2023 (1) TMI 45 - HC - Income Tax

Prior period adjustments to be included or excluded for working out book profit for the purpose of Section 115J - HELD THAT - The statute does not provide that prior period adjustments are to be excluded to work out the book profit as per sub-section (1A). In Apollo Tyres Limited 2002 (5) TMI 5 - SUPREME COURT was considering amongst others the question as to whether an assessing officer while assessing a company under Section 115J of the Act can question the correctness of the profit and loss account prepared by the assessee in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Looking into the accounts of the company, an assessing officer under the Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, 1956, which obligates the company to maintain its account in a manner provided by the Companies Act, 1956. Therefore, AO while computing the income under Section 115J has only the power to examine whether the books of accounts are certified by the authorities under the Companies Act, 1956, as having been properly maintained in accordance with the Companies Act, 1956. Assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said Section. Putting it differently, Supreme Court held that an assessing officer does not have the jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J of the Act. If that be the position, assessing officer could not have taken another figure as the net profit instead of the net profit of Rs.33,222.00 shown as per the profit and loss account prepared in terms of Parts II and III of Schedule VI to the Companies Act, 1956. That being the position, the substantial questions of law as extracted above are answered in favour of the appellant and against the respondent.

Summary

Issues:
1. Inclusion of prior period adjustments in book profit for Section 115J of the Income Tax Act.
2. Interpretation of the Supreme Court decision in Apollo Tyres Ltd. v. Commissioner of Income Tax regarding book profit calculation.

Issue 1: Inclusion of Prior Period Adjustments in Book Profit:

The case involved an appeal under Section 260A of the Income Tax Act, 1961, regarding the inclusion of prior period adjustments in the book profit for the purpose of Section 115J of the Act. The appellant contested the addition of prior period adjustments to the book profits, arguing that such additions were not permitted under the Explanation below sub-section (1A) to Section 115J of the Act. The key question was whether prior period adjustments should be included or excluded for calculating book profit under Section 115J. The Tribunal upheld the assessing officer's decision to exclude prior period adjustments, relying on the decision in CIT v. Krishna Oil Extraction Limited, which stated that prior period adjustments should be excluded for working out book profit under Section 115J.

Issue 2: Interpretation of Apollo Tyres Ltd. v. Commissioner of Income Tax Decision:

The appellant also raised a question regarding the Tribunal's dismissal of the appeal despite the Tribunal acknowledging that the appellant's case was similar to the Supreme Court decision in Apollo Tyres Ltd. v. Commissioner of Income Tax. The Tribunal, in its decision, noted that the appellant had adjusted prior period expenses from the net profit figure to arrive at the book profit. However, instead of setting aside the assessing officer's decision, the Tribunal upheld it, citing the Supreme Court's decision in Apollo Tyres Ltd. The Supreme Court decision clarified that assessing officers cannot question the correctness of the profit and loss account prepared by the assessee in accordance with the Companies Act, 1956. The Court emphasized that assessing officers have limited power to make adjustments as provided in the Explanation to Section 115J and cannot go beyond the net profit shown in the profit and loss account.

In conclusion, the High Court allowed the appeal, ruling in favor of the appellant on both issues. The Court held that prior period adjustments should not be excluded from the calculation of book profit under Section 115J and emphasized the limited jurisdiction of assessing officers to make adjustments to the net profit shown in the profit and loss account. The judgment provided a detailed analysis of the relevant provisions of the Income Tax Act and the Supreme Court decision in Apollo Tyres Ltd., clarifying the principles governing the computation of book profit for taxation purposes.