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Facts
The Principal Commissioner of Income Tax (PCIT) invoked revisional jurisdiction under Section 263 against the assessment order for A.Y. 2011-12. The PCIT considered the assessment order erroneous because it allowed the assessee's claim of Rs.5,24,57,202/- as an unascertained DPCO liability, which the PCIT believed should have been added back to book profits under Section 115JB. The assessee contended that the DPCO liability was subject to ongoing litigation in the Gujarat High Court and was an ascertained liability, not an unascertained one.
Held
The ITAT found that a previous ITAT order for the same assessment year had already held the DPCO liability of Rs.5,24,57,203/- to be an ascertained liability for normal income computation under Section 37(1). Consequently, the AO's decision to allow this claim for computing book profits under Section 115JB was based on a plausible view and was not erroneous or prejudicial to the revenue. The PCIT's revisional order under Section 263, based on an incorrect appreciation of facts, was set aside.
Key Issues
Whether the PCIT was justified in invoking revisional jurisdiction under Section 263 to disallow a DPCO liability as unascertained for computing book profits under Section 115JB, when the ITAT had previously confirmed it as an ascertained liability for income computation under Section 37(1).
Sections Cited
Section 263, Section 143(3), Section 115JB, Section 37(1), Section 115J
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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI SANJAY GARG & SMT. ANNAPURNA GUPTA
The present appeal has been filed by the assessee against the order of the Principal Commissioner of Income Tax, PCIT, Vadodara-1 (hereinafter referred to as “PCIT”), dated 29.02.2016 invoking his revisional jurisdiction under Section 263 of the Sarabhai Enterprises Ltd. vs. PCIT] A.Y. 2011-12 - 2 – Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2011-12.
The order in the present appeal was originally passed vide order dated 25.06.2025 dismissing the appeal as infructuous noting that no consequential order had been passed by the AO pursuant to the directions of the PCIT in his order passed u/s.263 of the Act. Subsequently, the assessee filed a Miscellaneous Application pointing out the fact that a consequential order had been passed by the AO dated 31.08.2016, copy of which is placed before the ITAT. Considering the same, the order passed by ITAT was recalled and the appeal of the assessee fixed for adjudication afresh on merits, vide order in MA No.94/Ahd/2025, dated 18.12.2025. The present appeal, accordingly, has come up for hearing before us.
The order of the Ld.PCIT reveals that he found the assessment order passed in the case of the assessee u/s.143(3) of the Act to be erroneous so as to cause prejudice to the Revenue for having wrongly allowed the assessee a claim of alleged unascertained liability amounting to Rs.5,24,57,202/- while computing its book profits liable to tax under the minimum alternate tax regime u/s.115JB of the Act. The Book Profits had been determined at Rs.3,94,60,143/- in the assessment order.
The Ld. PCIT noted that the assessee had provided for DPCO (The Drugs (Price Control) Order) liability in its book amounting to Rs.2,62,28,601/- on the basis of amount pre-deposited as directed by the Hon’ble Gujarat High Court and another Rs.2,62,28,601/- provided as DPCO liability on the basis of Bank Guarantee given as directed by the Hon’ble High Court. He noted that the Hon’ble Supreme Court had allowed the assessee’s civil appeals against the judgment of the Hon’ble Gujarat High Court and had ordered to execute a guarantee favoring the bank in respect of the dues in the Suit filed by the Banks, which was pending before the Debt Recovery Tribunal (in short ‘DRT’). Basis the aforesaid, the Ld. PCIT found that the aforestated liability relating to DPCO having been created for bank guarantee in response to the Suit filed by the Banks, they were not ascertained as at the close of the impugned year i.e. 31.03.2011 and, therefore, the entire amount of such liability i.e. Rs.5,24,57,202/- (2,62,28,601 + 2,62,28,601) was to be added back to the books profit u/s.115JB of the Act.
The said facts find mention at para 2.1 of the order of the Ld.PCIT as under:
“2.1 On verification of record, it is revealed that while computing income as per Income Tax Act, Rs 2,62,28,601/- is provided as DPCO liability on the basis of amount pre-deposited (as directed by Hon'ble Gujarat High Court), including interest expenses & another Rs.2,62,28,601/- provided as DPCO liability on the basis of bank guarantee given (as directed by Hon'ble Gujarat High Court), Sarabhai Enterprises Ltd. vs. PCIT] A.Y. 2011-12 - 4 – including interest. On further verification, it is noticed that Hole Supreme Court had allowed Company's Civil Appeals against the judgment of Hon’ble Gujarat High Court and ordered to execute a guarantee favoring the Bank in respect of the dues in the suit filed by the Banks, which is pending before the Debts Recovery Tribunal. Hence, it is clear that the aforesaid liabilities have been created for bank guarantee in response to the suit filed by Banks, which are not ascertained as on 31.03.2011. Therefore, Rs.5,24,57,202/- (Rs.2,62,28,601 + Rs.2,62,28,601) was to be added Back to the Book Profit u/s.115JB of the IT Act.”
The order further reveals the assessee to have clarified the nature of the DPCO liability outstanding as being on account of demand raised by the DPCO on the assessee of Rs.7,60,23,008/- for the period 01.07.1981 to August 1987 and 01.07.1981 to 31.12.1983, in respect of two scheduled drugs. He explained that when recovery proceedings were initiated for the same, the assessee challenged the demands before the Hon’ble High Court of Gujarat who had stayed the recovery of demand by interim orders directing the assessee to pay Rs.2,35,65,805/- out of the total demand raised on it. Vide another interim order dated 31.01.2011, the High Court had directed the assessee to pay 50% of the balance outstanding i.e. Rs.2,62,28,601/- and to furnish bank guarantee for the balance 50% of Rs.2,62,28,601/- which the assessee complied with for keeping the recovery proceedings in abeyance. The assessee also stated that the issue before the Hon’ble Gujarat High Court was still pending for adjudication. And that the matter had not travelled to the Hon’ble Supreme Court at all. The assessee further clarified that the Hon’ble Supreme Court issue referred to by the Ld.PCIT was a completely Sarabhai Enterprises Ltd. vs. PCIT] A.Y. 2011-12 - 5 – different issue wherein the assessee’s appeal in respect of sanction of claim of arrangement of transfer of the assessee’s two divisions i.e. Swastik Division and Electronic Division was allowed by the Hon’ble apex court. This, the assessee pointed out, was reflected in Note 5 of Schedule 12 of balance sheet, on the basis of which an audit query has been raised and in response to which, present revisionary proceedings had been initiated on the assessee. The submissions of the assessee in this regard are reproduced at page nos. 2 to 4 as under:
The Drugs (Prices Control) Order (DPCO) came into force on 06.01 1995. DPCO was notified by the government to regulate the equitable distribution and increasing supplies of bulk drugs specified in the first schedule of the DPCO and making them available at a fair price, from different manufacturers, after making such inquiry as it deems fit, from time to time by notification in the official gazette, being a maximum price at which such bulk drugs shall be sold. Certain Drugs manufactured were listed drug in the first schedule of the DPCO Government worked out the ceiling price as per its own stand point and raised demand of Rs. 7,60,23,008/- for the period 1.07.1981 to August 1987 & 1.07.1981 to 31.12.1983 in respect of two such scheduled drugs. The details are as under: Scheduled Drug Period Demand Order Demand (in Rs.) details Amozycilin 1.7.1981 to Order/letter no. 84,13,143/- Trihydrate August 1987 6(27-N)/86-D- II/DPEA, dated 10.10.1995 Oxyphenbutazone 1.7.1981 to Order no. 6,76,09,865/- 31.12.1983 11(21)2005 DPEA, dated 27.1.2006 Total Demand 7,60,23,008/- Sarabhai Enterprises Ltd. vs. PCIT] A.Y. 2011-12 - 6 –
Recovery proceedings were initiated by Collector, Vadodara City. Consequently, factory land was attached. Company challenged both the demands by way of Special Civil Applications filed before Hon'ble High Court of Gujarat. The same is pending for adjudication. No orders setting aside and quashing the said demand have been passed either by Hon'ble Gujarat High Court or by Hon'ble Supreme Court. Company is facing severe financial crisis with heavy losses incurred over last many years. In view of the same company moved petition before Hon'ble Gujarat High Court requesting, inter alia, to keep the recovery of demand in abeyance. Hon'ble Gujarat High Court stayed the recovery of the demand vide interim orders, dated 24.07.2008, accordingly, Company made the necessary payment on 27.08.2008. The details of the same, alongwith the balance outstanding are as under: Stay of Demand of Demand payable as Balance Rs. (in Rs.) per the condition laid outstanding (in Rs.) down by Hon’ble High Court (in Rs.) 6,76,09,865/- 2,05,35,575/- 4,70,74,290 84,13,143/- 30,30,230/- 53,82,913/- Total Amount Paid 2,35,65,805/- 5,24,57,203/- Vide second interim order, dated 31.01.2011. Hon'ble High Court stayed the recovery of demand with a condition to pay 50% of the balance outstanding i.e. Rs.2.62,28,601/- (50% of 5,24,57,203/-) & to furnish bank guarantee for the balance 50% of Rs.2,62,28,601/-. Company complied with the said conditions stipulated by Hon'ble High Court for keeping the recovery proceedings in abeyance. Only the recovery of demands in question has been stayed and SCAs challenging the demands are still pending for disposal. Simply because the demands has been challenged, it cannot be said that liability is unascertained, nor it can be said that the liability does not exist. The liability persists. Company is following mercantile systems of accounting and therefore, the alleged amount was booked in accounts.
Reliance placed upon Hon'ble Gujarat High Court decision in the case of CIT Vs. I.G.Gandhi Silk Mills, (2005), 195 CTR 253 (Guj) wherein Hon'ble Court has held that demand of excise duty, which is challenged by way of writ petition, is not unascertained liability for the purpose of computation of book profit u/s 115J. Following decisions are also relied upon: CIT Vs. Bharat Carbon & Ribbon Mfg. Co.(P) Ltd. (1999) 105 Taxman 737 Kedarnath Jute Mfg. Co.Ltd. Vs. CIT, (1971), 82 ITR 363 (SC) ED Sassoon & Co. Ltd. Vs. CIT, (1954) 26 ITR 27 (SC) Calcutta Co. Ltd. Vs. CIT (1959) 37 ITR 1 (SC) Eastern Power Distribution Co. of AP Ltd. Vs. ACIT (2011) 139 TTJ 94 (Visakha) CIT VS ILPEA Paramount P. Ltd. (2011), 336 ITR 54 (Delhi) Dresser Valve India (P) Ltd. Vs. ACIT, (2009) 30 SOT 495 (Mum) No petition is filed by the Company in this regard, neither any such petition is pending before the Hon'ble Supreme Court as alleged. The contents of the Note 5 of Schedule 12 of the Balance Sheet, which the impugned issue seems to be emerged is with regard to the Hon'ble Supreme Court allowing the company's appeal in respect of sanction of scheme of arrangement of transfer of erstwhile Swastik division and Electronics division and not in respect of demands in question under DPCO. The current proceedings have been initiated based on audit query raised on the basis of note no. 5 of Schedule 12 of Balance Sheet, under utter failure to understand and appreciate the true nature and character of the said note.”
We have noted that the Ld. PCIT did not deal with the facts as pointed out by the assessee before him, but, on the contrary, he considered the assessee’s submissions that the DPCO liability was Sarabhai Enterprises Ltd. vs. PCIT] A.Y. 2011-12 - 8 – an ascertained liability and held that since, the AO had not examined the character of impugned liability, therefore the assessment order was erroneous causing prejudice to the Revenue and he directed the AO to make proper enquiries to examine the records appreciating the facts and then decide the issue in accordance with law .
Before us, Ld. Counsel for the assessee contended that for the impugned year itself the ITAT had held the DPCO liability of Rs.2.62 Crores to be an ascertained liability for the purposes of computing the assessee’s income in terms of the normal provisions of law. He drew our attention to the order of the ITAT in dated 08.07.2025, copy of which was placed before us. Our attention was drawn to page nos. 13 to 20 of the order, more particularly, to the findings of the ITAT at page no.20 of the order holding the liability of Rs.5,24,57,203/- claimed by the assessee under DPCO to have validly accrued during relevant assessment year i.e. A.Y. 2011-12 and liable as deduction u/s. 37(1) of the Act.
Ld.DR fairly agreed that the ITAT had held the DPCO liability of Rs.5.24 Crores to be an ascertained liability for the purposes of computing its income as per the normal provisions of law.
In the light of the above fact alone, we hold, there remains no error in the order of the AO for having allowed claim of DPCO liability without examining its character, as held by the Ld.PCIT. The apprehension of the Ld.PCIT that the DPCO liability was an unascertained liability which ought not to be have been allowed for computing Book Profits of the assessee, now no longer remains since the said liability has been held to be ascertained liability by the ITAT eligible for deduction u/s 37(1) of the Act while computing income as per normal provisions in the case of assessee.
Further the Ld.PCIT’s finding of error also rested on the fact that the issue of DPCO liability arising from the order of the Hon’ble Gujarat High court was settled by the Hon’ble apex court and the amounts paid were merely towards guarantee’s favoring banks, furnished by the assessee in compliance with the order of the Hon’ble apex court. That they were there not ascertained liabilities.
This we find the assessee had pointed out was out of context and misplaced finding of the Ld.PCIT. The assessee had demonstrated that its matter relating to DPCO liability was still pending in the high court and had not travelled to the hon’ble apex court. That the matter before the apex court was a completely different matter relating to sanction of scheme of arrangement of Sarabhai Enterprises Ltd. vs. PCIT] A.Y. 2011-12 - 10 – transfer of two divisions of the assesses undertaking. Even before us the assessee has demonstrated the DPCO issue to be still pending as on date before the Hon’ble High court.
It is amply clear therefore that the Ld.PCIT’s finding of the assessee having been wrongly allowed deduction of an unascertained liability was based on incorrect appreciation of facts. For this reason also, his finding of error in the order of the AO is not sustainable.
In view of the above, we hold, that there is no case with the Ld. PCIT to hold the assessment order to be erroneous for having allowed deduction of DPCO liability for computing Book Profits of the assessee u/s.115JB of the Act without verifying its character whether ascertained or unascertained, since admittedly the AO’s order is in consonance with that of the ITAT in the case of the assessee holding the DPCO liability ascertained and hence allowable for deduction u/s 37(1) of the Act for computing income as per normal provisions of law. Even otherwise, considering the decision of the ITAT in the case of the assessee, the AO, we find, has taken a plausible view on the issue and for that reason also there cannot be said to be any error in the order of the AO allowing the claim of DPCO liability while computing the assessee’s books profits u/s.115JB of the Act.
In view of the above, the order passed by the Ld.PCIT is being found to be devoid of any merits and is accordingly set aside.
In the result, appeal filed by the assessee is allowed.
This Order pronounced on 18/02/2026
Sd/- Sd/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 18/02/2026 S. K. SINHA True Copy आदेश क� �ितिल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant ��यथ� / The Respondent. 2. संबंिधत आयकर आयु� / Concerned CIT 3. 4. आयकर आयु�(अपील) / The CIT(A)- �वभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,