Tribunal Overturns Tax Adjustments, Sets Precedent

The Tribunal allowed the assessee's appeal, setting aside the CIT(A)'s orders on adjustments under sections 115JB and 14A of the Income Tax Act. Regarding the adjustment under section 115JB, the Tribunal held that the AO's power is limited to verifying if accounts are certified under the Companies Act and making adjustments as per the law. The Tribunal relied on Supreme Court precedents and Bombay High Court decisions to support its decision, ultimately deleting the additions made by the AO. The matter of disallowance of expenses under section 14A was also remanded for re-examination in line with applicable law.

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Issues Involved:
1. Adjustment made u/s 115JB of the Income Tax Act, 1961.
2. Disallowance of expenses u/s 14A of the Income Tax Act, 1961.

Summary:

1. Adjustment made u/s 115JB:

The dispute relates to the adjustment made by the AO in the computation of book profit u/s 115JB. The AO noted that the assessee had earned gross profit from the sale of its rights in immovable property, which was not shown in the P&L Account but taken directly to the balance sheet. The AO concluded that the P&L account was not prepared in accordance with Part-II and Part-III of Schedule-VI of the Companies Act, and re-worked the book profit accordingly. The CIT(A) confirmed the adjustment, leading to the assessee's appeal before the Tribunal.

The assessee argued that the issue was covered by the Supreme Court judgment in Apollo Tyres Ltd. vs. CIT (255 ITR 273), which held that once accounts prepared as per the Companies Act are verified by the authorities, the AO cannot make changes. The DR, however, cited the Bombay High Court's decision in CIT vs. Veekaylal Investment Co. P. Ltd. (249 ITR 597), supporting the AO's adjustment.

The Tribunal, after considering the records and rival contentions, found that the issue was settled by the Supreme Court in Apollo Tyres Ltd. (255 ITR 273), which limited the AO's power to examine whether the books of account are certified by the authorities under the Companies Act and to make adjustments as provided in the Explanation to section 115J. The Tribunal noted that subsequent judgments of the Bombay High Court in CIT vs. Akshay Textiles Trading And Agencies P. Ltd. (304 ITR 401) and CIT vs. Adbhut Trading Co. P. Ltd. (338 ITR 94) reiterated this position. Consequently, the Tribunal set aside the order of CIT(A) and deleted the addition made by the AO.

2. Disallowance of expenses u/s 14A:

The second dispute concerns the disallowance of expenses u/s 14A related to income exempt from tax. The AO allocated expenses on a proportionate basis and disallowed a sum of Rs. 8,02,702/-. The CIT(A) directed the AO to re-compute the disallowance as per Rule 8D, which the assessee appealed against.

The Tribunal noted that the Bombay High Court in Godrej and Boyce Mfg. Co. vs. DCIT (328 ITR 81) held that Rule 8D is applicable only from AY 2008-09, and for prior years, disallowance should be made on a reasonable basis. The Tribunal set aside the order of CIT(A) and restored the matter for re-examination in light of the Bombay High Court's judgment, directing a fresh order after hearing the assessee.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal setting aside the CIT(A)'s orders on both issues and providing directions for re-examination and deletion of the adjustments made by the AO.

Order pronounced in the open court on 23.01.2013.

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