TMI Blog2017 (2) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection raised by the Assessee in this regard is hereby rejected. It is no doubt true that the assessee had income from growing, manufacturing and sale of tea as well as income from tea leaves purchased from third parties which were processed /manufactured and sold by the assessee. In so far as the first category of income is concerned, the same has to be regarded as part of the composite income for the purpose of applying Rule 8(1) of the Rules. In so far as the second category of income is concerned it cannot be regarded as part of the composite income under rule 8(1) of the Rules. This position has been accepted by the assessee itself in the computation of the total income under the normal provisions of the Act. We have referred to the computation of the total income by the assessee under the normal provisions of the Act in the earlier part of this order. Whether the position will change when it comes to computation of book profit u/s 115JB ? - Section 115J of the Act, the CBDT in Circular No.495 dated 22.09.1987 has set out the manner of computation of book profits and composite income in the case of an Assessee to which Rule 8(1) of the Rules, for the purpose of Sec.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have any impact on the tax liability of the Assessee. In that sense the order of the AO cannot be termed as prejudicial to the interest of the revenue. The law is well settled that for invoking the provision of section 263 of the Act, the order sought to be revised ought to be both erroneous as well as prejudicial to the interest of the revenue. Since the condition that the order should be prejudicial to the interest of the revenue is not satisfied, the order of CIT u/s 263 in so far as it is concerns computation of deduction u/s 80IB and 80IE of the Act, cannot be sustained and the same is hereby quashed. Disallowance under Rule 8D(2)(ii) - Counsel fairly conceded that the action of CIT in the impugned order is justified. Hence the order of CIT to this extent is sustained. Appeal of the assessee is partly allowed. - I.T.A No. 731/Kol/2015 Assessment Year : 2010-11 - - - Dated:- 3-2-2017 - Hon ble Sri N.V.Vasudevan, JM And Shri M.Balaganesh, AM For the Appellant: Shri Soumitra Chowdhury, Advocate For the Respondent: Shri Niraj Kumar, CIT ORDER N.V.Vasudevan, This is an appeal by the Assessee against the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,74,93,510 Less: i) Depreciation as per I.T.Act 1,99,23,624 19,27,50,303 ii)Dividend income fully exempted u/s 10(34) of the Act 1,08,73,870 iii)Replantation Subsidy fully exempted u/s 10(30) of I.T.Act 9,87,630 iv) Profit on sale of green leaf 26,146 v)Long Term Capital gains(considered under Capital Gains) 1,50,00,000 vi)Expenses Allowed u/s 43B 9,62,398 4,77,73,668 Less:Proportionate profit on sale of Tea out of purchased Tea 14,49,76,635 Total Tea Manufactured (Kgs) 57,91,372 Total tea purchased (Kgs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002-03 21,30,399 1,13,99,547 GROSS TOTAL INCOME 12,73,98,908 Less:Deduction u/s 80-IB of I.T.Act for Manu Tea Factory (10th Yr.) 6,11,90,887 6,11,90,887 (Fully exempted since Rule 8 is not applicable as tea fully manufactured out of bought leaf) Deduction u/s 80-IE of I.T.Act for Narayanpur T.E.(2nd Yr. Profit of the Unit as per Form No.10CCB 6,75,65,742 Total Production of the unit 20,76,146Kgs. Production from own leaf 10,70,954 Kgs. Applying Rule 8, 60% of own tea is exempted 642,572Kgs Therefore exempted income not deductible mu/s 80IE : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- as follows : COMPUTATION OF INCOME U/S 115JB FOR THE ASSTT. YEAR 2010-11 Rs. Rs. Net Profit as per Profit Loss Account 17,52,56,793 Add:Expenses disallowed u/s 14A read with Rule 8D 6,15,436 Less: i)Dividend Income fully exempted u/s 10(34) of I.T.Act 1,08,73,870 ii) Replantation Subsidy fully exempted u/s 10(30) of I.T.Act 9,87,630 1,18,61,500 16,40,10,729 Less:Agricultural income exempted u/s 10(1) of 60% of Rs. 16,40,10,729 9,84,06,437 BOOK PROFIT 6,56,06,437 Income Tax under section 115JB of Income tax Act @15% 98,40,644 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment year 2010-11 57,94,602 Total MAT credit carry forward 1,09,10,581 7. The AO passed order of assessment u/s 143(3) of the Act dated 24.09.2012 wherein he computed the total income of the assessee under the normal provisions of the Act at a sum of ₹ 1,13,99,547/- on which the tax payable was ₹ 25,83,138/-. The tax payable was less than 15% of the book profit and therefore the assessee s total income and tax payable was not determined by the AO under the normal provisions of the Act but as per the provisions of section 115JB of the Act. While computing total income u/s.115JB of the Act, the AO accepted the computation of book profit u/s 115JB of the Act as given by the assessee. 8. The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of AO accepting the computation of book profits u/s.115JB of the Act as given by the assessee was erroneous and prejudicial to the interest of the revenue. The CIT therefore issued a show cause notice u/s 263 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such setting off of interest paid against received allowed by AO resulted in less disallowance of ₹ 11 ,46,644/- as per Rule 8D(2)(ii) and thereby possible underassessment of income of ₹ 11 ,46,644/-. 11. The plea of the assessee was that while computing the book profit u/s 115JB of the Act the assessee need not exclude the income that arises out of tea manufacturing from tea leaves that are purchased. It was the contention of the assessee that even the profit obtained from manufacturing and sale of tea from tea leaves purchased should be regarded as part of the composite income under the provisions of section 115JB of the Act. Only 40% of such composite income should be taken as book profits for the purpose of section 115JB of the Act and the action of AO in this regard was proper. The assessee in this regard placed reliance on the decision of the Hon ble Supreme Court in the case of Apollo Tyres vs CIT 255 ITR 273 (SC) wherein it was held that the AO while arriving at the book profits has limited power of making adjustments only to the extent specified in Explanation to section 115JB (2) of the Act. The assessee also pointed out that similar method has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 11,59,99,361/- and deduction u/s. 80IB 80IE is Rs.l0,78,44,875/Tax calculated on business income of ₹ 81,54,486/- came to ₹ 24,46,346/-. During the course of hearing, the Ld. A/R explained that since the tax paid by the assessee was on account of tax calculated u/s 115JB amounting to Rs. l,11 ,49,449/- which was higher than the tax on business income amounting to ₹ 24,46,346/-. It was further stated that therefore, even if the amount of DEPB receipt of ₹ 24,22,983/- was treated as being income not from industrial undertaking, it would have no tax effect. I have considered the matter. It may perhaps be correct that even if the amount of DEPB receipt is reduced from the computation of deduction u/s. 80IB 80IE, it would have no tax effect as the tax payable as per MAT provisions is higher. Nonetheless, the AO is directed to examine the matter and determine as to whether the DEPB licence receipts were received in course of the business eligible for deduction u/s. 80IB 80IE respectively. If this be the case, the assessee would be entitled to include the same in the computation of deduction u/s. 80IB 80IE. However, if the DEPB receipt is not connected w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects the AO has to make an adjustment referred to in Explanation to section 115J(1) of the Act. It was pointed out by him that the adjustment proposed by the CIT, in so far as excluding the income from manufacturing and sale of tea from tea leaves purchased from third parties is not one such adjustment permitted under the explanation to section 115JB(2) of the Act. He relied on the decision of the Hon ble Supreme Court in the case of Apollo Tyres (supra) and submitted that the AO cannot be permitted to make any adjustment to the profit as per the profit and loss account prepared in accordance with the provisions of the Companies Act, 1956 except to the extent permitted by the Explanation to section 115JB(2) of the Act. In respect of the income from sale of DEPB licence he reiterated the submissions made before CIT. In so far as the disallowance under Rule 8D(2) (ii) of the Rules is concerned the ld. Counsel submitted that the proposed direction of the CIT in the impugned order is acceptable to the assessee and to this extent the order u/s 263 of the Act may be upheld. In so far as the other aspects dealt in the order of 263 are concerned the ld. Counsel prayed that the same may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be seen from the aforesaid observation of the Hon ble High Court that it has been made clear that no rigid rule can be laid down and that facts of each case will have to be seen to come to a conclusion whether audit objection was sufficient to come to a conclusion that the order of the AO that is sought to be revised in exercise of powers u/s.263 of the Act was erroneous and prejudicial to the interest of the revenue. On the facts of the present case, we are satisfied that the CIT applied his mind independently and that he had not proceeded purely on the basis of any audit objection. Therefore the preliminary objection raised by the Assessee in this regard is hereby rejected. 20. We have given a very careful consideration to the rival submissions. It is no doubt true that the assessee had income from growing, manufacturing and sale of tea as well as income from tea leaves purchased from third parties which were processed /manufactured and sold by the assessee. In so far as the first category of income is concerned, the same has to be regarded as part of the composite income for the purpose of applying Rule 8(1) of the Rules. In so far as the second category of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 8 of IT Rules 1962 provides that in the case of income derived from sale of tea grown and manufactured by the seller in India, the income shall be computed as if they were income derived from business and 40% of such income shall deemed to be income liable to tax. It is thus clear from the reading of Rule 8(1) that 60% of the income computed as aforesaid is to be treated as agricultural income exempt u/s 10(1) of the Act. Since 60% of the income is exempt u/s 10(1) of the Act. The Assessee s claim is that 60% of the income which is exempt in terms of Rule 8 of the Rules, is nothing but income exempt u/s.10(1) of the Act and hence the same should be reduced from the book profits under Explanation 1 clause (ii) listing amounts to be reduced u/s 115JB of the Act. We are of the view that the stand taken by the revenue deserves acceptance. The CBDT in the context of Sec.115J of the Act had in CIRCULAR NO. 495 DATED 22ND SEPTEMBER, 1987 in para 36.4 taken the same view: 36.4 In the case of a tea company where income is derived from the sale of tea grown and manufactured by the seller, only 40 per cent of such income is liable to tax under r. 8 of the IT Rules, 1962. Sixty pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ? The Hon ble Supreme Court after extracting the provisions of Sec.115J of the Act found that the intent and purpose of Sec.115J of the Act, as explained by the Hon ble Finance Minister when he introduced the relevant Bill containing the said provisions, was that highly profitable companies were showing nil income for the purpose of income tax calling them as zero-tax companies and that the provisions of Sec.115J were being inserted so that all profitable companies pay some tax and hence a provision whereby every company will to have to pay a minimum corporate tax on the profits declared by it in its own accounts was being introduced. The Hon ble Cort thereafter held that for the said purpose, Section 115-J makes the income reflected in the companies books of accounts as the deemed income for the purpose of assessing the tax. The books of accounts of the company is prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The Hon ble Court held that while so looking into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion that can be reached that the computation of book profit as done by the Assessee is correct and cannot be termed as erroneous and prejudicial to the interest of the revenue. 24. We also find that similar computation has been accepted by the revenue even in A.Y.2012-13 to 2014-15. Orders of assessment for A.Y.2013-14 and 2014-15 have been passed after order passed u/s 263 of the Act. We therefore are of the view that the CIT was not justified in invoking the provision u/s 263 of the Act, in so far as it relates to determination of book profit u/s 115JB of the Act. 25. So far as the action of CIT in invoking Sec.263 of the Act on the ground that income from sale of DEPB license ought to have been reduced from the profits eligible for deduction u/s 80IB and 80IE of the Act, the ld. Counsel had pointed out that there will be no prejudicial to the revenue in as much as tax liability of the assessee is being determined u/s 115 JB of the Act on book profits and therefore the computation of total income under the normal provisions of the Act will have no effect on the tax payable by the assessee. This has been accepted by the CIT in the impugned order in para- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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