1992 (10) TMI 115 - AT - Income Tax

Summary

Issues Involved:
1. Preliminary Objection: Validity of the Special Bench constitution.
2. Book Profit: Inclusion of profit from the sale of capital assets u/s 115J.
3. Assessment Proceedings: Revaluation of assets and its impact on book profits.
4. Tax Planning: Legitimacy of revaluation as a tax avoidance measure.
5. Interest Levy: Applicability of interest u/s 215.
6. Disallowances: Various specific disallowances in the assessment.

Summary of Judgment:

1. Preliminary Objection:
The Revenue objected to the constitution of a Special Bench, arguing it was redundant and without jurisdiction, as there was no difference of opinion among Tribunal Benches. The Tribunal rejected this, citing the President's inherent power u/s 255(5) to constitute a Special Bench even without conflicting decisions, emphasizing the necessity for a Special Bench in complex cases.

2. Book Profit:
The core issue was whether profit from the sale of capital assets should be included in book profits for tax u/s 115J. The Tribunal concluded that the book profit should be as shown in the profit and loss account prepared per Parts II and III of Schedule VI of the Companies Act. The profit from the sale of revalued shares, adjusted against the revaluation reserve, was correctly not included in the profit and loss account, aligning with accepted accounting practices.

3. Assessment Proceedings:
The Assessing Officer's rejection of the revaluation of shares, considering it a method to avoid tax u/s 115J, was deemed incorrect. The Tribunal held that revaluation was a legitimate accounting practice and the revaluation reserve created before 1-4-1988 could not be adjusted under the amended provisions of section 115J.

4. Tax Planning:
The Tribunal differentiated between legitimate tax planning and colorable devices. It found the assessee's revaluation of assets to be within the legal framework and not a colorable device. The revaluation was part of a broader scheme and not solely for tax avoidance.

5. Interest Levy:
The Tribunal addressed whether interest u/s 215 could be levied on income determined u/s 115J. It held that the assessee is required to estimate its current income, including the deemed income u/s 115J, for advance tax purposes. Thus, interest u/s 215 was applicable if there was a shortfall in advance tax payment.

6. Disallowances:
Several specific disallowances were confirmed:
- Interest payable to various departments was deemed contingent and not allowable.
- Donation to Vishwa Mangal Trust was disallowed based on a High Court decision.
- Expenditure on a failed tube well was considered capital and disallowed.
- Depreciation on a Diesel Generator Set was correctly reduced by the amount of subsidy received.

The appeal was partly allowed, with significant emphasis on the correct interpretation and application of section 115J and related accounting practices.