2014 (11) TMI 718 - AT - Income Tax

Power of CIT to invoke section 263 - Computation of book profits u/s 115JB Prior paid expenses reduced Held that - Following the decision in Apollo Tyres Ltd. Versus Commissioner of Income Tax 2002 (5) TMI 5 - SUPREME Court While assessing a company for income-tax u/s 115J the correctness of the P&L a/c prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Sch. VI to the Companies Act cannot be examined by the AO; AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J - Starting point for computation of book profits for purposes of s. 115JB should be the amount which is the final balance in the P&L a/c carried to balance sheet and in doing so even the extraordinary items have to be debited to the P&L a/c. When the P&L A/c of the assessee is drawn up in accordance with the provisions of Part II of Schedule 6 to the Companies Act, 1956 and is certified by Auditor, then, the AO cannot make any other modification to the book profit computed in the P&L A/c except as provided under Explanation 1 of section 115JB - the AO after examining the details has computed the book profit in the assessment order - Therefore, there cannot be non-application of mind by the AO - The view taken by the AO in computing book profit u/s 115JB being an acceptable view, the assessment order passed cannot be considered to be erroneous - Therefore, one of the conditions for invoking jurisdiction u/s 263 of the Act is not satisfied thus, exercise of power u/s 263 of the Act is not justified thus, the order of the CIT is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of disallowance under section 40(a)(ia) for non-deduction of TDS on rental and carriage & freight expenses.
2. Correctness of computation of book profit under section 115JB considering prior period expenses.
3. Exercise of revisionary powers under section 263 by the CIT.

Detailed Analysis:

1. Disallowance under Section 40(a)(ia):
The Assessing Officer (AO) disallowed Rs. 1,82,000/- under rental expenses and Rs. 6,32,623/- under carriage and freight expenses for non-deduction of tax at source (TDS). The AO invoked section 40(a)(ia) of the Income Tax Act, adding these amounts back to the income of the assessee. Consequently, the total income was determined at Rs. 8,14,62/- under normal provisions, with book profit computed at Rs. 34,20,315/- under section 115JB.

2. Computation of Book Profit under Section 115JB:
The Commissioner of Income Tax (CIT) examined the assessment records and found that the assessee had reduced prior period expenditure of Rs. 52,24,589/- while computing the book profit of Rs. 34,20,315/- under section 115JB. The CIT argued that since this expenditure was not incurred in the relevant previous year, it should not be considered under the provisions of Part II & III of Schedule VI to the Companies Act, 1956. Consequently, the CIT deemed the assessment order erroneous and prejudicial to the interests of the revenue and directed the AO to recompute the book profit at Rs. 86,44,904/-.

3. Exercise of Revisionary Powers under Section 263 by CIT:
The assessee challenged the CIT's revision order, arguing that the book profit was computed in accordance with Part II & III of Schedule VI of the Companies Act, 1956, and certified by the auditor. The assessee contended that the AO, having examined the details and computed the book profit accordingly, could not be said to have passed an erroneous order. The assessee relied on the Supreme Court decision in Apollo Tyres Ltd. and ITAT Mumbai Bench decisions in Duke Offshore Ltd. and Gulf Oil Corporation Ltd., which supported the view that the AO cannot disturb the book profit as computed and certified under the Companies Act.

The CIT, however, did not accept these contentions, holding that prior period expenditure cannot be reduced from the profit for arriving at the book profit under section 115JB. The CIT directed the AO to recompute the book profit accordingly.

Tribunal's Findings:
The Tribunal considered the submissions and perused the material on record. It noted that the Profit & Loss (P&L) Account was drawn in accordance with Part II & III of Schedule VI of the Companies Act, 1956, and certified by the auditors. Referring to Accounting Standard (AS) 5, the Tribunal observed that prior period items should be separately disclosed in the P&L Account. The Tribunal cited the Supreme Court's decision in Apollo Tyres Ltd., which held that the AO cannot go behind the net profit shown in the P&L Account except to the extent provided in the Explanation to section 115JB.

The Tribunal also referred to the ITAT Hyderabad Bench's decision in Gulf Oil Corporation Ltd., which emphasized that the starting point for computing book profits under section 115JB should be the final balance in the P&L Account carried to the balance sheet, including extraordinary items.

The Tribunal concluded that the AO, having examined the details and computed the book profit in accordance with the statutory provisions, had taken an acceptable view. Therefore, the assessment order could not be considered erroneous, and the conditions for invoking jurisdiction under section 263 were not satisfied. Consequently, the Tribunal set aside the CIT's order under section 263.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal set aside the CIT's revision order under section 263, affirming the AO's computation of book profit under section 115JB. The Tribunal held that the AO's order was neither erroneous nor prejudicial to the interests of the revenue.