TaxTMI 
TaxTMI 
2009 (9) TMI 639
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....s not raised before the learned CIT(A) and further the permission of the CoD was not obtained for raising this additional ground. Since the assessee has failed to obtain the permission of CoD on the additional ground, we decline to admit the additional ground and proceed to dispose of the grounds originally raised before us. 3. For the asst. yr. 1999-2000, the assessee has raised following two grounds. "1. Appellant most respectfully submits that the Hon'ble CIT(A)-I, Visakhapatnam is not justified in confirming the action of learned AO in reducing the provisions amounting to Rs. 5,43,13,196 from the net loss as per P&L a/c for computation of liability under s. 115JA of the IT Act. 2. Appellant respectfully submits that the Hon'ble CIT(A)-I, Visakhapatnam is not justified in confirming the learned AO's action in reducing the loans and interest waived amounting to Rs. 3,12,68,00,000 from the net loss as per P&L a/c." 4. The facts pertaining to the case are that the assessee, a public sector undertaking, is in the business of ship building/ship repairs. It filed its return of income for the asst. yr. 1999-2000 declaring a net loss of Rs. 10.02 crores. Subsequently, it was....
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.... ---------- However, the assessee did not account for these benefits in its accounts for the year ending 31st March, 1999, though the details of waiver benefits were disclosed in the annual report of that year. The AO agreed with the contention of the assessee that the conversion of loans into equity and the write off of Government loans are not liable to tax. With regard to the third item, the assessee, in its annual report, had stated that impact of capital restructuring would be incorporated in the books only after receipt of approval of MAT exemption from the Government. Hence the assessee contended that the waiver benefits sanctioned by the Government have not reached finality and accordingly it did not incorporate the waiver benefit in its books of accounts. 5.1 However, the AO rejected the contentions of the assessee. The assessee also contended that it had prepared the accounts in accordance with the Sch. VI to the Companies Act and hence the AO, for the purpose of computation of book profit under s. 115JA, is not ....
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....(Guj) 249 : (2008) 304 ITR 97 (Guj). 7. On the contrary, learned Departmental Representative submitted that the assessee is bound to account for the waiver benefits in its books of accounts as the company is following mercantile system of accounting and further it has disclosed the details of waiver in the annual report. Since the assessee has failed to account for the same, the auditors have qualified their audit report in which case, the accounts cannot be said to be certified to have been prepared in accordance with the provisions of Part II and Part III of Sch. VI. The very fact that the auditors have qualified their audit report only shows that the assessee does not have choice in this regard. In view of the above, the AO has the right and obligation under the Act, to correct the mistakes/omissions committed by the assessee while arriving at the book profit under s. 115JA of the Act. The decision rendered by the Hyderabad Tribunal in the case of NCL Industries Ltd. vs. Jt. CIT is distinguishable on facts, which is elaborated in para 10.7 of the said order. In that case though the total interest waived by financial institutions and banks was Rs. 18.67 crores, the assessee ha....
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....ompany M/s Sudhakar Kumar & Associates, Visakhapatnam in their audit report dt. 25th Aug., 1999 have qualified their report at para 4(i), by stating that losses and liabilities are subject to non-effecting of capital restructuring as provided by the Government of India. Further para 5 of the auditors' report reads as under: "5. In our opinion and to the best of our information and according to the explanation given to us the accounts together with the notes thereon give the information required by the Companies Act, 1956, in the manner so required and subject to para (4) above give a true and fair view: (a) In the case of balance sheet of the company's state of affairs as at 31st March, 1999. (b) In the case of P&L a/c of the loss for the year ended on that date." The audit report is printed at pp. 39 to 44 of the annual report. In this background the first question that arises in our mind is whether an assessee is entitled to postpone accounting of benefits that have already accrued to it and consequently the consequent tax liability can be postponed? 8.1 There cannot be any dispute that the recognition of an item of income depends upon the method of accounting foll....
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.... in this regard, with our approval: "In this context reliance is placed on the decision of Bombay High Court in the case of CIT vs. ACE Builders (P) Ltd. (1994) 116 CTR (Bom) 224 : (1993) 202 ITR 324 (Bom), wherein it was held that income is held to accrue only when the assessee acquires a right to receive that income, or in other words, income can be said to accrue on the date when the debt becomes due and unless the right to profits comes into existence, there is no accrual of profits. In the present case, Government of India have accepted the proposal for waiver of interest in the financial year relevant to the asst. yr. 1999-2000. Therefore, the assessee has got the right to receive waiver of interest, in the light of the approval by the Government of India in the financial year 1998-99 only. Since the assessee's right to receive the amount arose in the financial year relevant to the asst. yr. 1999-2000 only, the AO is right in assessing the amount of interest waived in the said assessment year." The Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. & Ors. vs. CIT (1954) 26 ITR 27 (SC) has held that income becomes chargeable to tax when the right to receive is ....
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.... absence of the same and on the language of s. 115J, it will have to hold 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 AO while computing the income under s. 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 AO 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 AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J." A careful analysis of the decision of the Hon'ble apex Court would show that the AO has only the power to examine whether the books of accounts are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. There cannot be any dispute that the authority to give such a certificate is primarily the statutory auditors of the company. However, in the instant case....
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....fore, in the given circumstances in the assessee's case, applying AS-5, interest waived by Government of India vide approval dt. 24th March, 1999 should have been shown in financial year relevant to asst. yr. 1999-2000 for the purpose of computing income under s. 115JA of the Act. Moreover according to sub-s. (4) of s. 115JA all other provisions of the IT Act are applicable and therefore, the provisions of s. 145 of IT Act can be invoked for determining the income under the provisions of s. 115JA." 8.3 The assessee placed reliance on the decision of the Mumbai Tribunal in the case of Greaves Chitram Ltd. vs. Dy. CIT to contend that the qualification made in the report of the auditors does not cast an onus on the AO to go beyond the accounts prepared by the assessee. We have carefully considered the said decision of Tribunal. In that case the assessee therein did not provide for gratuity liability and further it did not give any reason for not providing the liability. Hence the Tribunal held that when no reason has been put forward for not charging P&L a/c with the gratuity liability, the AO had no onus cast upon him to go beyond the accounts. In this case the assessee has disclo....
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....ssue still remains as to whether notes to accounts form part of the accounts, and whether the fact that the current year's depreciation which has not been debited to the P&L a/c would in any way deprive the assessee of its claim for the deduction from the 'net profit' in arriving at the figure of 'book profit' for the purposes of s. 115J of the Act. 4.9 The answer to this poser is found in sub-s. (6) of s. 211 of the Companies Act, which provides that except where the context otherwise requires any reference to a balance sheet or P&L a/c shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents by the Companies Act. As already noted it is obligatory under cl. 3(iv) of Part II of Sch. VI to Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears. According to us, once this information is disclosed in the notes to the account it would clearly fall within the ambit of the Explanation to s. 115J of the Act which defines 'book profit' to mean 'net profit' as 'shown' in the P&L a/c for the relevant assessment ....
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.... of the IT Act capital gains, as deemed income, cannot be brought to tax for the purposes of determining book profits under s. 115J. Thus the proposition is clearly laid down at para 19 of that judgment which is at p. 1141. On similar analogy we are inclined to agree with the argument of the assessee's counsel that s. 41(1) which is brought into the statute to supersede the principle that under general law remission of a trade liability is income cannot be brought in for the purposes of calculating book profit under s. 115J. The proposition laid down by the Hon'ble Supreme Court in that case of Bipin Chandra Maganlal & Co. Ltd. is binding on us and we do not have any other alternative but to agree with the arguments of the learned counsel for the assessee. No contrary judgments have been brought to our notice. Shri Meena tried to distinguish these judgments. We are unable to agree with him and we are bound by the judgments and propositions. Thus this ground of the assessee has to be allowed." 8.6.1 However, learned Departmental Representative placed his reliance on the decision of Hon'ble Bombay High Court in the case of Veekaylal Investment Co. (P) Ltd. to submit that the incom....
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....vered by cl. 2(b) of Part II of Sch. VI to the Companies Act which, inter alia, states that P&L a/c shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Lastly, even under cl. 3(xii)(b) profits or losses in respect of transactions not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature show clearly that capital gains should be included for the purposes of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be given to the shareholders under the said cl. 3(xii)(b). So also, the disclosure is required to be made in respect of investment in the capital of a partnership firm if the company is a partner on the date of the balance sheet. Similarly, profits or losses on such investments are also required to be disclosed." 8.6.2 We notice that the Hyderabad Tribunal in the case of NCL Industries followed the analogy of the decision of the Special Bench of Tribunal in the case of Sutlej Cotton Mills Ltd. vs. Asstt. CIT (1993) 111 CTR (Cal)(Trib) 321....
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....sp; --------------- Total Rs. 5,50,25,794 --------------- Aggrieved, the assessee carried the matter in appeal before the learned CIT(A) who deleted the last item in the list, viz., Rs. 7,11,598 and confirmed the other three additions. Still aggrieved, the assessee is in appeal before us. 10. Similarly, in the asst. yr. 2000-01, the AO added a sum of Rs. 108.67 crores debited in the P&L a/c under the head "Provisions and losse....
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....nder: "For the purposes of Parts I and II of this Schedule, unless the context otherwise requires,- (a) the expression 'provision' shall, subject to sub-cl. (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. (2) Where- (a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or (b) any amount retained by way of providing for any known liability; is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision." On careful perusal of this definition it suggests that the following three types of entries are treated as provisions: (a) Amount written off or retained by way of providing for depreciation, renewals of assets; (b) Amount written off or retaine....
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....n the date of balance sheet, there is no need to recognize the provision. In that case the enterprise should only disclose the existence of contingencies. For the purpose of preparation of financial statement, an enterprise should only recognize liabilities that exist at the balance sheet data. Such liabilities can be classified into ascertained liabilities and unascertained liabilities. Clause (c) of Explanation to s. 115JA is attracted only in the case of unascertained liabilities. 11.2 With this knowledge on "provisioning", we shall analyse the nature of provisions made by the assessee and try to classify them into: (a) Provision relating to depreciation, renewals or diminution in the value of assets. (b) Provision relating to ascertained liabilities, and (c) Provision relating to unascertained liabilities. 11.3 In the asst. yr. 1999-2000, the provisions made by the assessee relate to (a) provision for doubtful debts, (b) provision for reduction in ship repair bills and (c) provision of obsolescence of material. On the face of it, we can say that these three provisions can only be classified as the provision made for diminution in the value of assets. Hence all th....