2021 (12) TMI 549 - AT - Income Tax

Addition on account of scrap - difference in valuation of scrap - Rejection of books of accounts - HELD THAT - In the present case, having rejected the books of accounts maintained by assessee, Assessing Officer cannot rely upon on the same books of account for the purpose of making addition in respect of sale of scrap etc. Thus, in the light of the above settled legal position, the approach of both the authorities is totally flawed and cannot be sustained in the eyes of law. Thus, the addition made by the Assessing Officer under the normal provisions of the I.T. Act as confirmed by the ld. CIT(A) cannot be sustained under the law. Accordingly, ground of appeal no.1 raised by the assessee stands allowed. MAT computation u/s 115JB - income disclosed on account misclassification of scrap from excluding the book profits for the purpose of computing the tax liability u/s 115JB - whether the income surrendered to tax under the normal provisions of the I.T. Act/addition made to returned income is required to be added back to book profits for the purpose of computing the tax liability under the provisions of section 115JB of the Act or not? - HELD THAT - Admittedly, in the present case, the additional income disclosed for the purpose of computing the tax liability under the normal provisions of the I.T. Act does not fall any of the items mentioned in clauses (a) to (j) of the Explanation. We have carefully perused the audited financial statements wherein we find no qualification by statutory auditors on financial statements. Further, we note that financial statements were duly approved in Annual body of the company. Therefore, the Assessing Officer is not justified in adding back the additional income offered to tax under normal provision of Act to book profits for the purpose of computing the tax liability u/s 115JB of the Act. There is yet another reason to hold that mere admission in the statement recorded u/s 132(4) cannot form the basis of addition - addition of income disclosed under normal provisions of Act to book profits for the purpose of computing tax liability u/s 115JB is a pure question of law. The Hon ble Supreme Court in the case of CIT vs. V. Mr. P. Firm, Muar 1964 (10) TMI 13 - SUPREME COURT laid down that if a particular income is not taxable under the Act, it cannot be taxed on the basis of doctrine of estoppels, i.e. there is no estoppels against law/provisions of Statute. Therefore, in the light of settled position of law that mere admission of assessee cannot form the basis of assessment, addition of income disclosed under normal provisions of the Act, cannot be added back to book profits for the purpose of computing tax liability u/s 115JB of the Act. Thus, the ground of appeal no.2 raised by the assessee stands allowed.

Summary

Issues Involved:
1. Validity of addition to book profits under section 115JB.
2. Rejection of books of accounts and subsequent profit determination.
3. Validity of additions based on misclassification of scrap.

Detailed Analysis:

1. Validity of Addition to Book Profits under Section 115JB:
The core issue revolves around whether additional income disclosed under normal provisions should be added to book profits for computing tax liability under section 115JB. The Tribunal upheld that the Assessing Officer (AO) cannot add such income to book profits unless it falls under clauses (a) to (j) of the Explanation to section 115JB. The Tribunal cited the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, emphasizing that the AO must accept the profits as per the Profit & Loss Account certified under the Companies Act, without making further adjustments except those specified in the Act. The Tribunal also referenced the Bombay High Court's decision in CIT vs. Adbhut Trading Co. (P.) Ltd., which reiterated that the AO cannot alter the book profits certified under the Companies Act.

2. Rejection of Books of Accounts and Subsequent Profit Determination:
The Tribunal found the approach of the lower authorities flawed. Once the books of accounts are rejected, the AO cannot rely on the same books for making additions. Instead, the AO should determine profits by applying a flat rate of profits, considering the business conditions and comparing them with similar businesses. The Tribunal cited several cases, including CIT vs. K.Y. Pilliah & Sons and Indwell Constructions vs. CIT, which support the principle that rejected books cannot be used for making further additions.

3. Validity of Additions Based on Misclassification of Scrap:
The Tribunal addressed the addition of ?2.3 crores out of the total ?8.83 crores related to the alleged difference in scrap valuation. The Tribunal concluded that the AO's reliance on rejected books for this addition was incorrect. The Tribunal emphasized that any addition should be based on a flat rate of profit, not on the rejected books. Consequently, the addition made by the AO and confirmed by the CIT(A) was not sustainable under the law.

Separate Judgments:
The Tribunal delivered a single consolidated judgment for both the assessment years 2011-12 and 2012-13, applying the same principles and conclusions to both years.

Conclusion:
The Tribunal allowed the appeals filed by the assessee and dismissed the cross appeals filed by the Revenue. The decisions emphasized the sanctity of the Profit & Loss Account certified under the Companies Act and restricted the AO's ability to make adjustments beyond the specified provisions of section 115JB. Additionally, the Tribunal underscored the correct approach in dealing with rejected books of accounts, mandating profit determination based on a flat rate rather than relying on the rejected books for further additions.