Tribunal rules against tax authority on jurisdiction & book profit adjustment

The Tribunal held that the Principal Commissioner of Income Tax's assumption of jurisdiction under section 263 was erroneous as the assessment order was not found to be erroneous or prejudicial to revenue. Regarding the adjustment to 'Book Profit' under section 115JB, the Tribunal ruled that adding notional interest income was not permitted under Explanation 1 to the Act, as the audited financial statements did not recognize it. The Tribunal quashed the Pr. CIT's order under section 263 and deleted the adjustment made to the book profit, allowing the assessee's appeals.

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Issues Involved:
1. Erroneous exercise of jurisdiction under section 263 of the Income Tax Act.
2. Adjustment to 'Book Profit' under section 115JB of the Income Tax Act.

Detailed Analysis:

Issue 1: Erroneous Exercise of Jurisdiction under Section 263 of the Act

Grounds of Appeal:
The appellant contended that the Principal Commissioner of Income Tax (Pr. CIT) erroneously assumed jurisdiction under section 263 of the Income Tax Act, concluding that the assessment order dated 18.03.2016 was erroneous and prejudicial to the interests of revenue.

Tribunal's Analysis:
- The Tribunal noted that for the Pr. CIT to assume jurisdiction under section 263, two conditions must be satisfied: the order must be erroneous and prejudicial to the interests of the revenue. This principle was upheld by the Bombay High Court in CIT v/s. Gabriel India Ltd [1993] 203 ITR 108.
- The Tribunal found that the assessment order was not erroneous. The assessee's audited accounts were prepared according to accepted accounting principles and laws, and the assessment of MAT liability was as per section 115JB of the Act.
- The Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC), which held that the Assessing Officer (AO) has limited power to make adjustments to the net profit as per the audited profit and loss account, except for specific adjustments listed under Explanation 1 to section 115JB.

Conclusion:
The Tribunal concluded that the Pr. CIT's assumption of jurisdiction under section 263 was erroneous and not justified, as the assessment order was neither erroneous nor prejudicial to the interests of the revenue.

Issue 2: Adjustment to 'Book Profit' under Section 115JB of the Act

Grounds of Appeal:
The appellant argued that the Pr. CIT erred in adding notional interest income of INR 12,80,00,000 while computing Book Profits for the purpose of section 115JB, as such an adjustment is not permitted under Explanation 1 to section 115JB of the Act.

Tribunal's Analysis:
- The Tribunal noted that the assessee had not recognized notional interest income on an advance given to International Amusement Limited (IAL) in its audited financial statements due to significant uncertainty of ultimate collection of the principal.
- The Tribunal observed that the assessee's books of accounts were audited and certified by a reputed audit firm, and the non-recognition of interest was in accordance with Accounting Standard 9 on revenue recognition.
- The Tribunal emphasized that section 115JB is a separate code with specific adjustments listed under Explanation 1, and no other adjustments are permitted.
- The Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, which clarified that the AO does not have the jurisdiction to go behind the net profit shown in the profit and loss account, except as provided in the Explanation to section 115J.
- The Tribunal also cited the Bombay High Court's decision in Pr. CIT vs. Bhagwan Industries Ltd., which supported the view that the AO's acceptance of the assessee's computation of income, including the exclusion of notional interest, was correct.

Conclusion:
The Tribunal held that the Pr. CIT's direction to add the notional interest income to the book profit under section 115JB was not sustainable. The AO had correctly followed the law by not including the notional interest in the book profit, as it was not recognized in the audited financial statements.

Final Judgment:
The Tribunal quashed the order passed by the Pr. CIT under section 263 of the Income Tax Act, 1961, and allowed the assessee's appeals. The adjustment made to the book profit in relation to the interest income of INR 12,80,00,000 was deleted. The order was pronounced in the open court on 02.11.2018.

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