2007 (1) TMI 201 - AT - Income Tax

Challenged the rectification order passed by the AO u/s 154 - Jurisdiction Of AO - calculation of the book profits u/s 115JA - assessment originally framed u/s 143(3) - HELD THAT - As the present case is concerned it relates to cl. (iv) of the Explanation below s. 115JA(2) of the Act. Sec. 115JA inserted w.e.f. 1st April 1997 also seeks to impose tax on the book profits of a company incorporated under the provisions of the Companies Act 1956. The said section also refers to the net profit as shown in the P L a/c for the relevant previous year prepared in accordance with provisions of Parts II and III of Sch. VI to the Companies Act 1956 and subject to the adjustments as outlined in the Explanation below sub-s. (2). The erstwhile s. 115J is pari materia to s. 115JA which we are presently dealing with insofar as it relates to the controversy on hand. In our view the parity of reasoning enunciated in the case of G.T.N. Textiles Ltd. 2000 (8) TMI 35 - KERALA HIGH COURT is squarely applicable in the instant case to understand the amount deductible in terms of cl. (iv) of the Explanation below s. 115JA(2) of the Act. Following the aforesaid in our view for the purposes of cl. (iv) of the Explanation to s. 115JA(2) it is not the actual deduction u/s 80-IA which is relevant but what is relevant is the profits of eligible undertaking computed in terms of the P L a/c for the relevant previous year prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act 1956. Considering the order of the AO in the aforesaid light the same clearly emerges to be untenable in the eyes of law. Factually speaking there is no dispute that the net profit has been computed for the power co-generation unit of the assessee is in terms of the P L a/c prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act 1956. Therefore in terms of cl. (iv) it is the amount that is deductible to arrive at book profits u/s 115JA of the Act. AO while reducing the amount of deduction allowed u/s 80-IA from the net profits shown in the P L a/c for the instant year prepared in accordance with the provisions of Parts II and III of the Sch. VI of the Companies Act in order to compute book profit squarely fell in error. The said action of the AO is clearly not warranted by the statutory provisions. Hence in terms of the ratio of the decision in the case of Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME COURT in the instant case the AO exceeded his jurisdiction while computing book profits u/s 115JA of the Act by seeking to exclude the actual amount of deduction allowable u/s 80-IA in contrast to the actual profits of the eligible unit. Thus we hereby affirm the decision of the CIT(A) and stand of the Revenue is hereby dismissed. In the result appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Validity of the AO's rectification under Section 154 of the IT Act.
2. Calculation of income under Section 115JA.
3. Deduction under Section 80-IA before or after depreciation.
4. Jurisdiction of the AO in recalculating book profits under Section 115JA without specific notice.

Detailed Analysis:

1. Validity of the AO's Rectification under Section 154 of the IT Act:
The appeal by the Revenue challenges the order of the CIT(A) which canceled the AO's rectification under Section 154. The AO had initially allowed deductions under Section 80-IA before depreciation but later rectified this to allow depreciation first, resulting in a negative gross total income and disallowance of Section 80-IA deduction. The CIT(A) found that the AO's rectification was not authorized, as there was no specific notice issued regarding the recalculation of book profits under Section 115JA. The Tribunal agreed with the CIT(A) that the AO's action was not tenable as the recalculation of book profits was not part of the original notice under Section 154.

2. Calculation of Income under Section 115JA:
The AO recalculated the book profits under Section 115JA by reducing the net profit by the amount of deduction under Section 80-IA, resulting in a book profit of Rs. 3,23,00,114. The assessee contested this, arguing that the reduction should be based on the profits as declared in the books of account, not the deduction amount. The CIT(A) upheld the assessee's view, referencing the Supreme Court's decision in Apollo Tyres Ltd. The Tribunal concurred, stating that the profits to be reduced should be those declared in the P&L account as per the Companies Act, not the computed deduction under Section 80-IA.

3. Deduction under Section 80-IA Before or After Depreciation:
The AO initially allowed the deduction under Section 80-IA before depreciation but later rectified this to allow depreciation first. This adjustment led to a negative gross total income, making the Section 80-IA deduction unallowable. The CIT(A) found that the AO's rectification was not justified as it was not part of the original notice under Section 154. The Tribunal agreed, noting that the recalculation of book profits under Section 115JA was not mentioned in the notice, making the AO's action untenable.

4. Jurisdiction of the AO in Recalculating Book Profits under Section 115JA Without Specific Notice:
The Tribunal found that the AO's recalculation of book profits under Section 115JA was outside the scope of the notice issued under Section 154, which only proposed rectification regarding depreciation and Section 80-IA deductions. The Tribunal emphasized that any recalculation of book profits must be explicitly stated in the notice, and the AO's failure to do so rendered the rectification invalid.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the AO's rectification under Section 154 was not authorized due to the lack of specific notice regarding the recalculation of book profits under Section 115JA. The Tribunal also agreed that the reduction of profits for Section 115JA should be based on the profits declared in the P&L account, not the computed deduction under Section 80-IA. Consequently, the Revenue's appeal was dismissed.