2007 (3) TMI 303 - AT - Income Tax

Summary

Issues:
Appeal against order of CIT(A) under s. 143(3) for asst. yr. 1999-2000 - Increase in book profit under s. 115JA by disallowing loss on sale of vehicle debited to P&L a/c - Jurisdiction of AO to make adjustments under Explanation to s. 115JA - Correctness of AO's action in re-computing profit under s. 115JA - Whether loss on sale of assets is a capital loss - Compliance with provisions of Companies Act, 1956 for preparing P&L a/c - Power of AO to alter book profit under s. 115JA.

Analysis:
The appeal was filed against the order of CIT(A) for the assessment year 1999-2000, challenging the action of the Assessing Officer (AO) in passing an order under s. 154 of the IT Act, 1961 to increase the book profit computed under s. 115JA by disallowing the loss on the sale of a vehicle debited to the Profit & Loss (P&L) account, on the grounds that it was a capital loss. The AO added the loss on the sale of assets to the declared net profit, resulting in a higher book profit under s. 115JA. The CIT(A) upheld the AO's decision.

The contention of the assessee was that there was no mistake apparent from the record as the loss on the sale of the vehicle was correctly debited to the P&L account as per the prescribed accounting system. The Authorized Representative argued that the AO exceeded his jurisdiction by adding the loss debited in the P&L account, which was incurred on the sale of fixed assets, as none of the clauses in the Explanation to s. 115JA allowed for such adjustment.

On the other hand, the Departmental Representative argued that the AO correctly added back the loss on the sale of vehicles as it was a capital loss, and the AO had the power to make adjustments while computing the book profit under s. 115JA. The Tribunal analyzed the provisions of the IT Act, 1961, s. 154 read with s. 115JA, and the Companies Act, 1956 regarding the preparation of the P&L account.

The Tribunal held that the AO's jurisdiction to alter the book profit under s. 115JA was limited to the adjustments provided in the Explanation to s. 115JA. Since none of the clauses in the Explanation allowed for adjusting the actual loss debited on the sale of vehicles, the AO's action was deemed to be beyond the scope of the law. The Tribunal cited a Supreme Court case to emphasize the limited power of the AO in computing book profits under s. 115J.

Furthermore, the Tribunal distinguished between the computation of book profit under s. 115JA and the computation of profits under the IT Act, highlighting that while a loss on the sale of fixed assets is added back for taxable income computation, it is not required to be added back for book profit under s. 115JA. Therefore, the Tribunal concluded that there was no merit in the AO's action to enhance the book profit under s. 115JA by invoking powers under s. 154, as there was no mistake apparent from the record in debiting the loss on the sale of assets to the P&L account. Consequently, the appeal of the assessee was allowed.