2022 (2) TMI 1524 - AT - Income Tax

Buy-back share premium charged to P&L in s.115JB book profit calculation, remitted for fresh verification of accounts

Whether premium paid on buy-back of shares could be debited to the P&L account for computing book profit under s.115JB was in issue. While the CIT(A) held ... Disallowance of expenditure incurred on account of premium paid for buy-back of shares - CIT(A) deleted addition as AO does not have the jurisdiction to go behind the net profit shown in the P & L Account except to the explanation to section 115JB - plea of the DR before us is that as per the provisions of the Companies Act, premium paid for buy-back of shares is to be reduced from the capital reserves and therefore it cannot be debited to the P & L Account HELD THAT:- On examining the submissions of the DR we are of the view that the Ld. AO though he has disallowed the expenditure incurred towards premium paid for buy-back of shares while computing the income under the provisions of section 115JB of the Act he has not brought out the relevant provisions of the Companies Act in his order to justify his stand. No doubt the Hon’ble Apex Court in APOLLO TYRES LTD. [2002 (5) TMI 5 - SUPREME COURT] has laid down that the AO does not have jurisdiction to go behind the net profit shown in the P & L Account except to the extent provided in the Explanation to section 115J of the Act, however it does not mean that the ratio of the Hon’ble Apex Court has given liberty to the assessee to compute the P & L Account in according to its whims and fancies without adhering to the provisions of the Companies Act. Therefore, in the interest of justice, we hereby remit the entire matter back to the file of the Ld. AO to bring out the provisions of the Companies Act and if the assessee had violated the provisions of the Companies Act while drawing its P & L Account then make appropriate adjustments complying with the provisions of the Companies Act and thereafter decide the matter afresh in accordance with law and merit. Appeal of the Revenue is allowed for statistical purposes. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the delay in filing the appeal warranted condonation on the stated ground of pandemic-related difficulty. (ii) Whether, while computing book profit under section 115JB, the Assessing Officer could disallow an amount debited in the profit and loss account towards premium paid on buy-back of shares, and whether the appellate deletion of that adjustment was sustainable without examining compliance with the Companies Act requirements for preparation of accounts. (iii) What is the appropriate course where the assessment order does not specify the relevant Companies Act provisions allegedly violated in debiting such premium to the profit and loss account. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Condonation of delay in filing appeal Legal framework: The Tribunal considered the explanation for delay and applied the principle that delays may be condoned where sufficient cause is shown, particularly to advance substantial justice. Interpretation and reasoning: The Tribunal accepted that the stated reason-pandemic situation prevailing during the relevant period-prevented filing within the prescribed time. Treating this as a bona fide cause and prioritising adjudication on merits, the Tribunal condoned the delay. Conclusion: Delay of 93 days was condoned, and the appeal was taken up for decision on merits. Issue (ii) & (iii): Adjustment to book profit under section 115JB for premium paid on buy-back of shares; necessity of Companies Act compliance examination Legal framework: The judgment proceeded on the principle that, for section 115JB computation, the Assessing Officer generally cannot go behind the net profit as per the profit and loss account, except to the extent permitted by the Explanation to the relevant MAT provision; however, the Tribunal also recognised that the profit and loss account must be drawn in accordance with the applicable provisions governing company accounts (Companies Act compliance), and the MAT principle does not permit preparation of accounts 'without adhering to the provisions of the Companies Act'. Interpretation and reasoning: The Revenue's contention was that premium paid for buy-back of shares is required to be adjusted against capital reserves and therefore should not be debited to the profit and loss account. The Tribunal noted that the assessment order disallowed the debit while computing income under section 115JB, but did not set out or 'bring out' the relevant provisions of the Companies Act to substantiate the claim that the debit violated statutory accounting requirements. The Tribunal held that while the MAT principle limits the Assessing Officer's power to tinker with book profits beyond specified adjustments, it does not give an assessee liberty to prepare the profit and loss account contrary to Companies Act requirements. Because the necessary statutory accounting basis and factual verification were not articulated in the assessment order, the Tribunal found it appropriate to remit the matter for a proper examination anchored in the Companies Act provisions. Conclusion: The Tribunal set aside the appellate deletion to the extent necessary and remitted the entire issue to the Assessing Officer to: (a) identify and apply the relevant Companies Act provisions governing such debit; (b) verify whether the profit and loss account was drawn in violation of those provisions; and (c) if violation is found, make appropriate adjustments consistent with Companies Act compliance and then decide the issue afresh in accordance with law and on merits. The appeal was allowed for statistical purposes.