2014 (11) TMI 49 - HC - Income Tax

High Court rules AO unauthorized in redrawing P&L account, stresses adherence to Companies Act, limits AO powers

The High Court ruled in favor of the assessee, emphasizing that the Assessing Officer's act of redrawing the profit and loss account was unauthorized. The ... Minimum Alternate Tax - Entitlement to adopt the rates of depreciation – Adoption of rate of depreciation for arriving book profits u/s 115J(1)(a) - Assessee claimed depreciation at the rates as provided under the Income Tax Rules instead of adopting the rates as prescribed in Parts-2 and 3 of Schedule VI of the Companies Act, 1956 - Held that:- It is well settled in Apollo Tyres Ltd., Vs. C.I.T. [2002 (5) TMI 5 - SUPREME Court] that it is impermissible for the AO to redraw the profit and loss account as long as the same is prepared in terms of the Companies Act, and the same is required to be adopted for the purpose of calculating the profits u/s 115-J of the Act - the AO while computing the income u/s 115-J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been property maintained in accordance with the Companies Act - the AO does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J – thus, the AO had committed an error in redrawing the profit and loss account by making changes by adding depreciation debited to profit and loss account by the assessee, which is impermissible – thus, the order of the order of the Tribunal is set aside – Decided in favour of assessee. Issues:1. Interpretation of depreciation rules under the Companies Act and Income Tax Rules for calculating book profits under Section 115J of the Income Tax Act.2. Permissibility of redrawing the profit and loss account by the Income Tax Appellate Tribunal.Analysis:Issue 1: Interpretation of Depreciation Rules:The primary issue in this case revolves around the interpretation of depreciation rules under the Companies Act and Income Tax Rules for calculating book profits under Section 115J of the Income Tax Act. The assessee contended that they were entitled to adopt depreciation rates as provided under the Income Tax Rules, 1962, instead of those prescribed in Parts-2 and 3 of Schedule VI of the Companies Act, 1956. However, the authorities below disagreed, stating that the assessee cannot adopt rates under the Income Tax Rules for computing book profits under Section 115J of the Act. They relied on Accounting Standard No.6 to support their conclusion that higher depreciation rates can only be claimed in cases of bona fide technical necessity. The assessing authorities reworked the depreciation based on the minimum rates specified in the Companies Act, leading to a dispute.Issue 2: Permissibility of Redrawing Profit and Loss Account:Another crucial aspect of the case was whether the Income Tax Appellate Tribunal was justified in upholding the authorities' decision to redraw the profit and loss account. The Tribunal's action was questioned regarding the permissibility of such redrawing under the law. Citing the judgment in Apollo Tyres Ltd. vs. C.I.T., Kochi, it was established that Assessing Officers lack the authority to redraw profit and loss accounts if they comply with the Companies Act. The Supreme Court's ruling clarified that Assessing Officers can only make adjustments as specified in the Explanation to Section 115J but cannot alter the net profit shown in the profit and loss account. The Tribunal's failure to appreciate this argument led to a finding against their decision.In conclusion, the High Court ruled in favor of the assessee on all three questions, emphasizing that the Assessing Officer's act of redrawing the profit and loss account was unauthorized and contrary to the Supreme Court's precedent. The judgment highlighted the importance of adhering to the Companies Act provisions and restricting Assessing Officers' powers to make changes to profit and loss accounts.