2018 (11) TMI 477 - AT - Income Tax

Revision u/s 263 - assessee has not accounted for interest income in the books of account on advance to IAL - addition on account of interest on advance to IAL to the book profit u/s. 115JB - Held that - Since there was significant uncertainty of ultimate collection of principal itself, so in accordance with Accounting Standard 9 on revenue recognition ( AS 9 ) issued by Institute of Chartered Accountants of India ( MCAI ), Assessee has not recognized any notional interest income on such advance in its audited financial statements. CIT(A) has further noted that it has been argued that since such notional interest on advance was not recognized as revenue in its audited books of accounts and also the same is not covered in any of the items listed in the Explanation to 1 section 115JB, it was not considered in the books profits for MAT purpose and was not offered to tax under provisions of section 115JB. However, out of abundant caution, such notional interest @ 8% i.e. of 1NR 12.80 Crores on the advance given to IAL was separately offered to tax under the normal provisions of the Act. Thus, we note that the assessee has clearly explained that this income was not accounted for in the books of account due to uncertainty. The accounts were duly audited. However, due to abundant caution it was offered in the computation of the normal income. The assessee has further explained that there was uncertainty so it was not accounted for in the books of account which was also accepted by the auditors. Hence, the assessee has not offered the same under MAT provision of section 115JB. From the above, it is amply clear that in the computation of income, the issue was apparent and upon that computation of income, the A.O. has passed the assessment order. Hence, on these facts, it cannot be said that the A.O. has not applied his mind. A.O. has duly applied his mind and accepted the income offered u/s.115JB which did not include this interest accrued amount as it was not provided in the books of account. Moreover the ld. CIT(A) s opinion that the book profit needs to be reworked and the impugned amount added to book profit is not sustainable. - Decided in favour of assessee.

Summary

Issues Involved:
1. Erroneous exercise of jurisdiction under section 263 of the Income Tax Act.
2. Adjustment to 'Book Profit' under section 115JB of the Income Tax Act.

Detailed Analysis:

Issue 1: Erroneous Exercise of Jurisdiction under Section 263 of the Act

Grounds of Appeal:
The appellant contended that the Principal Commissioner of Income Tax (Pr. CIT) erroneously assumed jurisdiction under section 263 of the Income Tax Act, concluding that the assessment order dated 18.03.2016 was erroneous and prejudicial to the interests of revenue.

Tribunal's Analysis:
- The Tribunal noted that for the Pr. CIT to assume jurisdiction under section 263, two conditions must be satisfied: the order must be erroneous and prejudicial to the interests of the revenue. This principle was upheld by the Bombay High Court in CIT v/s. Gabriel India Ltd [1993] 203 ITR 108.
- The Tribunal found that the assessment order was not erroneous. The assessee's audited accounts were prepared according to accepted accounting principles and laws, and the assessment of MAT liability was as per section 115JB of the Act.
- The Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC), which held that the Assessing Officer (AO) has limited power to make adjustments to the net profit as per the audited profit and loss account, except for specific adjustments listed under Explanation 1 to section 115JB.

Conclusion:
The Tribunal concluded that the Pr. CIT's assumption of jurisdiction under section 263 was erroneous and not justified, as the assessment order was neither erroneous nor prejudicial to the interests of the revenue.

Issue 2: Adjustment to 'Book Profit' under Section 115JB of the Act

Grounds of Appeal:
The appellant argued that the Pr. CIT erred in adding notional interest income of INR 12,80,00,000 while computing Book Profits for the purpose of section 115JB, as such an adjustment is not permitted under Explanation 1 to section 115JB of the Act.

Tribunal's Analysis:
- The Tribunal noted that the assessee had not recognized notional interest income on an advance given to International Amusement Limited (IAL) in its audited financial statements due to significant uncertainty of ultimate collection of the principal.
- The Tribunal observed that the assessee's books of accounts were audited and certified by a reputed audit firm, and the non-recognition of interest was in accordance with Accounting Standard 9 on revenue recognition.
- The Tribunal emphasized that section 115JB is a separate code with specific adjustments listed under Explanation 1, and no other adjustments are permitted.
- The Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, which clarified that the AO does not have the jurisdiction to go behind the net profit shown in the profit and loss account, except as provided in the Explanation to section 115J.
- The Tribunal also cited the Bombay High Court's decision in Pr. CIT vs. Bhagwan Industries Ltd., which supported the view that the AO's acceptance of the assessee's computation of income, including the exclusion of notional interest, was correct.

Conclusion:
The Tribunal held that the Pr. CIT's direction to add the notional interest income to the book profit under section 115JB was not sustainable. The AO had correctly followed the law by not including the notional interest in the book profit, as it was not recognized in the audited financial statements.

Final Judgment:
The Tribunal quashed the order passed by the Pr. CIT under section 263 of the Income Tax Act, 1961, and allowed the assessee's appeals. The adjustment made to the book profit in relation to the interest income of INR 12,80,00,000 was deleted. The order was pronounced in the open court on 02.11.2018.