New Oriental Travellers Ltd, Hyderabad V. DCIT, Hyderabad

ITA 132/HYD/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3053 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-06-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 27-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA SINHA
• Assessee Lawyers: T S AJAY; V RAMAKRISHNA
• Keywords: Capital asset; Depreciation; Deemed to accrue or arise in india; Capital receipt; Unabsorbed depreciation; Set aside
• Section: 115JB; 195; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA. NO. 132/HYD/2010 ASSESSMENT YEAR 2006-2007 NEW ORIENTAL TRAWLERS P. LTD. 1 ST FLOOR, 128 SRINAGAR COLONY, HYDERABAD. PAN AAACN-6933-G VS. DCIT 16 (1) HYDERABAD (APPELLANT) (RESPONDENT) FOR APPELLANT : S/SHRI V.RAMAKRISHNA & TS. AJA Y FOR RESPONDENT : SMT. VASUNDHARA SINHA ORDER PER N.R.S GANESAN, J.M. 1. THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT (A)-V, HYDERABAD DATED 18-1-2010 AND PERTAI NS TO THE ASSESSMENT YEAR 2006-2007. THE ONLY ISSUE ARISES FO R CONSIDERATION IS ADDITION OF RS.15,35,10,501/- TO THE BOOK PROFIT ON ACCOUNT OF RE- POSSESSION OF THE VESSEL BY THE CREDITORS. 2. SHRI V. RAMAKRISHNA, LEARNED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF FISHING AND EXPORT. IN THE COURSE OF ITS BUSINESS A CTIVITY, THE ASSESSEE PURCHASED SIX VESSELS FROM M/S. WELL JOINT SHIPPING LTD. HONG KONG ON DIFFERED PAYMENT GUARANTEE BASIS. THE ASSESSEE HAS TO REPAY THE COST OF THE VESSELS ON INSTALLMENT BASIS. ACCORDING TO THE LEARNED REPRESENTATIVE, THE VENDOR RE-POSSESSED THE VESSEL IN PURSUANCE OF AGREEMENT FOR NON- PAYMENT OF THE INSTALLMENTS. AS ON 1-4-2005 THE TOT AL AMOUNT DUE TO THE CREDITOR FOR PURCHASE OF THE VESSEL WAS RS.29,89,25 ,521/-. THE RETURNED ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 2 DOWN VALUE OF THE VESSEL AS ON 1-4-2005 WAS RS.7,14 ,35,063/-. ACCORDINGLY, THE ASSESSEE COMPUTED THE SHORT TERM C APITAL GAIN OF RS.22,74,90,458/- AFTER SETTING-OFF OF THE DEPRECIA TION. THE ASSESSEE COMPUTED THE PROFIT AT RS.37,54,671/-. HOWEVER, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE IS NOT ENTITLED FOR SET-OFF OF DEPRECIATION AS CLAIMED IN THE RETURN OF INCOME. ACCORDINGLY, DISAL LOWED PART OF THE DEPRECIATION CLAIMED BY THE ASSESSEE. THE ASSESSIN G OFFICER THEREAFTER COMPUTED THE CAPITAL GAIN AT RS.15,35,10,501/-. THE ASSESSING OFFICER FOUND THAT THIS AMOUNT OF RS.15,35,10,501/- WAS NOT FORM PART OF THE PROFIT AND LOSS ACCOUNT. THEREFORE, THE PROFIT AND LOSS ACCOUNT WAS NOT PREPARED IN ACCORDANCE WITH PART II & III OF SCHED ULE VI TO COMPANIES ACT. ACCORDINGLY, THE ASSESSING OFFICER RECOMPUTED THE BOOK PROFIT BY MAKING AN ADDITION OF RS.15,35,10,501/-. 3. ACCORDING TO THE LEARNED REPRESENTATIVE FOR THE ASSESSEETHE ASSESSING OFFICER HAS NO POWER TO RE-COMPUTE THE B OOK PROFIT ONCE IT IS CERTIFIED BY THE AUDITORS AS PREPARED UNDER PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT AND APPROVED BY TH E SHARE HOLDERS. THE ASSESSING OFFICER CANNOT INVESTIGATE INTO THE B OOK PROFIT ONCE IT IS APPROVED BY THE SHAREHOLDERS. THEREFORE, ACCORDING TO THE LEARNED REPRESENTATIVE THE RE-COMPUTATION OF BOOK PROFIT IS CONTRARY TO THE JUDGMENT OF THE APEX COURT IN THE CASE OF APOLLO TY RES LTD. VS. CIT (2002) 255 ITR 273 (S.C.). ACCORDING TO THE LEARNED REPRES ENTATIVE IT IS NOT A SALE OF CAPITAL ASSET. ONLY THE RECEIPT ON SALE OF CAPITAL RECEIPT ALONE REQUIRED TO BE ROUTED THROUGH THE PROFIT AND LOSS A CCOUNT. IT IS A CASE OF RE-POSSESSION OF THE VESSELS FOR NON-PAYMENT OF THE INSTALLMENT. THEREFORE, THE ASSESSEE HAS NOT RECEIVED ANYTHING. THE TOTAL AMOUNT PAYABLE BY THE ASSESSEE TO THE VENDOR WAS TAKEN AS VALUE OF THE VESSEL AND IT WAS DEDUCTED FROM THE RETURNED DOWN VALUE. T HEREFORE, IN FACT THE ASSESSEE HAS NOT RECEIVED ANYTHING. THE OUTSTANDING AMOUNT PAYABLE BY THE ASSESSEE IS TAKEN AS NOTIONAL VALUE OF THE VESS EL. THEREFORE, SUCH ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 3 NOTIONAL AMOUNT AFTER DEDUCTING WRITTEN DOWN VALUE, NEED NOT BE ROUTED THROUGH PROFIT AND LOSS ACCOUNT. THE LEARNED REPRE SENTATIVE FURTHER SUBMITTED THAT EVEN THE PURCHASE OF THE VESSEL WAS NOT DEBITED IN THE PROFIT AND LOSS ACCOUNT. THEREFORE, ACCORDING TO TH E LEARNED REPRESENTATIVE THE ASSESSING OFFICER IS NOT JUSTIFI ED IN RE-COMPUTING THE BOOK PROFIT BY MAKING AN ADDITION OF RS.15,35,10,50 1/-. 4. ON THE CONTRARY, SMT. VASUNDHARA SINHA LEARNED DR SUBMITTED THAT THE ASSESSEE IS BOUND TO PREPARE THE PROFIT AND LOSS ACCOUNT AS PER PART II & III OF SCHEDULE VI TO THE COMPANIES ACT. REFERRING TO PARA II TO SCHEDULE VI OF THE COMPANIE S ACT MORE PARTICULARLY CLAUSE 2 (B), THE LEARNED REPRESENTAT IVE FOR THE REVENUE SUBMITTED THAT THE ASSESSEE HAS TO DISCLOSE EVERY M ATERIAL FEATURES, INCLUDING CREDIT OR RECEIPT AND DEBITS OR EXPENSES IN RESPECT OF NON- RECURRING TRANSACTION OR TRANSACTION OF AN EXCEPTIO NAL NATURE. IN VIEW OF SPECIFIC CLAUSE IN CLAUSE 2 (B) OF PART II OF SCHED ULE VI TO THE COMPANIES ACT THE SHORT TERM CAPITAL GAIN WHICH AROSE DUE TO RE-POSSESSION OF THE VEHICLE HAS TO BE ROUTED ONLY THROUGH PROFIT AND LO SS ACCOUNT. SINCE THE ASSESSEE HAS NOT SHOWN THE AMOUNT IN THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF RE-POSSESSION OF THE VESSEL, THE PROFIT AND LOSS ACCOUNT WAS NOT PREPARED IN ACCORDANCE WITH PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. THEREFORE, THE JU DGMENT OF THE APEX COURT IN THE CASE OF APOLLO TYRES (SUPRA) MAY NOT B E APPLICABLE TO THE FACTS OF THIS CASE. THE LEARNED REPRESENTATIVE PLAC ED HER RELIANCE ON THE DECISION OF MUMBAI BENCH OF THIS TRIBUNAL IN THE CA SE OF DCIT VS. BOMBAY DIAMOND COMPANY (ITA. NO. 7488/M/07 DATED 30 TH NOVEMBER, 2009) AND SUBMITTED THAT PART II OF SCHEDULE VI TO COMPANIES ACT REQUIRES THE ASSESSEE TO PREPARE PROFIT AND LOSS AC COUNT DISCLOSING EVERY MATERIAL FEATURE INCLUDING CREDITS OR RECEIPTS. IN THE CASE BEFORE THE MUMBAI BENCH, THE ASSESSEE EARNED A CAPITAL PROFIT OF RS.10.31 CRORES ON SALE OF RIGHTS IN IMMOVABLE PROPERTY. THE SAID P ROFIT WAS DIRECTLY ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 4 CREDITED TO THE CAPITAL RESERVE IN THE BALANCE SHEE T INSTEAD OF ROUTING THE SAME THROUGH THE PROFIT AND LOSS ACCOUNT. THEREFORE , THE MUMBAI BENCH OF THIS TRIBUNAL HELD THAT SINCE THE CAPITAL PROFIT WAS NOT ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT AND IT WAS DIRECTLY CRE DITED TO THE CAPITAL RESERVE IN THE BALANCE SHEET PROFIT AND LOSS ACCOUN T WAS NOT PREPARED AS PER PART II OF SCHEDULE VI TO THE COMPANIES ACT. TH EREFORE, THE JUDGMENT OF THE APEX COURT IN APOLLO TYRES LTD. (SUPRA) IS N OT APPLICABLE. ACCORDINGLY, IT WAS HELD THAT THE ASSESSING OFFICER HAS RIGHTLY RECOMPUTED THE BOOK PROFIT. IN VIEW OF THIS DISCUSS ION OF THE MUMBAI BENCH OF THIS TRIBUNAL IN BOMBAY DIAMOND COMPANY (S UPRA), ACCORDING TO THE LEARNED DR THE ASSESSING OFFICER HAS RIGHTLY RECOMPUTED THE BOOK PROFIT BY MAKING AN ADDITION OF RS. 15,35,10,501/-. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIALS AVAILABLE ON RECORD. ADM ITTEDLY, THE ASSESSEE IS IN THE BUSINESS OF DEEP SEA FISHING AND EXPORT. IN THE COURSE OF ITS BUSINESS ACTIVITY THE ASSESSEE PURCHASED SIX VESSEL S FROM M/S. WELL JOINT SHIP LTD. HONG KONG ON DEFERRED PAYMENT SCHEME. THE PURCHASE PRICE IS REPAYABLE ON INSTALLMENT BASIS. FROM THE MATERIALS AVAILABLE ON RECORD, IT APPEARS THAT ASSESSEE HAS REPAID THE INSTALLMENT RE GULARLY TILL 31-3-03. THEREAFTER, THE ASSESSEE COULD NOT REPAY THE INSTAL LMENTS FOR VARIOUS REASONS. THEREFORE, THE VESSELS WERE RE-POSSESSED I N TERMS OF THE AGREEMENT BY THE VENDOR M/S. WELL JOINT SHIPPING LT D. THE LOAN OUTSTANDING AS ON 1-4-2005 IS ADMITTEDLY RS.29,89,2 5,521/-. THE RETURN DOWN VALUE OF THE VESSELS AS ON 1-4-2005 WAS RS.7,1 4,35,023/-. THE ASSESSEE COMPUTED THE UNABSORBED DEPRECIATION FROM THE ASSESSMENT YEAR 1996-97 TO ASSESSMENT YEAR 2005-2006 AT RS.23, 41,68,463/-. HOWEVER, THE ASSESSING OFFICER FOUND THAT THE ASSES SEE HAS NOT CARRIED ON THE BUSINESS FOR THE ASSESSMENT YEARS 2004-05 AN D 2005-06. ACCORDINGLY, DISALLOWED THE CLAIM OF DEPRECIATION F OR THE ASSESSMENT YEAR 2004-2005 AND 2005-06. ACCORDINGLY, THE ASSESSING O FFICER RECOMPUTED ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 5 THE CLAIM OF DEPRECIATION AT RS.17,92,08,674/- INST EAD OF RS.23,41,68,461/- AS CLAIMED BY THE ASSESSEE. THE ASSESSING OFFICER ACCORDINGLY RECOMPUTED THE SHORT TERM CAPITAL GAIN AT RS.15,35,10,501/- THE ASSESSING OFFICER FURTHER FOUND THAT THE ASSESS EE HAS DIRECTLY CREDITED THE SO-CALLED CAPITAL GAIN DIRECTLY TO THE CAPITAL RESERVE INSTEAD OF ROUTING THE SAME THROUGH PROFIT AND LOSS ACCOUNT . THEREFORE, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS NOT P REPARED THE PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB UNDER PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. ACCORDINGLY, THE ASSESSING OFFICER REJECTED THE CON TENTION OF THE ASSESSEE AND RE-COMPUTED THE BOOK PROFIT BY MAKING AN ADDITI ON OF RS.15,35,10,501/-. 6. THE QUESTION ARISES FOR CONSIDERATION IS WHEN T HE BOOK PROFIT WAS COMPUTED UNDER SECTION 115JB AND THE CORRECTNES S OF THE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE WAS CERTIFIED BY THE AUDITORS AS HAVING BEEN PREPARED IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT, CAN THE ASSESSING OFFICER QUESTION ITS CORRECTNESS ? 7. WE FIND THAT THIS QUESTION WAS ELABORATELY CONS IDERED BY THE APEX COURT IN THE CASE OF APOLLO TYRES LTD. (SUPRA) . THE APEX COURT WHILE CONSIDERING THE PROVISIONS OF SECTION 115J OF THE I .T. ACT FOUND THAT THE ASSESSING OFFICER WAS NOT EMPOWERED TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO ENTRIES MADE IN THE BOOKS OF ACCOUNTS OF THE COMPANY. THE APEX COURT FOUND THAT WHEN THE INCOME TAX ACT MANDA TES THE ASSESSEE TO COMPUTE THE INCOME IN ACCORDANCE WITH COMPANIES ACT, THE SAME SHALL BE ACCEPTED BY THE INCOME TAX AUTHORITIES. ON CE THE INCOME COMPUTED UNDER THE PROVISIONS OF COMPANIES ACT IS A CCEPTABLE FOR THE PURPOSE OF COMPANIES ACT, THE SAME HAS TO BE ACCEPT ED FOR THE PURPOSE OF INCOME TAX ACT ALSO. THE SUPREME COURT FURTHER O BSERVED THAT THERE ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 6 CANNOT BE TWO INCOMES ONE FOR THE PURPOSE OF COMPAN IES ACT AND ANOTHER FOR THE PURPOSE OF COMPANIES ACT, BOTH MAIN TAINED UNDER THE SAME ACT THEREFORE, THE APEX COURT IN CATEGORICAL T ERMS HELD THAT THE ASSESSING OFFICER DOES NOT HAVE JURISDICTION TO GO BEYOND THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN EXPLANATION TO SECTION 115J. FOR THE PURPOSE OF CON VENIENCE WE REPRODUCE THE RELEVANT OBSERVATIONS OF THE APEX COU RT AS UNDER : (PAGE 279 AND 280 OF ITR) IF WE EXAMINE THE SAID PROVISION IN THE ABOVE BACKGROUND, WE NOTICE THAT THE USE OF THE WORDS IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI OF COMPANIES ACT WAS MADE FOR THE LIMI TED PURPOSE OF EMPOWERING THE ASSESSING AUTHORITY TO RE LY UPON THE AUTHENTIC STATEMENT OF ACCOUNTS OF THE COMPANY. WHILE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY, AN ASSESSING OFFICER UNDER THE INCOME TAX ACT HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT WH ILE OBLIGATES THE COMPANY TO MAINTAIN ITS ACCOUNT IN A MANNER PROVIDED BY THE COMPANIES ACT AND THE SAME T O BE SCRUTINIZED AND CERTIFIED BY THE STATUTORY AUDIT ORS AND WILL HAVE TO BE APPROVED BY THE COMPANY IN ITS GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE T HE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLIGATI ON ALSO TO EXAMINE AND SATISFY THAT THE ACCOUNTS OF TH E COMPANY ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT. IN SPITE OF ALL THESE PROCEDURES CONTEMPLATED UNDER THE PROVISIONS OF THE COMPANIES ACT, WE FIND IT DIFFICULT TO ACCEPT THE ARGUMENT OF THE REVENUE THAT IT IS STILL OPEN TO FI LE ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 7 ASSESSING OFFICER TO RE-SCRUTINISE THIS ACCOUNT AND SATISFY HIMSELF THAT THESE ACCOUNTS HAVE BEEN MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT. IN OUR OPINION, RELIANCE PLACED BY T HE REVENUE ON SUB-SECTION (1A) OF SECTION 115J OF THE INCOME TAX ACT IN SUPPORT OF THE ABOVE CONTENTION I S MISPLACED. SUB-SECTION (1A) OF SECTION 115J DOES NO T EMPOWER THE ASSESSING OFFICER TO EMBARK UPON A FRES H INQUIRY IN REGARD TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. THE SAID SUB-SECTION, AS A MATTER OF FACT, MANDATES THE COMPANY TO MAINTAIN IT S ACCOUNT IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT WHICH MANDATE, ACCORDING TO US, IS BODILY LIFTED FROM THE COMPANIES ACT INTO THE INCOM E-TAX ACT FOR THE LIMITED PURPOSE OF MAKING THE SAID ACCO UNT SO MAINTAINED AS A BASIS FOR COMPUTING THE COMPANY S INCOME FOR LEVY OF INCOME-TAX. BEYOND THAT, WE DO N OT THINK THAT THE SAID SUB-SECTION EMPOWERS THE AUTHOR ITY UNDER THE INCOME-TAX ACT TO PROBE STATUTE MANDATES THAT INCOME PREPARED IN ACCORDANCE WITH THE COMPANI ES ACT SHALL BE DEEMED INCOME FOR THE PURPOSE OF SECTI ON 115J OF THE ACT, THEN IT SHOULD BE THAT INCOME WHIC H IS ACCEPTABLE TO THE AUTHORITIES UNDER THE COMPANIES A CT. THERE CANNOT BE TWO INCOMES ONE FOR THE PURPOSE OF THE COMPANIES ACT AND ANOTHER FOR THE PURPOSE OF INCOME - TAX BOTH MAINTAINED UNDER THE SAME ACT. IF THE LEGISLATURE INTENDED THE ASSESSING OFFICER TO REASS ESS THE COMPANYS INCOME, THEN IT WOULD HAVE STATED IN SECTION 115J THAT INCOME OF THE COMPANY AS ACCEPTE D BY THE ASSESSING OFFICER. IN THE ABSENCE OF THE SA ME AND ON THE LANGUAGE OF SECTION 115J, IT WILL HAVE T O HELD ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 8 THAT VIEW TAKEN BY THE TRIBUNAL IS CORRECT AND THE HIGH COURT HAS ERRED IN REVERSING THE SAID VIEW OF THE TRIBUNAL. THEREFORE, WE ARE OF THE OPINION, THE ASSESSING OFF ICER WHILE COMPUTING THE INCOME UNDER SECTION 115J 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 DIFFEREN TLY, 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 EXPLAN ATION TO SECTION 115J. 8. IN VIEW OF THE ABOVE JUDGMENT OF THE APEX COURT , IT IS OBVIOUS THAT THE ASSESSING OFFICER CANNOT RE-SCRUTI NIZE THE ACCOUNT FOR THE PURPOSE OF SATISFYING HIMSELF THAT THE ACCOUNTS HAVE BEEN MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF COMPANIES ACT. THE AUTHORITY OF THE ASSESSING OFFICER IS ONLY TO VERIFY WHETHER THE BOO KS OF ACCOUNTS ARE CERTIFIED BY THE AUDITORS AS REQUIRED UNDER THE COM PANIES ACT AND HE CANNOT GO BEYOND THAT. 9. WE FIND THAT THE APEX COURT HAD AN ANOTHER OCCA SION TO CONSIDER AN IDENTICAL SITUATION IN CIT VS. HCL COMN ET SYSTEMS AND SERVICES LTD. (2008) 305 ITR 409. THE APEX COURT AF TER REFERRING TO ITS EARLIER OBSERVATION IN APOLLO TYRES LTD. (SUPRA) RE ITERATED THE POSITION BY HOLDING THAT WHEN THE BOOK PROFIT WAS COMPUTED U/S 115JA OF IT ACT, THE ASSESSING OFFICER DOES NOT HAVE JURISDICTION TO GO BEYOND THE NET PROFIT ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 9 SHOWN IN THE PROFIT AND LOSS ACCOUNT AS CERTIFIED B Y THE AUDITORS AND PASSED BY THE COMPANY IN GENERAL MEETING. FOR THE P URPOSE OF CONVENIENCE, WE REPRODUCE THE RELEVANT OBSERVATION AS REPORTED IN 305 ITR 409 AT PAGE 413 - FROM THE ABOVE, IT IS EVIDENT THAT THE ASSESSING O FFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT, WHICH ARE CERTIFI ED BY THE AUDITORS AND PASSED BY THE COMPANY IN THE GENERAL M EETING. THE ASSESSING OFFICER HAS ONLY THE POWER OF EXAMINI NG WHETHER THE BOOKS OF ACCOUNT ARE DULY CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AND WHETHER SUC H BOOKS HAVE BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH TH E COMPANIES ACT. THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEYOND THE NET PROFIT SHOWN IN T HE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE E XPLANATION. THEREAFTER, THE ASSESSING OFFICER HAS TO MAKE ADJUS TMENT PERMISSIBLE UNDER THE EXPLANATION GIVEN IN SECTION 115JA OF THE 1961 ACT. IT MAY BE NOTED THAT THE ADJUSTMENTS REQUIRED TO BE MADE TO THE NET PROFIT DISCLOSED IN THE PROFIT A ND LOSS ACCOUNT FOR THE PURPOSES OF SECTION 349 OF THE COMP ANIES ACT ARE QUITE DIFFERENT FROM THE ADJUSTMENT REQUIRED TO BE MADE UNDER THE EXPLANATION TO SECTION 115JA OF THE 1961 ACT. FOR THE PURPOSES OF SECTION 115JA, THE ASSESSING OFFICE R CAN INCREASE THE NET PROFIT DETERMINED AS PER THE PROFI T AND LOSS ACCOUNT PREPARED AS PER PARTS II AND III OF SCHEDUL E VI TO THE COMPANIES ACT ONLY TO THE EXTENT PERMISSIBLE UNDER THE EXPLANATION THERETO. ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 10 10. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER CA NNOT RE- SCRUTINIZE THE ACCOUNTS IN ORDER TO SATISFY HIMSELF WHETHER IT WAS PREPARED IN ACCORDANCE WITH COMPANIES ACT OR NOT. 11. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGME NT OF THE MUMBAI BENCH OF THIS TRIBUNAL IN BOMBAY DIAMOND CO. LTD. (SUPRA). THE MUMBAI BENCH OF THIS TRIBUNAL AFTER REFERRING T O THE JUDGMENT OF THE APEX COURT IN APOLLO TYRES LTD. (SUPRA) FOUND THAT THE JUDGMENT OF THE APEX COURT IN APOLLO TYRES LTD. (SUPRA) IS NOT APPL ICABLE WHEN THE BOOK PROFIT WAS COMPUTED U/S 115JB OF THE ACT. WHILE DI STINGUISHING THE JUDGMENT OF THE APEX COURT, THE MUMBAI BENCH OF THI S TRIBUNAL HAS OBSERVED (ITA. NO. 7488/M/07 DATED 20 TH NOVEMBER, 2009) AS UNDER AT PARA 21 OF ITS ORDER: 21. FROM THE ABOVE IT IS CLEAR THAT THE ISSUE BEFO RE THE HONBLE SUPREME COURT WAS UNDER THE PROVISIONS OF S ECTION 115J AND WHEN THE ACCOUNTS OF THE COMPANY ARE PREPA RED IN ACCORDANCE WITH THE REQUIREMENTS OF PART II AND PAR T III OF SCHEDULE VI TO THE COMPANIES ACT. HOWEVER, IN THE I NSTANT CASE THE ISSUE IS RELATING TO THE PROVISIONS OF SECTION 115JB AND THE ACCOUNTS ARE NOT PREPARED IN ACCORDANCE WITH THE PR OVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIE S ACT. MERELY BECAUSE THE AUDITORS HAVE CERTIFIED THE ACCOUNTS WH ICH APPARENTLY ARE NOT PREPARED IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT, THEREFORE, THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRE S LTD., IN OUR OPINION IS NOT APPLICABLE TO THE FACTS OF THE PRESE NT CASE. 12. THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF BOMBAY DIAMOND CO. (SUPRA) DISTINGUISHED THE JUDGMENT OF T HE APEX COURT IN APOLLO TYRES LTD. (SUPRA) ON TWO COUNTS VIZ., (A) T HE JUDGMENT OF THE SUPREME COURT RELATES TO SECTION 115J. THEREFORE, I T IS NOT APPLICABLE TO ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 11 SECTION 115JB (B) IN THE CASE BEFORE THE APEX COURT THE ACCOUNTS OF THE COMPANY WAS PREPARED IN ACCORDANCE WITH REQUIREMENT OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. THE B OMBAY BENCH FURTHER FOUND THAT IN THE CASE BEFORE THEM THE ACCOUNTS ARE NOT PREPARED IN ACCORDANCE WITH PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. 13. LET US NOW EXAMINE WHETHER THERE IS ANY DIFFER ENCE BETWEEN THE PROVISIONS OF SECTION 115J AND 115JB OF THE ACT FOR THE PURPOSE OF COMPUTING BOOK PROFIT? 13.1. SECTION 115J REQUIRES EVERY ASSESSEE TO PREP ARE ITS PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. SECTION 115J ( 1A) READS AS FOLLOWS : (1A) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSE OF THIS SECTION, PREPARE ITS PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANC E WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956) 13.2. WE HAVE ALSO CAREFULLY GONE THROUGH SECTION 115JB O F THE ACT. FOR THE PURPOSE OF CONVENIENCE WE ARE REPRODUC ING SECTION 115JB (2) OF THE I.T. ACT. 115JB (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSE OF THIS SECTION, PREPARE ITS PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH T HE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT, 1956 (1 OF 1956. PROVIDED THAT WHILE PREPARING THE ANNUAL ACCOUNTS I NCLUDING PROFIT AND LOSS ACCOUNT, - (I) THE ACCOUNTING POLICIES; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT; ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 12 (III) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL BE THE SAME AS HAVE BEEN ADOPTE D FOR THE PURPOSES OF PREPARING SUCH ACCOUNTS INCLUDI NG PROFIT AND LOSS ACCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 195 6 (1 OF 1956) ; PROVIDED FURTHER THAT WHERE THE COMPANY HAS ADOPTED OR ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHICH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THIS ACT, - (I) THE ACCOUNTING POLICIES; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT; (III) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL CORRESPOND TO THE ACCOUNTING POLICIES, ACCOUNTING STANDARDS AND THE METHOD AND RATES FOR CALCULATING THE DEPRECIATION WHICH HAVE B EEN ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFI T AND LOSS ACCOUNT FOR SUCH FINANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLING WITHIN THE RELEVANT PRE VIOUS YEAR. 14. THE ONLY DIFFERENCE BETWEEN 115J (1A) AND 115J B (2) IS THAT THE LEGISLATURE HAS INCORPORATED TWO PROVISOS IN SE CTION 115JB (2). THE PROVISO SAYS THAT WHILE PREPARING ANNUAL ACCOUNTS A ND PROFIT AND LOSS ACCOUNT, THE ACCOUNTING POLICIES, ACCOUNTING STANDA RD AND METHOD AND RATES ADOPTED FOR CALCULATING DEPRECIATION SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING SUCH ACCOUNTS INCLUDING THE PROFIT AND LOSS ACCOUNT. SO THE LEGISLATURE HAS CLARIFIED IN PROVISO TO SECTION 115JB (2) THAT THE ACCOUNTING PRACTICE AND THE RATE ADOPTED FOR DEPRECIATION SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING THE ACCOUNTS INCLUDING PROFIT AND LOSS AC COUNT UNDER THE COMPANIES ACT. IN THE 2 ND PROVISO, IT IS FURTHER CLARIFIED THAT THE FINANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLI NG WITHIN THE RELEVANT PREVIOUS YEAR SHALL BE TAKEN INTO CONSIDERATION IN CASE THE COMPANY ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 13 ADOPTS FINANCIAL YEAR UNDER COMPANIES ACT WHICH IS DIFFERENT FROM PREVIOUS YEAR UNDER INCOME TAX ACT. THEREFORE, THE INTENTION OF THE LEGISLATURE IS VERY CLEAR THAT THE BOOK PROFIT HAS TO BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 FOR SECTION 115J AND 115JB. IN 115JB (2), THE LEGISLATURE CLARIFIED THAT THE ACCOUNTING POLICY, A CCOUNTING STANDARD AND RATE OF DEPRECIATION SHALL BE UNIFORM FOR BOTH THE ACTS VIZ., IT ACT AND COMPANIES ACT. 15. LET US NOW COMPARE THE IDENTICAL PROVISION IN SECTION 115JA OF THE ACT. THE PARLIAMENT HAS INTRODUCED 115JA (2) WHICH IS IDENTICAL TO SECTION 115JB (2) OF THE ACT. FOR THE PURPOSE OF CO NVENIENCE WE ARE REPRODUCING SECTION 115JA (2) ALSO. 115JA (1) NOTWITHSTANDING ANYTHING CONTAINED IN AN Y OTHER PROVISIONS OF THIS ACT, WHERE IN THE CASE OF AN ASS ESSEE, BEING A COMPANY, THE TOTAL INCOME, AS COMPUTED UNDE R THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1 ST DAY OF APRIL, 1997 (BUT BEFORE THE 1 ST DAY OF APRIL, 2001) (HEREAFTER IN THIS SECTION REFERRED TO AS THE RELEVANT PREVIOUS YEAR) IS LESS THAN THIRTY PER CENT OF ITS BOOK PROFIT, THE TOTAL INCOM E OF SUCH ASSESSEE CHARGEABLE TO TAX FOR THE RELEVANT PREVIOU S YEAR SHALL BE DEEMED TO BE AN AMOUNT EQUAL TO THIRTY PER CENT OF SUCH BOOK PROFIT. (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSE OF THIS SECTION, PREPARE ITS PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH T HE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT, 1956 (1 OF 1956. PROVIDED THAT WHILE PREPARING PROFIT AND LOSS ACCOU NT, THE DEPRECIATION SHALL BE CALCULATED ON THE SAME METHOD AND RATES WHICH HAVE BEEN ADOPTED FOR CALCULATING THE DEPRECIATION FOR THE PURPOSE OF PREPARING THE PROFI T AND LOSS ACCOUNT LAID BEFORE THE COMPANY AT ITS ANNUAL GENER AL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTIO N 210 OF THE COMPANIES ACT, 1956 (1 OF 1956) ; - ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 14 PROVIDED FURTHER THAT WHERE A COMPANY HAS ADOPTED O R ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHICH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THE ACT, THE METHOD AND RATES FOR CALCULATION OF DEPREC IATION SHALL CORRESPOND TO THE METHOD AND RATES WHICH HAVE BEEN ADOPTED FOR CALCULATING THE DEPRECIATION FOR SUCH F INANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLING WITHIN THE RELEVANT PREVIOUS YEAR. 16. THEREFORE, THE PROVISIONS OF SECTION 115J, 115 JA AND 115JB ARE IDENTICAL AND SIMILAR AS FAR AS THE COMPUTATION OF BOOK PROFIT IS CONCERNED. WHILE INTERPRETING SECTION 115J (1A) THE APEX COURT IN APOLLO TYRES LTD. (SUPRA) AFTER REFERRING TO THE WORD IN ACCORDANCE WITH PROVISIONS OF PART II AND PART III OF SCHEDULE VI T O THE COMPANIES ACT OBSERVED THAT THE SAID WORD WAS USED FOR LIMITED PU RPOSE OF EMPOWERING THE ASSESSING AUTHORITY TO RELY ON THE AUTHENTIC ST ATEMENT OF ACCOUNTS OF THE ASSESSEE-COMPANY. SO LOOKING INTO THE ACCOUNTS OF THE COMPANY THE ASSESSING OFFICER UNDER THE ACT HAS TO ACCEPT THE A UTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF COMPAN IES ACT WHICH OBLIGATES THE COMPANY TO MAINTAIN ITS ACCOUNTS IN A MANNER PROVIDED BY THE COMPANIES ACT AND THE SAME HAS TO BE SCRUTINIZE D AND CERTIFIED BY THE STATUTORY AUDITOR. THE SUPREME COURT FURTHER OB SERVED THAT IN SPITE OF ALL THESE PROCEDURE CONTEMPLATED UNDER THE PROVI SIONS OF COMPANIES ACT, IT IS DIFFICULT TO ACCEPT THE ARGUMENT OF THE REVENUE THAT IT IS STILL OPEN TO THE ASSESSING OFFICER TO RE-SCRUTINIZE THE ACCOUNT AND SATISFY HIMSELF WITH THE ACCOUNTS MAINTAINED IN ACCORDANCE WITH PROVISIONS OF COMPANIES ACT. THE SUPREME COURT FURTHER OBSERVED T HAT THE RELIANCE PLACED BY THE REVENUE ON SECTION 115J (1A) OF THE A CT TO CONTEND THAT THE ASSESSING OFFICER CAN RE-SCRUTINIZE THE ACCOUNT IS MISPLACED. IN VIEW OF THE ABOVE SPECIFIC OBSERVATION OF THE APEX COURT IN THE CASE OF APOLLO TYRES LTD. (SUPRA), IN OUR OPINION, THE ASSESSING O FFICER CANNOT GO BEYOND THE ACCOUNTS CERTIFIED BY THE AUDITOR EXCEPT TO THE EXTENT TO VERIFY WHETHER IT IS CERTIFIED AS REQUIRED UNDER THE COMPA NIES ACT OR NOT ? MORE OVER, AS WE HAVE ALREADY DISCUSSED THE PROVISIONS O F SECTION 115J, 115JA ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 15 AND 115JB ARE IDENTICAL AND SIMILAR AS FAR AS COMPU TATION OF BOOK PROFIT IS CONCERNED. IN SECTIONS 115JA AND 115JB, PROVISOS ARE INCORPORATED TO ENSURE UNIFORM ACCOUNTING POLICY, ACCOUNTING STANDA RD METHOD AND RATE OF DEPRECIATION AND ALSO TO MAINTAIN PREVIOUS YEAR UNDER THE IT ACT. THEREFORE, IN VIEW OF THE ABOVE JUDGMENT OF THE APE X COURT IN APOLLO TYRES LTD. (SUPRA) THE POWER OF THE ASSESSING OFFIC ER IS WELL SETTLED AND THE ASSESSING OFFICER CANNOT RE-SCRUTINIZE THE ACCO UNT AT ALL. THIS JUDGMENT OF THE APEX COURT IN APOLLO TYRES LTD. (SU PRA) WHICH INTERPRETED THE PROVISIONS OF SECTION 115J (A) OF T HE ACT IS EQUALLY APPLICABLE TO SECTIONS 115JA(2) AND 115JB(2) OF THE ACT SINCE IDENTICAL PROVISION WAS ENACTED BY THE PARLIAMENT IN SECTIONS 115JA (2) AND 115JB (2). THIS IS OBVIOUS FROM THE JUDGMENT OF AP EX COURT IN HCL COMNET SYSTEMS & SERVICES LTD. (SUPRA). MOREOVER, IN SEC.115JA(2) OR 115JB(2) ALSO, THE LEGISLATURE USE THE WORD IN ACC ORDANCE WITH PROVISIONS OF PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT. THEREFORE, THE TWO PROVISIONS IN SEC.115JA(2) AND 1 15JB(2) WOULD NOT DIFFERENTIATE SEC.115JA AND 115JB FROM 115J AS FAR AS COMPUTATION OF BOOK PROFIT WAS CONCERNED. IN OTHER WORDS, SEC.115 J (1A), 115JA(2), 115JB(2) ARE IN PARI MATERIC. 17. THE NEXT REASON OF THE BOMBAY BENCH OF THIS TR IBUNAL FOR DISTINGUISHING THE JUDGMENT IN THE CASE OF APOLLO T YRES (SUPRA) IS THAT IN THE CASE BEFORE THE APEX COURT THE ACCOUNTS OF THE COMPANY WAS PREPARED IN ACCORDANCE WITH THE REQUIREMENT OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. THE FACTS AS EXTR ACTED BY THE SUPREME COURT AND THE JUDGMENT CLEARLY SHOWS THAT T HE PROFIT OF THE COMPANY WAS NOT PREPARED IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. AS SEEN FROM THE JUDGMENT OF THE APEX COURT, THE CONTENTION OF THE REVENUE WAS REJEC TED BY THE COCHIN BENCH OF THIS TRIBUNAL BY HOLDING THAT THE ASSESSIN G OFFICER HAS NO AUTHORITY TO REOPEN THE ACCOUNTS OF A COMPANY WHICH IS CERTIFIED BY AN ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 16 AUDITOR OF THE COMPANY AS HAVING BEEN MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF COMPANIES ACT. HOWEVER, THE VIEW OF THE COCHIN BENCH OF THE TRIBUNAL WAS NOT ACCEPTED BY THE KERALA HIGH COURT WHICH HELD THAT THE ASSESSING OFFICER HAS AUTHORITY TO EXAMINE WHETHER THE ACCOUNTS OF THE COMPANY HAVE BEEN MAINTAINED IN ACCORDANCE W ITH THE REQUIREMENT OF SUB-SECTION (1A) OF SECTION 115J OF THE ACT. IN THAT PROCESS THE KERALA HIGH COURT FOUND THAT THE ACCOUN TS OF THE COMPANY ARE NOT IN ACCORDANCE WITH THE PROVISIONS OF THE CO MPANIES ACT. THEREFORE, THE ASSESSING OFFICER CAN MAKE THE NECES SARY CHANGES AND RE- COMPUTE THE BOOK PROFIT. ON THOSE FACTS THE APEX CO URT IN APOLLO TYRES LTD. REVERSED THE JUDGMENT OF THE KERALA HIGH COURT HOLDING THAT THE ASSESSING OFFICER CANNOT RE-SCRUTINIZE THE ACCOUNTS ONCE IT IS CERTIFIED BY THE AUDITOR. THEREFORE, THE CONTENTION OF THE REVEN UE BEFORE THE APEX COURT IN THE CASE OF APOLLO TYRES LTD. IS VERY SPEC IFIC THAT THE ACCOUNTS OF THE COMPANY WERE NOT PREPARED IN ACCORDANCE WITH PA RT II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT. WHILE CONSIDERING THIS CONTENTION OF THE REVENUE, THE APEX COURT HELD THAT THE AUTHORITY OF THE ASSESSING OFFICER IS RESTRICTED ONLY TO VERIFY WHETHER THE AC COUNTS WERE CERTIFIED BY THE AUDITORS AS REQUIRED UNDER THE COMPANIES ACT OR NOT?. FOR THE PURPOSE OF CONVENIENCE WE REPRODUCE THE RELEVANT PA RAGRAPHS OF THE APEX COURT IN THE CASE OF APOLLO TYRES LTD. (2002) 255 ITR 273 AT PAGES 276 AND 277 AS UNDER : THE ASSESSEE-COMPANY WHILE DETERMINING ITS NET PRO FIT FOR THE RELEVANT ACCOUNTING YEAR HAS PROVIDED FOR ARREARS OF DEPRECI ATION IN ITS PROFIT AND LOSS ACCOUNT WHICH ACCORDING TO THE REVENUE IS NOT I N ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT , 1956 (THE 'COMPANIES ACT'). HENCE, THE ASSESSING OFFICER WHILE CONSIDERING THE CASE OF THE ASSESSEE-COMPANY UNDER SECTION 115J OF THE INCOME-TAX ACT RECOMPUTED THE SAID PROFIT AND LOSS ACCOUNT OF THE COMPANY SO AS TO EXCLUDE THE PROVISION MADE FOR ARREARS OF DEPRECIAT ION. THE SAID ACTION OF THE ASSESSING OFFICER IN QUESTIONING THE CORRECTNESS OF THE ACCOUNTS ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 17 MAINTAINED BY THE COMPANY WAS CHALLENGED BY THE COM PANY BEFORE THE INCOME-TAX APPELLATE TRIBUNAL ('THE TRIBUNAL') WHIC H AMONG OTHER THINGS HELD THAT THE ASSESSING OFFICER HAS NO AUTHORITY TO REOPEN THE ACCOUNTS OF A COMPANY WHICH IS CERTIFIED BY THE AUDITORS OF THE COMPANY AS HAVING BEEN MAINTAINED IN ACCORDANCE WITH THE PROVISIONS O F THE COMPANIES ACT AND WHICH ACCOUNT HAS BEEN ACCEPTED IN THE GENERAL MEETING OF THE COMPANY AS WELL AS BY THE REGISTRAR OF COMPANIES. TH IS VIEW OF THE TRIBUNAL WAS NOT ACCEPTED BY THE HIGH COURT WHICH H ELD THAT THE ASSESSING OFFICER HAS THE AUTHORITY TO EXAMINE WHETH ER THE ACCOUNTS OF THE COMPANY HAVE BEEN MAINTAINED IN ACCORDANCE WITH THE REQUIREMENT OF SUB-SECTION (1A) OF SECTION 115J AND IN THAT PRO CESS IF HE FINDS THAT THE ACCOUNTS OF THE COMPANY ARE NOT IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT, HE COULD MAKE THE NECESSARY CHANGES B EFORE PROCEEDING TO ASSESS THE COMPANY FOR TAX UNDER THE EXPLANATION TO SECTION 115J OF THE INCOME-TAX ACT. 18. THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF BOMBAY DIAMOND CO. LTD. (SUPRA) HAS DISTINGUISHED THE JUDG MENT OF THE APEX COURT WITHOUT NOTICING THE FACTUAL ASPECT AS REPROD UCED ABOVE AND THE FINDING RECORDED BY THE APEX COURT AS REPRODUCED AB OVE. WE ARE NOT EXPRESSING ANY OPINION ON THE DECISION OF THE MUMBA I BENCH OF THIS TRIBUNAL. SUFFIX TO SAY THAT THIS BENCH OF THE TRIB UNAL IS BOUND BY THE LAW LAID DOWN BY THE APEX COURT. THEREFORE, THIS BE NCH OF THE TRIBUNAL IS BOUND TO FOLLOW THE JUDGMENT OF THE APEX COURT I N THE CASE OF APOLLO TYRES LTD. (SUPRA) AND IN HCL COMNET SYSTEMS & SERV ICES LTD. RATHER THAN THE DECISION OF THE MUMBAI BENCH OF THIS TRIBU NAL IN BOMBAY DIAMOND CO. LTD. (SUPRA). 19. IT MAY NOT BE OUT OF PLACE TO REFER TO THE JU DGMENT OF THE JURISDICTIONAL HIGH COURT IN STATE OF ANDHRA PRADES H VS. CTO AND ANOTHER (1998) 169 ITR 564. AT PARA 572 OF ITR THE HIGH COURT OBSERVED AS FOLLOWS: WE MAY ALSO REFER TO THE DECISION OF THE GUJARAT HI GH COURT IN STANDARD RADIATORS VS. CIT (1987) 165 ITR 178. AN IDENTICAL QUESTION CAME UP FOR CONSIDERATION IN THAT CASE. THE GUJARA T HIGH COURT HELD THAT IT IS IMPLICIT IN THE POWER OF SUPERVISION CONFERRED O N A SUPERIOR TRIBUNAL THAT ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 18 ALL THE TRIBUNALS SUBJECT TO ITS SUPERVISION SHOULD CONFORM TO THE LAW LAID DOWN BY IT. HENCE, THE LAW LAID DOWN BY THE HIGH C OURT HAS TO BE FOLLOWED BY THE INCOME TAX AUTHORITIES SITUATED IN THE ARE OVER WHICH THE HIGH COURT HAS JURISDICTION. ADVERTING TO THE DECI SION OF THE SUPREME COURT IN EAST INDIA COMMERCIAL CO. LTD. V. COLLECTOR OF C USTOMS, AIR 1962 SC 1893, THE GUJARAT HIGH COURT OBSERVED AS UNDER: (P. 191) IN VIEW OF THIS DECISION OF THE SUPREME COURT, THE INCOME TAX OFFICER AND THE APPELLATE ASSISTANT COMMISSIONER WERE BOUND TO FOLLOW THE DECISION OF THIS COURT IN HASANALI KHANBHAIS CASE (1987) 165 I TR 19. IF THEY FAILED TO DO SO, IT WOULD UNDERMINE THE RESPECT FOR THE LAW L AID DOWN BY THE HIGH COURT AND THE CONSTITUTIONAL AUTHORITY OF THE HIGH COURT AND THEIR CONDUCT WOULD, THEREFORE, BE APPREHENDED BY THE PRINCIPLES UNDERLYING THE LAW OF CONTEMPT. IT IS CLEAR FROM THE JUDICIAL PRONOUNCEMENTS ABOVE REFERRED TO THAT THE AUTHORITIES AND THE TRIBUNALS FUNCTIONING WITHIN TH E JURISDICTION OF THE COURT IN RESPECT OF WHOM THIS COURT HAS THE POWER OF SUPE RINTENDENCE UNDER ARTICLE 227 ARE BOUND TO FOLLOW THE DECISIONS OF TH IS COURT UNLESS, ON AN APPEAL, THE OPERATION OF THE JUDGMENT IS SUSPENDED. IT IS NOT PERMISSIBLE FOR THE AUTHORITIES AND THE TRIBUNALS TO IGNORE THE DECISIONS OF THIS COURT OR TO REFUSE TO FOLLOW THE DECISIONS OF THIS COURT ON THE PRETEXT THAT AN APPEAL IS FILED IN THE SUPREME COURT WHICH IS PENDING OR T HAT STEPS ARE BEING TAKEN TO FILE AN APPEAL. IF ANY AUTHORITY OR THE T RIBUNAL REFUSES TO FOLLOW ANY DECISION OF THIS COURT ON THE ABOVE GROUNDS, IT WOULD CLEARLY GUILTY OF COMMITTING CONTEMPT OF THIS COURT AND IS LIABLE TO BE PROCEEDED AGAINST. IN VIEW OF THE ABOVE DISCUSSION, THE ASSESSING OFFI CER HAS NO AUTHORITY OR JURISDICTION TO RE-SCRUTINIZE THE ACCOUNTS ONCE IT IS CERTIFIED BY THE AUDITOR, AS HAVING BEEN PREPARED UNDER PART II & II I OF SCHEDULE VI TO COMPANIES ACT. 20. LET US NOW EXAMINE WHETHER THE SO-CALLED CAPITA L GAIN DUE TO REPOSSESSION OF THE VESSEL HAS TO BE ADDED BACK TO THE BOOK PROFIT IN VIEW OF EXPLANATION 1 (B) TO SECTION 115JB OF THE ACT. E XPLANATION 1 (B) CLEARLY SAYS THAT THE AMOUNT CREDITED TO ANY RESERVE BY WH ATEVER NAME CALLED OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33AC SHALL BE INCREASED PROVIDED THE SAID RESERVE IS DEBITED TO THE P & L A CCOUNT. THEREFORE, THERE ARE TWO CONDITIONS NEEDS TO BE SATISFIED FOR THE PU RPOSE OF ADDING BACK THE CAPITAL RESERVE TO THE BOOK PROFIT UNDER EXPLAN ATION 1 (B) TO 115JB. ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 19 THE FIRST CONDITION IS THAT ASSESSEE HAS TO CARRY T HE AMOUNT TO ANY RESERVE BY WHATEVER NAME CALLED. AND THE SECOND CON DITION IS THAT THE SAID AMOUNT SHALL BE DEBITED TO THE PROFIT AND LOSS ACCOUNT. 21. WE FIND THAT THE APEX COURT HAD AN OCCASION TO CONSIDER THE IDENTICAL SITUATION IN THE CASE OF THE NATIONAL HYD RO POWER CORPORATION LTD. VS. CIT (2010) 320 ITR 374. IN THE CASE BEFORE THE APEX COURT THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKING REQUIRED TO SELL THE ELECTRICITY TO STATE ELECTRICITY BOARDS AT A TARIFF NOTIFIED BY TH E CERC. THE TARIFF CONSISTS OF DEPRECIATION, ADVANCE AGAINST THE DEPRE CIATION, INTEREST ON LOAN, INTEREST ON WORKING CAPITAL, OPERATION AND MA INTENANCE EXPENSES RETURNED ON EQUITY ETC., THE QUESTION AROSE BEFORE THE APEX COURT WAS WHETHER THE ADVANCE AGAINST DEPRECIATION WAS TO BE ADDED TO BOOK PROFIT IN VIEW OF EXPLANATION 1 (B) TO SEC.115JB OF THE IT ACT. THE ADVANCE AGAINST THE DEPRECIATION DID NOT ENTER THE STREAM O F INCOME FOR THE PURPOSE OF DETERMINATION OF NET PROFIT AT ALL. THER EFORE, IT WAS FOUND THAT CLAUSE (B) OF EXPLANATION (1) TO SECTION 115JB WAS NOT APPLICABLE. THE APEX COURT FURTHER FOUND THAT ADVANCE AGAINST DEPRE CIATION IS NOT A RESERVE. IT IS NOT AN APPROPRIATION OF PROFIT MEANT FOR CERTAIN UNCERTAIN PURPOSES. ADVANCED AGAINST DEPRECIATION IS AN AMOU NT THAT IS UNDER OBLIGATION. THEREFORE, IT WAS FOUND THAT IT CANNOT BE DESIGNATED AS A RESERVE. ACCORDINGLY, THE APEX COURT HELD THAT ADVA NCE AGAINST DEPRECIATION CANNOT BE ADDED BACK TO THE BOOK PROFI T UNDER CLAUSE (B) OF EXPLANATION (1) TO 115JB. IN FACT THE APEX COURT OBSERVED AS FOLLOWS IN PAGE 376 AND 377 OF ITR 320 ITR 372: WE QUOTE HEREIN BELOW EXPLANATION 1 TO SECTION 115J B OF THE 1961 ACT WHICH READS AS UNDER: EXPLANATION 1 - FOR THE PURPOSES OF THIS SECTION, BOOK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCO UNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB SECTION (2), AS IN CREASED BY -.. ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 20 (B) THE AMOUNTS CARRIED TO ANY RESERVES, BY WHATEVE R NAME CALLED, OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33AC ; OR IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (H) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY, - WE FIND MERIT IN THIS CIVIL APPEAL. ON READING EXP LANATION 1, QUOTED ABOVE, IT IS CLEAR THAT TO MAKE AN ADDITION UNDER C LAUSE (B) TWO CONDITIONS MUST BE JOINTLY SATISFIED: A) THERE MUST BE A DEBIT OF THE AMOUNT TO THE PROFIT A ND LOSS ACCOUNT B) THE AMOUNT SO DEBITED MUST BE CARRIED TO THE RESERV E. SINCE THE AMOUNT OF AAD IS REDUCED FROM SALES, THER E IS NO DEBIT IN THE PROFIT AND LOSS ACCOUNT, THE AMOUNT DID NOT ENT ER THE STREAM OF INCOME FOR THE PURPOSES OF DETERMINATION OF NET PRO FIT AT ALL, HENCE CLAUSE (B) OF EXPLANATION 1 WAS NOT APPLICABLE. FU RTHER RESERVE AS CONTEMPLATED BY CLAUSE (B) OF EXPLANATION 1 TO SECT ION 115JB OF THE 1961 ACT IS REQUIRED TO BE CARRIED THROUGH THE PROF IT AND LOSS ACCOUNT. AT THIS STAGE, IT MAY BE STATED THAT THER E ARE BROADLY TWO TYPES OF RESERVES, VIZ., THOSE THAT ARE ROUTED THRO UGH THE PROFIT AND LOSS ACCOUNT AND THOSE WHICH ARE NOT CARRIED VIA TH E PROFIT AND LOSS ACCOUNT, FOR EXAMP[LE, A CAPITAL RESERVE SUCH AS SH ARE PREMIUM ACCOUNT. AAD IS NOT A RESERVE. IT IS NOT AN APPRO PRIATION OF PROFITS. AAD IS NOT MEANT FOR AN UNCERTAIN PURPOSE. AAD IS AN AMOUNT THAT IS UNDER OBLIGATION, RIGHT FROM THE INCEPTION, TO G ET ADJUSTED IN THE FUTURE, HENCE, CANNOT BE DESIGNATED AS A RESERVE. AAD IS NOTHING BUT AN ADJUSTMENT BY REDUCING THE NORMAL DEPRECIATI ON INCLUDIBLE IN THE FUTURE YEARS IN SUCH A MANNER THAT AT THE END O F THE USEFUL LIFE OF THE PLANT (WHICH IS NORMALLY 30 YEARS) THE SAME WOU LD BE REDUCED TO ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 21 NIL. THEREFORE, THE ASSESSEE CANNOT USE THE AAD FO R ANY OTHER PURPOSE (WHICH IS POSSIBLE IN THE CASE OF A RESERVE ) EXCEPT TO ADJUST THE SAME AGAINST FUTURE DEPRECIATION SO AS TO REDUC E THE TARIFF IN THE FUTURE YEARS. AS STATED ABOVE, AT THE END OF THE L IFE OF THE PLANT AAD WILL BE REDUCED TO NIL. IN FACT, SCHEDULE XII-A TO THE BALANCE SHEET FOR THE FINANCIAL YEARS 2004-05 ONWARDS INDICATES R ECOUPING. IN OUR VIEW, AAD IS INCOME RECEIVED IN ADVANCE. IT IS T IMING DIFFERENCE. IT REPRESENTS ADJUSTMENT IN FUTURE WHICH IS IN BUILT I N THE MECHANISM NOTIFIED ON MAY 26, 1997. THIS ADJUSTMENT MAY TAKE PLACE OVER A LONG PERIOD OF TIME. HENCE, WE ARE OF THE VIEW THA T AAD IS NOT A RESERVE. 22. IN THE CASE BEFORE US ALSO THE SO-CALLED CAPIT AL GAIN ON RE- POSSESSION OF THE VEHICLE WAS ADMITTEDLY NOT DEBITE D TO THE PROFIT AND LOSS ACCOUNT. THE BALANCE AMOUNT PAYABLE BY THE ASS ESSEE ON THE PURCHASE PRICE AFTER DEDUCTING RETURNED DOWN VALUE OF THE VESSEL WAS SHOWN AS CAPITAL RECEIPTS. IN FACT, THE ASSESSEE H AS NOT RECEIVED ANY AMOUNT AT ALL. A NOTIONAL CAPITAL GAIN WAS SHOWN B Y TAKING THE AMOUNT PAYABLE BY THE ASSESSEE TO THE VENDOR AS SALE PRICE . IN FACT, NO SALE TOOK PLACE. THE VESSELS ARE REPOSSESSED DUE TO NON PAYM ENT OF INSTALLMENT. THE QUESTION ARISE FOR CONSIDERATION IS THAT WHEN T HE ASSESSEE HAS SHOWN THE AMOUNT PAYABLE TO THE OWNER OF THE VESSEL ON RE -POSSESSION AFTER DEDUCTING WRITTEN DOWN VALUE AS CAPITAL GAIN CAN WE SAY THAT IT IS AN INCOME/RESERVE OF THE ASSESSEE. AS OBSERVED BY THE APEX COURT IN THE CASE OF NATIONAL HYDRO ELECTRIC POWER CORPORATION L TD (SUPRA) THE AMOUNT PAYABLE TO OWNER OF THE VESSEL AFTER DEDUCTI NG WRITTEN DOWN VALUE WHICH WAS SHOWN AS CAPITAL GAIN IS NOT AN APP ROPRIATION OF PROFIT MEANT FOR UNCERTAIN PURPOSE. THIS IS AN AMOUNT UNDE R OBLIGATION TO GET ADJUSTED IN CASE THE ASSESSEE WANTS TO GET BACK THE VESSEL OR ALLOWS THE VENDOR TO RETAIN POSSESSION OF THE VESSELS. THEREFO RE, IN OUR OPINION, IT MAY NOT BE CORRECT TO DESIGNATE THE SAME AS RESERVE AT ALL. FURTHER MORE, ITA NO.132/HYD/2010 NEW ORIENTAL TRAWLERS (P) LTD., HYDERABAD 22 THE SAID AMOUNT IS NOT DEBITED TO PROFIT AND LOSS A CCOUNT. THEREFORE, BOTH THE CONDITIONS REQUIRED FOR THE PURPOSE OF ADDING B ACK THE SAID AMOUNT TO THE BOOK PROFIT IS NOT SATISFIED. IN VIEW OF THI S JUDGMENT OF THE APEX COURT IN THE CASE OF NATIONAL HYDRO ELECTRICAL POW ER CORPORATION LTD. (SUPRA), IN OUR OPINION, EVEN UNDER EXPLANATION 1 ( B) TO SECTION 115JB THE DISPUTED AMOUNT OF RS.15,35,10,501/- CANNOT BE ADDED BACK TO THE BOOK PROFIT. IN VIEW OF THE ABOVE, WE ARE UNABLE TO UPHOLD THE ORDER OF THE LOWER AUTHORITIES. ACCORDINGLY, THE SAME IS SET ASIDE AND THE ENTIRE ADDITION IS DELETED. 23. IN THE RESULT, APPEAL OF THE ASSE SSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT, ON T HIS THE 30 TH DAY OF JULY, 2010 SD/- SD/- (CHANDRA POOJARI) (NRS. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATE 30 TH JULY, 2010 VBP/- COPY TO 1. NEW ORIENTAL TRAWLERS P. LTD. 1 ST FLOOR, 128 SRINAGAR COLONY, HYDERABAD. PAN AAACN-6933-G 2. DCIT 16 (1), HYDERABAD 3. CIT (A)-V, HYDERABAD. 4. CIT-1V, HYDERABAD 5. DR B BENCH, HYDERABAD 6. GUARD FILE