2002 (5) TMI 5 - SC - Income Tax

Whether, can an AO while assessing a company for income-tax under section 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 - No, Assessing Officer does not have the jurisdiction to go behind the net profit

Summary

Issues Involved:

1. Authority of Assessing Officer to question the correctness of the profit and loss account prepared by the assessee-company under section 115J of the Income-tax Act.
2. Inclusion of dividend income from Unit Trust of India (UTI) in computing the profit of eligible business under section 32AB of the Income-tax Act.
3. Classification of the business of buying and selling units of UTI as speculation business for the purpose of allowing set off of losses.

Issue-wise Detailed Analysis:

Issue 1: Authority of Assessing Officer under section 115J

The primary issue is whether an Assessing Officer can question the correctness of the profit and loss account prepared by the assessee-company and certified by the statutory auditors as per Parts II and III of Schedule VI to the Companies Act. The Assessing Officer recomputed the profit and loss account by excluding the provision for arrears of depreciation, which was challenged by the company. The Tribunal held that the Assessing Officer has no authority to reopen the accounts certified by the auditors and accepted by the Registrar of Companies. However, the High Court disagreed, stating that the Assessing Officer could examine the accounts to ensure compliance with sub-section (1A) of section 115J.

The Supreme Court clarified that section 115J was introduced to ensure that companies pay a minimum tax on their book profits. The Court emphasized that the Assessing Officer must accept the authenticity of the accounts certified under the Companies Act and cannot embark on a fresh inquiry. The Assessing Officer's role is limited to making adjustments as provided in the Explanation to section 115J, without questioning the net profit shown in the profit and loss account. The Supreme Court concluded that the High Court erred in reversing the Tribunal's view, and the Assessing Officer does not have the jurisdiction to go beyond the certified accounts.

Issue 2: Inclusion of Dividend Income from UTI under section 32AB

The second issue concerns whether the dividend income from UTI units can be included in computing the profit of eligible business under section 32AB. The assessee-company included the dividend income in its profit and claimed a deduction under section 32AB, which was allowed by the Tribunal and confirmed by the High Court. The Revenue argued that the dividend income, categorized as "income from other sources," should not qualify for the deduction under section 32AB, which applies to "profits and gains of business or profession."

The Supreme Court examined section 32AB and noted that the Tribunal and the High Court found that the investment in UTI units was part of the assessee's regular business. The Court agreed that the business of buying and selling UTI units is intertwined with the company's primary business, making it an eligible business under section 32AB. Therefore, the dividend income from UTI should be included in computing the profits of eligible business, and the assessee is entitled to the deduction.

Issue 3: Classification of Business of Buying and Selling UTI Units as Speculation

The final issue is whether the business of buying and selling UTI units amounts to a speculation business under the Explanation to section 73 of the Income-tax Act. The Revenue argued that UTI units should be considered shares, making the business speculative. They relied on section 32(3) of the UTI Act, which deems UTI as a company and the income from units as dividends.

The Supreme Court, agreeing with the Tribunal and the High Court, held that section 32(3) of the UTI Act creates a legal fiction limited to deeming UTI as a company and the income as dividends. The Court emphasized that this fiction does not extend to treating UTI units as shares. Therefore, the business of purchasing and selling UTI units cannot be classified as speculative under section 73. The Court upheld the view that the legal fiction should be applied only for the specific purposes for which it was enacted.

Conclusion:

The Supreme Court allowed the assessee's appeal (C.A. No. 6100 of 1998) regarding the first issue, holding that the Assessing Officer cannot question the certified accounts. The appeals by the Revenue (C.A. Nos. 2518-19 of 1999) were dismissed, affirming the inclusion of dividend income from UTI under section 32AB and rejecting the classification of the business as speculative.