2018 (12) TMI 279 - AT - Income Tax

ITAT questions AO's Rs. 52.74 crores adjustment under Section 115JB. Remanded for fresh assessment.

The ITAT concluded that the AO's adjustment of Rs. 52.74 crores due to a change in depreciation rates was not justified under Clause (i) of Explanation 1 ... MAT (Minimum Alternate Tax) - increase in liability - Addition on account of adjustment due to change in the depreciation rate - accounting standards application - Held that:- Provisions under paragraphs 11 and 13 of Accounting Standard-6 (AS-6) have been noted by CIT(A) and relevant portions of the order of CIT(A) have already been reproduced earlier in this order. Vide paragraph 11 of AS-6, Management of the company is vested with power to exercise judgment in the light of technical, commercial, accounting and legal requirements and it permits Management to periodically review the original estimate of useful life of an asset. Further, under paragraph 13 of AS-6, it is permitted for the company to apply the higher rate of depreciation where the management estimates of the useful life of an asset is shorter than that envisaged under the provision of the relevant statutes (here, The companies Act, 1956). As under AS-6, higher rates of depreciation for assets have to be based on bona fide technological evaluation of the useful life of the depreciable assets. For a bonafide technical evaluation, it is necessary that the evaluation should be made by a competent person or body having the requisite technical knowledge and expertise. Such an evaluation leading to higher rate of depreciation is a bona fide evaluation, especially when such an evaluation results in tax benefit for the company. A self serving evaluation, which is not bonafide, leading to claim of reduced tax burden for the Assessee will be a colourable device within the meaning of the landmark decision of Hon’ble Supreme Court in the case of McDowell and Co. Ltd. vs. Commercial Tax Officer [1985 (4) TMI 64 - SUPREME COURT]. A colourable device to evade tax has to be rejected. For the purpose of determination of book profits, the statutory role of Registrar of Companies to examine and satisfy that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act, has the mandate of the Supreme Court; and further, that report(s)/opinion(s) of statutory auditor(s) and the reports / opinions / recommendations as a result of Supplementary Audit are not final : these are not only subject to approval by the company in its general meeting, but also subject to examination by Registrar of Companies and his satisfaction that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act. Both the lower authorities, AO as well as CIT(A), have not considered whether, after examination by Registrar of Companies, whether Registrar of Companies was satisfied that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act - As relevant information, whether, after examination by Registrar of Companies, whether Registrar of Companies was satisfied that the accounts of the assessee are maintained in accordance with the requirements of the Companies Act; is not available on our records. Since the relevant information is not on our records, we restore the matter to the file of the AO with the direction to pass fresh order on this issue. Thus, the order of the CIT(A) is set aside on this limited issue and the matter in dispute in the present appeal before us is restored to the file of the AO for fresh order on this limited issue. In the result, appeal of the Revenue is partly allowed for statistical purposes. Issues Involved:1. Deletion of addition of Rs. 52.74 crores made by the Assessing Officer (AO) on account of adjustment due to change in the depreciation rate.Detailed Analysis:1. Deletion of Addition Due to Change in Depreciation Rate:The Revenue appealed against the deletion of an addition of Rs. 52.74 crores made by the AO due to an adjustment in the depreciation rate. The AO argued that this adjustment resulted in a diminution in the value of assets, which should be added back to the book profit under Clause (i) of Explanation 1 to Section 115JB of the Income Tax Act (I.T. Act). The AO also questioned the competence of the technical committee that recommended the change in depreciation rates and suggested that the change was a colorable device to avoid taxes.The CIT(A) held that the appellant had correctly computed the book profit and directed the AO to delete the increased MAT liability on the adjusted book profit. The CIT(A) noted that the appellant's accounts were audited by statutory auditors and supplementary audited by the office of the Comptroller and Auditor General (CAG), and there was no qualification by the auditors regarding the unreasonableness of accounting estimates. The CIT(A) also observed that the appellant had made adequate disclosures regarding the change in depreciation rates.The ITAT upheld the CIT(A)'s decision, emphasizing that the AO's contention that the additional claim of Rs. 52.74 crores due to change in depreciation rates resulted in diminution in the value of assets was misplaced. The ITAT noted that Clause (i) of Explanation 1 to Section 115JB of the I.T. Act applies to situations where the assessee claims diminution in the value of assets other than through depreciation. The ITAT also highlighted that the statutory role of the Registrar of Companies to examine and ensure that the accounts are maintained in accordance with the requirements of the Companies Act has the mandate of the Supreme Court.The ITAT further observed that the AO and CIT(A) had not considered whether the Registrar of Companies had examined and accepted the accounts of the assessee. The ITAT restored the matter to the file of the AO for fresh consideration, directing the AO to pass a fresh order on this limited issue, taking into account the satisfaction of the Registrar of Companies regarding the maintenance of accounts as per the Companies Act.Conclusion:The ITAT concluded that the AO's adjustment of Rs. 52.74 crores due to change in depreciation rates was not justified under Clause (i) of Explanation 1 to Section 115JB of the I.T. Act. The matter was restored to the AO for fresh consideration, particularly regarding the examination and satisfaction of the Registrar of Companies about the maintenance of accounts as per the Companies Act. The appeal of the Revenue was partly allowed for statistical purposes.