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2022 (9) TMI 283 - AT - Income TaxRevision u/s 263 by CIT - capital gain computation - book profit computation u/s. 115JB - Scope of order prejudicial to the interest of Revenue - PCIT has revised the order of the AO for the reason that the AO has not examined the fact that the sale consideration has not been reflected in the books of account resulting in understatement of book profits and the resultant tax - whether the AO during the course of assessment has examined the details relating to the capital gains? - HELD THAT - AO has called for the details pertaining to the long term capital gain along with supporting documents and proof and the assessee vide letter had furnished the computation, copy of purchase deed, communication from BMRCL and ledger abstract showing cost including stamp paper, registration charges etc. The assessee has also furnished the details of tax deducted along with reconciliation as per P L account and Form 26AS before the AO where the details of TDS done by BMRCL was furnished. The AO has verified these details and has passed the assessment order making a disallowance u/s. 14A of the Act r.w. Rule 8D. Though there is no mention specifically on the verification of capital gains by the AO, the same cannot be a reason for coming to the conclusion that the AO has not made any enquiry. Also the enquiry made by the AO need not be extended to the verification of the P L Account of the assessee based on which computation u/s. 115JB was prepared as the assessee being a public limited company has prepared the accounts as per the Companies Act and the same was approved by the share holders in the AGM of the company. The contention of the PCIT that the decision APOLLO TYRES LTD. 2002 (5) TMI 5 - SUPREME COURT is not applicable in assessee s case as the accounts are not prepared as per Companies Act has no merits, since the accounts are audited and certified by the auditors in this regard. The Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT had observed that phrase prejudicial to the interest of Revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of Revenue as a consequence of an order by the AO cannot be treated as prejudicial to the interest of the Revenue. In the given case the AO has perused the materials and have come to the conclusion accepting the book profit computation of the assessee. Further the assessee has also submitted before the AO/PCIT the fact that the compensation/ consideration is accounted in the FY 2015-16 and offered to tax in the year under consideration. We are of the considered view that the AO has correctly accepted the book profit computation u/s. 115JB - We therefore set aside the impugned order of the PCIT passed u/s. 263 and restore the assessment order. The issue is allowed in favour of the assessee.
Issues:
- Validity of order passed by Principal Commissioner u/s. 263 of the Income Tax Act, 1961 - Treatment of income from long term capital gains and set off against business loss - Compliance with AS-10 and Companies Act in preparation of financial statements - Consideration of CBDT Circular No. 36/2016 dated 25.08.2016 - Prejudice to the interest of Revenue due to alleged errors in assessment Analysis: 1. Validity of PCIT's Order: The appeal challenged the order of the Principal Commissioner of Income Tax (PCIT) passed u/s. 263 of the Income Tax Act for AY 2017-18. The appellant contended that the PCIT erred in passing the order without satisfying the conditions of section 263, which require the assessment order to be both erroneous and prejudicial to the Revenue's interest. 2. Income Treatment and Set Off: The PCIT observed that the assessee had declared long term capital gains but had not included the same in the books of accounts for computing book profits u/s. 115JB of the Act. This discrepancy led to the PCIT concluding that the assessment order was erroneous and prejudicial to the Revenue's interest, prompting a show cause notice u/s. 263. 3. Compliance with Financial Reporting Standards: The PCIT found fault with the financial statements' preparation, stating they were not in accordance with AS-10 and the Companies Act. This non-compliance resulted in an understatement of book profits and subsequent tax liability, leading to the PCIT's decision to set aside the AO's order for further investigation. 4. Consideration of CBDT Circular: The appellant argued that the sale of property had been correctly recognized in the books of accounts, and the tax effect should be nil as per CBDT Circular No. 36/2016. However, the PCIT disagreed, emphasizing the importance of verifying and including all gains in the book profits calculation. 5. Prejudice to Revenue: The Tribunal analyzed whether the AO had properly examined the capital gains details during assessment. It was noted that the AO had requested and verified relevant documents related to long term capital gains, even though specific mention of capital gains verification was absent in the assessment order. The Tribunal emphasized the limited power of the AO to make adjustments to the net profit shown in the profit and loss account. 6. Legal Precedents and Conclusion: Relying on legal precedents, including the decision in the case of Appollo Tyres Ltd. vs. CIT, the Tribunal concluded that the AO had correctly accepted the book profit computation u/s. 115JB of the Act. The Tribunal set aside the PCIT's order u/s. 263 and reinstated the assessment order, ruling in favor of the assessee. In summary, the Tribunal allowed the appeal in favor of the assessee, emphasizing the importance of proper verification of income details and compliance with relevant accounting standards in determining book profits for tax purposes.
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