2005 (7) TMI 39 - HC - Income Tax

Book profits - Whether Tribunal was justified in holding that the order passed by CIT u/s 263 was correct and thereby upholding the same? Whether Tribunal was justified in holding that the order passed by AO was erroneous and prejudicial to the interests of the Revenue? - The view about the scope and enquiry into the book profits as per the audited profit and loss account duly approved by the AGM and certified by the Registrar of Companies is settled by the decision SC in Apollo Tyres s case. Hence the orders of CIT u/s 263 as well as of the Tribunal are contrary to it, and must be held to be erroneous and not sustainable. In view of our aforesaid discussion, questions are answered against the Revenue and in favour of the assessee by holding that the Tribunal was in error in holding that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue and, therefore, the CIT could pass the order u/s 263 by recomputing the book profit by adding the amount of depreciation claimed by the assessee in this profit and loss account which has been audited, approved by the AGM and certified by the Registrar of Companies. Hence the exercise of jurisdiction by the Commissioner of Income-tax under section 263 was not sustainable nor its affirmance by the Tribunal

Summary

Issues Involved:
1. Justification of the Tribunal in upholding the order passed by the Commissioner of Income-tax under section 263.
2. Justification of the Tribunal in holding that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue.

Issue-wise Detailed Analysis:

Issue 1: Justification of the Tribunal in upholding the order passed by the Commissioner of Income-tax under section 263

The Tribunal upheld the Commissioner of Income-tax's order under section 263, which found the Assessing Officer's computation of book profit under section 115J to be erroneous and prejudicial to the interests of the Revenue. The Commissioner had recomputed the book profit by disallowing excess depreciation claimed by the assessee. The Tribunal agreed with the Commissioner that the book profit shown by the assessee did not reflect the correct profit as per the requirements of the Companies Act, particularly Schedule XIV, which mandates pro rata depreciation rather than depreciation for the entire year.

Issue 2: Justification of the Tribunal in holding that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue

The Tribunal found that the Assessing Officer's order lacked a detailed discussion on the applicability of section 115J, despite a passing reference. The Tribunal held that the Assessing Officer should have probed into whether the book profit shown by the company was true and fair. The Tribunal emphasized that the Assessing Officer must ensure the book profit complies with the true and fair view concept under section 211(2) of the Companies Act. Consequently, the Tribunal affirmed the Commissioner's order to recompute the book profit by disallowing the excess depreciation.

Conclusion:

The High Court overturned the Tribunal's decision, citing the Supreme Court's ruling in Apollo Tyres Ltd. v. CIT, which held that the Assessing Officer cannot question the correctness of the profit and loss account certified by statutory auditors, approved by the AGM, and filed with the Registrar of Companies. The High Court emphasized that section 115J mandates the acceptance of the book profit as shown in the audited profit and loss account, subject only to specific adjustments listed in the Explanation to section 115J. The High Court concluded that the Commissioner of Income-tax exceeded his jurisdiction by recomputing the book profit and that the Tribunal erred in upholding this action. Consequently, the High Court ruled in favor of the assessee, stating that the Tribunal was incorrect in holding the assessment order as erroneous and prejudicial to the interests of the Revenue. The exercise of jurisdiction by the Commissioner of Income-tax under section 263 was deemed unsustainable.