AO Cannot Alter Net Profit In Profit & Loss Account Except Under Explanation To S.115J Of Income Tax Act: Bombay High Court

The Division Bench consists of Chief Justice Alok Aradhe and Justice M.S. Karnik observed that “Section 115J of the 1961 Act mandates that in case of a company whose total income as computed under the provisions of the Act 1961 is less than 30% of the book profit, the total income chargeable to tax will be 30% of the book profit, as shown in the profit and loss account prepared in accordance with the provisions of Part II and III of Schedule VI of the Companies Act 1956, after certain adjustments.”

“Explanation to Section 115J (1A) provides that net profit so computed is to be increased by certain amounts and it is to be reduced by certain amounts which are mentioned therein. The provision does not contain any reference to concept of 'above the line' or 'below the line',” added the bench.

In this case, the assessee/appellant is a public limited company and is engaged in the manufacture of Jeeps, Tractors, Implements and other products.

The assessee filed the return of income for the period from 1^st April 1989 to 31st March 1990 (Assessment Year 1990-91) declaring a total income of Rs.3,50,20,837/-.

The Assessing Officer, by an order of assessment held that the assessee had placed deposits with certain concerns, who have declined to pay the deposits and interest on the ground that the deposits are linked to the amounts provided to M/s. Machinery Manufacturers Corporation Ltd. (MMC) by them, which have now become irrecoverable as MMC was directed to be wound-up by this Court by an order passed on 16th April 1989.

It was further held that amount of deposit and interest due to the assessee has been adjusted by various concerns against loan given by them to MMC. Therefore, the assessee cannot claim to have not recovered its dues.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals), who by an order held that the assessee did not incur the expenditure to carry on the business and the business of the MMC was not the business carried out by the assessee. Therefore, the expenses incurred by the assessee are not admissible under Section 37(1) of the 1961 Act.

Being aggrieved by the aforesaid order, the assessee preferred an appeal before the Income Tax Appellate Tribunal which was dismissed.

The assessee submitted that it is not open for the Assessing Officer to re-scrutinize the company's income and as the Assessing Officer, while computing the income under Section 115J of the 1961 Act, has limited power to examine whether the books of account are certified by the authorities under the Companies Act and having been properly maintained in accordance with the Companies Act.

The revenue submitted that the amount was shown to be debited in the profit and loss account below the line and therefore, it cannot be said that the profit and loss account was prepared as per part II and III of Schedule VI of the Companies Act and therefore, it was not open for the authorities to interfere with the same.

The claim of the assessee for the expenditure of 42.89 lac and the deduction of write-off Rs.622.01 lac being the amount lent to MMC including interest due and advances for purchase of machinery given in the course of dealing with MMC was disallowed by the authorities under the Act for the preceding year i.e. the year 1989-90, noted the bench.

The bench referred to the case of Apollo Tyres Ltd. V. Commissioner Of Income Tax [2002] 255 ITR 273 (SC) where it was held that “sub section (1A) of Section 115J mandates the company to maintain its accounts in accordance with the requirements of Companies Act and is bodily lifted from the Companies Act into the Act of 1961 for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax.”

After referring to above case, the bench observed that the Assessing Officer does not have jurisdiction to go behind the net profit shown in profit and loss account except to the extent provided in Explanation to Section 115J.

In view of the above, the bench allowed the appeal.

Case Title: M/s. Mahindra & Mahindra Ltd. v. Commissioner of Income-tax

Case Number: INCOME TAX APPEAL NO. 416 OF 2003

Counsel for Appellant/ Assessee: J. D. Mistri

Counsel for Respondent/ Department: N. C. Mohanty

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