2002 (5) TMI 5 - SC - Income Tax

AO cannot question profit and loss account certified by statutory auditors under section 115J assessment

Apollo Tyres Ltd. Versus Commissioner of Income Tax

The SC held that an AO cannot question the correctness of a profit and loss account prepared by an assessee-company and certified by statutory auditors as ... Arrears of depreciation in its profit and loss account - correctness of the accounts maintained by the company - Whether, can an AO while assessing a company for income-tax u/s 115J of the Income-tax Act question the correctness of the profit and loss account prepared by the assessee-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act - HELD THAT:- Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company's income, then it would have stated in section 115J that 'income of the company as accepted by the Assessing Officer'. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J. The assessee contends that its income from sale and purchase of units of the UTI is part of its regular business and that it has held these units as stock-in-trade and has been doing the business of buying and selling the same. The assessee also contends that its income from this business of investment in the units of the UTI and its business of manufacture and sale of tyres are pooled together in a common account of funds which is managed by one common management. It is also the submission of the assessee that these two businesses, namely, the business of buying and selling units of the UTI and the manufacture and sale of tyres are so intertwined and interlaced that the same cannot be separated and treated independently, therefore, this income from the UTI being part of its business income, it is entitled to claim the benefit of section 32AB. A perusal of section 32AB, as it stood at the relevant time, shows that if an assessee has a total income including income chargeable to tax under the head 'Profits and gains of business or profession' and if the income from such business is derived from an 'eligible business' and if the assessee has out of such income utilised any amount during the previous year for the purchase of new plant or machinery then it is entitled to a set off of a sum equal to 20 per cent. of the profit of such eligible business as computed in the accounts of the assessee which account has been audited in accordance with sub-section (5) of section 32AB. We have examined the provisions of the UTI Act and we are of the opinion that even though the said section creates a fiction to make the UTI a deemed company and distribution of income received by the unit holder a deemed dividend, by virtue of these deemed provisions, it cannot be said that it also makes the unit of the UTI a deemed share. In our opinion, a deeming provision of this nature as found in section 32(3) should be applied for the purpose for which the said deeming provision is specifically enacted, which in the present case is confined only to deeming the UTI a company and deeming the income from the units a dividend. If, as a matter of fact, the Legislature had contemplated making the units also a deemed share then it would have stated so. In the absence of any such specific deeming in regard to the units as shares it would be erroneous to extend the provisions of section 32(3) of the UTI Act to the units of the UTI for the purpose of holding that the unit is a share. For these reasons, we are in agreement with the finding of the High Court on this point also. Three core legal questions were considered by the Court in these appeals:(i) Whether an Assessing Officer, while assessing a company's income under section 115J of the Income-tax Act, can question the correctness of the profit and loss account prepared by the company and certified by its statutory auditors as compliant with Parts II and III of Schedule VI to the Companies Act;(ii) Whether dividend income earned by the company from investments in units of the Unit Trust of India (UTI) can be included in computing the profit of an eligible business under section 32AB of the Income-tax Act;(iii) Whether the business of buying and selling units of the UTI by the company constitutes a speculation business for the purpose of allowing set off of losses under the Income-tax Act.Issue (i): Authority of Assessing Officer to Question Certified Accounts under Section 115JThe legal framework centers on section 115J of the Income-tax Act, which was introduced to impose a minimum corporate tax on companies by deeming the company's income to be at least 30% of its book profit. Sub-section (1A) mandates that the profit and loss account be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. The Explanation to section 115J defines 'book profit' based on the net profit shown in such accounts, adjusted by specified additions and deductions.The Court examined the object behind section 115J, as elucidated in the Finance Minister's Budget Speech, which aimed to prevent companies from evading tax by manipulating their accounts to show zero or negligible taxable income. The provision was designed to tax companies on a minimum deemed income based on their own accounts.The Court reasoned that the phrase 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' was intended to empower the Assessing Officer to rely on the authenticity of accounts certified by statutory auditors, approved by the company's general meeting, and filed with the Registrar of Companies, who also has statutory obligations to scrutinize such accounts. This procedural safeguard ensures the accounts' validity under the Companies Act framework.Accordingly, the Court held that the Assessing Officer does not have authority to reopen or re-examine the correctness of the profit and loss account entries beyond verifying that the accounts were prepared and certified in compliance with the Companies Act. The sub-section (1A) of section 115J does not confer jurisdiction on the Assessing Officer to conduct a fresh inquiry into the accounts or to question the auditor's certification. If the legislature had intended to permit such reassessment, it would have explicitly stated so in the statute.The Court emphasized that there cannot be two separate incomes for the same company under the same Act-one for company law purposes and another for income-tax purposes. The income accepted under the Companies Act must be the basis for computing tax under section 115J. The Assessing Officer's power is limited to making adjustments expressly provided for in the Explanation to section 115J, such as adding back certain provisions or reserves, but not to disputing the fundamental correctness of the accounts.This reasoning led the Court to reverse the High Court's contrary view and uphold the Tribunal's decision that the Assessing Officer cannot question the correctness of the certified profit and loss account while assessing under section 115J.Issue (ii): Inclusion of Dividend Income from UTI Units in Eligible Business Profits under Section 32ABThe factual background reveals that the company included dividend income from its investment in UTI units as part of its 'eligible business' income and claimed a deduction of 20% under section 32AB for purchase of new machinery. The Revenue contended that dividend income falls under 'income from other sources' and not 'profits and gains of business or profession,' thus disqualifying it from section 32AB benefits.Section 32AB provides a deduction where an assessee has income chargeable under 'profits and gains of business or profession' derived from an 'eligible business,' and has invested in new plant or machinery. The term 'eligible business' is defined in sub-section (2) of section 32AB and excludes certain specified businesses, none of which included the company's UTI units investment business.The Tribunal and High Court had found as a question of fact that the company's business of buying and selling UTI units was intertwined and interlaced with its manufacture and sale of tyres, and that the investment in UTI units was held as stock-in-trade forming part of its business. The Court accepted this finding, recognizing that the UTI units business qualified as a business under section 32AB.Since the business did not fall within the excluded categories under section 32AB(2), it was held to be an 'eligible business.' The Court further held that the fact that dividend income was shown under a different head of income in the company's accounts does not preclude it from being included in computing profits of the eligible business for section 32AB purposes, provided the investment was in the course of the company's business.Thus, the dividend income from UTI units was rightly included in computing the profits of the eligible business under section 32AB, entitling the company to the claimed deduction.Issue (iii): Whether the Business of Buying and Selling UTI Units Constitutes Speculation BusinessThe Revenue argued that since the UTI units are shares by virtue of section 32(3) of the UTI Act, which deems the UTI to be a company and distributions to unit holders as dividends, the business of buying and selling such units would be a business in shares. Under the Explanation to section 73 of the Income-tax Act, business in shares is deemed speculative, thereby disallowing set off of losses against other income.The Court examined section 32(3) of the UTI Act, which creates a legal fiction for the limited purpose of income-tax assessment and tax deduction at source, deeming the UTI a company and distributions as dividends. However, the Court rejected the Revenue's extension of this fiction to treat the units themselves as shares.The Court held that the deeming provision must be applied strictly for the purposes for which it was enacted, and cannot be extended beyond those purposes. The UTI Act does not specifically deem the units to be shares. Therefore, the business of buying and selling UTI units cannot be equated with a business in shares for income-tax purposes.Consequently, the business of purchase and sale of UTI units was not a speculative business under the Income-tax Act, and losses from this business were eligible for set off as per the relevant provisions.Significant Holdings and Core PrinciplesOn the first issue, the Court held:'If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act.'This established the principle that the Assessing Officer's jurisdiction under section 115J is limited to verifying that the accounts have been properly prepared and certified under the Companies Act, and does not extend to reopening or questioning the correctness of the accounts.On the second issue, the Court affirmed that income from investments held as stock-in-trade and forming part of the company's business can be included in profits of an eligible business under section 32AB, even if shown under a different head of income in the accounts.On the third issue, the Court clarified the limited scope of deeming provisions and rejected the extension of the deeming of UTI as a company and dividend income as dividends to the units themselves being shares. This prevented the classification of the UTI units business as speculative.In conclusion, the Court allowed the appeal of the assessee-company on the first issue, holding that the Assessing Officer cannot question the certified profit and loss account under section 115J beyond the prescribed limits. The appeals by the Revenue on the second and third issues were dismissed, confirming the inclusion of dividend income from UTI units in eligible business profits and the non-speculative nature of the UTI units business.