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ITAT Mumbai settles dispute regarding dis-allowance of expenses relating to exempt income under section 14A

CLR Editorial Notes: The case is related to a dispute regarding dis-allowance of expenses relating to exempt income under section 14A of the Act. Under the said provisions, the dis-allowance of expenses relating to exempt income is required to be computed as per Rule 8D. The Hon’ble High Court of Bombay had earlier adjudged in a case of Godrej and Boyce Mfg. Co. vs. DCIT and held that Rule 8D is applicable only from assessment year 2008-09 and in respect of prior years, it was held that dis-allowance had to be made on a reasonable basis after hearing the assessee. In this particular case, CIT(A) directed the Assessing Officer to make dis-allowance as per Rule 8D which is incorrect. The ITAT, therefore, set aside the order of CIT(A) and restored the matter back to them for necessary examination in the light of judgment of Hon’ble High Court of Bombay in case of Godrej and Boyce Mfg. Co. vs. DCIT.

Forever Diamonds P. Ltd, Mumbai vs Assessee on 23 January, 2013

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “F”, MUMBAI

BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER

ITA No. 5720/Mum/2011

Assessment Year : 2004-05

M/s. Forever Diamonds Pvt. Dy. Commissioner of Income Ltd. tax Central Circle-1 Su-Raj House, 73-C, Corss Mumbai. Road Vs. Marol, MIDC, Andheri (E) Mumbai-400 093.

PAN No.AAACF 0602 J

(Appellant) (Respondent) Appellant by Shri Dillip J. Thakkar and :

Shri Rajesh P. Shah

Respondent by : Shri A.P. Singh

Date of hearing : 09.01.2013

Date of Pronouncement : 23.01.2013

ORDER

PER RAJENDRA SINGH, AM:

This appeal by the assessee is directed against the order dated 31.5.2011 of CIT(A) for the assessment year 2004-05. The assessee in this appeal has raised disputes on two different grounds which relate to adjustment made under section 115JB of the Income tax Act, 1961 (the Act) and disallowance of expenses under section 14A of the Act. 2 ITA No.5720/M/11 A.Y. 04-05

2. We first take up the dispute relating to adjustment made by AO in computation of book profit under section 115JB. Under the provisions of section 115JB, in case, total income computed under normal provisions of the Act is less than certain percentage of book profit, the book profit is deemed to be total income of the assessee on which tax is payable on a specified rate. The book profit under the said provisions is computed on the basis of profit shown in the P&L Account prepared in accordance with provisions of Part-II and Part-III of Schedule-VI of Companies Act to which certain adjustments as provided in the Explanation-1 to Section 115JB(2) are required to be made. In the present case, the AO noted that the assessee had earned gross profit of Rs.1,68,95,500/- from sale of its rights in the immovable property which had not been shown in the P&L Account but had been taken directly to the balance sheet. He referred to the sub- clause (xi) of clause-3 of Part-II of Schedule-VI as per which the assessee is required to show the amount of income earned from investment in the P/L Account, distinguishing between trade investments and other investments. It was thus mandatory for the company to show profit/loss on sale of assets in the P&L Account which had not been done. The AO thus concluded that the P/L account had not been prepared in accordance with Part-II and Part- III of Schedule-VI of the Companies Act. He referred to the decision of the Tribunal in the case of M/s. Bombay Diamonds Co. P. Ltd. in ITA No.7488/Mum/07 order dated 30.11.2009 in which in an identical situation, 3 ITA No.5720/M/11 A.Y. 04-05 the assessee had not shown the profit on sale of investments in P&L Account and AO had re-worked the profit for the purpose of Section 115JB. The Tribunal held that the AO had power to re-work the book profit by re-casting the P/L account in the manner provided in Part-II and Part-III of Schedule-VI of the Companies Act. The AO, therefore, re-worked the book profit in which addition on account of sale of investment was made and tax computed accordingly. In appeal, CIT(A) confirmed the adjustment made by AO to the book profit aggrieved by which the assessee is in appeal before the Tribunal.

3. Before us, the ld. AR for the assessee submitted that the issue was covered in favour of the assessee by the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) in which it was held that once accounts prepared as per Companies Act are verified by the authorities under Companies Act, it is not open to the AO to make changes in the accounts so prepared for the computation of book profit. The ld. AR also referred to the judgment of Hon’ble High Court of Bombay in case of CIT vs. Akshay Textiles Trading And Agencies P. Ltd. (304 ITR 401) and the judgment of same High court in case of CIT vs. Adbhut Trading Co. P. Ltd. (338 ITR 94) in which the Hon’ble High Court following the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra), held that the accounts prepared under the Companies 4 ITA No.5720/M/11 A.Y. 04-05

Act and certified by the authorities under the said Act have to be accepted. It was accordingly urged that the adjustment made by the AO on account of profit from sale of investment was not justified. 3.1 The ld. DR on the other hand submitted that the specific issue as to whether capital gain not routed by the assessee through P&L Account prepared under the Companies Act can be added to the book profit had been considered by the Hon’ble High Court of Bombay in the case ofCIT vs. Veekaylal Investment Co. P. Ltd. (249 ITR 597) and it was held that the adjustment by the AO was correct. It was argued that it was within the power of AO to go into the accounts prepared by the assessee under the Companies Act and re-cast the accounts in case the same was not prepared correctly. He placed reliance on the decision of the Tribunal in the case of Sumer Builders (P) Ltd. (50 SOT 198) in which the Tribunal after considering the judgment of the Hon’ble Supreme Court in case of Apollo Tyres (supra) and the judgment of Hon’ble High Court of Bombay in case ofCIT vs. Akshay Textiles Trading And Agencies P. Ltd. (supra), had upheld the adjustment made by the AO on account of profit from sale of investments. He also referred to the decision of the Mumbai Bench of the Tribunal in the case of Kopran Pharmaceuticals Ltd. Vs. DCIT (119 ITD 355) in which the Tribunal after referring to the judgment of Hon’ble Supreme Court in the case of Apollo Tyres (supra), held that the Hon’ble 5 ITA No.5720/M/11 A.Y. 04-05

Supreme Court in the said case had laid down the general proposition of law whereas the judgment of the Hon’ble High Court of Bombay in case of Veekaylal Investment Co. P. Ltd. (supra) was specific on the issue of capital gain and, therefore, the judgment of Hon’ble High Court would prevail on the issue.

3.2 In reply, the ld. AR stated that none of the decisions of the Tribunal cited by the ld. AR had considered the later judgment of Hon’ble High Court of Bombay in the case of CIT vs. Adbhut Trading Co. P. Ltd. (supra), in which following the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra), it was held that once the P/L account prepared under the Companies Act had been certified by the authorities under the said Act, it was not open for the AO to say that P&L Account had not been prepared in accordance with the provisions of Companies Act. It was accordingly argued that the issue being clearly covered by the judgment of Hon’ble Supreme Court and the Hon’ble Jurisdictional High Court, adjustment made by AO on account of profit on sale of investment has to be deleted.

4. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is regarding adjustment made by AO to the book profit computed under the provisions of section 115JB. Under the said provisions, in case, the total income computed under the 6 ITA No.5720/M/11 A.Y. 04-05 normal provisions of the Act is less than specified percentage of book profit, the book profit is deemed to be the total income on which tax is required to be levied at a specified rate. The book profit under section 115JB is required to be computed on the basis of P&L Account prepared in accordance with the provision of Part II and Part-III of Schedule VI of the Companies Act and, to such profit, certain adjustments as provided in the Explanation-1 to Section 115JB(2) is required to be made. The issue is whether the AO has power to re-cast the accounts prepared and certified by the authorities under the Companies Act. The case of the revenue is that, in case, accounts are not prepared in accordance with the provisions of Part-II and Part-III of Schedule VI of the Companies Act, the AO has the power to go into accounts and re-cast the same as per requirement of the Companies Act. The assessee on the other hand has argued that the accounts prepared under the Companies Act and certified by the authorities under the said Act can not be tinkered with by the AO and have to be accepted for computation of the book profit.

4.1 We have carefully considered the various aspects of the matter. We find that the issue raised before us has already been considered and decided by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT(255 ITR 273). In that case, the assessee had claimed arrears of depreciation in the P&L Account prepared under the Companies Act. The AO held that the 7 ITA No.5720/M/11 A.Y. 04-05 accounts prepared were not in accordance with Part-II and Part-III of Schedule-VI of the Companies Act and, therefore, disallowed the arrears of depreciation which had been upheld up to the level of the High Court. The Hon’ble Supreme Court observed that Section 115J provisions of which were similar to those of 115 JB was introduced in the Income tax Act with a deeming provision which made Companies liable to pay tax at least 30% of book profit as shown in its own accounts. For the said purpose, the section 115J made income reflected in the compan’s books of account, the deemed income for the purpose of assessing the tax. The Hon’ble Supreme Court further observed that the use of the words “in accordance with the provisions of part-II and Part-III of Schedule-VI of 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 and while so looking into the accounts of the company, the AO had to accept the authenticity of the accounts. It was so held by the Hon’ble Supreme Court that the AO has only the power to examine whether books of account are certified by authorities under the Companies Act as having been properly maintained in accordance with the provisions of the Companies Act. The AO, thereafter, has limited power of making adjustments as provided in Explanation to section 115J. The relevant portion of the judgment of the Hon’ble Supreme Court is reproduced below as a ready reference. 8 ITA No.5720/M/11 A.Y. 04-05

“The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, 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 section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provision of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.”

4.2 The revenue has relied on the judgment of Hon’ble High Court of Bombay in the case of Veekaylal Investment Co. P. Ltd. (supra), but the said judgment had been delivered prior to the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra) and, therefore reliance on the judgment of Hon’ble High Court of Bombay is misplaced. The Hon’ble High Court of Bombay, subsequent to the judgment of Hon’ble Supreme Court in case of Apollo Tyres Ltd. (supra), have reconsidered the issue and have held in case of CIT vs. Akshay Textiles Trading And Agencies P. 9 ITA No.5720/M/11 A.Y. 04-05

Ltd. (supra), that capital gain not shown in the P&L Account under the Companies Account cannot be added while computing to the book profit. The same position was reiterated by the Hon’ble High Court in case of CIT vs. Adbhut Trading Co. P. Ltd. (supra) in which it was held that once accounts including the P&L Account had been prepared and certified by authorities under the Companies Act, it was not open for the AO to state that P&L Account has not been prepared in accordance with the provisions of the Companies Act. The ld. DR pointed out that the Tribunal in case of Sumer Builders (P) Ltd. (supra) even after considering the judgment of the Hon’ble High Court of Bombay in case of CIT vs. Akshay Textiles Trading And Agencies P. Ltd. (supra), have held that the AO has power to re-cast the accounts prepared under the Companies Act, in case, these were not correctly prepared. Arguments advanced by the revenue have no merit in view of the issue having been already settled by the judgment of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra), as pointed out earlier. Moreover, the Tribunal in the case of Sumer Builders (P) Ltd. (supra) had no occasion to consider the latest judgment of the Hon’ble High Court of Bombay in the case of Adbhut Trading Co. P. Ltd. (supra) in which the Hon’ble High Court following the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra) have allowed the claim of the assessee. In the case of Appolo Tyres Ltd. (supra), it has been clearly held that the AO has only power of examination whether books of account 10 ITA No.5720/M/11 A.Y. 04-05 prepared under the Companies Act have been certified by the authorities under the Companis Act and, therefore, he could only make adjustments as provided in Explanation to Section 115JB(2) of the Act. It is thus clear that once accounts are prepared under the Companies Act and have been certified by the authorities, the AO cannot tinker with the accounts and make any changes while computing book profit except making adjustments as provided in Explanation to Section 115JB. The addition made by AO and confirmed by CIT(A) on account of profit on sale of asset not disclosed in the P&L Account prepared under the Companies Act cannot, therefore, be sustained. We, therefore, set aside the order of CIT(A) and delete the addition made.

5. The second dispute is regarding disallowance of expenses under section 14A of the Act in relation to income exempt from tax. The AO noted that the assessee had earned tax free dividend income of Rs.1,56,408/-. The AO therefore, allocated expenses relating to exempt income on proportionate basis and disallowed a sum of Rs.8,02,702/-. In appeal CIT(A) directed the AO to re-compute the disallowance as per Rule- 8D of Income tax Rule aggrieved by which the assessee is in appeal before the Tribunal.

5.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding disallowance of expenses 11 ITA No.5720/M/11 A.Y. 04-05 relating to exempt income under section 14A of the Act. Under the said provisions, the disallowance of expenses relating to exempt income is required to be computed as per Rule 8D. The Hon’ble High Court of Bombay in the case of Godrej and Boyce Mfg. Co. vs. DCIT (328 ITR 81) have held that Rule 8D is applicable only from assessment year 2008-09 and in respect of prior years, it was held that disallowance had to be made on a reasonable basis after hearing the assessee. In this case, CIT(A) directed the AO to make disallowance as per Rule 8D which is not correct. We, therefore, set aside the order of CIT(A) and restore the matter back to him for necessary examination in the light of judgment of Hon’ble High Court of Bombay in case of Godrej and Boyce Mfg. Co. vs. DCIT (supra) and for passing a fresh order after affording opportunity of hearing to the assessee .

6. In the result the appeal of assessee is allowed. Order pronounced in the open court on 23.01. 2013.

Sd/- Sd/-

( AMIT SHUKLA ) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 23.01.2013.

Jv.12 ITA No.5720/M/11 A.Y. 04-05

Copy to: The Appellant

The Respondent

The CIT, Concerned, Mumbai

The CIT(A) Concerned, Mumbai

The DR ” ” Bench

True Copy

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.

Tag: ITAT Mumbai

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