2016 (3) TMI 327 - HC - Income Tax

Revision u/s 263 - Computation of MAT u/s 15JB - Book Profit - loss of an amount on account of transfer of investment division of the assessee - CIT was of the opinion that the loss could not have been debited to the P/L account and the amount was required to be added back for computation of book profit under Section 115JB - ITAT held that the loss on account of transfer of investment division of the assessee could not be adjusted in Section 115JB of the Act although this loss is booked in the Profit and Loss Account - Held that - The disclosure made in the financial statements is in pursuance of the requirement of Clause- 25 quoted above and is also in pursuance of Clause 2(b) of Part II of Schedule VI to the Companies Act, 1956 which is not to be construed as any qualification indicating any inaccuracy in the accounts. There was, thus no mistake on the part of the assessee in debiting the loss to the profit and loss account. Once it is realized that the assessee had correctly debited the profit and loss account for the loss arising out of the transfer of investment division, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position Had it not been a case of section 115JB the capital loss incurred on transfer of investments would have been dealt as follows 1. Under section 70(2) short term capital loss would be set off against either short term or long term capital gain. 2. Under section 70(3) long term capital loss would be set off against long term capital gain only. 3. Under section 71(3) if the net result of computation under the head Capital gain is a loss then such loss cannot be set off against income under any other head. 4. Under section 74(1)(a) short term capital loss would be carried forward to the following assessment year and be set off against either short term or long term capital gain. 5. Under section 74(1)(b) long term capital loss would be carried forward to the following assessment year and be set off against long term capital gain only. In that view of the matter, the only conclusion which can be arrived at is that the order passed by the learned Tribunal is unexceptionable. - Decided against revenue

Issues Involved:
1. Justification of the Tribunal in quashing the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act.
2. Error in law by the Tribunal in holding that the loss on account of the transfer of the investment division could not be adjusted under Section 115JB of the Act.
3. Whether the Tribunal's order was perverse and bad in law.

Detailed Analysis:

1. Justification of the Tribunal in Quashing the Order Passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act:

The Tribunal quashed the CIT's order under Section 263, which had set aside the assessment order and directed the assessing officer to re-examine the issue. The CIT had observed that the assessee debited Rs. 919.52 lakhs to the Profit and Loss Account due to the transfer of its investment division to Daisy Commercials Pvt Ltd (DCPL) and did not add this back while computing the book profit under Section 115JB of the Act. The CIT deemed this as erroneous and prejudicial to the interests of the revenue. However, the Tribunal found that the assessee's accounts were maintained as per Part II and III of Schedule VI of the Companies Act, certified by statutory auditors, and approved by the shareholders in the AGM. The Tribunal relied on the Supreme Court's judgment in Apollo Tyres Ltd. v. CIT, which held that the assessing officer could not question the correctness of the accounts prepared in accordance with the Companies Act. The Tribunal concluded that the CIT's reliance on the Delhi High Court's judgment in CIT v. Hari Machine Ltd. was misplaced and that the loss on capital reduction was not fictitious.

2. Error in Law by the Tribunal in Holding that the Loss on Account of the Transfer of the Investment Division Could Not Be Adjusted under Section 115JB of the Act:

The Tribunal held that the loss of Rs. 919.52 lakhs on account of the transfer of the investment division could not be adjusted under Section 115JB of the Act. The Tribunal noted that the loss was booked in the Profit and Loss Account as per the sanctioned scheme of arrangement and the accounting standards. The Tribunal emphasized that the assessing officer could not make adjustments to the book profit unless explicitly provided under Explanation 1 to Section 115JB. The Tribunal found that the CIT did not provide any specific provision of Part II and III of Schedule VI of the Companies Act that was allegedly contravened by the assessee. The Tribunal also noted that the CIT's reliance on Hari Machine Ltd. was inappropriate, as that case dealt with penalty under Section 271(1)(c) and not with Section 115JB. The Tribunal concluded that the CIT's order under Section 263 was based on an erroneous interpretation of the law and the facts.

3. Whether the Tribunal's Order was Perverse and Bad in Law:

The Tribunal's order was challenged on the grounds that it was perverse and bad in law. However, the Tribunal's detailed reasoning and reliance on authoritative judgments, including Apollo Tyres Ltd. and Malayala Manorama Co. Ltd., supported its conclusion that the assessing officer had correctly computed the book profit under Section 115JB. The Tribunal found that the CIT's order under Section 263 did not meet the twin conditions of being erroneous and prejudicial to the interests of the revenue, as required by the Supreme Court's judgment in Malabar Industrial Company Ltd. v. CIT. The Tribunal also noted that the CIT did not challenge the accountant's certificate under Sub-section 4 of Section 115JB. The Tribunal's order was thus based on a thorough examination of the legal and factual aspects, and it was not perverse or bad in law.

Conclusion:

The High Court upheld the Tribunal's order, finding no error in its reasoning and conclusions. The High Court dismissed the appeal, answering the first question in the affirmative and noting that the judgment of the Delhi High Court in Hari Machine Ltd. had no applicability to the facts of the case. The rest of the questions did not require answers. The High Court concluded that the Tribunal's order was unexceptionable and that the CIT's exercise of jurisdiction under Section 263 was improper.

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