- (1.) THE Tribunal, Jodhpur, has submitted the statement of case and referred the following questions of law arising out of appellate order dt. 10th Jan., 1995 passed in IT Appeal No. 1047/Jp/1994 for asst. yr. 1990 -91 at the instance of assessee on an application for assessment (reference) under Section 256(1) of the IT Act, 1961. 'Q. No. 1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the order passed by the CIT under Section 263 was correct and thereby upholding the same ? Q. No. 2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue ?'
(2.) FACTS giving rise to this appeal are as under : That the assessee is a public limited company carrying on the business of textiles. For the asst. yr. 1990 -91 the assessee returned a net loss of Rs. 5,72,56,454. The assessment was completed under Section 143(3) of the Act on 22nd Oct., 1991 and the total income was assessed at nil. Thereafter, the CIT issued a notice under Section 263 calling upon the assessee as to why book profit may not be computed under Section 115J in accordance with the provisions of the Act at Rs. 3,26,16,000 and consequently 30 per cent of the same be not taken as taxable income as subject to tax. The Annex. 2 submitted on 22nd Oct., 1991 shows that in computing the total income, the assessee has shown net loss as per P&L; a/c at Rs. 31,65,800 and had claimed adjustment on account of depreciation at Rs. 8,29,95,990. The AO after considering claim to depreciation in respect of different assets finally allowed the depreciation at Rs. 8,71,81,294 and after making some adjustments, disallowed certain part of the claim made by the assessee in this regard. However, no additions were made on account of depreciation provided for by the assessee in his books of account, on newly installed plant and machinery. Determination of depreciation and its allowance in computing taxable income of the assessee in accordance with IT Act, 1961, was not found to be erroneous. The AO in assessment order dt. 20th Oct., 1991 had referred to Section 115J. After the assessment was completed, the CIT was of the opinion that the order dt. 22nd Oct., 1991 passed by the AO was erroneous and prejudicial to the interest of Revenue in considering the entire claim of depreciation on new machinery as provided in P&L; a/c which were duly audited, approved by AGM and certified by Registrar of Companies to be erroneous and prejudicial to interest of Revenue resorted to his jurisdiction under Section 263 of the IT Act and recomputed the book profit of company by disallowing the claim to depreciation. From the order dt. 21st March, 1994 passed by the CIT, it is revealed that the AO while making assessment under Section 143(3) and computing the total income under the provisions of the IT Act has not considered the applicability of Section 115J of the IT Act by way of reasoned order. So far as consideration of applicability of Section 115J is concerned, the AO has observed that applicability of Section 115J was also considered. The AO has further considered that certain additions are required to be made in the return of the assessee in its correct perspective and on the basis of which he has made certain modifications in computing the total income of assessee and also computing the amount for carrying forward of losses/unabsorbed depreciation to subsequent years with which we are not concerned here. The power of the CIT under Section 263 was exercised in respect of finding that the computation of book profit made under Section 115J by the AO was erroneous. For this purpose, he referred to following table about the information furnished by the assessee in his return regarding applicability of Section 115J : Profit as per P&L; a/c 31,65,800Less : Amount credited to P&L; a/c(i) Excess provisions written back 43,74,155(ii) Provisions for doubtful debt, written back 88,10,754 1,31,84,909(iii) Export profit under Section ( -) 1,00,19,109Tax due Nil. By referring to foot note 4(b) to Schedule XIII of the balance sheet, it came to the conclusion that it appears that P&L; a/c of the assessee did not reflect the correct book profit. The AO ought to have recomputed the book profit by reducing the inflated claim of depreciation to the extent of Rs. 436.35 lakhs and obviously the book profit would have come to Rs. 3,26,16,000 which according to the CIT ought to have been computed as book profit in terms of Section 115J and accordingly for 30 per cent of this recomputed book profit, the assessee ought to have been subjected to tax in terms of the provision which is popularly known as MAT. The principal ground for passing the order by CIT was that in terms of the Schedule XIV, the depreciation ought to have been allowed on pro rata basis and not in respect of complete year. Therefore, excess depreciation of Rs. 436.35 lakhs has been made and to that extent, the book profits are to be reduced. As a result of this conclusion, the CIT held the order of the AO relating to applicability of Section 115J to be erroneous and prejudicial to the interest of the Revenue and directed the AO to recompute the book profit as above and levy tax. On further appeal, the Tribunal has affirmed the order of the CIT overruling the objection of the assessee that book profit shown in P&L; a/c of the company prepared in terms of Part II and Part III of the Schedule VI of the Companies Act was not open for recomputation by any authority under IT Act except the permissible adjustments under Explanation to Section 115J. The CIT was in error in holding the assessment orders to be erroneous and prejudicial to interest of Revenue. The Tribunal found that the order of the AO if read in the light of applicability of Section 115J, no reference is found to Section 115J. In the entire order only observation is made about Section 115J, however, there is no discussion whatever in the order that Section 115J is not applicable. Section 115J being an important provision, some discussion in the order would not have been out of place. This sort of passing reference by the AO may lead a superior officer to think as to whether the subordinate officer must have considered all the aspects of law as well as facts or not in arriving at a particular conclusion. On these premises, the Tribunal found that the CIT was right in holding that the order of the AO was erroneous to that extent. The other objection of the assessee was that there was nothing on the basis of which the CIT could also find the order to be prejudicial to the interest of Revenue. The Tribunal went into various provisions of the Companies Act to find what is the purpose of maintaining accounts and what ought to be fair book profit in its opinion. The Tribunal was of the view that the condition laid down in Sub -section (1A) of Section 115J that the company has prepared its P&L; a/c in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956, has to be read conjoined with the provisions of Section 211(2) and other provisions of the Companies Act. The principal ground was that as per Schedule XIV the depreciation on new machines ought to have been allowed on pro rate basis and not for the whole year. In not adhering to Schedule XIV the profits declared by the company are not fair and true as per Section 212(2) of the Act. With this premise, the Tribunal held that what is fair and correct result is essence of finding book profit within the meaning of Sub -section (1A) of Section 115J. It said 'substantial provision of Section 212(2) is the true and fair result concept. Section 212(2) not only requires a company to show a true and fair view of profit or loss, but further, it also requires that while complying with requirement of Parts II and III of the Schedule VI of the Companies Act, the end result shall be subject to true and fair result concept. While applying Section 115J, enquiry into question whether book profit shown by the company is true and fair is permissible.' The AO according to the Tribunal is required to probe into the P&L; a/c of the company while considering the acceptability of book profit shown in P&L; a/c while applying the provisions of Section 115J. The Tribunal embarked on the discussion of other provisions of Companies Act rather than confine to Part II and Part III of Schedule VI to find out whether the book profit shown by the assessee satisfied the test of declaring 'true and fair result'. The Tribunal referred to the report of the auditors regarding P&L; a/c and balance sheet that the account of the company gives true and fair value result subject to the various notes appended to it, which included Note 4(b) under Schedule 13, which inter alia, reads as under : 'Depreciation on additions to fixed assets acquired and put to use after 1st Oct., 1987 together with existing looms in Sulzer Weaving Unit except temporary construction at Banswara, wherein the rate applied is 20 per cent has been provided on written down value method at the rates specified in Schedule XIV of the Companies Act, 1956, for the whole year instead of pro rata for the period of use. As a result of above, charge on account of depreciation for the year is higher by Rs. 426.35 lakhs, the resultant profit for the year is lower to this extent and came to the conclusion that by considering the various aspects of the accounting and the different requirements of the Companies Act for the purpose of providing of depreciation under Section 350 and the general guidelines issued by the Institute of Chartered Accountants, it came to the conclusion that by not providing pro rata depreciation in the new acquired assessment during the previous year relating to the assessment year. The books of account do not give true and fair value of the P&L; a/c of the company in terms of Section 211(2). This addition made in the book profit on account of depreciation charged referred to above added back to the book profit, otherwise shown in the P&L; a/c of the company and affirmed the order of the CIT passed under Section 263 of the IT Act.' The two questions which have been referred to us, in our opinion, are the aforesaid two aspects of the exercise of jurisdiction by the CIT under Section 263 namely, whether the order passed by AO is erroneous and secondly if it is erroneous, whether it is also prejudicial to the interest of the Revenue, as these are the two cumulative conditions, satisfaction of which alone gives the CIT to invoke Section 263 of the IT Act, 1961.
(3.) IT would require inquiry into the question through scope and ambit of the provisions related to Section 115J, which was then in force in the context of the object with which the provision had been enacted and the scope of the enquiry, which the AO can make into the book profits, disclosed in the books of account by the assessee in accordance with Part II and Part III to the Schedule VI of the Companies Act.;