2015 (7) TMI 1087 - HC - Income Tax

Tax effect - monetary limit - ITAT direction to deduct the amount of prior year adjustment out of current year s net profit for arriving at the book profit for the purpose of computation of income under section 115J - Held that - In view of the Instruction No. 5 dated 10 July 2014 read with decision of this court in CIT v. Madhukar K. Inamdar (HUF) 2009 (7) TMI 145 - BOMBAY HIGH COURT ; CIT v. Pithwa Engg. Works 2005 (7) TMI 66 - BOMBAY High Court and CIT v. Smt. Vijaya V. Kavekar 2013 (2) TMI 451 - Bombay High Court the instruction No. 5 of 2014 issued by the Central Board of Direct Taxes would also be applicable to pending appeals and references. Nothing has been shown to us to indicate that the issue raised in this particular reference would fall within the exclusion clause of the 2014 Instruction No. 5 of 2014 nor that the issue has a cascading effect or would otherwise be covered by the decision of apex court in CIT v. Surya Herbal Ltd. 2011 (8) TMI 137 - Supreme Court of India . In view of the above, we return the reference unanswered.

Issues:
1. Interpretation of section 256(1) of the Income-tax Act, 1961 for the assessment year 1988-89.
2. Justification of upholding the Commissioner of Income-tax (Appeals)'s direction to deduct the amount of prior year adjustment from the current year's net profit for arriving at the book profit under section 115J of the Income-tax Act, 1961.
3. Application of Instruction No. 5 of 2014 issued by the Central Board of Direct Taxes to pending appeals and references.
4. Consideration of tax effect in the reference and applicability of the decision in CIT v. Madhukar K. Inamdar (HUF) [2009] 318 ITR 149 (Bom) for returning unanswered references.

Analysis:
1. The reference under section 256(1) of the Income-tax Act, 1961 for the assessment year 1988-89 raised a question regarding the deduction of the prior year adjustment from the current year's net profit to determine the book profit for income computation under section 115J of the Act. The court was tasked with interpreting the legality and justification of the Income-tax Appellate Tribunal's decision to uphold the Commissioner of Income-tax (Appeals)'s direction in this regard.

2. During the hearing, the respondent's counsel argued that the tax effect in the present reference was less than Rs. 4 lakhs, suggesting that the reference should be returned unanswered. In response, the Revenue was directed to assess the tax effect and provide an affidavit indicating the amount. Subsequently, it was revealed that the tax effect for the assessment year 1988-89 amounted to Rs. 3,03,105. The court considered the implications of Instruction No. 5 of 2014 issued by the Central Board of Direct Taxes and its applicability to pending appeals and references.

3. Referring to previous judgments, including CIT v. Madhukar K. Inamdar (HUF) [2009] 318 ITR 149 (Bom), CIT v. Pithwa Engg. Works [2005] 276 ITR 519 (Bom), and CIT v. Smt. Vijaya V. Kavekar [2013] 350 ITR 237 (Bom), the court emphasized the importance of adhering to the instructions and circulars issued by the tax authorities. The court highlighted the rationale behind the decision not to file appeals if the tax effect is less than Rs. 4 lakhs, aiming to reduce the burden on the Department, Tribunals, and courts due to increasing litigation costs and case pendency.

4. In the absence of evidence demonstrating that the issue raised in the reference fell within the exclusion clause of Instruction No. 5 of 2014 or had a cascading effect, the court decided to return the reference unanswered. The court emphasized the need for the Department to adopt a consistent policy for old matters to align with the objectives set forth by the Central Board of Direct Taxes to streamline the appeal process and alleviate the burden on the judicial system.

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