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2015 (9) TMI 559 - MADRAS HIGH COURT

2015 (9) TMI 559 - MADRAS HIGH COURT - TMI - Reopening of assessment - escaped income under Section 115JA - assessee had written back depreciation wrongly in their profit and loss account and that therefore the income chargeable to tax had escaped assessment - Tribunal held that books profit is not to be reduced by the excess provisions of depreciation credited in the profit and loss account? - Held that:- The proviso under clause (i) of the Explanation makes it clear that in case where Section .....

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assessee in this case were relatable to a previous year relevant to the assessment year commencing on or after the first day of April, 1997.

Pointing out the object behind Section 115JA, it was contended by Mr.J.Narayanasamy, learned standing counsel that by a jugglery of the accounting methods, the assessee cannot always make it a "zero tax" company even while making profits or at least showing profits to certain stakeholders. We appreciate the concern. But the law relating to income .....

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bramanian And T. Mathivanan, JJ. For the Petitioner : Mr R. Vijayaraghavan for Mr P J Rishikesh For the Respondent : Mr J. Narayanasamy JUDGMENT (Judgment of the Court was delivered by V. Ramasubramanian, J.) This appeal by the assessee under Section 260A of the Income Tax Act, 1961, was admitted on the following substantial questions of law:- "(1) Whether on the facts and circumstances of the case, the Tribunal is right in law in holding that books profit is not to be reduced by the excess .....

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Whether the Tribunal is justified in holding that since the appellant has already got some benefits, the same has to be surrendered?'' 2. Heard Mr.R.Vijayaraghavan, learned counsel for the appellant/assessee and Mr.J.Narayanasamy, learned standing counsel for the department. 3. With respect to the assessment year 1997-98, the assessee filed a return of income on 28.11.97 admitting a loss. The return was processed under Section 143(1) on 30.3.98. 4. However, on the ground that the assess .....

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n written back in the earlier years. Therefore, the assessing officer treated 30 per cent of the book profit so calculated as the income of the assessee under Section 115JA. 6. An appeal filed by the assessee was partly allowed by the Commissioner of Income Tax (Appeals) by an order dated 20.7.2000. On the issue relating to the applicability of Section 115JA, the Commissioner decided the matter in favour of the assessee. 7. The Revenue filed an appeal before the Income Tax Appellate Tribunal in .....

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m 1.4.1997. The question that actually arises for consideration is as to whether the reserves created or the provisions made by an assessee in a previous year which has no relevance to the assessment year commencing on or after the first day of April, 1997 could be reduced or not. It is not necessary to extract Section 115JA in entirety. It will be sufficient to extract the Explanation under sub-section (2) of Section 115JA, which reads as follows:- "Explanation.-For the purposes of this se .....

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anies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; (g) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (g) is debited to the profit and loss account, and as reduced by,- (i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and lo .....

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nt was withdrawn) under this Explanation; or (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. ...." 9. Before we actually get into the scope of the Explanation under subsection (2) of Section 115JA, it may be relevant to take note of the object behind the introduction of Chapter XII-B .....

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Tax Act, 1961, by the Finance Act, 1987, with effect from April 1, 1988. In fact, Section 115J replaced section 80VVA of the Act. Section 115J (as it stood at the relevant time), inter alia, provided that where the total income of a company, as computed under the Act in respect of any accounting year, was less than thirty percent of its book profit, as defined in the Explanation, the total income of the company, chargeable to tax, shall be deemed to be an amount equal to thirty per cent of such .....

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stinction between public and private limited companies. In our view, section 115J of the Act legislatively only incorporates the provisions of Parts II and III of Schedule VI to the 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read section 115J(1A) of the Act in the strict sense. If we so read, it is clear that, by legislative incorporation, only Parts II and III of Schedule VI to the 1956 Act have been incorporated legislatively into section 115J of the Act. Therefore .....

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ery purpose of enacting section 115J of the Act would stand defeated, particularly when the said section does not make any distinction between public and private limited companies. It needs to be reiterated that, once a company falls within the ambit of it being a MAT company, section 115J of the Act applies and, under that section, such an assessee-company was required to prepare its profit and loss account only in terms of Parts II and III of Schedule VI to the 1956 Act. The reason being that .....

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gly reversed by this court in the case of Malayala Manorama Co.Ltd. v. CIT reported in (2008) 300 ITR 251." 10. Therefore, the very object of introduction of Chapter XII-B was to make very prosperous companies that managed to be "zero tax" companies by a clever process of accounting, pay tax. But what happened was that Chapter XII-B had to evolve over a period of about 14 years. It is stated that Section 115J was inserted with effect from 1.4.1988, with reference to the assessment .....

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bay even while making profits. 11. Keeping the above in mind, let us now come back to Section 115JA. Under sub-section (1) of Section 115JA, if the total income of an assessee which is a company in respect of any previous year relevant to the assessment year commencing on or after the first day of April, 1997 but before the first day of April, 2001 is less than 30 per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be .....

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xplanation was inserted to sub-section (2). 12. The question as to whether the assessing officer was entitled to recompute the book profit for the purpose of Section 115J of the Act after allowing depreciation as per Schedule XIV to the Companies Act, 1956 and not as per the rates specified in rule 5 of the Income Tax Rules, 1962, came up for consideration before the Supreme Court in Malayala Manorama Co.Ltd., v. Commissioner of Income Tax, (2008) 300 ITR 251. But the correctness of the view exp .....

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llant/assessee is that they had made a provision for depreciation in relation to certain assessment years which did not happen to be the relevant previous year for the assessment year commencing on or after the first day of April, 1997. But after the insertion of Section 115JA, the assessee switched over from the written down value method of depreciation to the straight-line method of depreciation. The assessee did it in terms of the provisions of Section 205(2)(b) of the Companies Act, 1956. Th .....

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anation (i) under sub-section (2) of Section 115JA, the assessee is not entitled to reduce the surplus amount from the book profit. For rejecting the claim of the assessee, the Tribunal relied upon the decision of the Punjab and Haryana High Court in Sterling Steels & Wires Ltd., v. Deputy Commissioner of Income Tax, (2004) 271 ITR 260. But as rightly contended by the learned counsel for the assessee, the Punjab and Haryana High Court, though concerned in that case with the scope of the prov .....

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planation (i) to Section 115J which is similar to Explanation (i) to Section 115JA (with which we are concerned in this case) also contained the same expression, namely, previous year relevant to the assessment year. This factual distinction was lost sight of by the Tribunal. If this had been taken into account, the Tribunal would have actually found that the decision in Sterling Steels could be taken advantage of by the assessee in this case. Therefore the question that arises is as to whether .....

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planation. (ii) Similarly, an assessee is entitled to have the net profit reduced by certain items mentioned in clauses (i) to (ix). 16. According to Mr.J.Narayanasamy, learned standing counsel for the department, the increases and the reductions stipulated in the Explanation should go together. It is contended by the learned standing counsel that unless the net profit of an assessee being a company as shown in the profit and loss account for the relevant previous year is increased by the amount .....

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ed from the revaluation reserve and set off against the amount of depreciation debited to profit and loss account could be excluded in terms of Explanation (i) to Section 115JB(2) read with the proviso thereto or not. Though the decision of the Supreme Court arose out of Section 115JB, the principles laid down in the said decision, if were applicable to the case on hand, would apply in principle to the cases arising under Section 115JA also. This is for the reason that the scope and ambit of Sec .....

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year prepared under Section 115JB(2) by the amounts specified in clauses (a) to (f), if such amounts had been debited to the profit and loss account. The second step was to reduce the amount so arrived at, by the amounts specified in clauses (i) to (vii) under the Explanation to Section 115JB. Paragraphs 15 to 17 of the decision of the Supreme Court in Indo Rama Synthetics read as follows:- "15. The first step for arriving at the "book profit" is that the net profit as shown in th .....

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relevant previous year prepared under s.115JB(2) and as increased by any amount, as stated above, has to be reduced by the amount(s) in cls.(i) to (vii). 17. For the purposes of deciding this case it may be noted that we are concerned with cl.(i) which inter alia refers to an amount(s) withdrawn from any reserves if any such amount(s) is credited to P&L a/c. During the relevant assessment year, cl.(i) had an exception to such exclusion. That exception was in the form of a proviso which inte .....

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lso have no difficulty in applying the same yardstick to the method of computation stipulated in Section 115JA, we think that the decision of the Supreme Court in Indo Rama Synthetics cannot go beyond that point. The reason is that in the case on hand, we are concerned about a provision made or reserve created by the assessee in a previous year which is not relevant to the assessment year commencing from first day of April, 1997. This is an issue which was not addressed in Indo Rama Synthetics. .....

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