2022 (9) TMI 283 - AT - Income Tax

Tribunal overturns Commissioner's decision under Income Tax Act, emphasizing accurate income verification.

Shri Chamundeswari Sugars Ltd. Versus The Principal Commissioner of Income-tax – 1, Bangalore.

Shri Chamundeswari Sugars Ltd. Versus The Principal Commissioner of Income-tax – 1, Bangalore. - TMI Issues:- Validity of order passed by Principal Commissioner u/s. 263 of the Income Tax Act, 1961- Treatment of income from long term capital gains and set off against business loss- Compliance with AS-10 and Companies Act in preparation of financial statements- Consideration of CBDT Circular No. 36/2016 dated 25.08.2016- Prejudice to the interest of Revenue due to alleged errors in assessmentAnalysis:1. Validity of PCIT's Order: The appeal challenged the order of the Principal Commissioner of Income Tax (PCIT) passed u/s. 263 of the Income Tax Act for AY 2017-18. The appellant contended that the PCIT erred in passing the order without satisfying the conditions of section 263, which require the assessment order to be both erroneous and prejudicial to the Revenue's interest.2. Income Treatment and Set Off: The PCIT observed that the assessee had declared long term capital gains but had not included the same in the books of accounts for computing book profits u/s. 115JB of the Act. This discrepancy led to the PCIT concluding that the assessment order was erroneous and prejudicial to the Revenue's interest, prompting a show cause notice u/s. 263.3. Compliance with Financial Reporting Standards: The PCIT found fault with the financial statements' preparation, stating they were not in accordance with AS-10 and the Companies Act. This non-compliance resulted in an understatement of book profits and subsequent tax liability, leading to the PCIT's decision to set aside the AO's order for further investigation.4. Consideration of CBDT Circular: The appellant argued that the sale of property had been correctly recognized in the books of accounts, and the tax effect should be nil as per CBDT Circular No. 36/2016. However, the PCIT disagreed, emphasizing the importance of verifying and including all gains in the book profits calculation.5. Prejudice to Revenue: The Tribunal analyzed whether the AO had properly examined the capital gains details during assessment. It was noted that the AO had requested and verified relevant documents related to long term capital gains, even though specific mention of capital gains verification was absent in the assessment order. The Tribunal emphasized the limited power of the AO to make adjustments to the net profit shown in the profit and loss account.6. Legal Precedents and Conclusion: Relying on legal precedents, including the decision in the case of Appollo Tyres Ltd. vs. CIT, the Tribunal concluded that the AO had correctly accepted the book profit computation u/s. 115JB of the Act. The Tribunal set aside the PCIT's order u/s. 263 and reinstated the assessment order, ruling in favor of the assessee.In summary, the Tribunal allowed the appeal in favor of the assessee, emphasizing the importance of proper verification of income details and compliance with relevant accounting standards in determining book profits for tax purposes.