) sub section (vii) of section 115JB of the Act, 1961, MAT is exempt for sick industrial companies.
2.1. The Ld.AR further submitted that the Profit & Loss accounts are prepared as per the Companies Act has been duly certified by the authorities under the said Act and approved by the Board of Directors in their meeting. The statutory audit was also conducted and the profit of the company was arrived at for the purpose of book profit as per the books of accounts and it is not open for the AO to revisit the Profit & Loss account to make the adjustment to the Profit & Loss account for the purpose of book profit u/s 115JB of the Act. For this proposition, the assessee relied on the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT 255 ITR 273 and the decision of Hon’ble Bombay High Court in CIT, Mumbai Vs. Forever Diamonds Pvt. Ltd., Mumbai and requested not to make any adjustment to the book profit for the purpose of MAT.
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The AO considered the explanation offered by the assessee and observed that as per Clause(b) of Explanation 1 to sub-section (2) of Section 115 JB, ‘Book profit’ means the net profit as shown in the Profit &Loss account for the relevant previous year prepared u/s 115JB, as increased by the amounts carried to any reserves by whatever name called, other than the reserve specified u/s 33AC of the act (i.e. Reserve for Shipping Business). In the instant case, the assessee has derived the profit of Rs.4,33,66,168/- on sale of the asset and the amount was directly carried to Capital Reserve in the Balance Sheet without crediting the said amount to the Profit & Loss A/c, which should have been credited to the P&L a/c for the purpose of calculating the book profit u/s 115JB of the Act. Having not done, the AO viewed that he has power of increasing the net profit shown in Profit & Loss account to the extent of reserves directly carried to the Balance Sheet. The AO further observed that the assessee is not engaged in the shipping business to claim exemption u/s 33AC of the Act, to carry the profit to Capital Reserve as provided in the Clause (b) of Explanation 1 to Sub-Section (2) of Section 115JB of the Act.
3.1. With regard to the proposition of Sick Industrial Company not
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subjected to MAT tax, the AO observed that when an industrial company has become a sick industrial company it should make reference to the BIFR. The Board of Directors of the Company, shall within, sixty days from the finalization of the audited accounts of the company for the financial year, as at the end of which the company has become a sick industrial company make a reference to the BIFR for determination of the measures which shall be adopted with respect to the company. The BIFR may make such inquiry u/s 16(1) of SICA as it may deem fit for determining whether any industrial company has become a sick industrial company, upon receipt of a reference with respect to such company u/s 15 or upon information received from such company or upon its own knowledge as to the financial condition of the company. As per section 17(1) of SICA, if after making an enquiry u/s 16, the BIFR is satisfied that a company has become a sick company, the BIFR after considering all relevant facts and circumstances of the case decide as soon as may be by order in writing, whether it is practicable for a company to make its net worth exceed the accumulated losses within a reasonable time. The BIFR shall by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make its net worth exceed the accumulated losses. if the Board decides that it
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is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in Sec.18 of SICA in relation to the said company, it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in relation to such company.
3.2. In view of the above, in the instant case, the assessee company has not filed any evidences/ documents/ orders issued by BIFR declaring the assessee company as Sick Industrial Company under the provisions of Sec.17(1) of the SICA. Therefore, the assessee company cannot be considered as Sick Industrial Company for the purpose of calculating Minimum A1ternate Tax(MAT) under the provisions of Sec.115JB of the Income Tax Act, 1961.Therefore, the AO rejected the claim of the assessee on this ground and relied on the decisions of Sumer Builders (P) Ltd. Vs. CIT (2012) 50 SOT 198 Mumbai and the Special Bench decision of ITAT in the case of Rain Commodities Ltd. Vs. CIT [2010] 40 SOT 265 and held that the assessee is not permitted
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to take the profit derived by sale of profits directly to the balance sheet and is required to be credited to the Profit & Loss account which is taxable u/s 115JB of the Act. Accordingly the AO adjusted the book profit and assessed the sum of Rs.4,33,66,168/- u/s 115JB of the Act.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the order of the AO.
Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before the Tribunal. During the appeal hearing, the Ld.AR submitted that in the instant case, the assessee sold the property which is a capital asset for a consideration of Rs.4,33,85,000/- and earned the resultant profit of Rs.4,33,66,168/- which was directly taken to the reserve account without routing it through Profit & Loss account and the same is permissible as per the Companies Act and no adjustment u/s 115JB is possible since the said profit was not credited to the Profit & Loss account. The Ld.AR relied on the decision of ITAT Mumbai in the case of Income Tax Officer-3(1)(2), Mumbai Vs. Bhagwan Industries Ltd. in I.T.A. No.6665/Mum/2008 for the A.Y. 2004-05 dated 08.09.2014 which was affirmed by the Hon’ble High Court of Bombay in ITA No.436 of 2015 dated 18.07.2017. The Ld.AR submitted that the AO relied on the decision of special bench in the case of
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Rain Commodities Ltd. V.s Dy.CIT (2010) [40 SOT 265], wherein the Special Bench has rendered the judgment with regard to capital profit credited to the Profit &Loss account but not taken to the reserves directly. The Ld.AR argued that having credited the capital profit to the Profit & Loss account there is no case for excluding the same from the P&L account for the purpose of computing the Book profit. Thus, the Hon’ble ITAT special bench delivered the decision holding that for the purpose of determining the book profit, capital profit cannot be reduced. Whereas in the instant case, the capital profit was not credited to the Profit and Loss account but directly taken to the balance sheet thus, the case law relied upon by the AO is distinguishable and not applicable in the assessee’s case.
5.1. The Ld.AR further argued that the company’s net worth is negative and the company became a sick industrial company as the accumulated losses as per the balance sheet are more than the net worth of the company (assets – liabilities). The Ld.AR argued that as per section 115JB, Clause (2)(vii) of the Act, , MAT is exempt for sick industrial companies. The Ld.AR further submitted that though the SICA act was repealed, the provision with regard to non-application of MAT in the case of sick industrial companies was not removed from the statute, hence, submitted that the provision of
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non-application MAT tax to Sick Industrial company is applicable in the case of the assessee as the company’s liabilities are more than the assets and the company’s net worth became negative. In support of his contention, the Ld.AR relied on the decision of ITAT Hyderabad ‘A’ Bench in the case of B.V.Reddy Transports Pvt. Ltd., Chittoor Vs. ACIT, Tirupathi vide I.T.A. No.13/Hyd/2016 dated 30.05.2018. Accordingly, argued that the order of the Ld.CIT(A) required to be set aside and allow the appeal of the assessee.
On the other hand, the Ld.DR argued that as per section 115JB, Explanation ‘1’ of sub section (2) the net profit shown in the books required to be as increased by the amounts carried to any reserves by whatever name called rather than the reserve specified u/s 33AC In the instant case, the reserves carried to the general reserve was not relating to section 33AC of the Act, since the assessee is not engaged in the shipping business. Therefore, argued that the assessee is not permitted to take the reserves directly to the balance sheet without routing it through Profit & Loss account. Even if the assessee carry it to the general reserve without taking to the Profit & loss account, the adjustment required to be made u/s 115JB (2) of the Act. With regard to sick industrial company, the Ld.DR submitted that the exemption is allowable only to sick companies as per the
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procedure laid down in Sick Industrial Companies Act (SICA) which was elaborately discussed by the AO. In the instant case, though the assessee’s net worth was negative, since the SICA was repealed w.e.f. 2003, there was no declaration declaring the company as a sick company from the BIFR thus there is no case for non-application of MAT in this case. Accordingly, argued that the AO has rightly made the addition which was confirmed by the Ld.CIT(A) and the order of the Ld.CIT(A) required to be upheld. The Ld.DR relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs.Veekaylal Investment Co.(P) Ltd. [249 ITR 0597].
Responding to the argument of the Ld.DR, the Ld.AR submitted that the Ld.DR relied on the order of CIT Vs. Veekaylal Investment Co.(P) Ltd. (2001) 116 Taxman 0104. In the said case, the Ld.AR argued that the profits were first credited to the Profit & Loss account and subsequently reduced from the profit declared by the assessee for the purpose of MAT tax. Therefore, the case law is distinguishable and is not applicable in the assessee’s case. The Ld.AR further argued that as per the decision of Hon’ble High Court of Bombay in the case of Veekaylal Investment Co.(P) Ltd., Hon’ble High Court held that while computing the book profits, the assessee is required to take into account the capital gains u/s 45 of the Act. In the instant case, the capital gains admitted by the assessee was loss of
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Rs.73,36,264/- and the AO did not allow the carry forward loss, even after assessment the capital gains assessed by the AO resulted in Nil income. Therefore, argued that the case law relied upon by the AO is not applicable in the assessee’s case.
We have heard both the parties and perused the material placed on record. In this case, the company is a loss making company and for the A.Y. 2013-14, the company filed Nil income and declared the long term capital loss of Rs.73,36,264/-. Further as submitted by the Ld.AR, the company’s net worth has become negative i.e. accumulated losses of the company exceeded the assets. During the previous year relevant to the A.Y.2012-13, the assessee sold the landed property (fixed asset) for a consideration of Rs.4,33,85,000/- which resulted in profit of Rs.4,33,66,168/-. The assessee has taken the said profit directly to capital reserve account, but not routed it through the Profit & Loss account. Therefore, contended that the profit which was not credited to the Profit & Loss account is not taxable u/s 115JB of the Act. Since the company’s Profit & Loss account, Balance Sheet was compiled in accordance with the Companies Act and Approved in the Board meeting the assessee contended that the AO is not permitted to disturb the book profit arrived by the assessee unless it is permitted by the provisions of section 115JB of the act. The assessee relied on the decision of Apollo
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Tyres Ltd. Vs. CIT (supra) and also the decision of Hon’ble High Court of Bombay in the case of CIT Vs. Forever Diamonds Pvt. Ltd., Mumbai. Before us, the assessee relied on the decision of ITAT Mumbai in the case of Bhagwan Industries Ltd., cited supra which was affirmed by the Hon’ble High Court of Bombay in I.T.T.A. No.436 of 2015. In this case also the assessee has not credited the resultant profit on sale of fixed asset to the Profit & Loss account but directly taken to the Balance Sheet and ITAT held that the AO is not permitted to make adjustment u/s 115JB. For the sake of clarity and convenience, we extract relevant part of the order of the Hon’ble ITAT, Mumbai in the case of Bhagwan Industries Ltd. which reads as under :
“2. The only grievance raised by the Revenue relates to the deletion of addition made to the book profit on account of profit made on sale of land amounting to Rs. 2,84,84,000/- which was not credited to the profit and loss account. Since in the instant case, the profit was not credited to the P&L account and the books of assessee company was certified by the Board of Directors of the of the company, in terms of decision by the Hon'ble Supreme Court in the Apollo Tyres Ltd. (supra), the A.O. was not justified in twinkling the P&L account prepared by the assessee. The adjustments so made by AO. does not fall within any of the clauses of Explanation provided below section 1 15JA. We find that the issue raised before us has already been considered and decided by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT[255 ITR 273). In that case, the assessee had claimed arrears of depreciation in the P&L Account prepared under the Companies Act. The AO held that the accounts prepared were not in accordance with Part-II and Part-III of Schedule- VI of the Companies Act and, therefore, disallowed the arrears of depreciation which had been upheld up to the level of the High Court. The Hon’ble Supreme Court observed that Section 115J provisions of which were similar to those of 115JB was introduced in the Income Tax Act with a deeming provision which made Companies liable to pay tax at least 30% of book profit as shown in its own accounts. For the said purpose, the section 115J made income reflected in the company's books of account, the deemed income for the purpose of assessing the tax. The Hon’ble Supreme Court further observed that the use of the words in accordance with the provisions of part-II and Part-Ill of Schedule- VI of the Companies Act' was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts
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of the company and while so looking into the accounts of the company, the AO had to accept the authenticity of the accounts. It was so held by the Hon’ble Supreme Court that the AO has only the power to examine whether books of account are certified by authorities under the Companies Act as having been properly maintained in accordance with the provisions of the Companies Act. The AO, thereafter, has limited power of making adjustments as provided inExplanation to section 115J. The relevant portion of the judgment of the Hon’ble Supreme Court is reproduced below as a ready reference.
"The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified 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 section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provision of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of r13 company are maintained in accordance with the requirements of the Companies Act. Sub-section (IA) of Section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.” 8.1. The above order of the ITAT Mumbai was affirmed by the Hon’ble High Court of Bombay in I.T.T.A. No.436 of 2015, the Hon’ble High Court held as under :
“3. Tribunal while passing the impugned Order observed that while computing the book profit under Section 115JB of the Income-Tax Act, the Assessing Officer added the sum of Rs.2,84,84,000/- in the book profit. The Commissioner of Income-Tax (Appeals) deleted the addition. The Tribunal referring to the Judgment of the Apex Court in a case of Apollo Tyres Ltd. v. CIT reported in 255 ITR 273 and judgement of this Court in case of Akshay Textiles Trading and Agencies PVT. Ltd. reported in 304 ITR 401 has observed as under :
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“Respectfully following the decision of Hon’ble Bombay High Court in the case of Adbhut Trading Co. Pvt. Ltd. (supra) and in the case of Akshay Textiles Trading and Agencies Pvt. Ltd. (supra), we do not find any infirmity in the order of the Ld.CIT(A) for deleting the addition under section 115JB. 4. In light of above, the Tribunal has not committed any error. The Appeal as such is dismissed. No costs”.
8.2. The Ld.DR relied on the decision of CIT Vs. Veekaylal Investment Co.(P) Ltd., In the cited case, the assessee has credited the capital profit to the Profit & Loss account and subsequently reduced the capital profit by making adjustment for the purpose of 115JB. Further, in the said case, the Hon’ble High Court held that the capital gains u/s 45 of the Act required to be brought to tax u/s 115JB of the Act. In the instant case, the capital gains on sale of asset resulted into Nil income. Therefore, even applying the case law in the case of Veekaylal Investment Co.(P) Ltd., the assessee is entitled for relief. In the instant case there was no profit in the ordinary course of business and the profit derived by the assessee was on account of sale of asset which was a capital profit. The assessee has not shifted the business profits to the balance sheet. The capital gains on sale of asset as per section 45 results in to loss but not the positive income. Therefore the facts of the assessee’s case are identical to the decision of Bombay high court in the case of Bhagwan Industries Ltd, and the said case is squarely applicable in the assessee’s case. Further the case law relied up on buy the Ld.AR also
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supports the assessee’s case since the capital gains results in to loss. Thus we hold that the lower authorities committed an error in making adjustment to the book profit and the same deserves to be deleted.
The next contention of the assessee is that SICA was exempt from the provisions of section 115JB of the Act. In the instant case, there is no dispute that the assessee company’s net worth was negative and the assessee satisfied the condition to hold the company as sick industrial company. Though the SICA was repealed w.e.f. 2003, the provision was not removed from the Income Tax Act. On the similar facts, the Coordinate Bench of ITAT, Hyderabad decided the issue in favour of the assessee. For the sake of clarity and convenience, we extract relevant part of the order of the ITAT in B.V.Reddy Transports Pvt. Ltd. (supra) which reads as under :
“7. We have considered the rival contentions and perused the Paper Book and case law relied on. There is no dispute with the fact that the company has negative net worth and has become sick under the repealed Act- Sick Industrial Companies (Special Provisions) Act, 1985. Issuance of certificate u/s. 17 of the SICA does not arise as the Board stand dissolved consequent to repeal of the Act. So, the insistence of AO and the Ld.CIT(A) for a certificate under that Act is not proper. Since the provisions of Section I JSJB have not been amended, to that extent the repealed SICA Act is applicable so it has to be applied. Therefore, under these circumstances, it is to be considered that assessee is covered by Section 17 of SICA and therefore, the company is exempt from the provisions of Section 115JB, being a sick company. This contention of assessee is accepted.” 9.1. Respectfully following the decisions of the Hon’ble Bombay High court in Bhagwan Industries Ltd, and the decision of coordinate bench of
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ITAT, Hyderabad we hold that there is no case for making adjustment s u/s 115JB of the act and the assessee is entitled for relief, therefore, we set aside the orders of the lower authorities and allow the appeal of the assessee.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 12th December, 2018.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 12.12.2018 L.Rama, SPS
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आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. ननर्ााररती / The Assessee – M/s Andhra Trade Development Corporation Pvt. Ltd.,Guntur 2. राजस्व / The Revenue– The Assistant Commissioner of Income-Tax, Circle- 1(1), Guntur 3. The Pr.Commissioner of Income Tax, Guntur 4. The Commissioner of Income Tax-(Appeals)-1,Guntur 5. धिभागीय प्रधिधिधि, आयकर अपीलीय अधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडा फ़ाईल / Guard file
आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM