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Income Tax Appellate Tribunal, Kolkata Bench, Kolkata
Before: SHRI ABY. T. VARKEY & SHRI M. BALAGANESH
IN THE INCOME TAX APPELLATE TRIBUNAL Kolkata Bench, Kolkata (Bench – “C”)
BEFORE SHRI ABY. T. VARKEY, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER I.T.A. No.819/Kol/2017 (Assessment year 2011-12) M/s. Himadri Chemicals & PCIT, Central-1, Kolkata. Industries Ltd. -Vs- [now known as Himadri Specialty Chemical Ltd.] [PAN :AAACH 7475 H] (Appellant) .. (Respondent) For the Appellant Shri S.K. Tulsiyan, Advocate For the Respondent Dr. P. K. Srihari, CIT(DR) Date of Hearing 03.04.2019 Date of Pronouncement 05.04.2019
ORDER Per M. Balaganesh:
This appeal of the assessee arises out of the order of the Learned Commissioner of Income Tax, Central-1, Kolkata [in short ld. CIT(A)] dated 27.03.2017 against the assessment order of DCIT, Central Circle-2(1), Kolkata [in short the ld AO] u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) on 27.03.2015 for the Assessment Year 2011-12.
Though the assessee has raised several grounds before us, the only issue to be decided in this case is as to whether the ld. CIT was justified in invoking revisional jurisdiction u/s 263 of the Act in the facts and circumstances of the case.
M/s. Himadri Chemicals & Industries Ltd. I.T.A. No.819/Kol/2017 Assessment year 2011-12
The brief facts of this issue are that the assessee is engaged in the business of producing of coal tar pitch and others and had filed its return of income for the Assessment Year 2011-12 on 30.09.2011 declaring total income of Rs.59,68,73,155/-. The assessment was completed u/s 143(3) of the Act on 27.03.2015 determining total income of Rs.61,66,77,310/- under normal provisions of the Act. In the said assessment, disallowance u/s 14A of the Act was made to the tune of Rs.99,658/- and adjustment to arm’s length price as proposed by the ld. Transfer Pricing Officer (‘TPO’) was made to the tune of Rs.1,72,04,492/-. The ld. A.O also computed the book profit of the assessee u/s 115JB at Rs.1,38,79,44,213/-. The ld. CIT sought to revise this assessment u/s 263 of the Act on the ground that the ld. A.O erred in not making addition of Rs.1,72,04,492/- being the adjustment made to arm’s length price while computing book profit u/s 115JB of the Act. The ld. CIT observed that ld. A.O did not make any enquiry on this aspect as to whether the transfer pricing addition made by ld. TPO would have to be added back while computing book profits u/s 115JB of the Act. The ld. CIT also observed that ld. A.O had not verified the compliance of provisions of section 297 of the Companies Act, 1956 by the assessee together with compliance of accounting standards issued by ICAI namely AS-18, AS-21 & AS-23. The ld. CIT observed that the ld. A.O had not verified the related party transactions of the assessee which would have a bearing in determining the correct net profit as per Companies Act. Accordingly, he treated the order of the ld. A.O as erroneous in as much as it is prejudicial to the interest of the Revenue. The relevant operative portion of the order of the ld. CIT is reproduced hereunder:
“5. As regards the contention of the assessee that no further adjustments can be made to the book profit, I would like to point out at the onset that the correctness of the net profit had never been verified by the AO by making proper enquiries with respect to the provisions of Section 297 of the Companies Act and Accounting Standards, namely AS-18, AS-21 and AS-23 specially when the TPO had made an adjustment of Rs.1,72,04,492/-, during the computation of arms length price with associated enterprises. Thus, it prima facie, appears that the net profit disclosed by the assessee is skewed in favour of the assessee with respect to the issue of transactions with associated enterprises. Hence, these 2
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needs elaborate examination by the AO by conducting detailed enquiries and verifications as explained above keeping in mind the provision of Companies Act, relevant Accounting Standards and Income Tax Act. In light of the discussion as narrated above, I set aside the Assessment Order u/s 143(3) dated 27.03.2015, in the case of the assessee for the A.Y. 2011-12, on the aforesaid points, and direct the A.O to pass fresh assessment order by making proper and adequate verification and enquiry in respect issues as pointed above, in accordance with the provisions the law. The AO is directed to pass fresh assessment order in the case of the assessee for the A.Y. 2011-12, after allowing the assessee a fair and reasonable opportunity of being heard, and as per the provisions of law.”
Aggrieved the assessee is in appeal before us.
We have heard the rival submissions and perused the materials available on record including the paper book of assessee comprising of annual report of the assessee company (printed copy) for the year ended 31.03.2011; copy of notices issued by ld. TPO and replies filed by the assessee thereon (enclosed in Pages 1 to 12 of the paper book); copy of notices issued by the ld. A.O and replies filed by the assessee thereon (Pages 13 to 25 of Paper Book); and copy of decisions relied upon by the assessee before the ld. CIT in 263 proceedings. The only grievance of the ld. CIT for treating the order of the ld. A.O as erroneous and prejudicial to the interest of the Revenue warranting invoking of revisional jurisdictional u/s 263 of the Act was that the addition made by the ld. TPO in the sum of Rs.1,72,04,492/-, though added under normal provisions of the Act was not added by the ld. A.O in the computation of book profits u/s 115JB of the Act. In this regard, it would be pertinent to note that Explanation 1 to section 115JB(2) of the Act clearly specifies the list of items that could be added to net profit as per profit & loss a/c to arrive at the book profits. For the sake of convenience the relevant provisions are reproduced hereinbelow:
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— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or 3
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(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa) the amount or amounts of expenditure relatable to, income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,— (A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, it is a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share or a special purpose vehicle to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be; if any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account...”
We find that the transfer pricing adjustment made u/s 92CA(3) of the Act is not an item falling under the aforesaid list provided in Explanation 1 to section
M/s. Himadri Chemicals & Industries Ltd. I.T.A. No.819/Kol/2017 Assessment year 2011-12
115JB(2) of the Act. The Hon’ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT reported in [2002] 255 ITR 273 (SC) held as under:
“The Assessing Officer, while computing the book profits of a company under section115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdictional to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub- section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of accounts of the company. Held accordingly, that, while determining the “book profits” under section 115J, the Assessing Officer could not re-compute the profits in the profit and loss account by excluding provisions made for arrears of depreciation.”
Now, the moot point that arises for our consideration is whether the accounts have been prepared by the assessee in accordance with the provisions of Part II & Part III of Schedule VI of the Companies Act, 1956 together with applicable accounting standards mandated under the Companies Act 1956. From the perusal of the annual report of the assessee company, we find that there is no qualification made by the statutory auditors in their audit report for violation of accounting standards or non-compliance to the same or non-compliance to preparation of accounts prescribed under Part II & Part III of Schedule VI of Companies Act. The related party loan transactions carried out by the assessee company are duly reflected in the audit report of the assessee as under:
M/s. Himadri Chemicals & Industries Ltd. I.T.A. No.819/Kol/2017 Assessment year 2011-12
“iii) a) The company has not granted any loan, secured or unsecured, to companies, firms or other parties covered in the register maintained under section 301of the Companies Act, 1956. Accordingly, the clauses(iii)(b) to (iii)(d) of the Order are not applicable. b) The Company has not taken any loan during the year from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act, 1956. The maximum amount involved during the year and the year and the year and balance in respect of such loan taken from a Company in earlier year was Rs. 900 lacs & Rs. 750 lacs respectively. The Company has also issued Deep Discount Debentures of face value of Rs. 123 crores in the earlier years to a Company covered in the register maintained under section 301 of the Act and the balance as on 31st March, 2011 net of discount, to be written off over the period of Debentures was Rs. 3679.84 lacs. c) In our opinion, the rate of interest and other terms and conditions of the aforesaid loans taken by the Company are prima facie not prejudicial to the interest of the Company. d) In respect of the aforesaid loan, the Company was regular in repaying the principal amount and was also regular in payment of interest as stipulated. v) a). To the best of our knowledge and belief and according to the information and explanations given to us, we are of the opinion that the particulars of the contracts or arrangements that need to be entered in the register maintained under section 301 of the Companies Act, 1956, have been so entered. b) In our opinion and according to the information and explanation given to us, the Company has not entered into any transactions during the year exceeding Rs. 5,00,000/- in pursuance of contracts of arrangements entered in the register maintained under section 301 of the Companies Act, 1956. As the Company has not entered into any transaction as aforesaid, Clause (v)(b) of the order is not applicable. xviii) To the best of our knowledge and according to the information and explanations given to us, the Company has not made any preferential allotment of shares to companies, firms or other parties covered in the register maintained under section 3012 of the Companies Act, 1956.”
We also find that the entire related party transactions are duly reflected in notes Forming Parts of Accounts for the year ended on 31.03.2011 vide Note No.21 as mandated in AS-18 which is reproduced hereinbelow for the sake of convenience:
“21. Related Party Disclosures: i.Name of the related parties where control exists irrespective of whether transactions have occurred or not 6
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a)Enterprise on which the Company has control Himadri Global Investment Ltd. (HGIL) Wholly Owned Subsidiary Shandong Dawn Himadri Chemical Industry Co. Ltd. Subsidiary of HGIL b)Entities / individuals owning directly or indirectly an interest in the voting power that gives them control None ii. Name of the other relates parties with whom transactions have taken place during the year a) Key Managerial Personnel Mr. Bankey Lal Choudhary Executive Director Mr. Shyam Sundar Choudhary Executive Director Mr. Vijay Kumar Choudhary Executive Director Mr. Anurag Choudhary Chief Executive Officer Mr. Amit Choudhary President – Projects Mr. Tushar Choudhary President – Operations CFO – (upto 31st August, 2010) Mr. Jatin Kapoor b) Enterprises owned or significantly influenced by the Key Managerial Personnel or their relatives Himadri Credit & Finance Ltd. Himadri Dyes and Intermediates Ltd. Himadri Industries Ld. AAT Techno-Infor Ltd. Sri Agro Himghar Ltd. HImadri e-Carbon Ltd.
SCHEDULES FORMING PART OF THE ACCOUNTS Transactions carried out with related parties referred to in above, in ordinary course of business are as under:
M/s. Himadri Chemicals & Industries Ltd. I.T.A. No.819/Kol/2017 Assessment year 2011-12
It is very clear from the perusal of the annual report that accounting standards 21to 23 are not applicable to the assessee company and hence there is no discussion regarding the same in the annual accounts of the assessee company.
The above observation would clearly prove that the accounts have been prepared in proper compliance with applicable accounting standards. There is no evidence brought on record by the ld. CIT that the accounts of the assessee have not been approved by the shareholders in the General Body Meeting or they have been subject to any enquiry by the Registrar of Companies for non-compliance to any accounting standards. Hence, the entire observations of the ld. CIT with regard to verification of compliance of provisions of section 297 of the Companies Act, compliance to accounting standards i.e. AS-18, AS-21 and AS-23 are totally irrelevant and not germane to the issue under consideration in the facts and circumstances of the assessee’s case.
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We find that the issue as to whether the transfer pricing addition made by the ld. TPO had to be added back while computing book profits u/s 115JB of the Act was the subject-matter of adjudication by the Coordinate Bench of the Delhi Tribunal in the case of M/s Cash Edge India (Pvt.) Ltd. vs. ITO; ITA No.64/Del/2015 dated 23.09.2015 for Assessment Year 2010-11 wherein it was held as under:
“36. We have considered the rival submissions and perused the material on record. It is settled law that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act. We find that that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1 Section 115JB(2) of the Act and, therefore, could not have been added back to the book profits under Section 115JB. 7. The case-law relied upon by the Ld. Sr. DR i.e. decision of the Special Bench in the case of the Tribunal in Rain Commodities (supra) does not also advance the case of the Revenue. In that case the Special Bench was considering whether the AO can alter the net profits declared by an assessee. The Special Bench has, following the decision the apex Court in Apollo Tyres and HCL Comnet), inter alia, held that the AO cannot travel beyond the net profits declared by the assessee unless (a) it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or (b) the incorrect accounting policies, accounting standards have been adopted for preparing such accounts and the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account. 38. In the present case there is no allegation is the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or that any incorrect accounting policies, accounting standards has been adopted for preparing such accounts or that the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account. 39. In view of aforesaid, we hold that the AO erred in adding back the transfer pricing adjustment of the book profits under Section 115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under Section 115JB of the Act.”
We find that this decision of the Delhi Tribunal was duly brought to the attention of the ld. CIT while giving reply to show cause notice issued u/s 263 of 9
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the Act and the ld. CIT conveniently ignored the same and does not whisper about the same in his final finding while proceeding to treat the order of the ld. A.O as erroneous and prejudicial to the interest of the revenue. Even otherwise, the ld. CIT had only mentioned in Para 5 of his order that the transactions with related parties and associated enterprises require elaborate examination by ld. A.O by conducting detailed enquires and verifications in the light of provisions of Companies Act, relevant accounting standards and income tax Acts. We find that the ld. CIT had not specifically pointed out any exact error committed by the ld. A.O while framing the assessment. Instead, the ld. CIT only directed the ld. A.O to make detailed and roving enquires through the route of invoking revisional jurisdiction u/s 263 of the Act. At the cost of repetition, we hold that the ld. A.O is not empowered to make any addition or deletion to the net profit as per Profit & Loss A/c prepared in accordance with Part II & Part III of Schedule VI of Companies Act 1956 and relevant accounting standards thereon, other than those items specifically mentioned in Explanation 1 to section 115JB(2) of the Act. Reliance in this regard is also placed on the decision of Hon’ble Supreme court in the case of CIT vs. HCL Comnet Systems and Services Ltd. reported in (2008) 305 ITR 409 (SC). There is no absolute allegation that the annual accounts of the assessee company were not passed/approved by the shareholders in the General Body Meeting.
In view of the aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the order of the ld. A.O was neither erroneous nor prejudicial to the interest of the Revenue warranting invocation of revisional jurisdiction u/s 263 of the Act in the facts of the instant case. Accordingly we have no hesitation in quashing the revision order passed by
M/s. Himadri Chemicals & Industries Ltd. I.T.A. No.819/Kol/2017 Assessment year 2011-12
the ld. CIT(A) u/s 263 of the Act and accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 05.04.2019. Sd/- Sd/- [A. T. Varkey] [M. Balaganesh] Judicial Member Accountant Member Dated : 05.04.2019 [RS, Sr.PS] Copy of the order forwarded to: 1. Appellant – M/s. Himadri Chemicals & Industries Ltd. [Now known as Himadri Speciality Chemical Ltd.], Fortuna Tower, 8th Floor, 23A, N.S. Road, Kol-1. 2. Revenue – PCIT, Central-1, Kolkata. 3. CIT(A)- Kolkata. 4. CIT – , Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.
//True copy// By Order
Assistant Registrar, Kolkata.