M/S GOLDEN GATE PROPERTIES LTD vs. DEPUTY COMMISSIONER OF INCOME TAX

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 4TH DAY OF MARCH 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE ASHOK S. KINAGI I.T.A. NO.258 OF 2016 BETWEEN: M/S GOLDEN GATE PROPERTIES LTD. REPRESENTED BY ITS DIRECTOR SRI.K.KRISHNAN NO.820, GOLDEN HOUSE 80 FEET ROAD, 8TH BLOCK KORAMANGALA BANGALORE - 560 095. ... APPELLANT (BY SRI.A.SHANKAR SR. ADV. FOR MR.JAYACHANDRAN, ADV.) AND: DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11 (3) BMTC BUILDING KORAMANGALA 80 FEET ROAD BANGALORE - 560 095. ... RESPONDENT (BY SRI.JEEVAN J.NEERALAGI, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 29.12.2015 PASSED IN ITA NO.1708/BANG/2013 FOR THE ASSESSMENT YEAR 2010- 11, PRAYING TO:

2 (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED ABOVE AND SNWERE THE SAME IN FAVOUR OF THE APPELLANT. (ii) TO ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN TH EORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE 'C' BENCH IN ITA NO.1708/BANG/2013 RELATING TO ASSESSMENT YEAR 2010-11 VIDE ITS ORDER DATED 29.12.2015. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2010-11. The appeal was admitted by a bench of this Court vide order dated 15.11.2017 on the following substantial questions of law:

(i) Whether the tribunal erred in law in not holding that as the provisions of Schedule VI of the Companies Act, 1956 and the applicable Accounting Standard, prior period expenditure of Rs.14,37,10,403/- which is disclosed as part of notes to accounts and also reduced from the accumulated

3 balance of the profit and loss account should be considered in the facts and circumstances of the case?

(ii) Whether the tribunal is justified in law in setting aside the issue to the record of the Commissioner of Income Tax (Appeals) with a direction to re-examine the issue in the light of provisions of Schedule VI of the Companies Act, 1956 and the applicable Accounting Standard and give a finding whether the amount of prior period expenditure is required to be part of the profit and loss account or not on the facts and circumstances of the case?

(iii) Whether the tribunal erred in not appreciating that the Commissioner of Income Tax (Appeals) has followed the judicial precedents which it turn have already considered the provisions of Schedule VI of the Companies Act, 1956 and the applicable Accounting Standard and thus given a finding that the amount of prior period expenditure is required to be part of the profit and loss account on the facts and circumstances of the

4 case?

(iv) Without prejudice, whether the tribunal ought to have itself decided the issue when the issue involved only application of provisions of law and did not require any investigation or verification of records or evidences on the facts and circumstances of the case? 2. Facts leading to filing of this appeal briefly stated are that the assessee is a public limited company engaged in the business of real estate projects. The assessee filed its return of income for the Assessment Year 2010-11 on 14.10.2010 declaring loss of Rs.4,21,81,982/-. Subsequently, a revised return of income was filed on 02.02.2011 declaring ‘NIL’ total income by claiming exemption under Section 80IB of the Act. The return of income was processed under Section 143(1) of the Act. The return was selected for scrutiny and the details sought for were furnished. The Assessing Officer passed an order on 31.01.2013 under Section

5 143(3) of the Act. The Assessing Officer made addition of Rs.14,37,10,403/- being the prior period expenses for the purposes of determining book profits at Rs.4,07,74,113/- under the provisions of Section 115JB of the Act. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 30.09.2013 deleted the addition of prior period expenses. Being aggrieved, the revenue filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal vide order dated 29.12.2015 set aside the order of the Commissioner of Income Tax (Appeals) and remitted the matter to Commissioner of Income Tax (Appeals). In the aforesaid factual background, the assessee has filed this appeal. 3. Learned Senior counsel for the assessee submitted that the assessee had debited the prior period expenses of Rs.14,37,10,403/- in the profit and loss account in its financial statements for the year ending

6 31.03.2010. It is further submitted that the details of the prior period items were disclosed by way of notes to the financial statements in Note No.17(17). It is also submitted that the Assessing Officer held that as the prior period expenditure has not been passed through the profit and loss account, the same cannot be claimed as deduction for the purpose of computation of book profits under Section 115JB of the Act. It is also pointed out that the Commissioner of Income Tax (Appeals) held that the assessee is eligible to adjust the prior period expenses while computing the book profits under Section 115JB of the Act irrespective of whether such prior period expenses are shown separately or not. It is contended that the prior period expenditure has been debited by the assessee in the opening balance of the profit and loss account to arrive at the closing balance of the profit and loss account. It is further contended that as per provisions of Section 115JB of the Act, an assessee being a company shall prepare its profit and

7 loss account for the relevant previous year in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. It is also contended that as per accounting standard-5, Net profit or loss of the period, prior period items and changes in accounting policies the prior period item should be separately disclosed. It is submitted that just because the information is shown separately, adverse inference cannot be drawn that the same is not debited to the profit and loss account. It is also submitted that the tribunal was not justified in remanding the matter to Commissioner of Income Tax (Appeals) and it ought to have upheld the order of the Commissioner of Income Tax (Appeals). In support of aforesaid submissions, reliance has been placed on decisions in 'TAMIL NADU CEMENTS CORPORATION LTD. VS. JCIT', (2012) 349 ITR 58 (MADRAS), 'CIT VS. KHAITAN CHEMICALS & FERTILIZERS LTD', (2008) 307 ITR 150 (DELHI), 'CIT VS. SAIN PROCESSING & WVG.

8 MILLS P. LTD.', (2010) 325 ITR 565 (DELHI), 'CIT VS. KARNATAKA SOAPS & DETERGENTS LTD', (2015) 59 TAXMANN.COM 43 (KAR.) AND 'CIT (LTU) VS. SANSERA ENGG. (P.) LTD.', (2016) 386 ITR 349 (KAR.). 4. On the other hand, learned counsel for the revenue submitted that the tribunal has merely remitted the matter to the Commissioner of Income Tax (Appeals) and has not recorded any findings on merits. It is further submitted that this court in this appeal cannot record the findings on the question urged on behalf of the assessee. It is also pointed out that in the facts and circumstances of the case, the tribunal is justified in remitting the matter to the Commissioner of Income Tax (Appeals) and no interference is called for in exercise of powers under Section 260-A of the Act. 5. We have considered the submissions made by learned counsel for the parties and have perused the

9 record. In our opinion, the scope of this appeal is limited that is to ascertain whether the tribunal was justified in setting aside the order passed by the Commissioner of Income Tax (Appeals) and remanding the matter to it. In other words, we have to examine the sufficiency of the material before the Commissioner of Income Tax (Appeals) on the basis of which challenge made by the assessee with regard to addition of prior period expenses in computing book profits, has been allowed. The tribunal has dealt with the claim for disallowance of prior period expenses in the following terms: 4. DISALLOWANCE OF PRIOR PERIOD EXPENSES: RS.14,37,10,403/- [GR.NO.3 & 4] 3.1 The grounds No.3 and 4 are in regard to the addition of Rs.14,37,10,403/- towards prior period expenses under the provisions of Section 115JB of the Act. The AO noted that in the Statement of Computation of Total Income under Section 115JB, the appellant company deducted prior period expenses directly adjusted in the opening reserve amounting to Rs.14,37,10,403/-. This amount

10 was not routed through the profit and loss account. The AO called for clarification on this issue and vide letter dated 31.01.2013 the appellant submitted its reply. However, the AO was not satisfied with the appellant's submissions and added the said expenses by invoking proviso 1 of Explanation to Section 115JB of the Act. 4.2 At the time of appeal hearing, the appellant made detailed submissions, which have been mentioned in the preceding paragraphs. The AR of the appellant also placed reliance on the following judicial pronouncements: (i) CIT vs. Khaitan Chemicals & Fertilizers Ltd., (2008) 307 ITR 150 (Delhi) (ii) CIT vs. Sain Processing & Weaving Mills Pvt. Ltd. (2010) 325 ITR 565 (Delhi) (iii) K.K.Nag Ltd. Vs. Addl. CIT, (2012) 52 SOT 381. 4.3 The information available on records reveals that the appellant had shown profit of Rs.4,07,74,114/- in the profit and loss account for the year ending 31.03.2010. While computing the book profit under

11 Section 115JB of the Act, it reduced the aforesaid sum of Rs.14,37,10,403/- as shown under the Notes to Accounts to arrive at book profits as per Explanation 1 to second proviso of the aforesaid section. The Hon'ble High Court of Delhi in the case of CIT vs. Khaitan Chemicals and fertilizers Ltd. (supra) held that prior items / extraordinary items were components of net profit as shown in the profit and loss account prepared under Section 115JA(2). The assessee was not claiming any reduction in the net profit on the basis of any of the clauses appearing in the Explanation. The assessee's claim was that the prior period items / extraordinary items were in any event subsumed in the computation of net profit. It is only that they were to be shown separately so that their impact on the current net profit or loss could be perceived. The Hon'ble High Court of Madras has concurred with the decision of the Hon'ble High Court of Delhi while deciding the case of Tamil Nadu Cements Corporation Ltd. Vs. JCIT (Spl. Range) (2012) 349 ITR 58 (Madras). Following the decision of the

12 Hon'ble High Courts of Delhi and Madras, the appellant is eligible to adjust the prior period expenses while computing the book profit under Section 115JB of the Act irrespective of whether such prior period expenses are shown separately or not. In view of the legal position discussed above, this ground of appeal is allowed in favour of the appellant. 6. The aforesaid finding has been set aside by the tribunal on the following grounds: The CIT(A) has not gone into this aspect of the issue whether this prior period expenditure was required to be part of profit and loss account as per Schedule VI of Companies Act or not. Therefore, if this amount was not required to be part of Profit & Loss Account prepared as per Schedule VI of the Companies Act, then undisputedly this amount not being part of any of the clauses of Explanation to Section 115JB cannot be excluded from net profit for the purposes of computing book profit under Section 115JB. Since, neither the revenue nor the assessee has furnished any record in support of their

13 respective claims, whether this amount of prior period expenditure was required to be part of profit and loss account prepared as per provisions of Schedule VI of the Companies Act, therefore, in the facts and circumstances of the case, we set aside this issue to the record of the CIT(A) to re- examine the issue light of the relevant provisions of Schedule VI of the Companies Act as well as the relevant accounting standard applicable

on this item of expenditure and then give a finding whether this amount of prior period expenditure is required to be part of profit and loss account or not. 7. Thus, it is evident that while passing the order, the tribunal has not adverted to the reasoning assigned by the Commissioner of Income Tax (Appeals). Therefore, we answer the second substantial question of law in favour of the assessee and against the revenue. In the result, the impugned order passed by the tribunal dated 29.12.2015 is quashed. We may clarify that

14 decision of this court in CIT VS. GMR INDUSTRIES LTD. (2020) 425 ITR 504 (KAR.) was rendered in the peculiar facts of that case. Needless to state that it will be open for the parties to raise all contentions as are admissible to them in law. Therefore, it is not necessary for us to answer the remaining substantial questions of law. In the result, appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss