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2019 (2) TMI 115 - AT - Income TaxRevision u/s 263 - MAT - Modification of books profits - Held that - The provisions of section 115JB is very clear that the profit or loss should be the same as laid before AGM. The assessee cannot alter the book profit by not following an Accounting Standard. What is relevant is the profit adopted in the AGM even after the qualification by the statutory auditors in the given case. Therefore, the profit adopted by the company in the AGM overlooking the qualification of auditor is the final book profit for the purpose of section 115JB, the assessee cannot alter the same by claiming that it had not followed certain Accounting Standards. All the judicial pronouncements relied on by the assessee are the direction to the AO to go beyond and modify the book profit if the assessee not followed the Accounting Standard. The assessee has no right to modify the profit declared as per Companies Act and adopt differently for the purpose of MAT provisions. As per the judicial pronouncements, AO can and must modify the book profit in case the company not followed the Accounting Standards as per the provisions of Companies Act. Whereas the assessee has prepared the financial statement by following accounting system, standards and methods as per the provisions of Companies Act and laid before the company in the AGM. Once the financial statements are ratified by the shareholders, the assessee cannot modify the book profit as per the first provision to section 115JB(2). Therefore, the wrong interpretation of law empowers ld. CIT to invoke provisions of section 263. - Decided against assessee.
Issues Involved:
1. Assumption of jurisdiction under Section 263 of the Income-tax Act, 1961. 2. Whether the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue. 3. Computation of book profit under Section 115JB of the Income-tax Act, 1961. 4. Adherence to Accounting Standards and provisions of the Companies Act, 1956 in preparing financial statements. Issue-wise Detailed Analysis: 1. Assumption of Jurisdiction under Section 263: The assessee contested the assumption of jurisdiction by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income-tax Act, 1961. The Pr. CIT observed that the AO’s assessment order was erroneous and prejudicial to the interests of the Revenue as it allowed a deduction of ?64 crores on the sale of investments from the book profits, which was not in conformity with the provisions of Section 115JB of the Act. The Pr. CIT issued a show cause notice to the assessee, who argued that the AO had made necessary inquiries and verifications before passing the assessment order. The Tribunal upheld the Pr. CIT’s jurisdiction, stating that an incorrect application of law by the AO justified the invocation of Section 263. 2. Erroneous and Prejudicial Order by AO: The Pr. CIT found that the AO allowed a deduction of ?64 crores on the sale of investments from the book profits, which was not permissible under Section 115JB. The AO’s acceptance of the assessee’s claim without proper discussion in the assessment order was considered erroneous. The Tribunal agreed with the Pr. CIT, citing the Supreme Court’s ruling in Malabar Industrial Co. Ltd., which states that an incorrect assumption of facts or incorrect application of law renders an order erroneous and prejudicial to the interests of the Revenue. 3. Computation of Book Profit under Section 115JB: The assessee argued that the profit and loss account should be prepared in accordance with Part II of Schedule VI of the Companies Act, 1956, and that adjustments should be made to bring the book profits in line with the applicable accounting standards. The Tribunal acknowledged this but emphasized that the financial statements, including the profit and loss account, must be prepared following the required accounting standards and laid before the company at its AGM. The Tribunal noted that the assessee did not follow Accounting Standard (AS) 13 while preparing the financial statements, which was also qualified by the statutory auditors. Despite this, the financial statements were ratified by the shareholders at the AGM. 4. Adherence to Accounting Standards and Companies Act: The Tribunal highlighted that for the purpose of Section 115JB, the financial statements must be prepared following the accounting standards and laid before the AGM. The Tribunal stated that the profit adopted in the AGM, even after the auditor’s qualification, is the final book profit for Section 115JB. The assessee cannot alter the book profit by claiming non-compliance with certain accounting standards. The Tribunal concluded that the AO must modify the book profit if the company did not follow the accounting standards, but the assessee cannot do so independently. Conclusion: The Tribunal dismissed the assessee’s appeal, upholding the Pr. CIT’s order under Section 263. It ruled that the AO’s assessment was erroneous and prejudicial to the interests of the Revenue due to the incorrect application of law regarding the computation of book profit under Section 115JB. The Tribunal emphasized the necessity of adhering to accounting standards and the provisions of the Companies Act in preparing financial statements for tax purposes.
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