LNG SECURITIES SERVICES PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH ‘D’ NEW DELHI BEFORE : SHRI C.M. GARG, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA No. 3708/Del./2013 Asstt. Year : 2004-05 LNG Securities Services Pvt. Ltd., vs. D.C.I.T., Circle 4(1), 223-225, Tribhuvan Complex, New Delhi. 6-51, Ishwar Nagar, Mathura Road, New Delhi. (PAN: AAACL 9447P) (Appellant) (Respondent) Appellant by : Sh. V.V. Kale, C.A. Respondent by : Sh. Yogesh Kumar Sharma, Sr. DR Date of hearing : 14.06.2016 Date of pronouncement : 11.07.2016 ORDER Per L.P. Sahu, Accountant Member: This is an appeal filed by the assessee against the order of ld. CIT(A)- VII, New Delhi dated 19.08.2011 for the assessment year 2004-05.

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hearing, the Bench found that the earlier direction was not complied with, therefore, the next date for hearing was fixed for 14.06.2016. The ld. AR filed proper grounds of appeal before the Bench, which are as under :

“1. The appellant prays that addition of loss on sale of investment to the tune of Rs.9,54,626/- in the book profit was not justified and this being a mistake apparent from records should be rectified. 2. The appellant prays that the assessing officer should be given a direction to rectify and recalculate the book profit. 3. The appellant prays that the interest charged u/s. 234A and 234D is deleted.

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“Assessment in this case was completed under section 143(3) at income at Rs.1,68,88,013/- under the normal provisions and at Rs.85,96,677/- under the special provisions of the Act. Scrutiny of income tax assessment revealed that the assessee claimed an expenditure of Rs.9,54,626/- on account of ‘loss on sale of investment’. The expenditure being capital in nature should have been disallowed. The mistake resulted in under assessment of income of Rs.9,54,626/- involving tax effect of Rs.4,52,063/-. In view of the above, I have reasons to believe that the income of Rs.9,54,627/- chargeable to tax has escaped assessment within the meaning of section 147/148 of the Income Tax Act, 1961.”

The impugned amount of Rs.9,54,627/- has been added at the time of calculation of income from business or profession. These details are on paper

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book page No. 15. The ld. AR has also furnished the statement of total income for MAT as per section 115JB which is on paper book page No. 16. The AO accepted the loss as furnished by the assessee, noted above. The ld. AO disagreed with the calculation of MAT as submitted by the AR. The calculation of MAT by the AR is as under :

Book profit as declared by assessee Rs.85,96,677/- Add: Loss on sale of investment Rs.9,54,626/- Total book profit Rs.95,51,303/-

Against the order of the AO u/s. 147/143(3), the assessee filed rectification u/s. 154 of the Act and claimed that the amount of Rs.9,54,626/- should not be added to the book profit which is a mistake apparent on record because the account has been prepared as per Companies Act, 1956 and as per applicable accounting standard AS-13. The application of assessee u/s. 154 was disposed of by the AO stating that (i) the issue is not covered under the purview of section 154; (ii) rectification can only be made in the case where the mistake is apparent from the record; (iii) this is not a case of mistake apparent from record rather this is a debatable issue and the Assessing Officer has made disallowance as per his points of view. Accordingly, the rectification application was rejected. Aggrieved by the rejection of application u/s. 154, the assessee appealed before the first appellate authority and the first

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appellate authority upheld the order of the Assessing Officer. Aggrieved by the order of CIT(A), the appellant filed appeal before the ITAT.

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The contention of the hon'ble CIT(A) is not tenable. In this regard our submissions are as under: (A) As per section 115JB of the Income Tax Act, every assessee,— (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company, (B) Provided that while preparing the annual accounts including profit and loss account,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same 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 210 of the Companies Act, 1956 (1 of 1956). Section 115JB specifically provides that every assessee, being a company shall for the purpose of the section prepare its Profits & Loss A/c for the relevant previous year in accordance with the provisions of Part II and Part III of schedule VI of the Companies Act, 1956. Therefore, in the Profit & Loss, realization form sale of assets did form part of the book profit. (C) As per Para 34 of AS -13 (Accounting Standard -13), Accounting for Investments, issued by the Institute of Chartered Accountants of India, it is required that "on the disposal of an investment, the difference between the carrying amount and net disposal proceeds should be charged to Profit & Loss A/c". It is thus important to note that Balance Sheet and Profit & Loss A/c has been prepared as per Companies Act following Accounting Policies/ Accounting Standards, which are relevant to this transaction and has been adhered to.

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Furthermore, profits in the nature of commercial income can only be taxed as book profits u/s 115JB and not capital receipt which may admittedly be of commercial nature like gifts, amalgamation reserve, capital reserve and revaluation reserve irrespective of the treatment in the books of accounts. Therefore merely on account of accounting treatment given to the particular receipt, the nature of the particular receipt cannot be decided. The Hon'ble High Court of Delhi has held in the case of CIT vs. MMTC Ltd. (2000) 246 ITR 725 (Del) that section 154 makes it clear that a "mistake apparent from the record" is rectifiable in order to attract the application of section 154, the mistake must exist and the same must be apparent from the record. "Mistake" means to take or understand the wrongly or inaccurately, to make an error in interpreting, it is an error, a fault, a misunderstanding, a misconception "Apparent" means visible, capable of being seen, obvious, plain it means "open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming. In this case, there is error in interpreting which is evident from the facts. Also the records contemplated in this provision do not mean only the order of assessment but it includes all proceedings on which the assessment is based, Thus for the purpose of exercising rectification jurisdiction, whole evidence must be looked and the law applicable to ascertain whether there was an error. Thus the case laws cited in the order of CIT (A) are not applicable on the case under assessment as the mistakes in this case are apparent from record thus rectifiable u/s 154. In the light of above it is here by prayed that loss on sale of investment should not be added back for calculating book profit under Section 115JB of the Act & that the addition done in the case may be deleted. Levy of consequential interest shall automatically be dropped and relief be granted to the assessee.” 6. The learned DR relied on the orders of the lower authorities.

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balance sheet as per the provisions of the companies Act. He has followed Accounting Standard-13, accounting for investment, issued by the Institute of Chartered Accountants of India. Being a company, it is mandatory to follow the accounting standard for the preparation and finalization of their profit and loss account and balance sheet. Para No. 34 of the Accounting Standard – 13 speaks “on the disposal of an investment, the difference between carrying on amount & disposal proceeds should be charged to Profit & Loss account”. Accordingly, the appellant has adjusted the losses on sale of investment of Rs.9,54,626/- and he has calculated his book profit which is on paper book page No. 16. The balance sheet and profit & loss account has been drawn by the company as per Companies Act which has been approved in the Annual General Meeting of the company. The Company has filed annual return with ROC to approve balance sheet and profit & loss account. The book profit of the company has not been defined in the Income Tax Act, but it is calculated as per section 115JB of the IT Act which reads as under :

“Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one- half per cent. (2) Every assessee,—

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(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including profit and loss account,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same 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 210 of the Companies Act, 1956 (1 of 1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. 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 (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 99[(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

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(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, is at 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 of 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] Following clause (fd) shall be inserted after clause (fc) of Explanation 1 to sub- section (2) of section 115JB by the Finance Act, 2016, w.e.f. 1-4-2017 : (fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; 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, 1[(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, and as reduced by,— (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or (ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or

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(iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or 2[(iic) the amount of income, being the 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, if any, such amount is credited to the profit and loss account; or (iid) the amount of 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 such income is credited to the profit and loss account and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie) the amount representing,— (A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the profit and loss account; or (iif) the amount of loss 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; or] Following clause (iig) shall be inserted after clause (iif) in the long line of Explanation 1 to sub-section (2) of section 115JB by the Finance Act, 2016, w.e.f. 1-4-2017: (iig) the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation.—For the purposes of this clause,— (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or (iv) to (vi) [***]

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(vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.—For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the profit and loss account. Explanation 2.—For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include— (i) any tax on distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time. Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this section, the assessee, being a company to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, has, for an assessment year commencing on or before the 1st day of April, 2012, an option to prepare its profit and loss account for the relevant previous year either in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956 or in accordance with the provisions of the Act governing such company. 3[Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if— (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.] 4[5[Explanation 5].—For the purposes of sub-section (2), the expression "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)6.] (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the

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provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub- section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. (4) Every company to which this section applies, shall furnish a report in the prescribed form7 from an accountant as defined in the Explanationbelow sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142. (5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section. (5A) The provisions of this section shall not apply to any income accruing or arising to a company from life insurance business referred to insection 115B. (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be: Provided that the provisions of this sub-section shall cease to have effect in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012. Following sub-section (7) shall be inserted after sub-section (6) of section 115JB by the Finance Act, 2016, w.e.f. 1-4-2017: (7) Notwithstanding anything contained in sub-section (1), where the assessee referred to therein, is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange, the provisions of sub-section (1) shall have the effect as if for the words "eighteen and one-half per cent" wherever occurring in that sub-section, the words "nine per cent" had been substituted. Explanation.—For the purposes of this sub-section,— (a) "International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (b) "unit" means a unit established in an International Financial Services Centre; (c) "convertible foreign exchange" means a foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999) and the rules made thereunder.”

From the provisions of above section, it is clear that when a company follows the method of accounting as per Companies Act and Accounting Standard and the book profit placed by it in Annual General Meeting of the Company stands accepted, then no adjustment can be made in the book profit of such company

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except those given in sub-section (2) Explanation of section 115JB of the IT Act.