2016 (9) TMI 496 - AT - Income Tax

MAT computation - disallowance of the cost of improvement under the normal computation and under the provisions of section 115JB - applicability of companies act - Held that - Whatever be the nature of profit or loss is incurred by the assessee it has to be disclosed in the profit and loss account mandatorily as per the provisions of the Companies Act, 1956. Only the assets & liabilities and the profit/loss carry forwarded from the profit and loss account are disclosed in the balance sheet. The format of balance sheet as provided under Schedule VI of the Companies Act itself indicate the fact that only the assets & liabilities including reserves and carry forward of profit/loss from the profit & loss account are to be disclosed in the balance sheet. Thus the profit determined in the profit & loss account of the assessee complying with the Companies Act shall be the book profit of the assessee company for the purpose of Section 115JB of the Act, subject to the other provisions of the Income-Tax Act. To make it clear, there is no provision in the Companies Act to directly absorb any profit or loss in the balance sheet directly other than routing it through the profit and loss account of the assessee. Therefore, it is apparent that the assessee company had directly absorbed the profit derived from the sale of its capital asset in the balance sheet thereby avoided to disclose the same in its profit and loss account in order to escape from the clutches of the provisions of section 115JB of the Income Tax Act. This is against the provisions of the Companies Act as well as against the Income Tax Act. The decisions cited by the learned Authorized Representative has not considered the mandatory provision of Companies Act, 1956 with respect to Schedule VI Part II & III. Therefore, we are of the considered view that the learned Assessing Officer has correctly computed the book profit as per the provisions of the Act, which is rightly upheld by the learned Commissioner of Income Tax (Appeals).

Summary

Issues Involved:
1. Re-computation of book profit under section 115JB of the Income Tax Act by including profits from capital assets directly credited to reserves without routing through the profit & loss account.
2. Disallowance of the cost of improvement under normal computation and under the provisions of section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Re-computation of Book Profit under Section 115JB:
The primary issue revolves around the inclusion of profits derived from the sale of fixed assets directly in the reserves without routing it through the profit & loss account, which led to the understatement of book profit. The assessee company sold fixed assets and derived a capital profit of `32,11,24,002/-, which was directly absorbed in the balance sheet. According to the Companies Act, 1956, Schedule VI Part II & III, it is mandatory to route such profits through the profit & loss account. The Assessing Officer (AO) added these profits to the profit & loss account for computing the book profit as per section 115JB. The AO's decision was based on several observations, including:
- The assets sold were fixed assets as defined in Accounting Standard (AS) 10.
- Gains or losses from the disposal of fixed assets should be recognized in the profit & loss statement.
- The statutory auditors of the company qualified their report, stating that the balance sheet and profit & loss account did not comply with Accounting Standards due to the direct inclusion of profits in reserves.
- The Supreme Court in J.K. Industries Ltd. vs. UOI upheld the mandatory nature of Accounting Standards issued by ICAI.
- The qualification by the statutory auditor indicated that the profit and loss account was not prepared as required by the Companies Act, thus giving the AO the duty to restate the book profit.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing that the Companies Act mandates the inclusion of all profits and losses in the profit & loss account. The Tribunal agreed, stating that the profit determined in the profit & loss account, complying with the Companies Act, shall be the "book profit" for the purpose of Section 115JB. The Tribunal concluded that the assessee's direct absorption of profits in the balance sheet was an attempt to avoid tax liability under section 115JB, and upheld the AO's re-computation of book profit.

2. Disallowance of Cost of Improvement:
The second issue pertains to the disallowance of the cost of improvement amounting to `3,10,00,000/- under normal computation and under section 115JB. The AO noted discrepancies in the assessee's claim of additional construction and improvement expenses, which were not substantiated with adequate evidence. The AO observed that:
- The materials bought for construction were only iron, steel, and cement, with no other materials purchased.
- The supplier and labor contractor were not produced for verification.
- The purchaser of the property did not notice any extensive civil work, despite the assessee's claims.
- The assessee's claim of spending `3,10,00,000/- within a short period was deemed improbable.

The Tribunal found no merit in the assessee's arguments and upheld the disallowance, noting that the assessee did not advance any substantial arguments to counter the findings of the Revenue authorities.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the re-computation of book profit under section 115JB and the disallowance of the cost of improvement. The Tribunal emphasized adherence to the Companies Act and the Income Tax Act provisions, affirming the correctness of the Revenue authorities' decisions. The order was pronounced in the open court on 1st August 2016.