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2016 (3) TMI 327 - CALCUTTA HIGH COURT

2016 (3) TMI 327 - CALCUTTA HIGH COURT - [2016] 384 ITR 457 - Revision u/s 263 - Computation of MAT u/s 15JB - Book Profit - loss of an amount on account of transfer of investment division of the assessee - CIT was of the opinion that the loss could not have been debited to the P/L account and the amount was required to be added back for computation of book profit under Section 115JB - ITAT held that the loss on account of transfer of investment division of the assessee could not be adjusted in .....

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t. - Once it is realized that the assessee had correctly debited the profit and loss account for the loss arising out of the transfer of investment division, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position - Had it not been a case of section 115JB the capital loss incurred on transfer of investments would have been de .....

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the following assessment year and be set off against either short term or long term capital gain. - 5. Under section 74(1)(b) long term capital loss would be carried forward to the following assessment year and be set off against long term capital gain only. - In that view of the matter, the only conclusion which can be arrived at is that the order passed by the learned Tribunal is unexceptionable. - Decided against revenue - GA No. 3094 of 2012, ITA No. 7 of 2004 - Dated:- 4-3-2016 - G .....

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the Tribunal ) B Bench, Kolkata in ITA No.239/KOL/2011 pertaining to the assessment year 2006-07. This Court by an order dated 25th March, 2014 had disposed of this appeal by setting aside the impugned order of the Tribunal and remanding the matter back to the assessing officer. The assessee approached the Supreme Court by special leave against the aforesaid order of this Court. By an order dated 26th October, 2015 the Supreme Court has remanded the matter back to this Court on the ground that n .....

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come Tax (Central - I) Kolkata under Section 263 of the Income Tax Act without appreciating the ratio of the judgement delivered by the Delhi High Court in the case of Commissioner of Income Tax - Vs- Hari Machine Ltd. reported in (2009) 311 ITR 285 (Del.)? ii) Whether on the facts and in the circumstances of the case, the Learned income Tax Appellate Tribunal B Bench, Kolkata erred in law in holding the loss of an amount of ₹ 919.52 lakhs on account of transfer of investment division of t .....

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return of income for the assessment year 2006-07 disclosing total income at nil and book profit under Section 115JB of the Act at ₹ 48,62,96,592/-. The same was processed under Section 143(1) of the Act. Subsequently, the scrutiny assessment proceeding was initiated and notice was issued under Section 143(2). The scrutiny assessment was completed under Section 143(3) by an order dated 5th November, 2008 whereby the total income was determined to be nil and book profit u/s.115JB was found .....

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). The said scheme of arrangement is explained by note number 8 of Schedule 15 (titled Significant accounting policies and notes on accounts ) of the Balance Sheet and Profit and Loss Account for the year ended 31st March 2006, which reads as follows:- The Scheme of Arrangement between the Company and Daisy Commercials Private Limited (DCPL) and their respective shareholders under sections 391 and 394 of the Companies Act, 1956 for transfer of the investment division of the Company, consisting o .....

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CPL on 28th September, 2005 against which DCPL has allotted 1,39,66,434 Equity Shares of ₹ 10/- each credited as fully paid-up aggregating to ₹ 1396.64 lakhs to the shareholders of the Company based on the option forms received by DCPL from the shareholders. On allotment of the aforesaid shares by DCPL, 13,66,434 Equity Shares of ₹ 10/- each fully paid-up of the Company held by such shareholders stand cancelled and the paid up Share Capital of the Company is accordingly reduced .....

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see reduced its share capital by ₹ 13.96 crores. The difference between the investment value of ₹ 23.16 crores and the share capital reduction of ₹ 13.96 cores, that is, ₹ 9.20 crores was debited to the Profit & Loss Account for the year ended March 31, 2006. The CIT by the aforesaid order dated 20th January 2011 u/s.263 of the Act, further observed that the aforesaid amount of ₹ 919.52 lakhs was not added back in computing the book profit u/s.115JB of the Act, .....

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akh to the P/L A/c on share capital reduction for disinvestment in shares held as investment as per scheme of arrangement and of not adding back the same for the purpose of computation of book profit for MAT u/s 115JB of the Act, have not been disputed by the assessee. The relevant facts are available from Notes on A/cs. no.8 of Schedule-15 of the audited accounts of the assessee company. As per the Notes, in accordance with a scheme of arrangement the assessee company transferred the investment .....

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into 20,31,01,274 equity shares of ₹ 10 each fully paid-up. The difference of ₹ 919.52 lakh has been adjusted against the balance in P/L A/c. as per terms of the Scheme… But the contentions raised by the assessee company are not justified or reasonable because of the following:- 1) It is apparent from record that the A.O. has not at all considered/examined the issue. 2) The contention is not correct since the debit of the amount under consideration is not as per Part- II & .....

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ause of prejudicial nature of the assessment regarding MAT payable for this year. 3) The case decisions relied upon by the assessee are not relevant/applicable since the issues in those cases before the Court/lTAT s were totally different. 4) The issue is required to be decided after examining whether the accounts were pared as per Part-II & III of Schedule-VI of the Companies Act and the case decision as referred to in (2) above. The basic issue is whether the condition stipulated in subsec .....

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ent from the report of the case of CIT Vs. Hari Machines Ltd. in 166 Taxman 84 (2008), which was in respect of penalty u/s 271 (1)(c) but in the facts such finding of ITAT has been discussed. Therefore, such share capital reduction cannot be an item of P/L Ac. As per Partll III of Schedule-VI of the Companies Act. The decision of the Hon ble Apex Court in the case of Apollo Tyres Ltd. in respect of adjustments only as per explanation-1 is applicable only after the accounts have been prepared as .....

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so far as the above mentioned issue is concerned and accordingly, the order is set aside to that extent and the A.O. is directed to decide the issue in accordance with law after giving reasonable opportunity to the assessee. Against the order of the CIT the assessee appealed before the Tribunal. The Tribunal by an order dated 30th March, 2012 while allowing the appeal of the assessee held as follows:- We find that irrespective of whether or loss such a loss is deductible in. computation of taxab .....

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mputation of income is thus wholly misplaced. We are also of the considered view that the loss in question is a loss on reduction of capital, because the entry in question is not in respect of the reduction of capital is not in the case of the assessee. As far as assessee is concerned; the assessee has been given shares in consideration of it s transfer of investments. There is nothing in Schedule VI of the Companies Act which prohibits this loss being booked in the profit and loss account nor c .....

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the case of Apollo Tyres Ltd. -vs.- CI'T' (255 ITR 273) holds so. As regards note no. 8 in the balance sheet, it is not an objection or qualification by the auditor but it is a part of significant accounting policies and notes on account's. Which is mainly informative in nature. By no stretch of logic, this can be treated as qualification in the auditors report. In view of these discussions, in our considered view, the adjustment directed by the CIT is devoid of legally sustainable .....

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utinized and certified by the statutory auditors and was approved by the assessee company in its annual general meeting. As such the assessing officer had no jurisdiction to question the correctness of the accounts. In support of his submission he relied on the judgement of the Apex Court in the case of Apollo Tyres Ltd. -Vs- CIT reported in (2002) 255 ITR 273 wherein the following issue arose for consideration:- Can an Assessing Officer while assessing a company for income tax under Section 115 .....

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deduced from the Budget speech of the then Hon'ble Finance Minister of India made in Parliament while introducing the said section which is as follows: It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called zero-tax highly profitable companies deserves attention. In 1983, a new Section 80- VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to intro .....

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ncome tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that Section 115-J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30% of its book profits as shown in its own account. For the said purpose, Section 115-J makes the income reflected in the companies' books of accounts as the deemed income for .....

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ence to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In .....

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1-A) of Section 115-J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company' .....

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e purpose of the Companies Act and another for the purpose of income tax, both maintained under the same Act. If the legislature intended the Assessing Officer to reassess the company's income, then it would have stated in Section 115-J that income of the company as accepted by the Assessing Officer . In the absence of the same and on the language of Section 115-J, it will have to be held that the view taken by the Tribunal is correct and the High Court has erred in reversing the said view o .....

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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 115-J. The views expressed by the Apex Court in Apollo Tyres (supra) was quoted with approval by the Apex Court in Malayala Manorama Co. Ltd. -Vs- CIT reported in (2008) 300 ITR 251. 2) The views expressed in Apollo Tyres (supra) was followed by this Court in the case of CIT -Vs- Ispat Industries Ltd reported in (2008) 2 DTR (Cal) 133 wherei .....

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the case of CIT -Vs- Adbhut Trading Company Pvt. Ltd. reported in (2011) 338 ITR 94 and held as follows: According to the Revenue, the assessee has intentionally prepared a wrong profit and loss account. Once the accounts' including the profit and loss account are certified by the authorities under the Companies Act it is not open to the Assessing Officer to contend that the profit and loss account has not been prepared in accordance with the provisions of the Companies Act, 1956. 3) The Re .....

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he assets and liabilities of the Investment Division shall be transferred to DCPL at their respective values as appearing in BCL s book of account as on the date immediately preceeding the Appointed Date. The said assets and liabilities shall be recorded in the books of accounts of DCPL at the said values. 8.2 The difference between the book value of the said assets and liabilities of the Investment Division recorded in the books of account of DCPL as reduced by the aggregate face value of the E .....

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ment sanctioned by this Hon ble Court it was obligatory on the part of the assessee to debit the amount of ₹ 919.52 lakhs towards loss on account of the transfer of the Investment Division of the assessee company to the Profit and Loss account. 5) The CIT by his order u/s.263 did not disclose any provision of Part II and III of Schedule VI of the Companies Act 1956 which was allegedly contravened. In fact the CIT by his order dated 20th January 2011 made a bald statement by holding as foll .....

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n the facts such finding of ITAT has been discussed. Therefore, such share capital reduction cannot be an item of P/L Ac. As per Part-II & III of Schedule-VI of the Companies Act. 6) The CIT by his order u/s.263 wrongly relied on the judgment of CIT - Vs- Hari Machines Ltd reported in (2009) 311 ITR 285 which has no manner of application to the facts of the instant case. In Hari Machines (supra) the issue was regarding imposition of penalty under Section 271(1)(c) of the Act and it was not a .....

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8377; 5 lakhs allegedly shown as a loss. The CIT(Appeals) as well as the Tribunal upheld the action of the assessing officer. The Tribunal came to a conclusion that the loss shown on account of reduction of share capital was a fictitious loss with the intention of creating a scheme or device to defraud the Revenue. In the meanwhile, the assessing officer initiated penalty proceedings against the assessee under Section 271(1)(c) of the Act. The CIT(A) and the Tribunal cancelled the levy of penalt .....

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itious loss on capital deduction may a balance sheet adjustment but cannot be an item of P & L A/c and the loss booked in the P & L A/c is required to be added back for computation of book profit u/s.115JB… From the facts stated above it is apparent that the loss booked in the P/L A/c is for share-capital reduction. There is no scope for such accounting as per Part-II & III of Schedule-VI of the Companies Act. Besides, such loss is fictitious as held by ITAT, Delhi in quantum .....

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sideration before the Delhi High Court was only regarding imposition of penalty and not regarding addition to book profit for purpose of section 115JB. In fact the Delhi High Court held that the finding recorded by the Tribunal in the quantum appeal that the loss was fictitious was harsh. The Delhi High Court while upholding the order of deletion of penalty observed as follows:- In the present case, there is no allegation that there was any gross or wilful neglect on the part of the assessee to .....

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ee approached the Calcutta High Court for reduction of its share capital. After considering the materials on record, the Calcutta High Court permitted the assessee to reduce its share capital in terms of its order dated December 21, 1972. It is nobody's case that the Calcutta High Court was defrauded by the assessee. That being the position we must proceed on the basis that the decision rendered by the Calcutta High Court was correct and there was no attempt on the part of the assessee to mi .....

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the affirmative, that is in favour of the assessee and against the Revenue. 7) The jurisdiction u/s.263 was wrongly exercised on an erroneous reading of the judgement in Hari Machines (supra) which has no manner of application to the facts of this case. The CIT in his order u/s.263 did not disclose any material on the basis of which he could arrive at the conclusion that the assessment order under consideration is erroneous in so far as it is prejudicial to the interests of the revenue . 8) The .....

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ich is mainly informative in nature. By no stretch of logic, this can be treated as qualification in the auditors report. 9) That revisional jurisdiction u/s.263 of the Act cannot be exercised where two views are possible and the assessing officer has taken one of the possible views. In support of his submissions he relied on a judgement in the case of Malabar Industrial Company -Vs- CIT reported in (2000) 243 ITR 83 wherein their Lordships discussed the scope of s.263 and held as follows:- &hel .....

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rect each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase prejudicial to the interests of the Revenue is not an expression of art and is not d .....

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nterests of the Revenue… The phrase prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer .....

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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 1 to the section 115JB(2). Thus, 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 1 to Section 115JB. The amount of ₹ 919.52 lakhs debited to the Profit and Loss A/c towards the lo .....

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that could have been taken. Furthermore the CIT in his order u/s.263 did not hold that the order of the assessing officer was unsustainable. Hence, in view of the mandate in Malabar Industrial Company Ltd., the exercise of revisional jurisdiction under Section 263 was bad as the preconditions for exercise of revisional power did not exist. The views expressed in Malabar Industrial Company (supra) were reiterated by the Apex Court in CIT -Vs- Max India Ltd. reported in (2007) 295 ITR 282. An err .....

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s no authority to initiate proceedings for revision u/s.263 of the Act. The said provision does not allow the Commissioner to substitute his own view for that of the assessing officer unless the conditions precedent u/s.263 are satisfied. In support of his submission he relied on a judgement of the Bombay High Court in CIT -Vs- Gabriel India Ltd. reported in (1993) 203 ITR 108 wherein the court has elaborately discussed the scope of s.263 in the following words:- From the aforesaid definitions i .....

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ld to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the acocounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at .....

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at in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of rev .....

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ed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in conseque .....

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istence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority… So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on examination to c .....

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hority. There must be materials available from the records called for by the Commissioner. 10) The accountant s certificate under Sub-section 4 of Section 115JB of the Act was not challenged by the CIT in his order u/s.263 of the Act. Mr. Bandopadhyay learned advocate appearing for the revenue contended that the loss could not have been debited to the P/L account. Therefore, it is not in accordance with the provisions of Section 115 JB hence it is erroneous and prejudicial to the Revenue. Theref .....

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Act. The assessing officer did not question the act of debiting loss arising out of the transfer to the P/L account. The CIT was of the opinion that the loss could not have been debited to the P/L account and the amount was required to be added back for computation of book profit under Section 115JB. The accounting standards laid down by the institute however provide for recognition of the profit or loss arising out of investment in the profit and loss account. Reference in this regard may be ma .....

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rately dividends from subsidiary companies), and rentals on investments showing separately such income from long term and current investments. Gross income should be stated, the amount of income tax deducted at source being included under Advance Taxes Paid; (ii) profits and losses on disposal of current investments and changes in carrying amount of such investments; (iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments; (c) signific .....

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II of Schedule VI to the Companies Act, 1956 which is not to be construed as any qualification indicating any inaccuracy in the accounts. There was, thus no mistake on the part of the assessee in debiting the loss to the profit and loss account. In the computation of income under Section 115JB there is authoritative pronouncement laid down by the Apex Court in Apollo Tyres (supra) which is as follows:- Therefore, we are of the opinion, the Assessing Officer while computing the income under Secti .....

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extent provided in the Explanation to Section 115-J. Once it is realized that the assessee had correctly debited the profit and loss account for the loss arising out of the transfer of investment division, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position as would appear from the following paragraph:- Therefore, such share cap .....

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