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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’
PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER :
1. This appeal by the Revenue is directed against the order of Commissioner of Income-tax (Appeals) - 11, Bangalore dated 30/11/2016 for asst. years 2008-09. The assessee has also filed Cross Objections (‘C.O’) in respect of the aforesaid order of the CIT(A).
2. Briefly stated, the facts of the case relevant for this appeal are as under:- 2.1 The assessee company is engaged in the business of manufacture and sale of animal feed supplements, manufacture and processing of packaging drinking water and generation of power. The assessee filed its return of income for asst. year 2008-09 on 27/9/2008 declaring loss of Rs.41,24,013/- comprising unabsorbed depreciation, under the normal provisions of the Act and reported negative ‘Book Profits’ at Rs.(-) 41,68,146/- u/s 115JB of the Income-tax Act, 1961 (in short ‘the Act’). This return was processed u/s 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was completed u/s 143(3) of the Act vide order dated 26/11/2010, wherein the loss under normal provisions was determined at Rs.40,75,221/- and the Book profits computed by the assessee was accepted as returned. 2.2 On 18/12/2012, search and seizure operations u/s 132 of the Act were conducted at the assessee’s premises. After conclusion of search operations, the Assessing Officer (‘AO’) issued notice u/s 153A of the Act dated 26/2/2014. In response thereto, the assessee filed return of income for asst. year 2008-09 on 30/4/2014 declaring Nil income as declared in the original return of income filed on 27/9/2008 for this asst. year. The AO completed the assessment u/s 143(3) r.w.s 153A of the Act vide order dated 30/3/2015 by determining the ‘Book Profits’ u/s 115JB of the Act at Rs.2,37,38,520/- as against book loss of Rs.41,68,146/- reported by the assessee. While computing the book profits the AO made an addition of Rs.2,79,06,666/- in respect of excess depreciation claimed by the assessee on windmills, as he was of the view that the assessee had claimed excess depreciation at 100% of the cost of the windmills and had not followed the Accounting Standards for claiming depreciation over the life of the asset. In that view of the matter, the AO re-computed the allowable deprecation at 1/15th of the cost of the windmills and thereby restricted the allowable depreciation at Rs.19,93,333/- for the year under consideration. 2.3 Aggrieved by the order of assessment for dated 30/3/2015 for asst. year 2008-09, the assessee preferred an appeal before the CIT(A)-11, Bangalore. The ld CIT(A) disposed off the appeal allowing the assessee partial relief. In doing so, the ld CIT(A) allowed the assessee’s claim that the AO was not entitled to make additions to the ‘Book Profits’, which was accepted by the stationary auditors and the Registrar of Companies (‘ROC’) and directed the AO to accept the ‘book profits’ as declared by the assessee. The ld CIT(A), however, rejected the assessee’s claim that the AO was not entitled to vary the book profits in the order of assessment framed u/s 143(3) r.w.s 153A of the Act in the absence of any incriminating/seized material being found at the time of search.
3.1 Revenue, being aggrieved by the order of the CIT(A)-11, Bangalore dated 30/11/2016 for asst. year 2008-09, has filed this appeal wherein it has raised the following grounds:- The issue under appeal was computation of the Book Profit by the A.O on the issue of 100% depreciation claimed on the windmill in the books of the company to arrive at the book profit. The asessee had claimed 100% depreciation on the windmill as per Income Tax Act to arrive at the total time as per normal provisions of the Act. However, while computing the book profit as per Companies Act. also the assessee claimed 100% depreciation on the windmill and arrived at a book profit. The A.O was of the opinion that depreciation at the rate of 100% was neither in accordance to the Schedule VI of the Companies Act,1956 nor with the Accounting Standard -6 . As per the Accounting Standard- 6, depreciation is to be claimed over the period of time over while the depreciable asset was supposed to tube a useful life. The assessee was asked to explain as to how the entire depreciation i.e. 100% was claimed in the first year itself. The assessee replied that the interpretation of section 205 read with schedule XIV of the Companies Act,1956, was that the Board of Directors of the Company if in their wisdom deem fit to adopt higher rate of depreciation for an asset over and above the rate of depreciation in the Schedule XIV, then such rate can be adopted. Same has taken place in this case as per the assessee. Notable in this regard is that, as per Schedule XIV, during this year there was no prescribed rate of depreciation as per Companies Act for the Windmill . Further, it was erroneous on the part of the assessee to assume and claim that the Board of Directors was empowered to adopt any rate of depreciation for any asset. There is no such explicit provision in the Companies Act, 1956. In such a scenario, the assessee was supposed to claim depreciation as per AS-6 and claim it over a period of the useful life of the asset. Thus, it was clear that the profit and loss account of the company was not in conformity with Schedule VI of the companies Act. Thus, the A.O was correct in allowing only 1115th of the depreciation assuming that the windmill will be in operation for at least 15 years.
The learned CIT (A) erred in fact and in law deleting the addition to the book-profit placing reliance on the Judgment of the Apex Court in the case of APOLLO TYRES, 255 ITR 273 and upon Karnataka High Court order in the case of 1- IARIRAM HOTELS ( dt-16.12.15).
The A.O relied upon the judgment in case of Bombay Diamond Co. Ltd, 2009-TIOL-ITAT( Mumbai) , where the apex court order in the case of APOLLO TYRES (Supra) was discussed and was held that mere because an auditor has certified the accounts of the company does not mean that the accounts of the company have been prepared according to Schedule VI of the Companies Act. Further, as far as the judgment in the case of HARIRAM HOTELS ( Supra) is concerned, the facts of the case are not squarely applicable in this case. In the case of HARIRAM HOTELS, what was discussed, was whether capital gains has to be mandatorily taken into account in arriving at the book profit.
In the instant case, the assessee without being enabled by Companies Act, 1956, has charged higher depreciation and not maintained the profit and loss accounts as per Schedule VI of the Companies Act., thus it is justified to re-compute book profit by charging depreciation as per AS-6.”
3.2 The ld DR for Revenue was heard in support of the grounds raised (Supra). According to the ld DR, the ld CIT(A) erred in allowing relief to the assessee by directing the AO to accept the computation of ‘book profits’ u/s 115JB of the Act as declared by the assessee. It is contended that the ld CIT(A) ought to have appreciated that the assessee has not followed the Accounting Standards while claiming 100% depreciation on windmills and therefore the AO was correct in re-computing the ‘book profits’ u/s 115JB of the Act by allowing the admissible depreciation. It was prayed that the finding of the ld CIT(A) on this issue be reversed. 3.3 Per contra, the ld AR for the assessee supported the finding rendered by ld CIT(A) in the impugned order, submitting that in coming to the conclusion that the AO was not authorized to re- compute the declared ‘Book Profits’ u/s 115JB of the Act when the same was certified by the Statutory Auditors and accepted by the Companies Act, 1956, the ld CIT(A) followed the judgment of the Hon’ble Karnataka High Court in the case of Hariram Hotels (ITA No.53/2009 dated 16/12/2005), which in turn had followed the decision of Hon’ble Apex court in the case of Apollo Tyres Ltd., (255 ITR 273) (SC). The ld AR also contended that the AO was not competent to re-compute the ‘Book Profits’ u/s 115JB of the Act in the absence of any seized materials found in the course of search proceedings u/s 153A of the Act in this regard. According to the ld AR, the scope of the assessment u/s 153A of the Act was a limited one and the AO, in the absence of any seized material, could not have re-visited issues that were already examined in the order of assessment earlier passed u/s 143(3) of the Act. 3.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the only issue for adjudication before us in this appeal is with regard to the computation of book profits u/s 115JB of the Act. From perusal of the records, it is seen that as per the return of income filed that the assessee had computed and declared the ‘Book Profits’ u/s 115JB of the Act at a loss of Rs.(-)41,68,196/-. The assessee has claimed an amount of Rs.2,99,00,000/- as depreciation on windmill @ 100% of the cost of windmill. In the order of assessment, the AO has restricted the claim for depreciation on windmill to 1/15th of its cost i.e, Rs.19,19,333/- and recomputed the ‘book profits’ u/s 115JB of the Act at Rs.2,37,38,520/- by making an addition/disallowance of Rs.2,79,06,666/- in respect of depreciation. 3.4.2 In the factual matrix of case, as discussed above, the ld CIT(A) while allowing the assessee’s claim has held as under at para 6.2.6 to 6.2.8 of the impugned order.
“6.2.6 The second contention of the appellant regarding the power of the A.O. to rework the book profits of the appellant is well founded. I find that the Hon'ble Karnataka High Court in the case of HARIRAM HOTELS in vide judgment dated 16/12/2015 has held that the A.O. has to accept the audited accounts as certified by the statutory auditors and approved by the company in the general body meeting by following the judgment of the Hon'ble Supreme Court in the case of APPOLLO TYRES (supra). The relevant observations of the Hon'ble jurisdictional High Court are as follows:- "11. Section 1151B of the Act during the relevant period provides that notwithstanding anything contained in any other provisions of this Act, in the case of an assessee being a company, the income tax payable on the total income as computed under the Act is less than 7 ½% of the book profit, the tax payable for the relevant previous year shall be deemed to be 7 ½% of such book profit. Thus, the assessee has to first compute the total income in accordance with the Act and if the total income is less than 7 ½% of the book profit, then the assessee has to prepare profit and loss account for the previous year, then fictionally, it will be deemed that its total income chargeable to tax would be an amount equal to 7 ½% of such book profit. The Income Tax Officer has computed the book profit and the regular income. As tax on regular income is more than tax on book profit, tax on regular income is adopted. The Authorities have consistently relied upon Clause 3 (XII(b)) of Part-11 of Schedule VI to the Companies Act, to come to a conclusion that capital gains has to be mandatorily taken into profit and loss account while computing the book profit. That having not been done by the Assessee, the authorities have recomputed the book profit. At this juncture, it would be beneficial to refer to the Judgment of the Apex Court in Apollo Tyres (supra) which is rendered while dealing with an identical provision of Section 115J of the Act. It is held thus: "Therefore, we are of the opinion, the Assessing Officer while computing the income under section 1151 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 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."
In the subsequent Judgment of the Apex Court in HCL Comnet Systems (supra), following the Judgment of Apollo Tyres (supra), it is held that the adjustment required to be made to the net profit disclosed in the profit and loss account for the purpose of section 349 of the Companies Act are quite different from the adjustment required to be made under the explanation to be made under section 11 51A of the Act. For the purpose of section 1151A, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the explanation thereto.
The explanation appended to Section 115JB provides certain Items which if debited to the profit and loss account can be added back to the net profit for computing the book profit. Clause (b) of the said explanation provides for the amount carried to any reserves by whatever name called. In the present case, it is true that the capital gains are directly taken to capital reserve without taking the said amount of capital gain to the profit 'and loss account however, no such capital gain is debited to the profit and loss account, as such, the said explanation is not applicable to the facts of the present case. 14. We have noticed the auditor's report, certified with a qualification that the profit and loss account and balance sheet referred to in the report comply substantially in all material respects with the applicable accounting standards referred to in Section 211 (3C) of the Companies Act except the land and building sold during the year, the capital gain has been transferred directly to capital reserve account instead of crediting to profit and loss account, which in the opinion of the directors is more appropriate. However, it is not disputed that this auditor's report is accepted by the General Body, the books of account and the balance sheet are filed before the Registrar of Companies. It is also noticed by us that Clause 3(XII)(b) and (c) of Part II of Schedule VI of the Companies Act provides that profit and losses in respect of transactions of a kind, not usually undertaken by the Company or undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount and miscellaneous income, are required to be disclosed in the profit and loss account. Considering, the capital gain income falling under these clauses, it is incumbent on the Company to disclose the said amount of capital gain in the profit and loss account. Section 211 of the Companies Act contemplates, form and contents of balance sheet and profit and loss account. Sub-sections 3(A),3(B) and 3(C) of Section 211 provides that every profit and loss account and balance sheet of the company shall comply with the accounting standards, where the profit and loss account and balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and the balance sheet the following mainly: (a) the deviation from the accounting standards; (b) the reasons for such deviation; and the financial effect, if any, arising due to such deviation.
For the purpose of Section (3C) of Sec.211 of the Companies Act, 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 210(A).
The proviso to the said Section 211(3)(C) of the Companies Act makes it clear 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 the sub- section 3(C). The Assessing Officer has placed reliance on the accounting standards, vide No.9949 dated 25.1.1996 and has held that the transaction of sale property should have been brought into the profit and loss account as an extraordinary item since the assessee has failed to follow the accounting standards, determined the book profit after allowing the deduction towards cost as per provision to Section 115JB (2) of the Act. This order is confirmed by the appellate authority as well as by the ITAT. However, this exercise of the assessing authorities, in recomputing the book profit of the assessee is contrary to the principles of law laid down by the Apex Court in Appollo Tyres (supra). The Apex Court has held that the only power vested with the Assessing Officer is to make increases and deductions as provided in the explanation to Section 115JB of the Act. Assessing Officer has no power to embark upon a fresh enquiry in regard to the entries made in the books of accounts of the company. In the light of the judgment of Apollo Types (supra), we are of the opinion that the Assessing Officer has no power to recompute the book profit and has to rely upon the authentic statements of accounts of the company, the accounts being scrutinized and certified by the statutory auditors though with a qualification, approved by the company in general body meeting and thereafter filed before the Registrar of Companies, who has a statutory obligation to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act"
It is very clear from the above judgment of the jurisdictional High Court that the power of the A.C. with regard to the computation u/s. 115JB of the Act is very limited in scope. The AC. has to examine the accounts and see if the same has been accepted by the Statutory Auditors of the company and the shareholders in the AGM. Thereafter, he has to only take the book profit as shown in the accounts and make the adjustments as per explanation to section 115JB of the Act. Testing the action of the A.O. on the ratio of the aforesaid decision, it is seen that the A.O has rendered a finding that the appellant has claimed excess depreciation in the profit and loss account and therefore, the A.O has recomputed the same by allowing only 1/15th of the cost of the asset as depreciation. Whatever be the correctness or otherwise of the said view taken by the A.O., it is clear that the appellant has provided depreciation at 100% of the cost in the profit and loss account and has mentioned in the notes to accounts at point 4 to Schedule 17 of the financial statements that Depreciation on Windmills is provided at 100% of the cost" and the same is duly disclosed and accepted by the Statutory Auditors and the Shareholders in the AGM. Thus, the same cannot be called into question by the A.O. in the assessment proceedings in light of the judgment of the jurisdictional High Court supra.
It is also relevant to notice here that the A.O. has relied upon 2 decisions of the Hon'ble ITAT in support of the-view that the A.O. is entitled to rework the book profits of the appellant in the event the same is not prepared in accordance with the provisions of the Companies Act. The appellant has distinguished these decisions of Hon'ble ITAT by pointing out that the subsequent judgment of the Hon'ble Bombay High Court in the case of ADBHUT TRADING CO. PVT Ltd., in 338 ITR 94 (Born.). At any rate, there is a judgment of the jurisdictional High Court in the case of HARIRAM HOTELS (supra), which is binding on me and the same has to be followed. Hence, the decisions relied upon by the A.O. in the assessment order are of no avail. 6.2.7 I have also considered the provision of Explanation (1) to section 115JB of the Lt under which there can be additions and deletions to the book profit as per the profit and loss account. In terms of the clause (g) of Explanation 1, the book profit has to be increased by the amount of depreciation that has been provided in the accounts of the appellant. However, by virtue of clause (iia) of the very same Explanation 1, the amount of depreciation debited to the profit and loss account has to be deducted. However, while doing so, depreciation on account of revaluation of the asset cannot be deducted by virtue of the exclusion of the same in clause (iia) of Explanation 1. From a combined reading of these 2 clauses, it is clear that the legislature has intended to prohibit the allowance of depreciation as a deduction while computing the book profits to the extent it relates to the depreciation on revaluation of t assets. Such a situation is not obtaining in the case of the appellant. There is no revaluation of the asset and the extent of depreciation claimed is on the original cost of the windmill. Thus, even if, the provisions of Explanation 1 to sec. 115JB of the Act are applied, the amount of increase as well as reduction in the figure of depreciation remains the same and thus, the book profits returned by the appellant cannot be disturbed. 6.2.8 For the aforesaid reasons, the computation of income u/s. 115JB of the Act by making an addition of Rs. 2,79,06,066/- by the A.O. cannot be allowed to stand. The said computation of income u/s. 115JB of the Act is hereby vacated and the income as computed by the appellant of Rs. 41,68,146/- requires to be accepted. It is directed accordingly. Grounds No. 3 & 4 are ALLOWED.
3.4.3 On a perusal of the finding rendered by the ld CIT(A) on the issue before us (Supra), we find that the ld CIT(A) has followed the judgments of the Hon’ble Apex Court in Appollo Tyres Ltd., (255 ITR 273) (SC) and of the Hon’ble Jurisdictional High Court in the case of Hariram Hotels in dated 16/12/2015, while holding that the AO was not competent to go into the computation of ‘Book Profits’ u/s 115JB of the Act except to the limited extent of making additions and reductions as laid out in Explanation (1) to sec. 115JB of the Act. We find that the ld CIT(A) has also tested the claim of depreciation as per the provisions of Explanation (1) to sec. 115JB while coming to the view that the AO was not authorized to make the addition while re-working the extent of depreciation claimed by the assessee. The accounts of the assessee have been certified by the Statutory Auditors. The accounting policies followed by the assessee have not been found fault with by the Statutory Auditors or the authorities concerned under the Companies Act. In such cases, the AO is not permitted to make any variation by holding that the assessee has not followed the mandate of the Accounting Standards and the provisions of Companies Act while preparing its financial statements. The object of sec. 115JB of the Act is to bring to tax the book profits as shown by the company to its shareholders and keeping in view the aforesaid object behind sec. 115JB of the Act and the judicial pronouncements on the scope of the ‘AO’s powers computing the book profits, we do not find any reason to interfere with the impugned order passed by the ld CIT(A) on this issue and therefore uphold the same. Consequently, the grounds raised by Revenue are dismissed.
4. In the result, Revenue’s appeal for asst. year 2008-09 is dismissed. Assessee’s C.O No.81/Bang/2017 for A.Y 2008-09 5.1 The assessee has raised the following grounds/Cross- objections:-
The orders of the authorities below in so far as they are against the Cross-objector/respondent are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
The learned CIT[A] is not justified in rejecting the contention of the cross objector that the re-computation of the book profit u/s. 115JB of the Act at Rs. 2,37,38,520/- in the proceedings u/s. 153A of the Act was impermissible especially since the book profits/(loss) computed by the appellant at (Rs. 41,68,146/-) was not disturbed in the regular assessment framed u/s. 143[3] of the Act completed before the date of search and when there was no materials found and seized at the time of search to take a different view in the proceedings u/s. 153A of the Act and consequently the books profits determined at Rs. 2,37,38,520/- ought to have been vacated on this score as well.
For the above and other grounds that may be urged at the time of hearing of the Cross-Objection, your Respondent/Cross-Objector humbly prays that the appeal filed by the appellant A.O. in respect of the relief granted by the CIT [Appeals] may be dismissed and grounds of the Cross-Objection may be allowed and Justice rendered.
5.2 Since we have decided the issues raised in Revenue’s appeal against Revenue and thereby upheld the impugned order of the ld CIT(A), the C.O’s of the assessee is now only of academic interest and the same are dismissed as infructuous. 6. In the result, the assessee’s C.O for asst. year 2008-09 is dismissed. 7. To sum up, both Revenue’s appeal for asst. year 20008-09 and the assessee’s Cross-objections are dismissed.
Order pronounced in the open court on 13th October, 2017.