Does the AO have the jurisdiction to go behind the net profit shown in the profit and loss account under Section 115-J?
The Income Tax Law provides special provisions to certain specific companies under Section 115J. According to the said section, in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991, is less than 30% of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit.
Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956.
Let us refer to the case of Apollo Tyres Ltd v. CIT (2002) where the question raised was could the AO while determining the book profits chargeable under section 115J question the correctness of the profit and loss account prepared by the assessee in accordance with the requirements of the Companies Act and certified by statutory auditors of the company.
Facts of the Case:
- The assessee company while determining its net profit for the relevant accounting year had provided for arrears of depreciation in its profit and loss account which according to the Revenue was not in accordance with Part II and III of Schedule VI to the Companies Act, 1956.
- Hence, the Assessing Officer (AO) while considering the case of the assessee company under Section 115-J recomputed the said profit and loss account of the company so as to exclude the provisions made for arrears of depreciation.
- The said action of the AO in questioning the correctness of the accounts maintained by the company was challenged by the company before the Income Tax Appellate Tribunal (ITAT).
- ITAT held that the AO had no authority to reopen the accounts of a company which was certified by the auditors of the company as having been maintained in accordance with the provisions of the Companies Act and which account was accepted in the General Meeting of the Company as well as by the Registrar of Companies.
- This view of the ITAT was not accepted by the High Court which held that the AO had the authority to examine whether the accounts of the company have been maintained in accordance with the requirement of Sub-section (1A) of Section 115-J and in that process if he found that the accounts of the company were not in accordance with the provisions of the Companies Act, he could make the necessary changes before proceeding to assess the company for tax under the Explanation to Section 115-J of the IT Act
Observations of Supreme Court (SC)
- For deciding this issue, SC examined the object of introducing Section 115-J which was deduced from the Budget Speech of the then Finance Minister of India made in the Parliament while introducing the said Section.
- The Speech showed that the income tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax.
- It was 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 made 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 made the income reflected in the company’s books of accounts as the deemed income for the purpose of assessing the tax.
- If the said provision was examined in the above background, SC noticed that the use of the words “in accordance with the provisions of Part II and III of Schedule VI to the Companies Act” was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company.
- While looking into the accounts of the company, an AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligated the company to maintain its account in a manner provided by the Companies Act.
- The same was to be scrutinised and certified by statutory auditors and would have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who had 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.
- Despite of all these procedures contemplated under the provisions of the Companies Act, SC found it difficult to accept the argument of the Revenue that it was still open to the AO to re-scrutinize this account and satisfy himself that these accounts were maintained in accordance with the provisions of the Companies Act.
- Reliance placed by the Revenue on Sub-section (1A) of Section 115-J in support of the above contention was misplaced.
- Sub-section (1A) of Section 115-J did not empower the AO 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, mandated the company to maintain its account in accordance with the requirements of the Companies Act which, according to SC, was 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’s income for levy of income-tax.
- Beyond that, SC did not think that the said sub-section empowered the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act.
- If the statute mandated that income prepared in accordance with the Companies Act should be deemed income for the purpose of Section 115-J of the Act, then it should be that income which was acceptable to the authorities under the Companies Act.
- There could not be two incomes one for the purpose of Companies Act and another for the purpose of income tax both maintained under the same Act.
- If the legislature intended the AO 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 was held that view taken by the tribunal is correct and the High Court had erred in reversing the said view of the tribunal.
Therefore, AO while computing the income under Section 115-J has only the power of examining whether the books of account are certifies by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. AO 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.