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2016 (8) TMI 855 - ITAT KOLKATA

2016 (8) TMI 855 - ITAT KOLKATA - [2016] 49 ITR (Trib) 641 - Applicability of Section 115JB - assessee is an electricity company Held that:- In view of the legislative change brought about by the introduction of Explanation 3 in section115JB of the Act by the Finance Act, 2012, the assessee's conten tion in fact stands more fortified. Explanation 3 to section 115JB makes it evidently clear that section 115JB is applicable only to entities registered and recognised to be companies under the Compa .....

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t the companies were declaring huge profits as per their Companies Act and declaring dividends to its shareholders but paying nil tax or lesser tax under the Income-tax Act due to various exemptions/ deductions like sections 10A/10B/80-IA/80-IB. To justify the imposition, the real income theory was stressed and it was held that the companies cannot be allowed to have two faces, one for the shareholder and another for the tax man. Section 115JA was enacted by restructuring the provisions of secti .....

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e admittedly not in accordance with the Companies Act, 1956. We find that there are major differences with regard to the treatment of several items in the accounts in the Electricity Act vis-a-vis the Companies Act, 1956. Hence, it can safely be concluded that the accounts of electricity companies are not prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 and, hence the provisions of section 115JB of the Act cannot be made applicable to the said companies. - I .....

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2 against the order of assessment framed for the assessment year 2007- 08 under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). 2. During the course of hearing, the learned authorised representative stated that in view of the smallness of the amount involved, he is not pressing ground No. 1 on the issue of disallowance under section 14A of the Act. Accordingly, ground No. 1 is dismissed as not pressed. 3. The next issue to be decided in this appeal is .....

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e policies and standards prescribed under the Electricity Act and its regulations. In terms of the said regulations and location of the assessee, the assessee is required to prepare its balance-sheet and profit and loss account in accordance with the West Bengal Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2005. Since the accounts were prepared not in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956, the assessee pleaded that .....

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nder the provisions of section 115JB of the Act. Accordingly, he refused to admit the additional grounds but proceeded to adjudicate the issue on the merits. Aggrieved, the assessee had raised the following ground before us : "2.0. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) was not justified and erred in not admitting the additional grounds filed before it, without considering the fact that the additional grounds were merely que .....

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at the issues involving question of law and not requiring investigation of facts could be raised for the first time even at the appellate proceedings. Respectfully following the said judgment, we hold that the dismissal of the additional ground raised by the assessee is not justified. Accordingly, the ground No. 2 raised by the assessee before us is allowed. 4. The next issue to be decided in this appeal is as to whether the provisions of section 115JB of the Act could be made applicable to the .....

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on (Terms and Conditions of Tariff) Regulations, 2005. The learned Commissioner of Income-tax (Appeals) had given a clear finding to this effect in his order. The learned authorised representative argued that as per the provisions of section 115JB(2) of the Act, for computing book profit under this section, the assessee has to prepare its accounts as per Parts II and III of Schedule VI to the Companies Act, 1956, and not as per the Electricity Act, 2003. The learned Commissioner of Income-tax (A .....

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Companies Act, 1956, is reproduced below : 616. Application of Act to insurance, banking, electricity supply and other companies governed by special Acts. The provisions of this Act shall apply- (a) to insurance companies, except in so far as the said provisions are inconsistent with the provisions of the Insurance Act, 1938 ; (b) to banking companies, except in so far as the said provisions are inconsistent with the provisions of the Banking Companies Act, 1949 ; (c) to companies engaged in the .....

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n the Official Gazette, specify in this behalf, subject to such exceptions, modifications or adaptations, as may be specified in the notification. 4.2. The Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948, has since been repealed by the Electricity Act, 2003. From a perusal of the above it could be noted that for an electricity company, the provisions of the Electricity Act, 2003, shall override the provisions of the Companies Act wherever there is inconsistencies between the .....

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evant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956) ; or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company : Provided that while preparing the annual accounts including profit a .....

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that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) the accounting policies ; (ii) the accounting standards adopted for preparing such accounts including profit and loss account ; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which hav .....

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ll, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case ; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading 'Notes' at the end of that Part : Provided that nothing contained in this sub-section .....

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are applicable thereto : Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. (3) The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule .....

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account and balance sheet, the following, namely :- (a) The deviation from the accounting standards ; (b) The reasons for such deviation ; and (c) The financial effect, if any, arising due to such deviation. (3C) For the purposes of this section, the expression 'accounting standards' means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Gover .....

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arified that for the purposes of this section, the assessee, being a company to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956), is applicable, has, for an assessment year commencing on or before the 1st day of April, 2012, an option to prepare its profit and loss account for the relevant previous year either in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956 (1 of 1956), or in accordance with the provisi .....

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JB was not applicable to it. 4.6. The Notes on Clauses to the Finance Act, 2012, on the subject of minimum alternate tax (MAT) is reproduced below ([2012] 342 ITR (St.) 145, 288) : "(i) Under the existing provisions of section 115JB of the Act, a company is liable to pay MAT of eighteen and one half per cent. of its book profit in case of tax on its total income computed under the provisions of the Act is less than the MAT liability. Book profit for this purpose is computed by making certai .....

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ir regulatory Acts. In order to align the provisions of the Income-tax Act with the Companies Act, 1956, it is proposed to amend section 115JB to provide that the companies which are not required under section 211 of the Companies Act to prepare their profit and loss account in accordance with Schedule VI of the Companies Act, 1956, profit and loss account prepared in accordance with the provisions of their regulatory Acts shall be taken as a basis for computing the book profit under section 115 .....

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, if the same is not credited to the profit and loss account. (iii) It is also proposed to omit the reference of Part III of Schedule VI of the Companies Act, 1956 from section 115JB in view of omission of Part III in the revised Schedule VI under the Companies Act, 1956. These amendments will take effect from 1st April, 2013, and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years." 4.7. In view of the above, we hold that in view of the legis .....

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nd, therefore, consequently, we hold that the provisions of section 115JB of the Act are also not applicable. 4.8. The basic intention of MAT under section 115JB is only to tax the book profits irrespective of nil or lesser taxable income due to various exemptions/deductions like section 10A/10B/80-IA/80-IB, etc. The intention of MAT is that the companies were declaring huge profits as per their Companies Act and declaring dividends to its shareholders but paying nil tax or lesser tax under the .....

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JA and 115JB are by and large similar to each other. 4.8.1. The scope and effect of section 115JA was elaborated in the Department Circular No. 762, dated February 18, 1998. The relevant portion is reproduced hereunder ([1998] 230 ITR (St.) 12, 42) : "Alternate minimum tax on companies 46.1 In recent times, the number of zero-tax companies and companies paying marginal tax has grown. Studies have shown that in spite of the fact that companies have earned substantial book profits and have pa .....

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e Income-tax Act, is less than 30 per cent. of the book profit. Where the total income as computed under the normal provisions of the Income-tax Act, is more than 30 per cent. of the book profit, tax shall be charged on the same." 4.8.2. The Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 1996 categorise the amendment under the caption "Rationalisation and simplification". The relevant portion is reproduce hereunder ([1996] 220 ITR (St.) 248, 263) : "Rationa .....

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30 per cent. of the book profits as per the books of account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. 'Book profits' is defined and certain adjustments are provided in the proposed section. The proposed amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years." 4.8.3. The honourable apex court in the case of Surana Steels Pvt. Ltd. v. Deputy CIT reported in .....

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inally the companies entitled for exemptions under section 10A/10B and deductions under section 80-IA/80- IB were eligible for deduction from book profits under section 115JB. But later to be in line with the underlying intention behind introduction of MAT provisions to tax the companies declaring huge dividends to shareholders by reporting higher profits as per Companies Act but paying lesser tax under the Income-tax Act, the amendment was brought out in the statute book wherein the companies e .....

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- (i) what was the law before the Act was passed ; (ii) what was the mischief or defect for which the law had not provided ; (iii) what remedy Parliament has appointed ; and (iv) the reason of the remedy." 4.8.5. A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. The task of a judge is to go by the intent of the statute and fill the gaps. The two rules of most general application in construing a statute are that-first that it shall, if possi .....

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e statute. 4.9. We find that the accounts laid before the annual general meeting have followed the accounting policies which are required to be followed under the Electricity Act read with the West Bengal Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2005, which are admittedly not in accordance with the Companies Act, 1956. We find that there are major differences with regard to the treatment of several items in the accounts in the Electricity Act vis-a-vis the .....

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dships of the Kerala High Court held that (headnote) : "Section 115JB of the Income-tax Act, 1961, creates a legal fiction regarding the total income of assessees which are companies. The book profit of the company is deemed to be the total income of the assessee in the circumstances specified in the section. The expression 'book profit' for the purpose of the section is explained to mean the net profit as increased or decreased by the various amounts shown in the various sub-clause .....

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ucted, in accordance with section 210 of the Companies Act, 1956. Though the Kerala State Electricity Board, a statutory corporation constituted by virtue of section 5 of the Electricity (Supply) Act, 1948, answers the description of an Indian company and therefore a company within the meaning of section 2(17) of the Income-tax Act, 1961, it is not a company for the purpose of the Companies Act, 1956. It is not obliged to either to convene an annual general meeting or place its profit and loss a .....

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e Comptroller and Auditor-General of India. The accounts so prepared along with the audit report are required to be laid annually before the State Legislature and also to be published in the prescribed manner. At the earliest point of time when section 115J was introduced, the section expressly excluded from its operation bodies like the Electricity Board. Though such express exclusion is absent in section 115JA, the Central Board of Direct Taxes issued Circular No. 762 dated February 18, 1998, .....

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JA for the reason that such a policy would promote the infrastructural development of the country. Such an understanding of the CBDT is binding on the Department. Section 115JB, which is substantially similar to section115JA cannot have a different purpose and need not be interpreted in a manner different from the understanding of the CBDT of section 115JA. Where the computation provision could not be applied in a particular case, it is indicative of the fact that the charging section also would .....

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he Income-tax Act." Maharashtra State Electricity Board v. Joint CIT reported in [2002] 82 ITD 422 (Mum), wherein it was held that : "15. We find that sub-section (2) of section 115JA requires the company 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. The assessee was required to prepare its account in conformity with the provision of section 69 of the Electricity (Supply) Act, 1948. Besides the pr .....

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n two or more persons. In case of MSEB there is no other person. Similarly, the second proviso to sub- section (2) provides that where a company has adopted or adopts a financial year under the Companies Act, 1956, which is different from the previous year under the Act, the methods and the rates of depreciation shall correspond to the method and rates, which have been adopted for calculating the depreciation, for which financial year or part of such financial year falling within or relevant pre .....

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on or supply of electricity. As such it will come within the sweep of this provision. MSEB cannot be construed to be a company within the meaning of section 3 of the Companies Act, therefore, though it is engaged in the generation/distribution of electricity, it cannot be deemed as a company within the meaning of section 616(c). 17. The Explanation to section 115JA defines the term 'book profit' to mean the net profit as shown in the profit and loss account for the relevant previous year .....

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The term company as defined in the said section is, nomen generalissimum (term of the most general meaning) and its meaning in the context of section 115JA is to be gathered from the connection in which it is used and from the subject matter to which it is applied. The definition as given in section 2 of the Act begins with the qualifying words, 'unless the context otherwise requires'. Text and context are the basis of interpretation. If the text is the texture, context is what gives the .....

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her the same meaning, as has been given in the interpretation clause, should be given to the word wherever it occurs, will depend upon the context. Therefore, it becomes necessary not only to look at the words but also to look at the context, the collocation and the objects of such words relating to such matter. 19. It is true that the word used in section 115JA of the Act is 'company'. The heading of this section is 'deemed income relating to certain companies'. The provision be .....

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s been paid by them to the exchequer. To curb this mischief MAT was introduced by inserting section 115JA. This is a deeming provision. It is a trite law that deeming provision should be narrowly watched, jealously regarded and never to be pressed beyond its true limits. It is applicable to a company. The assessee is not a company. It is not required to distribute any dividend. As such it does not come within the mischief of this section . . . ." State Bank of Hyderabad v. Deputy CIT report .....

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it is contended that section 115JB will be applicable only where the assessee is required to show profit and loss account in accordance with Schedule VI to the Companies Act. As the banks are required to prepare balance sheet and profit and loss account in accordance with the Banking Regulation Act, the provision of section 115JB cannot be applied to the banks. In the case of Maharashtra State Electricity Board v. Joint CIT [2002] 82 ITD 422 (Mum) it was held that provisions of book profit cann .....

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ibution of electricity), should prepare their profit and loss and balance sheet in accordance with the provisions of the Act governing such companies. This would mean that prior to assessment year 2013-14, provisions of section 115JB will not apply to companies to which proviso to section 211(2) of the Companies Act, 1956, applies. The assessee being a company to which the proviso to section 211(2) of the Companies Act, 1956, applies, will not be liable to be taxed under section 115JB. 14. The M .....

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assessee-bank and set aside the assessment made under section 115JB on the assessee- company." ICICI Lombard General Insurance Co. Ltd. v. Asst. CIT reported in [2012-TIOL-690-ITAT Mum]) (I. T. A. No. 2398/Mum/2009 dated October 10, 2012, for the assessment year 2003-04, wherein it was held that : "The proviso to section 211(2) of the Companies Act creates an exemption of applicability of sub-section (2), inter alia, in respect of insurance companies or banking companies or any other c .....

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ction (5) of section 211 of the Companies Act. In order to align the provisions of the Income-tax Act with the Companies Act, an amendment has been brought in to the statute by the Finance Act, 2012, whereby section 115JB has been amended with effect from April 1, 2013, and, therefore, prior to April 1, 2013, the amended provisions of section 115JB cannot be applied in case of insurance, banking, electricity generation and distribution companies and other class of companies, which are not requir .....

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ction 115JB are not applicable in the case of the assessee." Bank of India v. Addl. CIT reported in [2014] 5 TMI 929 (Mum) (I. T. A. No. 1498/Mum/2011 dated April 9, 2014-ITAT-Mumbai) wherein it was held that "6. Ground No. 5 is regarding applicability of provisions of section 115JB in case of bank. 6.3 Having considered the rival submissions as well as relevant material on record, we note that this issue has been considered by this Tribunal in the series of decisions including the dec .....

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rts II and III of Schedule VI to the Companies Act are not applicable at all. Once there is no possibility for preparing the accounts in accordance with Parts II and III of Schedule VI to the Companies Act then the provisions of section 115JB cannot be forced. Therefore, in view of the above facts and circumstances and respect fully following the above decisions of the honourable Supreme Court and the decision of the Tribunal for assessment year 1988-89, we hold that the provisions of section 11 .....

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5JB are not applicable in the case of the assessee". Accordingly, this issue is decided in favour of the assessee and against the Revenue. Though, section 115JB has been amended to bring all the companies in its ambit vide Finance Act, 2012, with effect from April 1, 2013, however, the said amendment is not applicable in the assessment year under consideration. Following the decision of the co-ordinate Bench of this Tribunal we decide this issue in favour of the assessee. Reliance Energy Lt .....

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required under the Companies Act, therefore, the accounts so prepared under the Companies Act will not be in accordance with Parts II and III of Schedule VI. 24.5. The assessee also referred to the requirement of the Electricity Supply Act as regards the real profits and reasonable return. In the accounts under the Electricity Supply Act, the excess of profits is required to be transferred to tariff and dividend control reserve and also to be distributed to the consumers. This treatment is not .....

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ot be followed under the Companies Act and if followed the accounts will not be in accordance with Parts II and III of Schedule VI. 24.6. It was, therefore, submitted that an electricity company cannot prepare the accounts under Parts II and III of Schedule VI to the Companies Act following the same accounting policies as followed in the accounts under the Electricity Supply Act which are presented before the company in annual general meeting. The asses see, therefore, submitted that the provisi .....

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he same accounting policies and same accounting standards in both the accounts as prepared under the Electricity Supply Act and under the Companies Act. This material departure in section 115JD from the provisions in section 115JA has resulted in the accounts to be prepared under the Companies Act following the same accounting policies. Find same accounting stand ards unworkable and any such attempt to make the accounts will be not in accordance with the provisions of the Companies Act. 25. As p .....

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, which went into liquidation. For the assessment year 1963-64 the Assessing Officer was of the opinion that their taxable income would attract liable to Super Profits tax Act. Under the Act the super profits tax is leviable in respect of chargeable profits, which are in excess of standard deduction as specified in Third Schedule to the said Act. Standard deduction was defined to mean an amount equal to six per cent. of the capital of the company or ₹ 50,000, whichever is higher. The issue .....

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t attracted. In this case the definition of "standard deduction" was to mean six per cent. of the capital or ₹ 50,000, whichever is higher. Out of the two limbs of the calculation, one limb being capital was not capable of ascertainment. The Supreme Court held that when one limb is not capable of ascertainment, the whole provision fails, in other words there is "break down" of the whole provision and the provision cannot be applied. 25.1 While deciding so, the honourabl .....

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ation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantify .....

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to prepare the accounts under the Companies Act because the assessee is preparing the accounts as per the policies of the Electricity Supply Act. 26.1. The honourable Supreme Court in the case of CIT v. Kwality Biscuits Ltd. in [2006] 284 ITR 434 (SC) has held that provisions of sections 234B and 234C are not applicable in respect to computation of deduction under section 115J because the computation of profit under the provisions of section 115J has to be made on the basis of book profit and si .....

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Therefore, in view of the ratio of this decision, in our considered view, the provisions of section115JB cannot be attracted on the facts of the present case. 27. The issue in regard to doctrine of impossibility has been discussed in a decision of the Tribunal in the case of Divine Holdings Pvt. Ltd. (I. T. A. No. 180/Mum/2000, vide order dated June 26, 2001). The Tribunal in paragraph 8 has observed that the assessee did whatever was possible on its part. It is well-known principles "law .....

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le for it. In view of the above facts and circumstances, it can be easily held that a person cannot be forced to do something impossible. The law does not compel a man to do that which he cannot possibly perform. The law creates a duty or charge, and the party is disable to perform it, without any default in him, and has no remedy over, there the law will in general excuse him and though impossibility of performance is in general no excuse for not performing an obligation which a party has expre .....

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ot possible to prepare the accounts under the Companies Act for the purpose of computation under section 115JB, therefore, the assessee cannot be forced to prepare the accounts when it is not possible. Therefore, we are in agreement with the contentions of the assessee inasmuch as the accounting policies following in the electricity accounts if followed for the preparation of Companies Act amount will not disclose true and fair view and will not be in accordance with Parts II and III of Schedule .....

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