2014 (6) TMI 1029 - HC - Income Tax

MAT - Computation of book profit - computing deemed income u/s. 115JA - HELD THAT - In the present case the auditors have not certified that the books of account were properly maintained in accordance with the provision of the Companies Act. The auditors in their certificate have indicated that the depreciation was not charged to the Profit Loss A/c. and therefore the certificate was subject to Note No.9 amongst others. Submissions advanced by Mr. Khaitan must prevail. The Assessing Officer does not have jurisdiction to go behind the net profit shown in the Profit Loss A/c. except as provided in the statute in those cases where the accounts have been properly maintained. When the Statute provides for computation of book profit of the assessee being a Company which has computed the total income under this Act in respect of any previous year it has to be implied that the legislature intended to mean that the assessee being a Company has computed total income correctly as per the provisions of the Act. If the total income has not been correctly computed then the bar created limiting the jurisdiction of the Assessing Officer would not be operative. For the aforesaid reasons the findings of the learned Tribunal indicated above are reversed. Net profit computation for the purposes of section 115JA - On account of depreciation the learned Tribunal opined that the Assessing Officer had no jurisdiction to tinker with the books of accounts certified by the auditors but with regard to this item of expenditure the learned Tribunal exhorted the Assessing Officer to tinker with the books of accounts. There was no question of allowing any adjustment as per Explanation to Section 115JA. The prior period expenditure amounting to a sum of 1, 28, 986/- was already shown in the profit and loss account as per accounting standards. The learned Tribunal purported to disallow the aforesaid expenditure on the basis of a mistaken belief that the assessee was seeking adjustment of the aforesaid sum in computing the book profit but missed the fact that the expenditure had already been taken into account in computing the net profit.

Summary

Issues:
1. Interpretation of depreciation treatment in Profit & Loss A/c. under Section 115JA
2. Treatment of prior period expenses in arriving at book profit under Section 115JA

Interpretation of Depreciation Treatment:
The High Court analyzed the appeal challenging a Tribunal's judgment that reversed the order of the CIT(A) and allowed the appeal by the Revenue. The Tribunal held that if an assessee chooses not to provide for depreciation in the Profit & Loss A/c., they cannot adjust for depreciation while computing deemed income under Section 115JA. Referring to the Companies Act, the Court emphasized that the Profit & Loss A/c. must be prepared in accordance with the Act's provisions. Citing the case of Apollo Tyres vs. CIT, the Court highlighted that the assessing officer cannot examine the correctness of the Profit & Loss A/c. prepared by the company, except as provided in the Explanation to Section 115JA. The Court ruled that the Assessing Officer's jurisdiction is limited to specific adjustments outlined in the statute, and they cannot disturb the book profit certified in the Profit & Loss A/c.

Treatment of Prior Period Expenses:
The appellant raised a second issue regarding the disallowance of prior period expenses in arriving at book profit under Section 115JA. The Court referred to a judgment in CIT vs. Khaitan Chemicals and Fertilizers Ltd., emphasizing that prior period items must be taken into account in computing net profit as envisaged in Section 115JA. The Court noted inconsistency in the Tribunal's approach, where they allowed adjustments for depreciation but disallowed prior period expenses. The Court held that the prior period expenditure, already reflected in the profit and loss account as per accounting standards, should not be disallowed in computing the book profit. Consequently, the Court set aside both views expressed by the Tribunal and allowed the appeal by the assessee.

In conclusion, the High Court reversed the Tribunal's judgment on both issues, emphasizing the limited jurisdiction of the Assessing Officer in making adjustments to the book profit under Section 115JA. The Court upheld the importance of complying with accounting standards and statutory provisions while determining the deemed income of a company.