2015 (1) TMI 198 - HC - Income Tax

Preparation of P&L Account in violation of AS or not for determination of book profits u/s 115JA(6) - Benefit of waiver of interest as part of acceptance of OTS proposal by the financial institutions accrues to the assessee on acceptance and not on mere initiation or not - Waived interest of ₹ 5.37 Crores to the profit and loss accounts maintained under the Companies Act connected in the context of Section 115JA - Held that - The Tribunal has undertaken fairly extensive discussion - one of the views expressed by it was that though Section 154 empowers an AO to rectify the orders of assessment, it cannot be exercised in such a way that one facet of it can be selectively lifted and in the name of rectification, the mater be left at that - It cannot be keenly said that the filing of return is a comprehensive exercise and that in turn is proceeded by a fairly extensive accounting process - an assessee bestows its attention in respect of each and every amount and once a comprehensive return is filed, taking away of one facet would have its own cascading effect, on others - it may disturb the entire edifies of accountancy and may prove to be disastrous for an assessee - whenever the power u/s 154 is exercised, it should be done in such a way that no violence is done to the order of assessment passed in respect of different years. The Companies Act provides a detailed mechanism of verification of accounts and there are also statutory auditors under that Act scrutinise them - nobody pointed out any defect in the exercise undertaken by the respondent in Apollo Tyres Ltd. Versus Commissioner of Income Tax 2002 (5) TMI 5 - SUPREME Court , the Supreme Court explained the power of the Assessing Authority under the I.T. Act vis-a-vis the accounts maintained under the Companies Act, in the context of Section 115J it has been held that while computing the income u/s 115J has only the power of examining whether the books of account are certifies by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act - the AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the section the AO 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 thus, the Tribunal rightly held that the accounts referable to Section 115J of the I.T. Act must be taken on their face value and once it becomes clear that the income of an assessee determined is less than 30% of the book profits reflected in the books of account maintained under the Companies Act, the tax leviable would be only 30% - Decided against revenue.

Summary

Issues:
1. Interpretation of accounting standards in determining book profit under Section 115JA(6) of the Income Tax Act.
2. Recognition of benefit from waiver of interest under One Time Settlement (OTS) proposal for book profit calculation.
3. Accrual of income from waiver of interest and its treatment as capital receipt under the Income Tax Act.

Issue 1: Interpretation of Accounting Standards

The case involved a company that borrowed a large amount from a bank and had proposals for One Time Settlement (OTS) in place. The company claimed deduction of interest on the loan over the years. The Assessing Officer added the waived interest as income for the assessment year 1997-98, rectifying the assessment for the previous year. The Tribunal allowed the appeal, challenging the Tribunal's decision. The appellant argued that the Tribunal exceeded its scope, and the waived interest should be treated as income. The respondent contended that the benefit accrued in 1996-97 due to the mercantile system of accounting. The court noted the conflict between the Companies Act and the Income Tax Act regarding accounting treatment and upheld the Tribunal's decision based on the Supreme Court's ruling in Apollo Tyres Ltd. v. CIT, emphasizing the limited power of the Assessing Officer to interfere with accounts maintained under the Companies Act.

Issue 2: Recognition of Benefit from Waiver of Interest

The Assessing Officer rectified the assessment for the year 1996-97 to include the waived interest as income for the subsequent year 1997-98. The appellant argued that the benefit accrued in 1997-98 and should have been reflected in that year's returns. The Tribunal highlighted the importance of not disturbing the comprehensive accounting process while exercising powers under Section 154 of the Income Tax Act. It emphasized that rectification should not selectively lift one aspect of an assessment, leading to adverse consequences for the assessee. The court agreed with the Tribunal's reasoning and rejected the appellant's arguments, emphasizing the proper application of accounting principles in determining the tax liability.

Issue 3: Accrual of Income from Waiver of Interest

The dispute centered on whether the waived interest should be treated as a capital receipt or income under the Income Tax Act. The appellant contended that since the company had claimed deductions for the interest over the years, the waived amount should be treated as income. The respondent argued that the amount was posted as a capital receipt in the accounts under the Companies Act, and the Assessing Officer had no jurisdiction to interfere with those accounts. The court cited the Supreme Court's ruling in Apollo Tyres Ltd. case to support the Tribunal's decision, emphasizing the limited power of the Assessing Officer to adjust accounts maintained under the Companies Act. The court dismissed the appeal, upholding the Tribunal's decision and emphasizing the importance of respecting accounting standards in tax assessments.