2022 (8) TMI 1603 - AT - Income Tax

Qualified audited accounts and uncredited derivatives settlement gains in book profit-AO allowed to adjust s.115JB computation

The dominant issue was whether, while computing book profit under s.115JB, the AO could adjust net profit beyond the items specified in the Explanation ... Reopening of assessment u/s 147 - Addition made in computation of book profit u/s 115JB - AO made the addition as the assessee has not declared profits as per accounting principles as pointed out by the Auditors itself - HELD THAT:- Undoubtedly, in the case of Apollo Tyres [2002 (5) TMI 5 - SUPREME COURT] held that the AO has a limited power to increase or decrease the deduction in the income of the assessee in terms of Explanation 2 of section 115JB of the Act. However, the above said decision is required to be understood in the context of two caveats. (1) Books of accounts were prepared and maintained in accordance with the Companies Act. (2) That the said accounts were certified by the authorities under the Companies Act. The perusal of the Audit Objection clearly shows that the books of accounts had not been prepared in accordance with the Companies Act, and the assessee has wrongly set off the net gain made during the current year on account of the speculation of the trade contract with the brought forward losses of the earlier years. The above set off of brought forward losses against the net gain of the current assessment year is against the accounting standards applicable for the assessee and the provisions of the Income Tax Act, 1961. The perusal of the objections in the audit report clearly shows that auditors have given qualified certificate that the accounts were not prepared in accordance with the Companies Act. On account of qualified audited account, impunity given by the Hon'ble Supreme Court could not be exercised in favour of the assessee as requisite criteria had not been fulfilled by assessee as required under section 115JB of the Act. A person who has not prepared the accounts in accordance with the Companies Act and even the Auditors have objected to the preparation of accounts will not get the immunity u/s 115JB of the Act and variation can not be restricted to class of adjustment or additions as provided under Explanation to section 115 JB of the Act. Assessee company has made a net gain oon account of the settlement of trade contracts otherwise than on delivery and forex derivatives and set off this amount against the brought forward losses of earlier year and thereafter balance unabsorbed loss were carry forwarded and grouped under the head 'claim and other receivables' in the balance sheet. However, the gain was not credited to the profit and loss account during the relevant year, in contradiction of accounting standard / policy under the Companies Act which auditors have qualified in audit report. Thus, assessee had understated the profit for the year to that extent. Hence, this amount is required to be charged along with other income and is required to be brought to tax u/s 115 JB. Thus, the Assessing Officer's order in the present proceedings was in accordance with law. In view of the foregoing discussion and respectfully following the decision in the case of Everest Kanto Cylinders Ltd. [2022 (6) TMI 631 - ITAT MUMBAI] we do not find any substance in the submissions of the assessee and accordingly, we allow the appeal filed by the Revenue and restore the Assessing Officer order. Thus, the appeal of Revenue is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether delay in filing the cross-objection should be condoned on the reasons stated. (ii) Whether reopening of assessment under section 147 on the issue of computation of book profit was invalid as being based on a mere change of opinion, where the original assessment order was silent on the relevant aspect. (iii) Whether, for purposes of section 115JB, the Assessing Officer could add to book profit an amount representing net gain on settlement of trade contracts/forex derivatives which was not credited to the profit and loss account, in the face of auditor qualification that such non-credit was against accounting standards and that accounts were not prepared in accordance with the Companies Act. 2. ISSUE-WISE DETAILED ANALYSIS (i) Condonation of delay in filing cross-objection Interpretation and reasoning: The Tribunal considered the explanation that the assessee's operations had ceased due to financial crisis and enforcement action by lenders, leading to loss of control over assets and delay in understanding and pursuing the litigation. It assessed whether the delay was intentional or deliberate. Conclusion: The Tribunal held the delay was not intentional or deliberate and condoned it in the interest of substantial justice. (ii) Validity of reopening under section 147-whether barred by 'change of opinion' Legal framework (as discussed by the Tribunal): The Tribunal applied the principle that reassessment cannot be used as a power of review on a mere change of opinion; however, where the earlier assessment order is non-speaking/cryptic/perfunctory and does not address the matter, an 'opinion' may not be attributable to the Assessing Officer, and reopening is not barred on that ground. Interpretation and reasoning: The Tribunal found the original assessment order contained no discussion on the specific aspect of setting off brought-forward losses against the current year's net gain and no material indicating enquiry or examination of that issue. On being queried, the assessee could not point to any specific questioning by the Assessing Officer on this aspect during the original assessment. The Tribunal treated the original assessment as non-speaking and perfunctory on the issue forming the basis of reopening. It further reasoned that repetition of similar auditor notes in earlier years did not, by itself, negate reopening because each assessment year is separate and the issue in the relevant year arose in the context of the set-off claimed in that year; the principle of res judicata was held inapplicable in tax proceedings. Conclusion: Reopening was upheld as valid; the cross-objection challenging reopening was dismissed. (iii) Re-computation of book profit under section 115JB-addition of net gain not credited to profit and loss account Legal framework (as discussed by the Tribunal): The Tribunal considered that the limitation on the Assessing Officer's ability to go behind the net profit under section 115JB operates where (a) the accounts are prepared and maintained in accordance with the Companies Act, and (b) such accounts are duly certified under that framework; otherwise, the assessee cannot claim 'immunity' from adjustment beyond the statutory additions/reductions contemplated for properly drawn accounts. Interpretation and reasoning: The Tribunal relied on the auditor qualification noting that a net gain on settlement of trade contracts/forex derivatives was not brought to credit in the profit and loss account and that such treatment was against accounting standards, resulting in understatement of profit and overstatement of balance sheet items. On that basis, the Tribunal held the accounts were not prepared in accordance with the Companies Act requirements as contemplated for section 115JB purposes. Consequently, the Tribunal held the assessee could not rely on the principle restricting the Assessing Officer from recasting book profit, because the foundational condition-accounts prepared in accordance with the Companies Act-was not satisfied. The Tribunal concluded that the omitted net gain was required to be credited and brought to tax while computing book profit under section 115JB, and that permitting the assessee to exclude it would allow benefit from its own mistake in preparing the profit and loss statement. Conclusion: The Tribunal reversed the deletion of the addition, held the addition to book profit was warranted, restored the Assessing Officer's determination, and allowed the revenue's appeal.