Tax Tribunal Upholds Excise Subsidy Exclusion from Book Profits, High Court Affirms

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Case Name:

Commissioner of Income Tax Vs Shyam Century Ferrous Ltd. (High Court of Calcutta)

ITA No.200 of 2009

Date: 22nd July 2016

Key Takeaways:

1. The Assessing Officer’s power to adjust book profits under Section 115JB (of Income Tax Act, 1961) is limited.
2. Reserves not created by debiting the profit and loss account cannot be added back to book profits.
3. The High Court affirmed the principle established in Apollo Tyres Ltd. vs. CIT, restricting the Assessing Officer’s jurisdiction in computing income under Section 115J (of Income Tax Act, 1961) (now 115JB).

Issue:

Whether the Income Tax Appellate Tribunal was correct in deleting the addition of Rs.3,60,20,761/- (excise subsidy) to the book profits as a reserve under Section 115JB (of Income Tax Act, 1961)?

Facts:

1. The case pertains to the assessment year 2004-05.
2. Shyam Century Ferrous Ltd. is a newly established undertaking eligible for benefits under Section 80IB (of Income Tax Act, 1961).
3. The company received an excise duty refund subsidy of Rs. 3,60,20,761/-.
4. Under normal computation, the total income after Section 80IB (of Income Tax Act, 1961) deduction was ‘Nil’.
5. The Assessing Officer added the subsidy amount to book profits under Section 115JB (of Income Tax Act, 1961) computation.
6. The CIT(A) upheld the Assessing Officer’s decision.
7. The Income Tax Appellate Tribunal allowed the assessee’s appeal and deleted the addition.

Arguments:

Assessee’s Argument:

• The auditors didn’t qualify the accounts in their report.
• The reserve wasn’t created by debiting the profit and loss account, so it shouldn’t be added back under Explanation 1(b) of Section 115JB (of Income Tax Act, 1961).
• The Assessing Officer overstepped his jurisdiction by going behind the accounts.

Revenue’s Argument:

• The addition was justified under Section 115JB (of Income Tax Act, 1961).
• The CIT(A) correctly upheld the Assessing Officer’s decision.

Key Legal Precedents:

The main precedent cited is Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273. The court quoted this judgment, which states that the Assessing Officer’s power is limited to examining whether the books of account are properly certified under the Companies Act and making increases and reductions as provided in the Explanation to Section 115J (of Income Tax Act, 1961) (now 115JB).

Judgement:

The High Court dismissed the revenue’s appeal and answered the question in favor of the assessee. The court agreed with the Income Tax Appellate Tribunal’s decision to delete the addition of the excise subsidy to book profits. The judgment affirmed that the Assessing Officer doesn’t 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 115JB (of Income Tax Act, 1961).

FAQs:

Q: What is Section 115JB (of Income Tax Act, 1961)?

A: Section 115JB (of Income Tax Act, 1961) deals with the Minimum Alternate Tax (MAT) on book profits of certain companies.

Q: Why couldn’t the Assessing Officer add the excise subsidy to book profits?

A: The subsidy wasn’t created as a reserve by debiting the profit and loss account, which is a requirement under Explanation 1(b) of Section 115JB (of Income Tax Act, 1961) for such additions.

Q: What’s the significance of the Apollo Tyres Ltd. case in this judgment?

A: It established the principle that the Assessing Officer’s power is limited in adjusting book profits under Section 115J (of Income Tax Act, 1961) (now 115JB), which was applied in this case.

Q: Does this judgment set a precedent for similar cases?

A: Yes, it reinforces the limitations on the Assessing Officer’s power to adjust book profits and the importance of following the specific provisions of Section 115JB (of Income Tax Act, 1961).

Q: What does this mean for companies receiving subsidies?

A: It suggests that subsidies not explicitly created as reserves in the profit and loss account may not be added back to book profits for MAT calculations.

The subject matter of challenge is a judgment and order dated 20th March, 2009 passed by the learned Income Tax Appellate Tribunal, “C” Bench, Kolkata in ITA No.694(Kol) of 2008 pertaining to the assessment year 2004-05 by which the learned Tribunal allowed the appeal preferred by the assessee.

The aggrieved revenue has come up in appeal. The following questions of law has been suggested by the revenue:-

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in deleting the addition of Rs.3,60,20,761/- being excise subsidy received to the book profits, as a reserve according to Explanation (b) to Section 115JB (of Income Tax Act, 1961) ?”

The facts and circumstance of the case briefly stated are as follows:-

The assessee is a newly established undertaking, which is entitled to the benefit under section 80IB (of Income Tax Act, 1961). It would appear from the assessment order that under the normal computation, the total income after giving deduction under section 80IB (of Income Tax Act, 1961) was ‘Nil’. In the computation under section 115JB (of Income Tax Act, 1961), the assessing officer added to the book profit a sum of Rs.3,60,20,761/- received on account of excise duty refund subsidy.

The order was unsuccessfully challenged by the assessee before the CIT(A). In a further appeal by the assessee, the learned Tribunal deleted the addition regard being had to the order passed during assessment of the previous year and the subsequent year as also referring to the Apollo Tyres Ltd.

In the case of Apollo Tyres Ltd. Vs. CIT. reported in (2002) 255 ITR 273, the jurisdiction of the assessing officer was held to be restricted as follows:-

“Therefore, we are of the opinion, the Assessing Officer while computing the income under section 115J (of Income Tax Act, 1961) has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer 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 115J (of Income Tax Act, 1961).”

Mr.Khaitan, learned senior advocate appearing for the assessee submitted that the auditors have not qualified the accounts in their report. He added that the assessing officer could have resorted to Clause (b) of Explanation 1 of Section 115JB (of Income Tax Act, 1961) provided the reserve had been created by debiting to the profit and loss account, which reads as follows:-

“(b) the amounts carried to any reserves, by whatever name called [other than a reserve specified under section 33AC (of Income Tax Act, 1961)]” Since the reserve was not created by debiting the profit and loss account, the assessing officer had no power to go behind the accounts.

The assessing officer, according to him, over stepped his jurisdiction which was also affirmed by the CIT(A).

The learned Tribunal, according to him, realising the mistake gave the benefit which was lawfully due to the assessee.

Mr. Agarwal, learned advocate, appearing for the revenue submitted that the authoritative pronouncement in the case of Apollo Tyres Ltd. Vs.CIT (supra) was binding and, therefore, the assessing officer and CIT(A) erred in not following that judgment.

In that view of the matter, the appeal is admitted but the question is answered in the affirmative and against the revenue.

The appeal, as such, is dismissed.

(GIRISH CHANDRA GUPTA, J.)

(ARINDAM SINHA, J.)