DCIT, NEW DELHI vs. M/S RAILTEL CORPORATION OF INDIA LTD.,, DELHI

Revenue has accepted the decision of the Ld. CIT(A) in respect of the adjustments made to book profit by the AO on account of “Prior Period Expenses” and “Provision for Railways extraordinary items”. However, the decision of Ld. CIT(A) on adjustments made by the AO on account of “Adjustments due to change in depreciation rates” has not been being accepted by Revenue and present appeal before us is against the order of the Ld. CIT(A) on this issue. The relevant portions of the Assessment Order and the order of the Ld. CIT(A) on this issue are reproduced as under:

Relevant portion of the Assessment Order

“Allowability of Depreciation of earlier years under MAT provisions on account of change in accounting estimate

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

In view of the above the prior period expense cannot be allowed as deduction from MAT provisions.is observed that the assessee company has claimed a huge amount of adjustment on account of adjustment due to change in Depreciation rate. For this purpose it is stated that a committee of the GM level officers working under the company was formed. On the basis of the recommendations of the committee useful life of the assets of the company has been reduced drastically and the resultant amount of adjustment to the tune of Rs 52 74 crores has been claimed during the year on this account. No evidence to the effect that the committee members possess the necessary qualification, experience and expertise to judge the estimated life of the equipment. The assets owned by the assessee company are highly technical telecom and radio equipment Network devices etc. No proper justification for deviating from the standards set up by the BSNL and adopting the standards of Idea Cellular has been given. For example as admitted by tne assessee company the useful life of Radio Equipment is taken to be 12 to 15 years by the BSNL yet the committee has reduced the useful life to 3 Yrs. Section 145(1) of the Act, as amended, lays down method of accounting in respect of business income or income from other sources. The method of accounting could be either cash or mercantile. Section 13 of the 1922 Act, corresponding to section 145 of the Act, has been held to be a computation provision [CIT v. BadridasRamrai Shop [1939] 7 ITR 613 (Nag.)]. Further, section 115JA(2) lays down a method for compiling profit and loss account as well as a method for computing book profits, for the purpose of section 115JA of the Act. Section 115JA(4) of the Act makes applicable all the provisions of the Act except those provisions which are provided in the section itself. Accordingly, the provisions of section 145(1) would not apply. Section 145(2) of the Act provides that the Central Government may notify accounting Standards, from time to time, to be followed by any class of assessee or in respect of any class of income.

Apparently, as such, section 145(2) is not linked to section 145(1). However, section 145(1) states that business income or income from other sources could be computed, subject to provision of sub-section (2), in accordance with either cash or mercantile system of accounting. Further, the accounting standards notified lay down that any assessee who follows mercantile system of accounting has to follow the notified standards. Under the said Act, a company has to follow accrual system of accounting,

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. which more or less corresponds to mercantile system of accounting as construed by courts. The notification does not prescribe the class of income with respect to which it could apply. Accordingly, as per one view of the matter, the accounting standards notified would apply to a company as it is required to follow accrual system of accounting. The Government has notified two Accounting Standards: (a) Relating to disclosure of accounting policies; and (b) Relating to disclosure of prior period and extraordinary items as well as changes in accounting policies. These Standards are more or less based on the similar standards notified by Institute of Chartered Accountants of India ('ICAI') and therefore they are not analysed in detail. However, the following provisions of the Standards need to be noted for the purpose: (a) The policies adopted must reflect a true and fair view of the state of the affairs of the business and major considerations for selection or application of accounting policy are - prudence, substance over form; and materiality. One may note that prudence requires a provision of all known liabilities and losses even though the amount cannot be ascertained with certainty (b) Fundamental accounting assumptions accepted are accrual; going concern and consistency. For the purpose, accrual means recognition of revenue as they are earned and recognition of cost as they are incurred. (c) A change in accounting policy can be made only if the change is required by statute or the change would result in a more appropriate preparation or presentation of Financial Statements. The effect of the application of notified accounting standards under section 145 of the Act could be as follows : (a) In compiling the accounts, compliance with Accounting Standards will have to be ensured, and if there is inconsistency in that, some powers to Assessing Officer could arise under section 145(2) of the Act. (b) Any change in method of accounting will have to strictly comply with the requirements- If the requirements cannot be justified, as statutorily required, or otherwise as mentioned on the basis of sound commercial reasoning or application of accounting principles, such change in the method of accounting could be disregarded by the Assessing Officer. Further, the method of accounting, which is employed, has to be consistent. In the case of assessee, the company formed a committee which advised for change in useful life of the asset and corresponding depreciation amount got increased considerably. Had the depreciation

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. change been effected from retrospective effect, and the effect of such change been given in respective years, the entire burden of depreciation would not have arrived in the current year. There needs to be consistent in the accounting method, else, the book profits can always be managed by the assessee in the year, in which such provisions are applicable vis-a-vis when such provisions are not applicable.

Another next basic issue to be considered is the nature and extent of adjustments which could be carried out to the net profit as reflected in the profit and loss account prepared in accordance with the provisions of the Schedule. This issue has been considered by Special Bench of the Income-tax Appellate Tribunal in case of Sutlej Cotton Mills Limited v. ACIT [1993] 45 ITD 22 (Cal.) and in that case it was held as follows (extracted from the head notes): "As regards the question whether the Assessing Officer can recast the book profits, an implied mandate is given to the Assessing Officer to verify and satisfy himself whether the net profit was as shown in the profit and loss account for the relevant previous year and as to whether the profit and loss account was prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act. If in case the Assessing Officer finds that the net profit was not as shown by the profit and loss account or the profit and loss account was not prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, he is entitled to adjust the profit To this extent, the power to adjust the book profit will have to be conceded to the Assessing Officer” Accordingly, the differential change in depreciation amount, the impact of which relates to earlier years, cannot be allowed as deduction while computing book profit under MAT provisions. Even Accounting Standard-1 on “Accounting Policies” categorically states that the primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. For this purpose, one of the major considerations governing the selection and application of accounting policies as laid down in the said AS is Substance over form. The relevant extracts are reproduced below. “b. Substance over Form - The accounting treatment and presentation in financial statements of transactions and events

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. should be governed by their substance and not merely by the legal form." The assessee-company has deliberately deviated from the generally accepted accounting principle/ accounting standard so as to avoid paying taxes under the MAT as well. Non-acceptance; of the method of accounting as laid down by the relevant Accounting Standard issued by the Institute of Chartered Accountants of India is also a violation of Section 211(3A) and 211(3B) of the Companies Act 1956 which requires that every financial statements shall comply with the accounting standards. The relevant extracts of the section are listed below.

“211. Form and contents of balance-sheet and profit and loss account ……………………. ………………………. (3A) Every profit and loss account and balance-sheet of the company shall comply with the accounting standards. (3B) Where the profit and loss account and the balance-sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance- sheet, the following, namely:— the deviation from the accounting standards; (a) the reasons for such deviation; and (b) the financial effect, if any, arising due to such deviation. (c) (3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A: Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this subsection.” i) Thus, financial statements of the company, in the ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. absence of compliance of relevant Accounting Standard, does not give a true and fair view of the state of affairs of the company as at the end of the financial year. The deviation in accounting is nothing but a device deployed for avoidance of taxes. ii) Rather, the authorized representative had gone ahead by relying on the decision of Supreme court in ApolloTyres limited vs CIT (255 ITR 273). The assessee is taking refuge under the decision of the Supreme court which in turn had never allowed the taxpayers to adopt accounting practices which are not in line with the norms so as to reduce their MAT liability. iii) Further, the constitution bench decision of the Supreme Court in McDowell and Co. Ltd. v. Commercial Tax Officer (154 ITR 148) is equally relevant. In the said decision, Supreme Court took a serious view of tax avoidance devices, and held that such devices will not stand the scrutiny of law if the object is only tax avoidance. It sought the aid of emerging techniques of interpretation in trying to relate such tax avoidance devices to existing legislation. It chose to rely on the famous British ruling in Ramsey's case, in order to expose the devices for what they really are, and to refuse to give judicial benediction. The relevant extracts from the decision are given below “The planning may be legitimate provided it is within the frame work of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. ” iv) In respect of assesee's taking refuge under the case of Apollo tyres, the following observations in the case of Padmasundara Rao v. State of Tamil Nadu, (255 ITR 147 at page 153), are being relied. "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. enactment, and it is to be remembered that judicial utterances are made in the set-ting of the facts of a particular case, said Lord Morrin in Herrington v. British Railways Board, [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases." Similar views were expressed by the Apex Court in Sun Engg. Works, (198 ITR 297 at page 320). Where instances come to the light on examination that excess claims v) have been made (in the audited accounts), not in accordance with the provisions of Companies Act, the AO would be failing in his duty, if he does not make the correction called for. If the Income tax department comes across (camouflaged) accounts not in accordance with the provisions of Companies Act and accounting standards, it would be duty-bound to disturb the book profits. vi) In a recent decision by Hyderabad Tribunal in the case of Rain Commodities Limited (ITA No 673/Hyd/2009), the Tribunal while placing its reliance on the Apollo Tyres limited, quoted as below. "One of the moot question relevance to the issue before us is whether the assessing officer has power to alter the net profit? In our considered opinion, Yes. YYe agree that it is settled law that assessing officer has the power to alternate the net profit. In the following two cases, the assessing officer can rewrite the profit and loss account i.e. to say that assessing officer should recalculate the net profit and then follow the adjustments of MAT as usual: [1] if it is discovered that profit and loss account is not drawn up in accordance with Part II and Port III of Schedule vi of the companies Act. However, the assessing officer cannot disturb the Net Profit as shown by the assessee where there are no such allegations, fraud or misrepresentation but only a difference of opinion as to whether a particular amount should be properly shown in the profit and loss account or in the Balance sheet2] If accounting policies, accounting standards not adopted for preparing such accounts and method, rate of depreciation which have been incorrectly adopted for preparation of profit and loss account

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

This also reiterates the point that the Apex court had not placed a blanket ban on the Assessing officers to question the financial statements in cases where the deviation from the generally accepted accounting principles / accounting standards is apparent. Without prejudice to the above, the section 115JB in Explanation [1] provides the as under under:

For the purposes of this section, "book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-2, as increased by : ………………………………………

(g) the amount of depreciation

(i) the amount or amounts set aside as provisions for diminution in the value of any asset.

If any amount referred to in clauses (a) to (i) is debited to the profit and loss account or in any amount and as reduced by,

(iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revlaution of assets); or In view of the above also although the nomenclature given by the assessee to the claim of Rs.52.74 crores is change in depreciation rates, the nature is that it has resulted in diminution in the value of the assets and alternatively in the form of excess depreciation claim on account of revaluation of assets. In view of the aforesaid discussions, I hereby make an adjustment of a sum of being prior period expenses of Rs. 2,40,48,802/- , provision for Railways extraordinary items Rs.14,09,30,283/- and adjustment due to change in depreciation rates amounting to Rs.52.74 crores to the returned book profits

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. of the company for the purpose of computation of income as per MAT. “

Relevant portion of the order of Ld. CIT(A)

“4. Ground No. 2 is directed against the disallowances made by the AO while calculating book profit under section 115JB of the Act. Ground No. 2.1, 2.2 & 2.3 are against adjustments on account of Prior period expenses of Rs.2,40,48,802, Exceptional item of Rs. 14,09,30,283 and Adjustment due to change in Depreciation rate of Rs. 52,74,00,000/-.

4.1 On these grounds, the Ld. AR furnished written submission as under:

"Section 115JB of the Income Tax Act, 1961 provides for Minimum Alternate Tax (MAT) on companies. A company is required to pay a specified percentage (18.5%) of its book profit as income tax if the tax liability of the company under regular provisions is lower than this amount. Section 115JB of the Income-tax Act mandates for the purpose of this section the profit and loss account shall be prepared in accordance with the provisions of Part II of Schedule VI of the Companies Act 1956.Book profit is required to be calculated by making certain adjustments to the net profit, as shown in the profit and loss account. The additions and deletions to be made to the net profit are laid out in Explanation 1 to section 115JB. This list is an exhaustive list and no adjustment, apart from those mentioned in this section, can be made to the book profits whatever the case maybe.

In various cases, it has been held that Assessing Officer has authority only to examine whether the books of accounts are maintained according to the provisions of the Companies Act. AO thereafter has limited powers of making adjustments as provided for in the Explanation of section 115JB. The computation of book profit starts from the net profit as shown in the Profit & Loss Account as increased by items prescribed in (a) to (i) and ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. reduced by items (i) to (viii) of Explanation 1 of Section 115JB of the Act. So, necessarily any of the amounts which are to be added or reduced can only be considered in the light of the items specified in the Act.

Reference in this regard maybe be placed on the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [255 ITR 273] wherein it was held that:

"Therefore, we are of the opinion that the Assessing Officer while computing the income under section 115J 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 increase 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."

Further, the Hon'ble Supreme Court in the case of Malayala Manorama Co. Ltd. v CIT [300 ITR 251 ]reaffirmed the decision rendered by it in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 and has held as under: "If we examine the said provision in the above background, we notice that the use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, the Court observed that it is difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act."

In the light of the above, our submissions on each of the disallowances made by the Ld. AO are as under: a) Prior Period Expenses and Extraordinary Item:

The Ld. AO has discussed the allowability of prior period expenses at pages 12 to 14 of the assessment order. His main contentions are as under: • The basic requirement of preparing profit and loss accounts as per Para II of the schedule under companies Act is that the P & L should be made to disclose the results of the working of the company during the period covered by the accounts. • Reference has been made to section 145 of the Income- tax Act. As per Ld. AO, the accounting standard prescribed u/s 145(2) provides for “accrual basis”. • The reason as why the AS-5 requires for adjustment of prior period item in current year is that the India regulator does not allow for revision of earlier years financial statements. • Further, the Ld. AO has placed reliance on the case decided by Hon’ble Kerala High Court in Shree Bhagawathy Textile Ltd. vs. Asstt. CIT- • The Ld. AO has not given any reason in his order for disallowing “extraordinary item”. Presumably the same has been disallowed on the basis of above contention:

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

Our submissions: The perusal of above contention raised by the Ld. AO in the assessment order will clearly reveal that the disallowance on account of prior period expenses and exceptional item is clearly out non-application of mind and overruling jurisprudence. It is a well settled legal position that section 115JB starts with a non-obstante clause and hence, is a code in itself. A non-obstante clause in a statute makes the provision independent of other provisions contained in the law, even if the other provisions provide to the contrary. In this regard, we submit that as per section 115JB(2), in order to compute book profits under this section, the profit & loss account should be prepared in accordance with the provisions Companies Act. The relevant provisions are contained u/s 211(3A) to 211(3C) of the Com pa nr Act, 1956 provide as under- “211 (1) …………………. (2) Every profit and loss account of a company shall give a true an fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto.

Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. (3) The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it i necessary to grant the exemption in the public interest. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification. (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards.

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

(3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account , and balance sheet, the following, namely:- (a) the deviation from the accounting standards ,. (b) the reasons for such deviation ; and (c) the financial effect, if any, arising due to such deviation.

(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 f38 of 1949). as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A : Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section."

A perusal of the above clearly rested down that as per section 211(3A) of Companies Act 1956, the profit & loss account of a company should be prepared in accordance with the applicable accounting standards issued by ICAI.

A further reference may be made to Guidance Note issued by ICAI that the accounting standards referred to in section 115JB are the ones issued by ICAI (i.e. referred u/s 211(3C) of Companies Act) and not the ones issued u/s 145(2) of the Income Tax Act. An extract of the relevant Guidance Note issued by ICAI is reproduced hereunder:

"19.3 The variation regarding the accounting policies, accounting standards and method and rates of depreciation arise in two cases. Firstly, when the accounting year of the company is different from the previous year under the Income-tax Act and secondly, .-/her the '/a. company having

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. the same accounting year and previous year, prepares accounts for income- tax on different bases. It may be noted that the reference to accounting standards n :ms section are to the accounting standards as referred to in section 211(3C) of the Companies Act and not the accounting standards notified by the Central Government under section 145(2) of the Income-tax Act.”

However, the Ld. AO has applied accounting standard issued u/s 145(2) instead of AS-5.

The Ld. AO has further ignored the aforesaid clear decisions of the Hon'ble Supreme Court and went on to examine what was not contemplated u/s 115JB. It may please be noted that in his order, the Ld. AO has accepted the position that prior period expenses are allowed for adjustment under Companies Act in the current period only. In addition to this, it is nowhere alleged by the Ld. AO that the accounts of the assessee are not in accordance with Part II of the Schedule of Companies Act.

Also, it is imperative to note that the reliance placed by the Ld. AO on the judgment of Hon'ble Kerala High Court in Sree Bhagawathy Textiles Ltd. v. Assistant Commissioner of Income-tax [342 ITR 244]is imprudent. In the said case, it was clearly on records that prior period expenses were not debited to "Profit and Loss" account but to "Profit and Loss Appropriation" account. The Hon'ble Court examined and held in the concluding paragraph as under:

"What is clear from the above is that the Assessing Officer should start with the profit available in the profit and loss account prepared in terms of Parts II and III of Schedule VI to the Companies Act. The profit under the said profit and loss account admittedly is Rs. 1,01,37,664. The way the assessee has claimed deduction based on the profit and loss appropriation account is detailed in the order of the Commissioner of Income-tax (Appeals). What is clear from the said order is that the assessee made a further deduction from the profit available under the profit and loss account prepared under the Companies Act. Obviously,

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. unless the deduction made by the assessee is permissible in terms of clauses (i) to (ix) of the Explanation to section 115JA above stated, the same is inadmissible. The assessee has no case that the prior period expenses is an item that could be deducted from the profit in terms of any of the clauses covered by the Explanation to section 115JA. So much so, the claim is not a deduction allowable from the profit taken from the profit and loss account prepared under the Companies Act. When the deduction is admittedly not admissible under the provisions of the Act, the assessee wants to bank on the technicality that the deduction, though wrongly allowed in the assessment based on the wrong claim made by the assessee, cannot be revised in rectification proceedings under section 154. We are unable to accept this contention because it is the settled position as revealed from the decisions of the Supreme Court relied on by the assessee itself that the Assessing Officer has to start assessment by adopting the profit available in the profit and loss account prepared in terms of Parts II and III of Schedule VI to the Companies Act. If the assessee has made a claim of deduction from this profit not enumerated in clauses (i) to (ix) covered by the Explanation to section 115JA, the assessment so completed based on the profit taken from the profit and loss appropriation account submitted by the assessee happens to be an apparent mistake which could be rectified in proceedings to be initiated under section 154."

In fact, the case of the assessee is identical to CIT v Khaitan Chemicals & Fertilizers Ltd., [307 ITR 150], where the Hon'ble Delhi High Court while allowing that prior period expenses are allowable under MAT observed as under:

"The Tribunal was correct, in law, in holding that the Assessing Officer had failed to appreciate that the net profit for the purpose of section 115JA is to be computed only after deducting the prior period expenses/extraordinary items. The fundamental flaw that had entered into the Assessing Officer's approach was that he was under an impression that the assessee was claiming a reduction in the ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. net profit in terms of clauses (i ) to (ix) of the Explanation to section 115JA(2). The assessee had all along contended that the net profit was to be computed on the basis of the profit and loss account which, in turn, was to be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Such a computation of net profit, in view of the prescribed Accounting Standard (AS-5). requires the prior period expenses/extraordinary items to be shown separately. That did not mean that because those items had been shown separately, they did not constitute part of net profit. ' Paragraph 5 of the Accounting Standard (AS-5) specifically requires that all items of income and expenses which are 'recognized in a period' should be included in the profit or loss for the period unless an AS requires or permits otherwise, f period items', as given in AS-5. clearly stipulates that prior period items are incomes or expenses which arise 'in the current period' as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e.. the period relevant for the purposes of computing the net profit or loss. Clearly, prior period items are to be included in the determination of net profit or loss. Furthermore, Paragraph 7 of AS-5 stipulates that the net profit or loss, inter alia, comprises of extraordinary items and the same should be disclosed on the face of the statement of profit and loss. From this, it is clear that both 'prior period items' as well as 'extraordinary items' are to be included in the determination of net profit or loss. If a prior period item is an expense, it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be incomes or expenses. The conclusion is that prior period items and extraordinary items form part of the net profit or loss. [Para 10]

Paragraph 15 of AS-5 makes it clear that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. that their impact on the 'current' profit or loss can be perceived. Two approaches have been indicated in Paragraph 19 of the said Accounting Standard (AS-5). The normal approach is to include prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. As indicated in the Accounting Standard, in either case, the objective is to indicate the effect of such items on the current profit or loss. It was obvious that because of the prescribed AS which has to be followed by the assessee in view of the provisions of section 115JA(2) of the Act, read with section 211 of the Companies Act, the assessee was required to show the prior period items/extraordinary items separately so that their impact on the current profit or loss could be perceived. The fact, that the assessee had adopted the alternative approach of showing such items in the statement of profit and loss after determination of current net profit or loss, did not mean that those items were not to be taken into account in computing net profit as envisaged in section 115JA. Thus, what the assessee had done was only to indicate prior period items/extraordinary items separately. That did not mean that the figure of net profit was to be arrived at de hors those items In view of the aforesaid discussion, net profit (as referred to in section 115JA) of the assessee-company was to be computed only after deducting the expenses on prior period/extraordinary items which were business expenditure, but were shown separately in the profit and loss account due to the specific requirement of the AS prescribed by the Institute of Chartered Accountants of India, "(emphasis supplied)

It is imperative to take note of the case of Hon'ble Delhi High Court in Commissioner of Income-tax v. Jagatjit Industries Ltd. [339 ITR 382] where the Hon'ble Court allowed prior period expenses even when the computation was under normal provisions of the Act and section 145(2) was applicable. By implication, there is no justification to make

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. addition on account of prior period expenses while applying section 115JB.

Under MAT, favourable view was also taken by the Hon'ble Madras High Court in the case of Tamil Nadu Cements Corporation Ltd v CIT [349ITR58], The Hon'ble High Court clearly held that the case of Sree Bhagawathy Textiles Ltd. v. Assistant Commissioner of Income-tax [342 ITR 244] (as was relied upon by the AO) was distinguishable as it was more about the P&L appropriation account. The Hon'ble High Court has held as under: "It is relevant to note herein that the said decision rendered by the Delhi High Court was considered by this court in the decision reported in CIT v. Swamiji Mills Ltd. [2012] 342 ITR 250 (Mad), wherein in preference to the decision of the Delhi High Court reported in CIT v. Khaitan Chemicals and Fertilizers Ltd. [2008] 307 ITR 150 (Delhi) this court applied the decision of the Kerala High Court reported in Sree Bhagawathy Textiles Ltd. v. Asst. CIT ITR 244 (Ker), on the facts available that it was more about the appropriation considering the nature of the expenses charged on the appropriation account, this court held that the assessee was not entitled to have the deduction of amounts debited in the appropriation account in the computation of the net profit. As such, the Court reported in CIT v. Swamiji Mills Ltd. [2012] 342 ITR250 (Mad), has no facts of the case herein and it is totally distinguishable."

In the case of Gulf Oil Corporation Ltd v. ACIT [111 ITD 124] net profit as per audited balance sheet was arrived after deducting prior period expenses. Assessing Officer was of the opinion that net profit before debiting prior period expenses should be taken as base for calculating book profit as per section 115JB of the Act. The CIT(A) referred to the judgment of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT [255 ITR 273] in which it was held that the Assessing Officer is not supposed to make any alteration in the book profits shown in the Profit & Loss Account prepared as per Companies Act. According to him, this option is not available to ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. the assessee also. The CIT(A) observed that the prior period expense claimed by the assessee do not fall within the adjustments that can be made to the net profit as per Profit & Loss Account because the expenditure relates to the transaction of earlier year. Accordingly, he confirmed the computation of book profits made by the Assessing Officer. The ITAT Bench of Hyderabad deleted the addition and held that:

"Therefore, we are in agreement with the argument of the learned counsel that the starting point for computation of book profits for the purposes of section 115JB should be Rs. 660.81lakhs which is the final balance in the Profit & Loss Account carried to Balance Sheet. It may also be noted from the above discussion that even extraordinary items have to be debited to the Profit & Loss Account. Having adopted the figure of Rs. 660.81lakhs as the starting point, the same has to be increased by the items specified in clauses (a) to (f) and has to be reduced by the items specified in clauses (i) to (vii) given in the Explanation. No other adjustment is permitted by law and also as laid down by the Supreme Court in the case of Apollo Tyres Ltd. (supra). None of the clauses given in the Explanation provide for the increase or decrease of the book profits by extraordinary items."

ITAT Bench of Hyderabad in the case of DCIT v. M/s. Ushodaya Enterprises (ITA No. 1419/HYD/2008) followed the decision of rendered in the case of Gulf Oil Corporation vs. ACIT [111 ITD 124] while deciding the issue in favour of the assessee dismissed the ground of department for addition of prior period expenses to net profit as declared in the balance sheet. Without prejudice to our above submissions, we would like to mention that the Ld. AO has disallowed prior period expenses owing to the nature of the transaction, i.e. as per the Ld. AO, prior period expenses are not related to the assessment year and hence should not form part of the profit and loss account of the assessment year. Even if the contention of the Ld. AO is accepted, the Ld. AO has failed to apply the same principle for prior period income shown by the assessee in the profit and loss account of the assessment year. During the year under consideration, the ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. assessee has shown prior period expenses amounting to Rs. 2,40,48,802/- and prior period income amounting to Rs. 5,11,08,612/- in the profit and loss account under the head prior period adjustment. However, the Ld. AO has cherry picked and disallowed prior period expenses only and corresponding prior period income has been ignored by the Ld. AO. Therefore, even if the contention of the Ld. AO is accepted and transactions not pertaining to the assessment year are ignored for the purpose of computing book profit us 115JB, prior period income should also be ignored along with prior expenses for calculating the book profit as per section 115JB.

In the light of the above submissions and also in the light of the fact that direct precedent is available on similar issue from Jurisdictional High Court, it is prayed that the addition on prior period expense and exceptional item mav please be deleted.

(b) Adjustment due to change in depreciation rates

During the captioned assessment year i.e. AY 2012-13, there is a change in the rate of depreciation claimed by the assessee as compared to the earlier years. The change was necessitated on account of Technical committee recommendation, the copy of which was duly submitted before the LD. AO. The impact of this change in estimated useful life of assets was claimed by the assessee separately in P&L account as "adjustment due to change in depreciation rates"

The Ld. AO has discussed the allowability of 'adjustment due to change in depreciation rates' under MAT at pages 14 to 20 of the assessment order. His main contentions are as under:

• The assessee has deviated from relevant accounting standards issued by ICAI and therefore, financial statements of the assessee do not give true and fair view of the state of affairs of the company • Reference has been to section 145 of the income-tax, Act. As per

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

Ld. AO, the accounting standard prescribed u/s 145 (2) should be followed and AO can interfere in case of inconsistency in complying with these accounting standard. • The Ld. AO has placed reliance on Sutlej Cotton Mills Ltd. vs. ACIT (1993) 45 ITO 22 and Rain Commodities Ltd. (ITA no. 673/Hyd/2009) to substantiate the power of AO to adjust the book profit. According to Ld. AO, the decision of Supreme Court in Apollo Tyres Ltd. vs. CIT (255 ITR 273) does not place a blanket ban on AO to question financial statements where deviation from accounting standards is apparent. • The Ld. AO challenged the competency of technical committee and has placed reliance on McDowell and Co. ltd. v. Commercial Tax Officer (154 ITR 148) to hold that assessee has deliberately changed the depreciation rates to avoid paying taxes u/s 115JB. • An alternative ground has been taken by the Ld. AO that without prejudice to above the said claim should be disallowed under clause (i) of explanation 1 of section 115JB(2) i.e. amount set aside as provisions for diminution in the value of any asset. Our submissions:

The Ld. AO has ignored the detailed submission filed by the assessee to substantiate that the claim is well in accordance with Accounting Standards prescribed by ICAI. In this regard, we submit that as per section 115JB(2), in order to compute book profits under this section, the profit & loss account should be prepared in accordance with the provisions of Companies Act. The relevant provisions are contained u/s 211(3A) to 211(3C) of the companies act 1956 which provides as under- "211 (1)…….. (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. for which a form of profit and loss account has been specified in or under the Act governing such class of company. (3) The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification. (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards. (3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely:- (a) the deviation from the accounting standard; (b) the reasons for such deviation ; and (c) the financial effect, if any, arising due to such deviation. (3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 f38 of 1949). as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A : Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section." A perusal of the above clearly rested down that as per section 211(3A) of Companies Act 1956, the profit & loss account of a company should be prepared in accordance with the applicable accounting standards issued by ICAI. The applicable accounting standard with respect to disallowance of depreciation shall be Accounting Standard 6, Depreciation Accounting. The relevant paras of accounting standard 6 which allows a company to revise the useful life of an asset are reproduced hereunder-

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

Relevant paragraphs of AS-6

Para 11 "The quantum of depreciation to be provided in an accounting period involves the exercise of judgement by management in the light of technical, commercial, accounting and legal requirements and accordingly may need periodical review. If it is considered that the original estimate of useful life of an asset requires any revision, the unamortised depreciable amount of the asset is charged to revenue over the revised remaining useful life." Para 13 "The statute governing an enterprise may provide the basis for computation of the depreciation. For example, the Companies Act, 1956 lays down the rates of depreciation in respect of various assets. Where the management's estimate of the useful life of an asset of the enterprise is shorter than that envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate. If the management's estimate of the useful life of the asset is longer than that envisaged under the statute, depreciation rate lower than that envisaged by the statute can be applied only in accordance with requirements of the statute." As per Para 24 of Accounting Standard-5, Net Profit or Loss for the Period, Prior period items and change in accounting policies, any change in accounting estimate may have an effect on the financial statements of current year or future years. Relevant paragraph of AS-5 Para 24

"A change in an accounting estimate may affect the current period only or both the current period and future periods. For example, a change in the estimate of the amount of bad debts is recognised immediately and therefore affects only the current period. However, a change in the estimated useful life of a depreciable asset affects the depreciation in the current period and in each period during the remaining useful life of the asset. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods, is ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. recognised in future periods." Considering the above standards and taking into account the fact that the management of the company is responsible for showing true and fair view of the state of affairs of the company, a multi-disciplinary expert Committee of senior level officers was formed which had taken into account the technological changes in the telecom industry and practices being followed by other companies in the industry and thus taking into account the above factors, determined the useful life of assets and accordingly the company had charged depreciation in the books of accounts during the financial year 2011-12 based on revised life of assets. The recommendations of Committee were duly approved by the Audit Committee and also by the Board of Directors. It was explained that Telecom Industry has been going through fast pace of technological changes and accordingly the company has to take into account the cost of maintenance vis-a-vis the cost of new asset and end of life in order to ensure that depreciation is charged in the books of accounts based on above factors and maintenance of assets in the long run may not become unviable. Thus, the change in the life of assets as determined by the Committee taking into account all the technological changes in regard to relevant equipment were implemented while finalizing the balance sheet for financial year 2011-12. This was done in order to ensure presentation of true and fair view of the books of accounts of the company. The books of accounts of the company are audited by statutory auditor appointed by office of CAG and the supplementary audit is conducted by the office of the CAG. The auditors are required to look into the matter of accounting estimates followed by company and its proper disclosure in financial statements. As per SA 540,'Auditing Accounting Estimates, Including Fair Value And Related Disclosures', an auditor is required to assure, with proper audit evidence, that accounting estimates followed in the financial statements are reasonable and does not involve management biasness. An auditor is required to disclose accounting estimates significant risks and possible management bias identified during the course of audit. In the instant case, no qualification has been made by the auditors with respect unreasonableness of accounting estimates. The Ld. AO has failed to establish his claim as to how the assessee has deviated from Accounting Standard prescribed by ICAI. Therefore, the main contention of the Ld. AO that profit & Ioss account of assessee

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. company for AY 2012-13 does not comply with the accounting standards incorrect. Moreover, without appreciating the fact that accounting standard notified u/s 145(2) has no relevance in context of section 115JB, the Ld. AO has heavily relied upon sectionl45(2). We a again reproducing the extract from Guidance Note issued by ICAI cited above. It provides the accounting standard referred to in section 115JB are the ones issued by ICAI (i.e. referred u 211(3C) of Companies Act) and not the ones issued u/s 145(2). An extract is reproduced hereunder: "19.3 The variation regarding the accounting policies, accounting standards and method and rates of depreciation can arise in two cases. Firstly, when the accounting year of the company is different from the previous year under the Income-tax Act and secondly, when the company having the same accounting year and previous year, prepares accounts for income tax on different bases. It may be noted that the reference to accounting standards in the section are to the accounting standards as referred to in section 211(30 of the Companies Act and not the accounting standards notified by the Central Government under section 145(2) of the Income-tax Act." Further, the Ld. AO has relied on the decision of Sutlej Cotton Mills Limited v. ACIT [1993] 45 IT 22 and Rain Commodities limited (ITA No 673/Hyd/2Q09) to substantiate the power of AO t adjust the book profit. In effect, the Ld. AO and the assessee are on the same page regarding the powers of the AO to adjust the book profit as per section 115JB. Invariably, the Courts have held that AO has the power to adjust the book profit only if the profit and loss account is not prepared as per Part II of the Companies Act. In case of Sutlej Cotton Mills Limited v. ACIT [1993] 45 ITO 22, it has been held that:

"If in case the Assessing Officer finds that the net profit was not as shown by the profit and loss account or the profit and loss account was not prepared in accordance with Part II am. Part III or the Sixth Schedule to the Companies Act, he is entitled to adjust the profit. To this extent, the power to adjust the book profit will have to be conceded to the Assessing Officer' However, the Ld. AO has failed to point out a single instance wherein the books of accounts a prepared by the assessee are not as per Part II of schedule of the Companies Act. The tinkering in the book profits has been done by the Ld. AO on his whims and fancies and without any legal or ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. factual support. Therefore, it is earnestly prayed that in the absence of non-compliance of Part II of the Companies Act while preparing the profit and loss account, the AO cannot tinker with the profit and loss account to adjust the book profits and the addition made by the Ld. AO may be deleted. The Ld. AO has also contended that the assessee has employed the method of change in depreciation rates as a tool to avoid tax and hence, the Ld. AO has observed that the decision of the Supreme Court in McDowell Co. Ltd. v. Commercial Tax Officer (154 ITR 148) is relevant. The reliance is misplaced in the light of following factors:

• The Ld. AO failed to appreciate that the assessee has been assessed under MAT. Whatever MAT liability is paid, the same is available by way of MAT credit for 10 years. The assessee company could not save anything by reducing MAT liability. Infact in FY 2014-15, the assessee has been assessed under normal provisions of computation. The MAT credit available is utilized in FY 2014-15 and remaining would be utilized in years to come. • Not even a single discrepancy could be pointed out by the Ld. AO in support of his claim that the accounts are not as per accounting standard or as required by Companies Act. • The Ld. AO has failed in hi duty by ignoring statutory auditors’ report and CAG auditor’s report which is in total disregard of section 115JB. • Available jurisprudence has clearly been ignored while adjudicating the matter. No weightage has been given to Jurisdictional High Court cases. • The addition has been made in haste without application of mind. The confusion is evident from the fact that reliance has been placed on accounting standard issued under section 145(2) ignoring the non-obstante clause of 115JB. Moreover, while considering Prior period expenses, Ld. AO has ignored Prior period income. Our Reply on alternate contention raised by AO In addition to the above, the Ld. AO has raised an alternative ground that depreciation on account of change in depreciation rates is in effect a diminution in the value of assets. Clause (i) of explanation 1 to section 115JB(2), the relevant section that deals with disallowance of amount set

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. aside as provision on account of diminution of value of assets, is quoted as under: "Explanation 1. —For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- … … … (i) the amount or amounts set aside as provision for diminution in the value of any asset,"

As per the above clause, only the amount set aside as provision for diminution in the value of any asset has to be added back while computing book profits as per section 115JB. However, the Ld. AO has failed to observe that no amount has been set aside as provision by the assessee as diminution in the value of assets. The assessee has charged to the profit and loss account the actual amount of depreciation due to change in depreciation rates. Hence, the provision relied by the Ld. AO is inapplicable to the facts of the present case. Therefore, it is earnestly prayed that the even the alternative contention raised by the Ld. AO is factually incorrect and disallowance of 'adjustment due to change in depreciation rates' made by the Ld. AO may kindly be deleted."

4,2 The Ld. AR furnished further submission vide letter dated 17.02.2016 as under: ”Condition 1: Profit and loss should be prepared in accordance with Part II of schedule VI The provisions in relation to preparation of Profit and Loss account in accordance with Part II of Schedule VI of Companies Act, 1956 are contained in Section 211 of Companies Act, 1956. Sub section 2 of section 211 provides as under: "(2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto."

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

It further provides vide section 3A that "Every profit and loss account and balance sheet of the company shall comply with the accounting standards." Therefore, it is clear from the above that the Profit and Loss Account must comply with the Accounting Standards as contemplated in sub section 3A of the Companies Act, 1956. Sub-Section 3C clarifies that "For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act. 1949 (38 of 1949). as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A : Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section." Therefore, for the purpose of MAT, the profit and loss under section 211 of Companies Act can be carved out only after applying Accounting Standards prescribed by ICAI. The provisions in relation to claim of depreciation considering the useful life of the asset are contained in Accounting Standard-6, Depreciation Accounting as recommended by ICAI.

The relevant provisions of Accounting Standard 6 are discussed hereunder- • Vide para 11 it states "The quantum of depreciation to be provided in an accounting period involves the exercise of judgement by management in the light of technical commercial, accounting and legal requirements and accordingly may need periodical review. If it is considered that the original estimate of useful life of an asset requires any revision, the unamortized depreciable amount of the asset is charged to revenue. over the revised remaining useful life." • Vide para 13 it states that "The statute governing an enterprise may provide the b< for computation of the depreciation. For example, the Companies Act, 1956 lays dc the rates of depreciation in respect of various assets.

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

Where the management’s estimate of the useful life of an asset of the enterprise is shorter than that envisage under the provisions of the relevant statute, the depreciation provision appropriately computed by applying a higher rate. A perusal of the aforesaid provisions contained in Accounting Standard-6 clearly provides that depreciation should be claimed considering the useful life of the asset. The original estimate useful life may be revised and the rates of depreciation may be different (higher) than the rates contained in schedule XIV of Companies Act, 1956. Not only accounting standard but also Circular issued under Companies Act (dated 07/03/198 clarifies the position that the rates of depreciation charged by a company may be higher than I rates contemplated in Schedule XIV. The relevant extract of the circular as mentioned above is as under- "It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the schedule in relation to assets purchased after the date of applicability of the schedule. However, if on the basis of a bona fide technologic evaluation, higher rates of depreciation are justified, they may be provided with prop disclosure by way of a note forming part of annual account." A perusal of the Circular clarifies that a company can claim depreciation higher than the rate contained in Schedule XIV provided: a. It is based on a bonafide evaluation of the life of the asset, and b. The company has disclosed the facts by way of a note forming part of annual accounts of the company.

We humbly submit that the company for the purpose of determining the useful life of the ass had formed a committee comprising senior officials of the company. The life of the asset was determined by the company based on the technical report submitted by such committee to the company. Also, the company

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. has duly disclosed this fact in its Notes to Accounts forming part Annual Account. It would be important to mention here that being a Public Sector Undertaking, accounts of the assessee Company have been audited by statutory auditor appointed by office of CAG and the supplementary audit is conducted by the office of the CAG. Auditor has clearly expressed h, opinion on compliance of section 211 at para no 5(e) of the Auditor's Report. It reads as follows "The Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this repot comply with the accounting standard referred to in sub-section 3C of Section 211 of the Companies Act, 1956 except for Accounting Standards 15 for Employee Benefits in respect of no provision of liability for LTC." Therefore, our humble submission is, the Book profits considered by assessee Company after considering revised life is very much within section 211 of the Companies Act. Condition 2: Adoption of same Annual Accounts in Annual General Meeting Section 115JB requires that the annual accounts including Profit & Loss Account shall be the as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 21G of the Companies Act, 1956 in respect of the following - • The accounting policies • The accounting standard adopted for preparing such accounts including profit and loss account • The method and rates adopted for calculating the depreciation the assessee company has complied with the same. 4.3 The AO observed that the profit and loss A/c for purpose of computation of book profit as per section 115JB, should be prepared after considering transactions the current period and should not relate to transactions of prior years. If the expense of earlier years is allowed, it would defeat the very provisions of introduction of MAT. He relied on the decision of the Hon'ble High Court of Kerala in the case of Bhagawathy Textiles Ltd. vs. ACIT - ITA No. 74/2010. The AO also observed that as per Accounting Standard (AS) - 5 on net profit

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. or loss for the Period, the prior period items and changes in accounting policies, the prior period items relate to the past and needed separate disclosure. He, finally, observed that the reason why AS requires for adjustment of prior period item in current year is that the Indian regulatory environment does not allow for revision of earlier year’s financial statements. If prior period expense is allowed, the appellant will try to shift the expense to a period when the MAT provisions are applicable as against when normal provisions of Income Tax are applicable. 4.4 I have carefully considered the order passed by the AO and the submission filed by the Ld. AR. Section 115JB of the Act mandates that P & L A/c shall be prepared in accordance with the provisions of part II and part III of schedule VI of the Companies Act, 1956. The “book profit” so calculated is subject to adjustments to be increased by items prescribed in (a) to (i) and reduced by items (i) to (viii) of Explanation 1 of section 115JB of the Act. This clearly implies that any adjustments can only be considered with reference to the items specified in the Act. There are numerous decisions of the Hon'ble Courts wherein it is held that section 115JB is a complete code in itself. The AO has only limited authority to examine whether the books of accounts are maintained as per provisions of Companies Act or the books profit has been arrived as per the relevant schedule thereto. The Hon’ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [255 ITR 273] had held:

''Therefore, we are of the opinion that the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been property maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increase and reductions as provided for in the Explanation to the said section. To put if 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.

4.5 This decision was reaffirmed by the Hon’ble Supreme Court in the case of Malayala Manorama Co. Ltd. v CIT 300 ITR 251. It was held as under:

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

"If we examine the said provision in the above background, we notice that the use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, the Court observed that it is difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. " 4.6 The AO has relied on AS-5, issued by Institute of Chartered Accountant of India (ICAI) to disallow the prior period expenses. The said standard provides only for separate disclosure of prior period expenses but does not prohibit the appellant from claiming prior period expenses in the P & L A/c. The Hon'ble Delhi High Court has upheld allowability of prior period expenditure in the case of CIT v Khaitan Chemicals & Fertilizers Ltd., [307ITR 150]. The Hon’ble Court observed as under: "The Tribunal was correct, in law, in holding that the Assessing Officer had failed to appreciate that the net profit for the purpose of section 115J A is to be computed only after deducting the prior period expenses/extraordinary items. The fundamental flaw that had entered into the Assessing Officer's approach was that he was under an impression that the assessee was claiming a reduction in the net profit in terms of clauses (i ) to (ix) of the Explanation to section 115JA(2). The assessee had all along contended that the net profit was to be computed on the basis of the profit and loss account which, in turn, was to be in accordance with the provisions

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. of Parts II and III of Schedule VI to the Companies Act, 1956. Such a computation of net profit, in view of the prescribed Accounting Standard (AS-5). requires the prior period expenses/extraordinary items to be shown separately. That did not mean that because those items had been shown separately, they did not constitute part of net profit. Paragraph 5 of the Accounting Standard (AS-5) specifically requires that all items of income and expenses which are 'recognised in a period' should be included in the determination of net profit or loss for the period unless an AS requires or permits otherwise. The definition of 'prior period items', as given in AS-5, clearly stipulates that prior period items are incomes or expenses which arise 'in the current period' as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e.. the period relevant for the purposes of computing the net profit or toss. Clearly, prior period items are to be included in the determination of net profit it or loss. Furthermore, Paragraph 7 of AS- 5 stipulates that the net profit or loss, inter alia, comprises of extraordinary items and the same should be disclosed on the face of the statement of profit it and loss. From this, it is clear that both 'prior period items' as well as 'extraordinary items' are to be included in the determination of net profit or loss. If a prior period item is an expense, it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be incomes or expenses. The conclusion is that prior period items and extraordinary items form part of the net profit or loss. [Para 10]

Paragraph 15 of A5-5 makes it dear that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the 'current'profit or loss can be perceived. Two approaches have been indicated in Paragraph 19 of the said Accounting Standard (AS-5). The normal approach is to include prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. As ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. indicated in the Accounting Standard, in either case, the objective is to indicate the effect of such items on the current profit or loss. It was obvious that because of the prescribed AS which has to be followed by the assessee in view of the provisions of section 115JA(2) of the Act, read with section 211 of the Companies Act, the assessee was required to show the prior period items/extraordinary items separately so that their impact on the current profit or loss could be perceived. The fact, that the assessee had adopted the alternative approach of showing such items in the statement of profit and loss after determination of current net profit or loss, did not mean that those items were not to be taken into account in computing net profit as envisaged in section 115JA. Thus, what the assessee had done was only to indicate prior period items/extraordinary items separately. That did not mean that the figure of net profit it was to be arrived at de hors those items In view of the aforesaid discussion, net profit (as referred to in section 115JA) of the assessee-company was to be computed only after deducting the expenses on prior period/extraordinary items which were business expenditure, but were shown separately in the profit and loss account due to the specific requirement of the AS prescribed by the Institute of Chartered Accountants of India, "(emphasis supplied) 4.7 The AO has not given any instance wherein the appellant has not complied with the provisions of part II and part III of schedule VI of the Companies Act, 1956 while preparing its P & L A/c. In the light of the decision of the Hon'ble jurisdictional Court there cannot be any dispute about of allowability of prior period expenses in computing book profit within the meaning of section 115JB of the Act. It is also pertinent to mention here that the appellant company had also disclosed prior period income amounting to Rs.5,11,08,612/- in the P & L A/c under the head prior period adjustment. This has not been commented upon by the AO while disallowing prior period expenses. Considering the above and the decision of the Hon'ble Delhi High Court (supra), I am of the view that the adjustment of Rs.2,40,48,802/- by adding back prior period expenses to the book profit, made by the AO, is not as per provisions of the Act and is, therefore, directed to be deleted. 4.8 The AO has also disallowed Rs. 14,09,30,283/- as an exceptional item debited to the P & L A/c as it had an element of prior period expense.

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

Though, no specific finding has been given by the AO while disallowing the same, it is implied that the said adjustment was made on the same reasoning for disallowance of prior period expenses. Since I have held in para 4.7 above that disallowance of prior period expenses is not warranted in view of the facts of the case and the decision of the jurisdictional High Court, the disallowance made by the AO is ordered to be deleted. 4.9 The appellant claimed depreciation in accordance with the method followed consistently in the past. But it claims to have the useful life of its fixed assets examined by a technical committee and as the useful life as per the recommendation of the committee is reported to be shorter, it charged depreciation at a higher rate in order to align the duration of the depreciation charge with the expected useful life of the assets. 4.10 The AO made an adjustment on account of change in depreciation rate amounting to Rs.52.74 crores to the book profit of the company for the purpose of determination of tax liability as per provisions of section 115JB. The AO was of the view that the accounting standard prescribed u/s 145(2) of the Act should be followed by the appellant and in case that was not done he had the authority to modify the book profit. He relied on the decisions in the case of Sutlej Cotton Mills Ltd. vs. ACIT 45 ITR 22 and Rain Commodities Ltd. (ITA No. 673/Hyd./2009). The AO also relied on judgement of the Hon'ble Apex court in the case of McDowell and Co. Ltd. vs. Commercial Tax Officer, 154 ITR 148 and was of the view that the appellant had resorted to a colorable device in order to reduce its tax liability under MAT. He was also of the view that the excess depreciation claimed by the appellant due to the higher rate applied by it could be deemed to be the amount set aside as provisions for diminution in the value of the assets and should be ignored while calculating the book profit. Accordingly, he made adjustments to the effect that the enhanced depreciation ignored and, consequently, higher MAT was determined with reference to the adjusted higher book profit. The Ld. AR had submitted that appellant has maintained its account in accordance with the requirement of the Companies Act, 1956 as well as the Accounting Standard-6. The change in the rate of depreciation was also effected in keeping with the same. The appellant had made due disclosure of this fact by way of a note forming part of the Annual Report. The Ld. AR further argued that the appellant is a public sector company and its accounts are audited by auditors appointed by the Comptroller and Auditor General (CAG) and are also subjected supplementary audit by the ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

Officers of the CAG. The auditors have certified that the books of accounts of the appellant depict true and fair view of its state of affairs. The decisions relied upon (supra) by the AO in fact support its case in so far as they lay down the principle that, if accounts are maintained in accordance with the provision of the Companies Act, the AO has no authority to disturb the book results. Excess depreciation cannot be termed provision for diminution in the value of the asset. In fact, it had made such provision separately by way of an impairment account but had duly added it back to the net profit while computing the book profit. 4.11 I have carefully considered the observations of the AO in the assessment order and the submission furnished by the Ld. AR. The requirement of section 115JB of the Act is as under: i) The appellant should prepare its P & L A/c for previous year in accordance with the provision of Part II of Schedule VI to the Companies Act and ii) While preparing the annual accounts including P & L A/c, the accounting policies, the accounting standards adopted for preparing such accounts including P & L A/c and the method and rates adopted for calculating the depreciation shall be the same as has been adopted for the purpose of repairing such accounts including P & L A/c and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956. 4.12 According to section 350 of the Companies Act, 1956, “The amount of depreciation to be deducted in pursuance of clause (k) of sub-section 4 section 349 shall be the amount of depreciation on assets as shown by the books of the company at the end of the financial year expiring at commencement of this act or immediately thereafter and at the end of the each subsequent financial year and rate specified in the schedule XIV”. The Companies Act lays down the depreciation rate for different types of assets. According to Circular No. 2/89 dated 07.03.1989, issued by the Department of the Company Affairs, “It may be clarified that the rates as contained in schedule XIV should be viewed as the minimum rates, therefore, a company shall not be permitted the charge depreciation at rates lower than those specified in the schedule in relation to assets purchased after the date of applicability of the schedule. However, if on the basis of a bonafide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of the annual account”. 4.13 Accounting Standard - 6 (relating to Depreciation Accounting),

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. deals with useful life of assets and defines the same as “either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of assets by the enterprise”. According to clause-8, “Determination of useful life of depreciable asset is a matter of estimation and normally based on various factors including experience with similar types of assets”. According to clause -11, “The quantum of depreciation to be provided in an accounting period involves the exercise of judgement by the management in the light of technical, commercial, accounting and legal requirements and accordingly may need periodical review. If it is considered that the original estimate useful life of an asset requires any revision, the unamortized depreciable amount of the asset is charged to revenue over the revised remaining useful life”. As per clause - 13, “The statute governing an enterprise may provide the basis for computation of depreciation. For example, the Companies Act lays down the rates of depreciation in respect of various assets. Where the management’s estimate of the useful life of the asset is shorter than that envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate. If the management’s estimate of the useful life of the asset is longer than that envisaged under the statute, depreciation rates lower than that envisaged by the statute can be applied only in accordance with the requirement of the statute”. 4.14 It is thus, clear from a combined reading of the Companies Act, 1956 and the Accounting Standard-6 that there is no bar on the management carrying out revaluation of the useful life of an asset and, accordingly, modify the rate of depreciation so that “depreciable amount” and the revise useful life of the asset are aligned with each other. The appellant claims to have carried out bonafide revaluation of the useful of its assets through an expert Technical Committee consisting of its qualified personnel. The AO has not pointed out any material defect in the report of the Technical Committee. He has gone by the effect of the revised rate of depreciation applied by the appellant, i.e. the fact that the net profit as per the P & L A/c is lower than what it would have been if the change in the depreciation rate had not been effected. But, as has been brought out in para 4.13, as the Companies Act and Accounting Standard permit the management to carry out such revaluation (resulting in change in depreciation rate), it is not open to the AO to challenge the validity thereof simply because it has effect of reducing the net profit. 4.15 The provisions of section 115JB is applicable to a company which shows higher profit in its accounts but computes lower or nil profit of business under the regular provisions of the I. T. Act. Companies have ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. also been found window dressing their accounts, so as to report higher profits and better financial health in order to cater to investors, creditors etc. Not claiming depreciation or claiming lower depreciation has been one of the instruments of such window dressing. In the case of the appellant, the situation is the reverse. It has reported lower net profit in the books on account of revision in the rate of depreciation. Prima facie therefore, it is not the case of window dressing by manipulating depreciation. In this regard, it may not be out of place to mention that: a) It is the public sector undertaking owned by the Government of India (Ministry of Railways). b) Its accounts audited by the auditors appointed by the CAG and also subjected to supplementary audit by the Officers of the CAG. c) The auditors have certified that the books of the accounts of the appellant depict true and fair view of its state of affairs. 4.16 The appellant has maintained its accounts as per the Companies Act and has made adequate disclosure in relation to higher charge of depreciation. Section 115JB of the Act requires certain adjustments to the net profit as per the P & L A/c so as to arrive at “book profit” for the purpose of that section. Depreciation is first added back and then the depreciation (excluding the depreciation on account of revaluation of assets) is reduced. The net effect is that any artificial depreciation on account of revaluation of assets gets neutralized while calculating the book profit. Here, the appellant has not revalued its assets but revised its estimate of the useful life of the assets and, consequently, increased the rate of depreciation. Such increase in depreciation is not permitted to be ignored while calculating the book profit u/s 115JB of the Act. The AO has taken an alternative plea that the increased depreciation may be deemed to be “the amount or amounts set aside as provisions for diminution in the value of any assets” as per clause (i) of Explanation 1 to section 115JB and for that reason, it should be added to the net profit while arriving at the book profit. This, however, does not apply as it is not the case of diminution in the value of assets but diminution in the useful life thereof. Further, it is evident that no amount has been set aside as provision by the appellant as diminution in the value of assets. The appellant has charged to its P & L A/c actual amount of depreciation due to change (increase) in rate of depreciation which is permissible under the Companies Act, 1956. It has already been mentioned that impairment amount was separately calculated by the appellant at Rs.4,01,13,063/-

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. and was charged to the P & L A/c. This amount representing impairment being in the nature of diminution in the value of assets was added back by the appellant under the referred clause for the purpose of computing book profit. 4.17 In the light of the above, it is quite clear that the appellant had correctly computed the book profit and the upward division thereof by the AO by way of adjustment due to change in depreciation rates amounting to Rs.52.74 crores is not in as per provisions of law. It is, therefore, held that increased MAT liability on the adjusted book profits is not justified and the same is directed to be deleted. These grounds of appeal are ruled in favour of the appellant.”

(2.2) At the time of hearing before us, Ld. CIT (DR) relied on the Assessment order and read out the relevant portion from the same.

(2.2.1) The Ld. Authorized Representative (AR) for the Assessee relied on the Paper Book which consisted of the following particulars:

Ld. AR also submitted that the Assessee is Public Sector Undertaking and is subject to audit by Statutory Auditor appointed by Office of CAG (Comptroller and Auditor General) and supplementary audit is further conducted by the Office of the CAG; and he strongly contended that the audit report should be accepted in view of the fact that no qualification has been made by the Auditors with respect to unreasonableness of accounting estimates.

(3) We have heard both sides attentively. We have considered the precedents and case laws brought to our notice during hearing before us and/or mentioned in the orders of the AO and Ld. CIT(A). We have carefully perused the materials on record which includes the Paper Book filed by the Assessee. We have given anxious consideration to rival submissions and contentions.

(3.1) The contention of the AO that the additional claim of Rs. 52.74 crores due to change in depreciation rates has resulted in diminution in the value of assets is misplaced. Clause (i) of Explanation 1 to Section 115JB of IT Act provides that the book profit is to be increased by the amount or amounts set aside as provision for diminution in the value of any asset. However, Clause (i) of Explanation 1 to Section 115JB of IT Act is not applicable for reduction in book value of assets as a result of depreciation. If the book value of certain assets undergoes reduction as a result of depreciation, such reduction is different from diminution in value for the purposes of Clause (i) of Explanation 1 to Section 115JB of IT Act. Clause

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

(i) of Explanation 1 to Section 115JB of IT Act is applicable to those situation in which the assessee claims diminution in value of assets other than through reduction in value as a result of depreciation. For example, if an assessee claims diminution in value of stock in trade such as, shares etc. (which is not eligible for depreciation) as a result of expected fall in market price below the book value of the stock in trade, such claim on account of diminution in value of assets is hit by Clause (i) of Explanation 1 to Section 115JB of IT Act. Even if the assessee claims additional depreciation for earlier years because of change in method of providing depreciation retrospectively, such additional depreciation for earlier years, claimed in a subsequent year, cannot be treated as diminution in value of assets, and is not hit by Clause (i) of Explanation 1 to Section 115JB of IT Act. We may mention that the Hon’ble Gujarat High Court, in CIT v.

Dintex Dyechem Ltd. [2015] 55 taxmann.com 178 (Guj.) and in Dy. CIT v. Gujarat Filaments Ltd. [2014] 369 ITR 384 (Guj.) held that addition made by the AO to book profit on account of additional depreciation debited in accounts for earlier years because of change in method of providing depreciation retrospectively was liable to be deleted. A perusal of Section 115JB (2) of IT Act shows that the book profit of the assessee company is to be arrived at in accordance with statement of profit and loss as

per the provisions of Schedule III of the Companies Act, 2013 or as per the provisions of the Act governing such companies to which second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable. Claim of

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. depreciation in accordance with the provisions of Schedule III of the Companies Act, 2013 or as per the provisions of the Act governing such companies to which second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable; as the case may be, is not hit by Clause (i) of Explanation 1 to Section 115JB of IT Act. Therefore, the AO was in error of law in holding that the additional claim of Rs. 52.74 crores due to change in depreciation rates have resulted in diminution in the value of assets.

(3.2) The Ld. AR of the assessee failed to bring to our attention any judicial precedents or any statutory provisions to show that the audit report by statutory auditors and/or the opinion of the statutory auditor is binding or final for all statutory authorities; even if the statutory auditor is appointed by the office of CAG and further even if the office of CAG conducts supplementary audit. The report(s)/opinion(s) of statutory auditor(s) are meant to aid and assist the statutory authorities and are not aimed to curtail their discretion, power or role; unless specifically provided under law or intended by necessary implication of specific provisions under law, or so held by binding judicial precedents. This applies even in respect of report(s)/opinion(s) of supplementary audit conducted by the office of CAG.

(3.2.1) In this context, the following portion of the order of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT 255 ITR 273, at page 279 (supra) are relevant:

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

“…… Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act.” [Emphasis added by us.] (3.2.1.1) It is thus obvious, that for the purpose of determination of book profits, the statutory role of Registrar of Companies to examine and satisfy that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act; has the mandate of the Supreme Court.

It can be readily inferred that report(s)/opinion(s) of statutory auditor(s) and the reports / opinions / recommendations as a result of Supplementary Audit are not final: these are not only subject to approval by the company in its general meeting, but also subject to examination by Registrar of Companies and his satisfaction that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act.

(3.3) The Ld. AR of the assessee did not bring any judicial precedents or statutory provisions to our attention in which preferential treatment for a public sector undertaking is prescribed in relation to determination of its tax liabilities. We are of the ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. view that unless specifically provided under law or intended by necessary implication of specific provisions under law, or so held by binding judicial precedents; a public sector undertaking cannot legitimately claim a preferential treatment in determination of its tax liabilities. Therefore, we hold that the fact that assessee is a public sector undertaking is irrelevant for adjudication of the dispute in this appeal before us.

(3.4) We now come to the contention of Ld. AR of the assessee, that the issue in dispute is covered in favour of the assessee by decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT (supra). The AO did not accept this contention of the Assessee, taking note of the order of Hon’ble Supreme Court in the case of Padmasundara Rao v. State of Tamil Nadu (255 ITR 147 at page 153) in which it was held as under:

“Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the set-ting of the facts of a particular case, said Lord Morrin in Herrington v. British Railways Board, [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.”

(3.4.1) Similar views were expressed by the Apex Court in the case of Sun Engineering Works (198 ITR 297 at page 320).

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

(3.4.2) With this background, we now consider the facts of this case and relevant provisions of law. Provisions under paragraphs 11 and 13 of Accounting Standard-6 (AS-6) have been noted by Ld. CIT(A) and relevant portions of the order of Ld. CIT(A) have already been reproduced earlier in this order. Vide paragraph 11 of AS-6, Management of the company is vested with power to exercise judgment in the light of technical, commercial, accounting and legal requirements and it permits Management to periodically review the original estimate of useful life of an asset. Further, under paragraph 13 of AS-6, it is permitted for the company to apply the higher rate of depreciation where the management estimates of the useful life of an asset is shorter than that envisaged under the provision of the relevant statutes (here, The companies Act, 1956). The provisions regarding rates of depreciation charged by a company were explained in Circular dated 07/03/1989 issued under the Companies Act, the relevant portion of which is reproduced as under:

“It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the schedule in relation to assets purchases after the date of applicability of the schedule. However, if on the basis of a bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosures by way of a note forming part of annual account.” [Emphasis added by us.] (3.4.2.1) It is, therefore, obvious that under AS-6, higher rates of depreciation for assets have to be based on bona fide technological evaluation of the useful

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. life of the depreciable assets. For a bona fide technical evaluation, it is necessary that the evaluation should be made by a competent person or body having the requisite technical knowledge and expertise. It is further necessary that such an evaluation leading to higher rate of depreciation is a bona fide evaluation, especially when such an evaluation results in tax benefit for the company. A self serving evaluation, which is not bona fide, leading to claim of reduced tax burden for the Assessee will be a colourable device within the meaning of the landmark decision of Hon’ble Supreme Court in the case of McDowell and Co. Ltd. vs. Commercial Tax Officer 154 ITR 148 (SC). A colourable device to evade tax has to be rejected.

(3.4.3) We have already held in foregoing paragraph (3.2.1.1) that for the purpose of determination of book profits, the statutory role of Registrar of Companies to examine and satisfy that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act, has the mandate of the Supreme Court; and further, that report(s)/opinion(s) of statutory auditor(s) and the reports / opinions / recommendations as a result of Supplementary Audit are not final : these are not only subject to approval by the company in its general meeting, but also subject to examination by Registrar of Companies and his satisfaction that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act.

ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd.

However, on the perusal of records before us, which includes the Assessment Order, the order of the Ld. CIT(A), the Paper book filed by the Assessee, Form 35, Form 36 etc; we find that the both the lower authorities, AO as well as Ld. CIT(A), have not considered whether, after examination by Registrar of Companies, whether Registrar of Companies was satisfied that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act. Further, on perusal of records, we find that the relevant information, whether, after examination by Registrar of Companies, whether Registrar of Companies was satisfied that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act; is not available on our records. Neither of the two sides, in the course of appellate proceedings in ITAT has provided details regarding constitution of the committee which recommended lower useful life of the assets and higher rate of depreciation.

Furthermore, the information regarding technical qualifications, knowledge and expertise of the committee members is also not available on our records. Moreover, a copy of the report of the committee is also not available on our records. On perusal of the records, we find that the query of the AO from the Assessee as to why the useful life of radio equipment has been taken by this committee to the three years, when BSNL (Bharat Sanchar Nigam Limited) considers the useful life of radio equipment to be 12 to 15 years, has remained unanswered. Importantly, the lower authorities, the AO as well as the Ld. CIT (A), have also not considered whether the Registrar of Companies has accepted the decision of the Assessee company to charge higher rate of ITA No.-2743/Del/2016. M/s Railtel Corporation of India Ltd. depreciation and to reduce the useful life of certain depreciable assets with retrospective effect, as a result of which the Assessee has made additional claim of depreciation amounting to Rs. 52.74 crores. Since the relevant information is not on our records, we restore the matter to the file of the AO with the direction to pass fresh order on this issue. Thus, the order of the Ld. CIT(A) is set aside on this limited issue and the matter in dispute in the present appeal before us is restored to the file of the AO for fresh order on this limited issue. In the result, appeal of the Revenue is partly allowed for statistical purposes.

Order pronounced in the open court on 28/11/2018.