TMI Blog2005 (2) TMI 747X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Briefly stated, the facts of the case are that the assessee-company had revalued certain shares at Rs. 53,30,500 and taken the difference between the revalued price of the shares and the book value of shares as shown prior to revaluation to the Investment Revaluation Reserve Account in the balance sheet during the previous year relevant to the assessment year under appeal. The assessee sold the shares subsequently, after revaluation, for Rs. 53,30,500 during the previous year relevant to the assessment year under appeal. Since there was no difference between sale price and revalued price at which the shares were shown in the books of account, the assessee did not show any profit on sale of shares in its profit loss account prepared under the provisions of the Companies Act, 1956. The accounts as prepared under the Companies Act as also the book profit shown therein were duly certified by the statutory auditors of the assessee-company and filed along with the return of income for the purposes of section 115JA of the Income-tax Act, 1961. As far as the treatment of gains arising on sale of shares under the Income-tax Act is concerned, the long-term capital gain after indexa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment carried out by the Assessing Officer was beyond the scope of adjustments permitted under section 115JA. He also held that the judgment of the Hon ble jurisdictional High Court in CIT v. Veekaylal Investment Co. (P.) Ltd. [2001] 249 ITR 597 1 (Bom.) was distinguishable on facts. He further held that the facts of the present case were similar to those in Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.) (SB) and, therefore, following the said decision of the Special Bench of the Tribunal, deleted the capital gains from the book profit. The Department is now in appeal before the Tribunal against the said order of the CIT(A). 6. At the time of hearing, the learned Departmental Representative ( DR in short), took us through the provisions of sub-section (2) of section 115JA and submitted that the assessee was obliged to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. He contended that the Assessing Officer could go behind the profit loss account to find out as to whether it was prepared in accordance with the provisions of Parts II and III of Schedule VI to the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any has disposed of Investments which were revalued as of 1st April, 1997 to Rs. 53.31 lacs." 8. On the basis of the aforesaid certificate and note of the statutory auditors of the assessee-company, the learned DR contended that the book profit was not correctly reflected in the profit loss account of the assessee-company and hence the Assessing Officer was justified in adopting the book profit on the basis of the aforesaid notes as the said notes were also part of the profit loss account of the assessee. 9. Referring to Part II of Schedule VI to the Companies Act, Shri Maheshwari submitted that the assessee-company was required to disclose its income by way of capital gain on sale of shares in its profit loss account which it failed to do and hence the Assessing Officer was justified in correcting the same on the basis of the notes forming part of the accounts of the assessee-company. 10. Citing the judgment of the Hon ble jurisdictional High Court in Veekaylal Investment Co. (P.) Ltd. s case ( supra ), the learned DR submitted that the profit on sale of shares was required to be shown as part of book profit under section 115JA. According to him the action of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered : -An auditor has qualified his audit report stating that certain income which is to be included in profit and loss account is not so included but directly taken to reserve. -An auditor has qualified his report stating that provision is not made for certain expenditure which is actually incurred. -Auditor has reported that there are some mistakes in computing the amounts of expenditure or income. In the above kind of cases, it would appear that the profit and loss account adopted by AGM may not be sacrosanct and necessary adjustments are warranted under the provisions of section 115JB for the reason that the profit and loss account may not be considered to be in accordance with Parts II and III of Schedule VI of the Companies Act, 1956." 12. In view of the aforesaid opinion expressed by the Bombay Chartered Accountants Society, the learned DR contended that the Assessing Officer had the necessary jurisdiction to recompute the book profit in accordance with the notes of the Auditors of the assessee-company which clearly reflected that there was profit on sale of shares. 13. Per contra the learned authorized representative for the assessee ( AR in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts for the purposes of the Companies Act, 1956, there is no dispute that it is only the revalued shares which were subsequently sold. The difference between the revalued price and the book value of the said shares, arising on revaluation of shares was taken to the Investment Revaluation Reserve Account in the balance sheet as the assessee did not make any profit on revaluation of its own shares. It is in this background that the difference between revalued price and book value of the shares was not shown in the Profit Loss Account and consequently not made available even for distribution of dividends. As far as the total income required to be computed under the Income-tax Act, 1961 is concerned, there was indeed capital gain arising on sale of shares but that was exempt under section 54EA of the Income-tax Act by virtue of the investments made by the assessee-company in specified securities. The said capital gain was therefore exempt not only from capital gains tax but was also not includible even in the total income for the purposes of the Income-tax Act, 1961. It may be mentioned that it is not the total income which is the subject-matter of charge under section 115JA. An i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm part of the Companies Act at the relevant point of time. The position could have been different if the aforesaid Accounting Standards relied upon by the Department were part of the Companies Act during the relevant period. 17. It was vehemently argued by the learned CIT-DR that audited accounts of the assessee-company did not reflect the correct net profit of the assessee-company as the statutory auditors of the assessee-company had qualified their report by their comments and explanation appended thereto and hence the Assessing Officer was justified in taking into account the said comments of the statutory auditors and re-calculate the net profit of the assessee. We are unable to agree with the aforesaid submission for several reasons. One, the statutory auditors have not given any comments that the net profit shown in the audited accounts was incorrect or did not reflect the true profits of the assessee-company. On the other hand, the certificate given by the statutory auditors (reproduced above) clearly states that "accounts together with notes give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view." We are theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. , the Companies Act for the purposes of section 115JA of the Income-tax Act. In our view, this issue now stands authoritatively settled by the decision of the Hon ble Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 1 in which the Hon ble Court has held that 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 115J. The Hon ble Supreme Court has further held as under : ". . . For the said purpose, section 115J makes the income reflected in the company s books of account 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 Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 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 115J." [Emphasis supplied] 20. In Kinetic Motor Co. Ltd. v. Dy. CIT [2003] 262 ITR 330 1 (Bom.), the Hon ble jurisdictional High Court, following judgment in Apollo Tyres Ltd. s case ( supra ), has held as under : "The short question that arises for consideration in this tax appeal is whether it is open to the Assessing Officer to make adjustment to the book profits beyond what is authorised by the definition given in Explanation to section 115J of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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