MORE CARE REQUIRED IN COMPUTATION OF INCOME

[CA DEV KUMAR KOTHARI]

Relevant links and references:

Section 50 of the Income-tax Act, 1961.

Section 28, 29, 32, 40 ,40A,145 and 145A of   Income-tax Act.

The Commissioner of Income Tax-I Versus Somany Evergreen Knits Ltd. 2013 (4) TMI 154 - BOMBAY HIGH COURT

Computation of income:

Computation of income or loss is based on accounts and supporting documents. In case of many organisations which are constituted under a law audit of accounts is compulsory- this is popularly called statutory audit. Even in case of small organisations who do not require any statutory audit, but who have turnover over prescribed limit, accounts are required to be audited and a report as required under the Income-tax Act is to be obtained and filed by assessee. In case of organisations who are required to obtain statutory audit report, tax audit report is additionally required if the turnover exceeds limit prescribed for the previous year.

Computation of income- an important step:

Computation of income is an important preliminary exercise for filling in details in form of ITR. A proper computation and reconciliation of taxable income with profit or loss will help in detection of mistakes. In form of computation, items allowable in addition or in variation of P & L account entries is important to seek additional relief which is not claimed in P & L account for example deprecation as per I.T.Rules, weighted deductions , claims based on last years disallowances, claims based on actual payments etc.

Similarly many items debited in P & L account cannot be claimed fully or partly. We need to consider provisions and find out if any item is disallowable. This can be due to specific disallowance, or disallowance due to non payment or disallowance due to special treatment.

Reconciliation with P & L account:

Reconciliation of income or loss as per computation with amount of profit or loss as per P & l account can be considered an important exercise to check mistakes. For this purpose items which require adjustments in computation can be recorded with special marking or can be recorded in a separate document as items which require adjustment in computation of income.

Details have to be looked into:

Many expenses are grouped under suitable heads as per standard forms of P & L account adopted as per applicable specific law or it may be due to adoption of specific soft ware for preparation of final accounts. Therefore, grouping of accounts, need to be checked. Details of certain heads of expenses also need to be checked to find out if any items which is not allowable is booked under heads like manufacturing expenses , overheads , motor car expenses, miscellaneous expenses, general expenses etc.

If an item of expenses involves contentious issues , claim of such expenses need to be disclosed and explained.  

Direct filling of form can lead to mistakes:

In e-filing of return, more care is required. Directly filling figures in form of return can lead to mistakes. It is desirable to prepare a computation and also grouping of assets , liabilities, income and expenses as per grouping made in the prescribed and applicable ITR form. After such computation only form of return should be filled in to avoid chances of mistake.

On line filing of paperless return- advisable to file hard copies immediately:

When return is filed on line and in paperless manner, some of very important documents, which are basis of return of income are not required to be filed until and unless the AO require the same.

However, it is advisable to file hard copy of computation of income, annual account and prescribed reports before or immediately after filing of return on line. It is also advisable to file hard copies within due date. This will help to establish that the assessee has made full disclosure of relevant information. This can be handy tool in case of need to contest many proceedings like proceedings for rectification, revision, reassessment and penalty etc.

Loss on sale of assets:

When we find an item like profit or loss on sale of assets we need to examine details. This items can include many items which require different treatment. For example this may include certain items which require computation as long-term capital gains or loss after indexation with cost inflation index, some items may be short term capital gain or loss, some may be exempted (e.g. case of rural agricultural land) some may relate to depreciable assets which require adjustment in block of asset and computation of capital gains.

Loss on sale of assets of depreciable assets require special treatment. The loss debited in P & L account is generally disallowed because there is special treatment in block of assets and computation of short term capital gain or loss as per provisions of Section 50 of Income-tax Act.

Inadvertent mistakes- be more careful to avoid such mistakes:

It has come to notice that many times inadvertent mistakes occur about loss on sale of assets and amount of loss is not disallowed or amount of profit is not excluded while making computation. This is because of confusion or misunderstanding. The reason is that the asset which was sold was a business asset used for the purpose of business, therefore, apparently the item of profit or loss on sale of fixed assets is confused as profit or loss of business. Therefore, inadvertent mistakes take place. While reviewing some assessment orders and assessment records author has come across cases in which the sale value of depreciable asset was deducted from WDV of lock , still in computation loss on sale of assets was not disallowed. This shows inadvertent mistake because in P & L account amount is specifically debited, in TAR sale value is specifically deducted from block of assets. Still the necessary adjustment escaped attention of person who prepared computation and / or return of income.

We need to be more careful to avoid such inadvertent mistakes. Some Tribunals have found such mistakes as inadvertent mistake and therefore, penalty was deleted. This is a liberal view. This should not be considered as indication that in future also liberal view will be taken. Furthermore, such findings are factual finding and therefore, may not be binding in other cases. Besides judges is also human being and can differ in views according to situation and from case to case. This can be dependent on manner in which matter is presented before judges and how it appeals to them at particular time, this is again dependent on mood of judges which is quite natural. In one case when counsel of assessee can make convincing arguments, it can be considered as an inadvertent mistake and in another case, when counsel of revenue make more convincing arguments, it can be considered as deliberate mistake. Therefore, one should be more careful about adjustments which are required to be made in computation of income.         

Case before Bombay High Court:

The assessee Somany Evergreen Knits Ltd. Had shown loss on sale of garment unit in the Profit and loss account. However, this was not properly adjusted in the computation of income.

Assessee also made mistake in depreciation chart in as much as instead of deducting the amount of sale value of assets the amount was added in WDV of block of assets. Therefore deprecation was claimed excessively. The AO and CIT(A) both found case of concealment of income by furnishing inaccurate particulars.

On appeal Tribunal found that there was inadvertent and bonafide mistake and therefore, cancelled penalty. This was pure finding of fact, which was not challenged.

The revenue preferred appeal before High Court, This was related to assessment year 2003-04. The following questions of law were raised:

A. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the penalty levied by the assessing officer u/s.271(1)(c) of the Income Tax Act even though the assessee had accepted in assessment proceedings that it had filed inaccurate particulars of income by claiming excess depreciation amounting to Rs.32,51,161/- in its return of income ?

B. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the penalty levied by the assessing officer u/s.271(1)(c) of the Income Tax Act even though the assessee had accepted in assessment proceedings that it had filed inaccurate particulars of income by wrongly claiming loss on sale of garment unit amountint to Rs.21,68,597/-as a revenue deduction in its return of income ?

The High Court held that the order of Tribunal is based on finding of facts by Tribunal that there was bonafide inadvertent mistake. The High Court also observed that “ it is not disputed that it was a bonafide mistake on the part of the respondent-assessee. In that view of the matter, imposition of penalty was not warranted”.

The High Court in relation to both questions, separately held that the order of the Tribunal is based on a finding of fact, so court see no reason to entertain question.

Observations of author:

We find that the assessee is a company. Its business operation cannot be called very small. Accounts of assessee company need to be audited under the provisions of the Companies Act, 1956. Whether a tax audit report was obtained or not is not ascertainable from the facts and information found in the reported judgment. The company had sold its garment manufacturing machines and suffered a loss of Rs,21,68,597/- as per accounts. The company had obtained depreciation allowance of Rs.1.05 crore. Considering all these aspects, it cannot be said that the company is a small organisation and is not properly manpowered and equipped to deal with tax issues correctly.

The amount involved in two issues are significant amount. Therefore, more care, checking and cross verification and reconciliation of computation with amount of profit or loss as per P & L account was desirable. The Tribunal has taken a liberal view on aspect of nature of mistake. Such views may not always be taken as this is dependent on the nature of proceedings, and recording of full facts in order of lower authorities also.

The revenue has also not challenge facts found by Tribunal as incorrect , unreasonable or perverse. Therefore, the High Court did not find any reason to interfere.

Whether loss can be allowed- an issue for brain storming:

In this case any contention was not raised as to allowability of loss. If we think further deeply, we find that there is possibility of claiming such loss as business loss.

As per method of accounting, Accounting Standards, and standard form of Profit and Loss account, in case of companies carrying business, any loss on sale of assets of a business or on sale of a part of business, which is incurred in normal course of business, is required to be debited in Profit and Loss account. Therefore, such loss is recognised as a normal loss or incident of business of company carried during the accounting year or previous year. Such loss is computed as per method of accounting and method of depreciation adopted in accounts. Business income or loss is to be computed u/s 28- 44DB read with section 145 (Method of accounting) and 145A (exceptions from method of accounting). There seems no specific bar for not allowing loss on sale of assets which took place in normal course of business which was carried by assessee.

Section 32 provides about allowance for depreciation. Section 43 (6) only provide about determination of written down value of block of assets when some of assets are sold out of block of assets. Section 37 provides about revenue expenses and bars on allowability of capital expenditure. It does not concern about business loss. Section 50 provides only about method of computation of capital gains chargeable u/s 45 in case of assets forming part of block of assets. The section carves out exception for method of computation of capital gains.

We find no specific disallowance under section 40 and 40A for such loss or adjustment about loss on sale of business assets in section 145 and 145A.

Therefore, it can be said that the loss on sale of business assets, which take place in normal course of business carried by assessee is a loss incidental to business and may be allowed as business loss.