REVISED PROFIT AND LOSS ACCOUNT CANNOT BE IGNORED EVEN IF REJECTED NEPC MADRAS HIGH COURT

[CA DEV KUMAR KOTHARI]

Revised Profit and Loss Account of company to be basis of computation of MAT- case of Commissioner of Income Tax Chennai. Versus M/s. NEPC India Limited, Chennai - 2012 (7) TMI 661 - MADRAS HIGH COURT

Revision of annual accounts:

Before discussing the judgment let us consider circumstances in which a Profit and Loss Account of company, need to be revised. If it is found by management of company or any authority that the Profit And Loss Account, though audited and approved by the share holders is materially wrong and it deserves to be revised to show correct picture of profit or loss and state of affairs, the accounts can be revised. In such circumstances, revised P & L Account, and Balance sheet will be drawn, it will be approved by board of directors, and auditors will audit and render a fresh report. Then the shareholders will approve the same and revised annual report will be filed with the Registrar of Companies. On such revision of annual account, the previously approved annual accounts get substituted with the revised set of annual accounts.

When a company adopts revised profit and Loss Account and Balance Sheet, and file the same with the Registrar of Companies, the originally filed Profit and Loss Account and Balance Sheet no longer exist in eye of law because of substitution.

The reasons for revision must be justifiable:

The reason for revision of annual accounts must be justifiable. The justification is to be derived based on merit of reasons of revision, materiality and bona fides. In case of minor mistakes a revision of accounts is not adopted, in such cases in subsequent year adjustments can be made under headings like items pertaining to earlier years. However, when there is major mistake of principal and the amount involved is also substantial, a revision in profit and loss account and balance sheet should be made as soon as possible to stop continuing default of not presenting true and fair view of state of affairs of company and its profit or loss.

Case of NEPC India Ltd- brief analysis:

The company filed original return u/s 139(1) within prescribed time, so the company was entitled to file a revised return also. After filing of the original return of income, company had to revise its profit and loss account and balance sheet as per order of authorities under the Companies Act. Therefore, company filed a revised return showing loss for the year instead of profit as per original profit and loss account. The revised return was filed late and therefore, the AO and CIT(A) considered the same as non est. For the same reasons they did not consider the revised amount of loss and imposed tax u/s 115JA on book profit as declared in the original return.

It appear that during scrutiny u/s 143(2) (of original return) the assessee has requested the AO and CIT (A) to consider revised return and had not raised the contentions as stated by author in earlier paragraphs that on revision of P & l account original P & L account is no longer existing in eye of law and the revised P & L account has substituted the original P & L a/c which need to e considered by the AO.

On appeal the Tribunal restored the issue to the AO to examine the revised P & L account with directions also to check if the revision of P & L account was simply to avoid tax liability admitted earlier in original return.

Appeal of revenue before High Court:

The Revenue in appeals against the common order of the Income Tax Appellate Tribunal, Madras 'A' Bench dated 13.12.2002 in ITA.Nos.1019/Mds/2002 and 1265/Mds/2002 raised the following substantial questions of law:-

" 1.Whether in the facts and circumstances of the case, the Tribunal was right in remanding the matter to the assessing officer to consider claims made in the revised return, when such return was filed beyond the time limit prescribed under Section 139(5)? and

2. Whether in the facts and circumstances of the case, the Tribunal was right in not giving a finding on how the assessing officer could consider claims made in a revised return which was filed beyond time?"  

On reading of the judgment we find that the revision of P & L account was on substantial issues which had very material impact on the amount of profit and loss of company and it was necessary to comply with directions of the authorities under the Companies Act. Therefore, there was full justification for such revision.

High Court considered facts and circumstances of the case and then following the decisions of the Supreme Court in Apollo Tyres Ltd v. Commissioner of Income Tax (2002 (5) TMI 5 - SUPREME Court), and Malayala Manorama Co. Ltd. v. Commissioner of Income Tax (2008 (4) TMI 20 - SUPREME COURT) has held that once the assessee has filed revised balance sheet and profit and loss account, which were revised on the basis of objections raised by the Department of Company Affairs and the same had been placed before the annual general meeting and approved, it is not open to the Assessing Officer to reject the accounts or rescrutinize the accounts to satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act.

Once the results as per revised P & L accounts shows loss, the question of invoking the provisions under Section 115 JA does not at all arise. Therefore the question to be decided, was whether the revised profit and loss account and balance sheet in the form of revised returns would really have to be considered by the Assessing Officer within the meaning of Section 139(5) as the same has already been rejected as non est in the eye of law.

The High Court did not find any justification in the contention of the Revenue that the revised results do not merit any consideration. Even if the revised return is treated as a time barred one, when once the assessment is made under Section 143(2) based on the materials gathered, the Assessing Officer cannot fight shy of considering the materials coming in the form of the direction of the Department of Company Affairs and its effect on the account results.

Analysis and observations of author:

In the judgment of the High Court it is not specifically mentioned that once revised P & L account is approved and filed, the original one becomes non est and the revised one replaces the original, when revised P & L account is as per directions of authorities under the Companies Act and revised P & L account is on record of the Registrar of Companies, the AO cannot consider original P & L account and he has to base assessment on revised P & l account. However, the net result is the same.

This is clear from the following observations of the High Court:

1. In the process, if the book results are to show a result different from what was originally projected, the mere fact that it resulted in a negative result could not take away the correctness of the results projected.
2. If, for the purpose of assessment of profits under section 115 JA, the Revenue could rest safely on the accounts maintained as per the provisions of the Companies Act, the same should hold good on the reversed result too.
3. Ultimately, what matters in the assessment, is the correctness of the accounts.
4. It is not denied by the Revenue that the transaction is inter divisional transfer of 24 WTG. There is no grievance from the Revenue that the transaction of inter divisional transfer between one Unit and another is not by way of sale.
5. In the background of the said admitted fact, the only question that arises herein is as to how the Assessing Officer has to arrive at the assessable income of the assessee.
6.  it is not denied by the Revenue that the revision of the book results on the changed nature of transaction was itself on account of the objection raised by the Regional Director, Department of Company Affairs.
7. That being the case, we do not find any justification in the contention of the Revenue that the revised results do not merit any consideration. Even if the revised return is treated as a time barred one, when once the assessment is made under Section 143(2) based on the materials gathered, the department cannot fight shy of considering the materials coming in the form of the Regional Director's direction and its effect on the account results.
8. The revised profit and loss account and balance sheet were approved by the shareholders in the annual general meeting to be treated as revised claim. In this, we do not find any ground to read an intention that the revision was done with a view to revise the liability of the assessee under the Act.

Even though, the assessee has not filed any Tax Appeal before this Court, on this observation of the Tribunal, we are bound to observe that the said statement is without any basis. In the light of what we have observed in the preceding paragraph, we have no hesitation in remanding the matter back to the Assessing officer to examine the issue once again, uninfluenced with any of the observations made by the Tribunal as regards the valuation, but looked into the claim of the assessee in the background of the nature of transaction i.e. inter divisional transfer of WTG from manufacturing unit to power generating unit as not by way of sale.