TaxTMI 
TaxTMI 
2016 (3) TMI 327
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....h October, 2015 the Supreme Court has remanded the matter back to this Court on the ground that no substantial questions of law were formulated by this Court while allowing the appeal by the order dated 25th March, 2014. In the circumstances the appeal is once again taken up for hearing. The following substantial questions of law have been proposed by the revenue for consideration in the instant appeal:- i) Whether on the facts and in the circumstances of the case, the Learned Income Tax Appellate Tribunal "B" Bench, Kolkata was justified in quashing the order passed by the Commissioner of Income Tax (Central - I) Kolkata under Section 263 of the Income Tax Act without appreciating the ratio of the judgement delivered by the Delhi High Court in the case of Commissioner of Income Tax - Vs- Hari Machine Ltd. reported in (2009) 311 ITR 285 (Del.)? ii) Whether on the facts and in the circumstances of the case, the Learned income Tax Appellate Tribunal "B" Bench, Kolkata erred in law in holding the loss of an amount of Rs. 919.52 lakhs on account of transfer of investment division of the assessee could not be adjusted in Section 115JB of the Act although this loss is booked ....
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....id investment division to DCPL on 28th September, 2005 against which DCPL has allotted 1,39,66,434 Equity Shares of Rs. 10/- each credited as fully paid-up aggregating to Rs. 1396.64 lakhs to the shareholders of the Company based on the option forms received by DCPL from the shareholders. On allotment of the aforesaid shares by DCPL, 13,66,434 Equity Shares of Rs. 10/- each fully paid-up of the Company held by such shareholders stand cancelled and the paid up Share Capital of the Company is accordingly reduced to Rs. 20310.13 lakhs divided into 20,31,01,274 Equity Shares of Rs. 10 each fully paid-up. The difference of Rs. 919.52 lakhs, has been adjusted against the balance in the Profit and Loss Account in accordance with the terms of the Scheme." Therefore according to the sanctioned scheme, the assessee transferred its investment division worth Rs. 23.16 crores to DCPL. The shareholders of the assessee company were issued shares of the value of Rs. 13.96 crores in DCPL. The assessee reduced its share capital by Rs. 13.96 crores. The difference between the investment value of Rs. 23.16 crores and the share capital reduction of Rs. 13.96 cores, that is, Rs. 9.20 crores was debit....
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....i Machine Ltd. (2009) 311 ITR 285 that such capital reduction is fictitious. On similar facts the Delhi ITAT held that such fictitious loss on capital deduction may a balance sheet adjustment but cannot be an item of P & L A/c and the loss booked in the P & L A/c is required to be added back for computation of book profit u/s.115JB. The Assessee's contention is not tenable because of prejudicial nature of the assessment regarding MAT payable for this year. 3) The case decisions relied upon by the assessee are not relevant/applicable since the issues in those cases before the Court/lTAT's were totally different. 4) The issue is required to be decided after examining whether the accounts were pared as per Part-II & III of Schedule-VI of the Companies Act and the case decision as referred to in (2) above. The basic issue is whether the condition stipulated in subsection (2) of Sec. 115JB that the accounts have to be prepared as per Part-ll & III of Schedule-VI of the Companies Act, is satisfied or not. From the facts stated above it is apparent that the loss booked in the P/L A/C. is for share-capital reduction. There is no scope for such accounting as per P....
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....respect of the reduction of capital is not in the case of the assessee. As far as assessee is concerned; the assessee has been given shares in consideration of it's transfer of investments. There is nothing in Schedule VI of the Companies Act which prohibits this loss being booked in the profit and loss account nor could learned Departmental Representative point out the same. Unless it is pointed out that the book profit is not arrived at on the basis of profit and loss account computed in accordance with Part II and III of Schedule VI to the Companies Act, or unless there are no Specific enabling provisions for adjustment in Section. 115JB itself, the book profit as per profit and loss, duly approved by the auditor and duly adopted by the Company, cannot be tinkered with Hon'ble Supreme Court's judgment in the case of Apollo Tyres Ltd. -vs.- CI'T' (255 ITR 273) holds so. As regards note no. 8 in the balance sheet, it is not an objection or qualification by the auditor but it is a part of significant accounting policies and notes on account's. Which is mainly informative in nature. By no stretch of logic, this can be treated as qualification in the auditors report. In v....
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....ds, a domestic widely held company will pay tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores." The above speech shows that the Income Tax Authorities were unable to bring certain companies within the net of income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that Section 115-J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30% of its book profits as shown in its own account. For the said purpose, Section 115-J makes the income reflected in the companies' books of accounts as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Of....
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....ce of the same and on the language of Section 115-J, it will have to be held that the 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 115-J 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 115-J." The views expressed by the Apex Court in Apollo Tyres (supra) was quoted with approval by the Apex Court in Malayala Manorama Co. Ltd. -Vs- CIT reported in (2008) 300 ITR 251. 2) The views expressed in Apollo Tyres (supra) was followed by this Court in the case of CIT -Vs- Ispat Industries Ltd reported in (2008) 2 DTR (Cal) 133 wherein a....
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....s Scheme shall also be adjusted against the balance in Profit and Loss Account of BCL." Thus in view of accounting treatment expressly laid down in the scheme of arrangement sanctioned by this Hon'ble Court it was obligatory on the part of the assessee to debit the amount of Rs. 919.52 lakhs towards loss on account of the transfer of the Investment Division of the assessee company to the Profit and Loss account. 5) The CIT by his order u/s.263 did not disclose any provision of Part II and III of Schedule VI of the Companies Act 1956 which was allegedly contravened. In fact the CIT by his order dated 20th January 2011 made a bald statement by holding as follows:- "From the facts stated above it is apparent that the loss booked in the P/L A/c is for share-capital reduction. There is no scope for such accounting as per Part-II & III of Schedule-VI of the Companies Act. Besides, such loss fictitious as held by ITAT, Delhi in quantum appeal in a similar case of debit in the case of Hari Machines Ltd. This is evident from the report of the case of CIT Vs. Hari Machines Ltd. in 166 Taxman 84 (2008), which was in respect of penalty u/s 271 (1)(c) but in the facts such findin....
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....uch loss is fictitious as held by ITAT, Delhi in quantum appeal in a similar case of debit in the case of Hari Machines Ltd. This is evident from the report of the case of CIT Vs. Hari Machines Ltd. in 166 Taxman 84 (2008), which was in respect of penalty u/s 271 (1)(c) but in the facts such finding of ITAT has been discussed. Therefore, such share capital reduction cannot be an item of P/L Ac. As per Part-ll & III of Schedule-VI of the Companies Act." However a close scrutiny of the judgement in Hari Machines (supra) reveals that the issue for consideration before the Delhi High Court was only regarding imposition of penalty and not regarding addition to book profit for purpose of section 115JB. In fact the Delhi High Court held that the finding recorded by the Tribunal in the quantum appeal that the loss was fictitious was harsh. The Delhi High Court while upholding the order of deletion of penalty observed as follows:- "In the present case, there is no allegation that there was any gross or wilful neglect on the part of the assessee to declare the correct income. The question that arises is whether the assessee has committed any kind of fraud. It is diffi....
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....account's which is mainly informative in nature. By no stretch of logic, this can be treated as qualification in the auditors report." 9) That revisional jurisdiction u/s.263 of the Act cannot be exercised where two views are possible and the assessing officer has taken one of the possible views. In support of his submissions he relied on a judgement in the case of Malabar Industrial Company -Vs- CIT reported in (2000) 243 ITR 83 wherein their Lordships discussed the scope of s.263 and held as follows:- "...The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue - recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrec....
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....ion of the assessee company, cannot be added back for computing the book profit u/s.115JB because the Explanation 1 to s.115JB(2) does not provide for such addition. Hence the assessing officer in the instant case could not have made any addition for the said amount. Thus the view taken by the assessing officer in not making any addition to the book profit for purpose of s.115JB cannot be called erroneous. In fact it was the only possible view that could have been taken. Furthermore the CIT in his order u/s.263 did not hold that the order of the assessing officer was unsustainable. Hence, in view of the mandate in Malabar Industrial Company Ltd., the exercise of revisional jurisdiction under Section 263 was bad as the preconditions for exercise of revisional power did not exist. The views expressed in Malabar Industrial Company (supra) were reiterated by the Apex Court in CIT -Vs- Max India Ltd. reported in (2007) 295 ITR 282. An erroneous order is one which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. An order can be said to be "prejudicial to the interests of the Revenue" if it is not in accorda....
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.... enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. We, therefore, hold that in order to exercise power under subsection (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what....
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....he Act by the CIT. It is a fact that the assessee incurred loss of a sum of Rs. 9.20 crores by resorting to transfer of its investment division to Daisy Commercials Private Ltd. The loss was debited to the profit and loss account. The assessment was under Section 115JB of the Act. The assessing officer did not question the act of debiting loss arising out of the transfer to the P/L account. The CIT was of the opinion that the loss could not have been debited to the P/L account and the amount was required to be added back for computation of book profit under Section 115JB. The accounting standards laid down by the institute however provide for recognition of the profit or loss arising out of investment in the profit and loss account. Reference in this regard may be made to Clauses 21 and 25 of Accounting Standard 13. "21. On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognised in the profit and loss statement. 25. The following disclosures in financial statements in relation to investments are appropriate:- (a) the accounting policies for the determination of carrying amoun....
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....ion, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position as would appear from the following paragraph:- "Therefore, such share capital reduction cannot be an item of P/L Ac. As per Part-ll III of Schedule-VI of the Companies Act. The decision of the Hon'ble Apex Court in the case of Apollo Tyres Ltd. in respect of adjustments only as per explanation-1 is applicable only after the accounts have been prepared as provided in sub-section (2) of Sec. 115JB of the Act. The condition not having been satisfied, the amount was required to be added back in computation of Book profit for MAT u/s 115JB. But it is apparent from the records that the issue has not been examined by the AO at all while passing the assessment order and no such addition has been made." Had it not been a case of section 115JB the capital loss incurred on transfer of investments would have been dealt as follows: 1. Under section 70(2) short term capital loss would be set off against either short term or long term capital gain. ....