2018 (7) TMI 2060 - AT - Income Tax

Revision u/s 263 by CIT - setting aside the assessment order framed u/s 143(3) - investments in EOPL and their diminution in value - MAT computation - AO disallowing the claim of capital loss and at the same time, not considering the same for computation of book profit u/s 115JB - HELD THAT - Book profit is computed and report in Form No. 29B is placed at pages 48 to 50. It can be seen from the aforementioned details given in the audited financial statement of account that the assessee company had clearly disclosed the investments in EOPL and their diminution in value due to court approved Capital Reduction Scheme. It can be further seen that the assessee has written off loss on transfer/write off of investment under the head Other expenses and details of non-current investments mentioned elsewhere that the provisions for diminution in value of investments is only 4.69 lakhs. A perusal of the order of the PCIT shows that he has proceeded on wrong proposition that the assessee has not only claimed loss in diminution in value of shares in Profit and Loss account, but has suo moto added back while computing the taxable profit at normal rate of tax. We find that this very basis is bad on facts of the case in hand. The assessee did add back loss while computing the profit at normal rate of tax but the same has been claimed as capital loss under the head income from capital gains and this very claim of loss has been disallowed by the AO while framing the assessment order u/s 143(3) of the Act. The second fallacy in the order of the PCIT is that he has presumed that the diminution in the value of shares has been claimed as a provision in the balance sheet and, therefore, the same has to be added back for the purpose of calculating book profit u/s 115JB of the Act. On the contrary, the fact is that the assessee never claimed this as provision in the balance sheet and has, in fact, written off by reducing its assets and, therefore, claiming that provision has to be added back is bad in law. AO, while computing the income u/s 115JB of the Act has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO, thereafter, has limited power of making increases and reductions as provided for in Explanation 1 to section 115JB of the Act. Thus, it can be safely concluded that the AO does not have jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in Explanation 1 to section 115JB of the Act. Since the assessee has actually reduced its assets, it cannot be said that he has shown provision on the liability side of the balance sheet. Therefore, Explanation 1 to section 115JB of the Act is not at all applicable. Moreover, this very issue was examined by the AO during the course of scrutiny assessment proceedings and has specifically disallowed the claim of loss. Therefore, it cannot be said that the AO never examined the issue. AO while framing the assessment u/s 143(3) of the Act has taken a possible view by disallowing the claim of capital loss and at the same time, not considering the same for computation of book profit u/s 115JB of the Act, the PCIT cannot impose his view upon the AO on wrong appreciation of facts. We failed to persuade ourselves to accept the order of the PCIT framed u/s 263 of the Act, which, in our opinion, has to be set aside - Decided in favour of assessee.

Issues Involved:
1. Whether the Principal Commissioner of Income Tax (PCIT) wrongly assumed jurisdiction under Section 263 of the Income-tax Act, 1961.
2. Whether the assessment order dated 28.03.2015 framed under Section 143(3) was erroneous and prejudicial to the interest of the Revenue.
3. Whether the loss on transfer/write-off of investments should have been added back to the book profit under Section 115JB.

Detailed Analysis:

Issue 1: Assumption of Jurisdiction under Section 263
The primary grievance of the assessee was that the PCIT wrongly assumed jurisdiction under Section 263 of the Income-tax Act, 1961. The PCIT issued a show cause notice alleging that the assessment order framed under Section 143(3) was erroneous and prejudicial to the interest of the Revenue. The Tribunal noted that the powers under Section 263 can only be exercised if two conditions are satisfied: the assessment order should be erroneous and prejudicial to the interest of the Revenue. The Tribunal emphasized that where there are two possible views and the Assessing Officer (AO) has taken one, no action to exercise revision powers can arise. This view is supported by the decisions in CIT vs. Nirav Modi and Shri Prakash Bhagchand Khatri.

Issue 2: Erroneous and Prejudicial to Revenue
The Tribunal examined whether the assessment order dated 28.03.2015 was erroneous and prejudicial to the interest of the Revenue. The PCIT's order was based on the assumption that the assessee had claimed a loss on diminution in value of shares in the Profit and Loss account, which should have been added back while computing book profit under Section 115JB. The Tribunal found that this assumption was incorrect. The assessee had written off the loss by reducing its assets rather than showing it as a provision in the balance sheet. The Tribunal referred to the Supreme Court's judgment in Malabar Industrial Co. Ltd., which clarified that the Commissioner must be satisfied of both conditions for exercising jurisdiction under Section 263. The Tribunal concluded that the AO had taken a possible view by disallowing the claim of capital loss and not considering it for book profit computation under Section 115JB.

Issue 3: Addition to Book Profit under Section 115JB
The PCIT contended that the loss on transfer/write-off of investments should be added back to the book profit under Section 115JB. The Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd., which held that the AO has limited power to make increases and reductions as provided in Explanation 1 to Section 115JB. The Tribunal noted that the assessee had disclosed the investments and their diminution in value due to a court-approved Capital Reduction Scheme. The Tribunal found that the AO had examined this issue during the scrutiny assessment proceedings and had disallowed the claim of loss. Therefore, it could not be said that the AO never examined the issue.

Conclusion:
The Tribunal concluded that the PCIT's order under Section 263 was based on incorrect assumptions and was not sustainable. The AO had taken a possible view, and the PCIT could not impose his view on the AO. The Tribunal set aside the order of the PCIT and restored the assessment order framed under Section 143(3). The appeal of the assessee was allowed. The order was pronounced in the open court on 04.07.2018.

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