2010 (7) TMI 1180 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 15,35,10,501 to the book profit on account of repossession of the vessel by the creditors.
2. Assessing Officer's power to re-compute book profit once certified by auditors.
3. Applicability of the judgment in Apollo Tyres Ltd. v. CIT to the case.

Detailed Analysis:

1. Addition of Rs. 15,35,10,501 to the Book Profit:

The main issue in this appeal is the addition of Rs. 15,35,10,501 to the book profit due to the repossession of a vessel by creditors. The assessee, engaged in fishing and export, purchased six vessels on a deferred payment basis. Due to non-payment of installments, the creditor repossessed the vessels. The outstanding amount was Rs. 29,89,25,521, and the written down value was Rs. 7,14,35,063. The assessee computed a short-term capital gain of Rs. 22,74,90,458 after setting off depreciation, which the Assessing Officer recomputed to Rs. 15,35,10,501, adding this amount to the book profit.

2. Assessing Officer's Power to Re-compute Book Profit:

The assessee argued that the Assessing Officer has no power to re-compute the book profit once certified by auditors and approved by shareholders, citing the Supreme Court judgment in Apollo Tyres Ltd. v. CIT. The Assessing Officer cannot investigate the book profit once approved by shareholders. The revenue countered that as per Parts II & III of Schedule VI to the Companies Act, the assessee must disclose all material features, including non-recurring transactions. The Mumbai Bench of the Tribunal in Dy. CIT v. Bombay Diamond Co. supported the revenue's view, stating that profits not routed through the profit and loss account do not comply with Schedule VI, thus allowing the Assessing Officer to recompute the book profit.

3. Applicability of Apollo Tyres Ltd. v. CIT:

The Tribunal considered whether the Assessing Officer can question the correctness of the profit and loss account certified by auditors. The Supreme Court in Apollo Tyres Ltd. held that the Assessing Officer cannot re-scrutinize accounts certified under the Companies Act. The Tribunal found that the provisions of section 115J, 115JA, and 115JB are identical regarding book profit computation. The Tribunal also noted that the Mumbai Bench's distinction of Apollo Tyres Ltd. was based on incorrect factual interpretation, as the Supreme Court had already addressed similar circumstances. The Tribunal concluded that the Assessing Officer cannot re-scrutinize accounts certified by auditors, as per the Supreme Court's judgment in Apollo Tyres Ltd. and HCL Comnet Systems & Services Ltd.

Conclusion:

The Tribunal held that the Assessing Officer has no authority to re-scrutinize the accounts once certified by auditors and approved by shareholders. The addition of Rs. 15,35,10,501 to the book profit was deleted, and the appeal of the assessee was allowed. The Tribunal emphasized the binding nature of the Supreme Court's judgment in Apollo Tyres Ltd., which restricts the Assessing Officer's power to re-compute book profit beyond verifying auditor certification.