Appeal Details
Counselvise Citation
[2018] 119 COUNSELVISE.COM (IT) 1514 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 6 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-11-2018
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
A
Assessment Year
2012-2013
Appeal Filed On
13-05-2016
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH: A: NEW DELHI) BEFORE SHRI S.K. YADAV, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER ITA NO:- 2743/DEL/2016 ( ASSESSMENT YEAR: 2012-13) DY. COMMISSIONER OF INCOME TAX, CIRCLE-21(1), NEW DELHI. VS. M/S RAILTEL CORPORATION OF INDIA LTD., 6 TH FLOOR, IIIRD BLOCK, DELHI TECHNOLOGY PARK, SHASTRI PARK, DELHI-110053. PAN NO: AABCR7176C APPELLANT RESPONDENT REVENUE BY : SH. SANJAY GOEL, CIT (DR) ASSESSEE BY : SH. AJAY MITTAL, CA ORDER PER: ANADEE NATH MISSHRA, AM THIS APPEAL BY REVENUE HAS BEEN DIRECTED AGAINST TH E ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-7, NEW DELHI ( FOR SHORT HEREINAFTER REFERRED ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 2 OF 51 TO AS THE LD. CIT(A)) DATED 26.02.2016 FOR ASSESS MENT YEAR 2012-13 ON THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.52.74. CRORES MADE BY ASSESSING OFFICER ON ACCOUNT OF ADJUSTMENT DUE TO CHANGE IN T HE DEPRECIATION RATE. 2. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FRESH GROUND (S) OF APPEAL AND / OR DELETE OR AMEND ANY OF THE GROUND (S), OF APPEAL. (1.1) IN THIS ORDER, THE FOLLOWING ABBREVIATIONS HAVE BEE N USED: A. ASSESSING OFFICER AS AO B. COMMISSIONER OF INCOME TAX (APPEALS) AS CIT(A) C. DEPARTMENTAL REPRESENTATIVE AS DR D. DATED AS DTD. E. INCOME TAX ACT AS I.T. ACT F. INCOME TAX APPELLATE TRIBUNAL AS ITAT G. LEARNED AS LD. H. UNDER SECTION AS U/S I. ACCOUNTING STANDARD AS AS (2) RETURN OF INCOME WAS FILED ON 29.09.2012 DECLARING INCOME UNDER THE NORMAL PROVISIONS AMOUNTING TO RS. 56,81,18,862/- AFTER CL AIMING DEDUCTION U/S 80IA AMOUNTING TO RS. 113,07,28,240. TAX WAS PAID U/S 1 15 JB ON BOOK PROFIT OF RS. 109,12,74,502/-. THE RETURN WAS REVISED ON 29.03.2 014 VIDE E-FILING ACKNOWLEDGMENT NUMBER 154755411290314 DECLARING INCOME OF RS. 56,8 1,18,862/-, UNDER NORMAL COMPUTATION AFTER CLAIMING DEDUCTION U/S 80IA AMOUN TING TO RS. 113,20,12,434/-. THE INCOME U/S 115 JB WAS REVISED TO RS. 109,69,73,347/ -. ASSESSMENT ORDER DATED ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 3 OF 51 23.03.2016 WAS PASSED U/S 143(3) OF I.T. ACT WHEREI N FOLLOWING ADJUSTMENTS WERE MADE BY THE AO TO THE BOOK PROFIT AS REPORTED BY THE ASS ESSEE IN RETURN OF INCOME: 1. PRIOR PERIOD EXPENSES RS. 2,40,48,802 2. PROVISION FOR RAILWAY EXTRAORDINARY ITEMS RS. 14,0 9,30,283 3. ADJUSTMENT DUE TO CHANGE IN DEPRECIATION RATES RS. 52,74,00,000 (2.1) THE ASSESSEE FILED APPEAL BEFORE LD. CIT(A). VIDE ORDER DATED 26.02.2016, LD. CIT(A) DIRECTED TO AO TO DELETE INCREASED MAT (MIN IMUM ALTERNATE TAX) LIABILITY ON THE ADJUSTED BOOKS PROFIT; BY HOLDING THAT THE ASSESSEE HAD CORRECTLY COMPUTED THE BOOK PROFIT AND REJECTING THE UPWARD REVISION BY THE AO BY WAY OF ADJUSTMENTS TO BOOK PROFIT. REVENUE HAS ACCEPTED THE DECISION OF THE LD. CIT(A) IN RESPECT OF THE ADJUSTMENTS MADE TO BOOK PROFIT BY THE AO ON ACCOUNT OF PRIOR PERIO D EXPENSES AND PROVISION FOR RAILWAYS EXTRAORDINARY ITEMS. HOWEVER, THE DECISIO N OF LD. CIT(A) ON ADJUSTMENTS MADE BY THE AO ON ACCOUNT OF ADJUSTMENTS DUE TO CHANGE IN DEPRECIATION RATES HAS NOT BEEN BEING ACCEPTED BY REVENUE AND PRESENT APPEAL BEFORE US IS AGAINST THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. THE RELEVANT PORTIONS OF TH E ASSESSMENT ORDER AND THE ORDER OF THE LD. CIT(A) ON THIS ISSUE ARE REPRODUCED AS UNDE R: RELEVANT PORTION OF THE ASSESSMENT ORDER ALLOWABILITY OF DEPRECIATION OF EARLIER YEARS UNDER MAT PROVI SIONS ON ACCOUNT OF CHANGE IN ACCOUNTING ESTIMATE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 4 OF 51 IN VIEW OF THE ABOVE THE PRIOR PERIOD EXPENSE CANNO T BE ALLOWED AS DEDUCTION FROM MAT PROVISIONS.IS OBSERVED THAT THE ASSESSEE CO MPANY HAS CLAIMED A HUGE AMOUNT OF ADJUSTMENT ON ACCOUNT OF ADJUSTMENT DUE TO CHANGE IN DEPRECIATION RATE. FOR THIS PURPOSE IT IS STATED TH AT A COMMITTEE OF THE GM LEVEL OFFICERS WORKING UNDER THE COMPANY WAS FORMED. ON T HE BASIS OF THE RECOMMENDATIONS OF THE COMMITTEE USEFUL LIFE OF THE ASSETS OF THE COMPANY HAS BEEN REDUCED DRASTICALLY AND THE RESULTANT AMOUNT O F ADJUSTMENT TO THE TUNE OF RS 52 74 CRORES HAS BEEN CLAIMED DURING THE YEAR ON THIS ACCOUNT. NO EVIDENCE TO THE EFFECT THAT THE COMMITTEE MEMBERS POSSESS TH E NECESSARY QUALIFICATION, EXPERIENCE AND EXPERTISE TO JUDGE THE ESTIMATED LIF E OF THE EQUIPMENT. THE ASSETS OWNED BY THE ASSESSEE COMPANY ARE HIGHLY TEC HNICAL TELECOM AND RADIO EQUIPMENT NETWORK DEVICES ETC. NO PROPER JUSTIFICAT ION FOR DEVIATING FROM THE STANDARDS SET UP BY THE BSNL AND ADOPTING THE STAND ARDS OF IDEA CELLULAR HAS BEEN GIVEN. FOR EXAMPLE AS ADMITTED BY TNE ASSESSEE COMPANY THE USEFUL LIFE OF RADIO EQUIPMENT IS TAKEN TO BE 12 TO 15 YEARS BY TH E BSNL YET THE COMMITTEE HAS REDUCED THE USEFUL LIFE TO 3 YRS. SECTION 145(1) OF THE ACT, AS AMENDED, LAYS DOWN ME THOD OF ACCOUNTING IN RESPECT OF BUSINESS INCOME OR INCOME FROM OTHER SOU RCES. THE METHOD OF ACCOUNTING COULD BE EITHER CASH OR MERCANTILE. SECTION 13 OF THE 1922 ACT, CORRESPONDING TO SECTIO N 145 OF THE ACT, HAS BEEN HELD TO BE A COMPUTATION PROVISION [CIT V. BADRIDAS RAMRAI SHOP [1939] 7 ITR 613 (NAG.)]. FURTHER, SECTION 115JA(2) LAYS DOWN A METHOD FOR COM PILING PROFIT AND LOSS ACCOUNT AS WELL AS A METHOD FOR COMPUTING BOOK PROF ITS, FOR THE PURPOSE OF SECTION 115JA OF THE ACT. SECTION 115JA(4) OF THE A CT MAKES APPLICABLE ALL THE PROVISIONS OF THE ACT EXCEPT THOSE PROVISIONS WHICH ARE PROVIDED IN THE SECTION ITSELF. ACCORDINGLY, THE PROVISIONS OF SECTION 145(1) WOULD NOT APPLY. SECTION 145(2) OF THE ACT PROVIDES THAT THE CENTRAL GOVERNMENT MAY NOTIFY ACCOUNTING STANDARDS, FROM TIME TO TIME, TO BE FOLLOWED BY ANY CLASS OF ASSESSEE OR IN RESPECT OF ANY CLASS OF INCOME. APPARENTLY, AS SUCH, SECTION 145(2) IS NOT LINKED T O SECTION 145(1). HOWEVER, SECTION 145(1) STATES THAT BUSINESS INCOME OR INCOM E FROM OTHER SOURCES COULD BE COMPUTED, SUBJECT TO PROVISION OF SUB-SECTION (2 ), IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING. FURTHER, THE ACCOUNTING STANDARDS NOTIFIED LAY DOWN THAT ANY ASSESSEE WHO FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING HAS TO FOLL OW THE NOTIFIED STANDARDS. UNDER THE SAID ACT, A COMPANY HAS TO FOLLOW ACCRUAL SYSTEM OF ACCOUNTING, ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 5 OF 51 WHICH MORE OR LESS CORRESPONDS TO MERCANTILE SYSTEM OF ACCOUNTING AS CONSTRUED BY COURTS. THE NOTIFICATION DOES NOT PRESC RIBE THE CLASS OF INCOME WITH RESPECT TO WHICH IT COULD APPLY. ACCORDINGLY, AS PE R ONE VIEW OF THE MATTER, THE ACCOUNTING STANDARDS NOTIFIED WOULD APPLY TO A COMP ANY AS IT IS REQUIRED TO FOLLOW ACCRUAL SYSTEM OF ACCOUNTING. THE GOVERNMENT HAS NOTIFIED TWO ACCOUNTING STANDARDS : (A) RELATING TO DISCLOSURE OF ACCOUNTING POLICIES; AND (B) RELATING TO DISCLOSURE OF PRIOR PERIOD AND EXTRAOR DINARY ITEMS AS WELL AS CHANGES IN ACCOUNTING POLICIES. THESE STANDARDS ARE MORE OR LESS BASED ON THE SIMILA R STANDARDS NOTIFIED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ('ICAI' ) AND THEREFORE THEY ARE NOT ANALYSED IN DETAIL. HOWEVER, THE FOLLOWING PROVISIO NS OF THE STANDARDS NEED TO BE NOTED FOR THE PURPOSE: (A) THE POLICIES ADOPTED MUST REFLECT A TRUE AND FAIR VI EW OF THE STATE OF THE AFFAIRS OF THE BUSINESS AND MAJOR CONSIDERATIONS FOR SELECTION OR APPLICATION OF ACCOUNTING POLICY ARE - PRUDENCE, SUBSTANCE OVER FORM; AND MAT ERIALITY. ONE MAY NOTE THAT PRUDENCE REQUIRES A PROVISION OF ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE ASCERTA INED WITH CERTAINTY (B) FUNDAMENTAL ACCOUNTING ASSUMPTIONS ACCEPTED ARE ACCR UAL; GOING CONCERN AND CONSISTENCY. FOR THE PURPOSE, ACCRUAL MEANS RECOGNITION OF REVENU E AS THEY ARE EARNED AND RECOGNITION OF COST AS THEY ARE INCURRED. (C) A CHANGE IN ACCOUNTING POLICY CAN BE MADE ONLY IF T HE CHANGE IS REQUIRED BY STATUTE OR THE CHANGE WOULD RESULT IN A MORE APPROP RIATE PREPARATION OR PRESENTATION OF FINANCIAL STATEMENTS. THE EFFECT OF THE APPLICATION OF NOTIFIED ACCOUNTING STANDARDS UNDER SECTION 145 OF THE ACT COULD BE AS FOLLOWS : (A) IN COMPILING THE ACCOUNTS, COMPLIANCE WITH ACC OUNTING STANDARDS WILL HAVE TO BE ENSURED, AND IF THERE IS INCONSISTENCY IN THAT, SOME POWERS TO ASSESSING OFFICER COULD ARISE UNDER SECTION 145(2) OF THE ACT . (B) ANY CHANGE IN METHOD OF ACCOUNTING WILL HAVE TO STRICTLY COMPLY WITH THE REQUIREMENTS- IF THE REQUIREMENTS CANNOT BE JUSTIFI ED, AS STATUTORILY REQUIRED, OR OTHERWISE AS MENTIONED ON THE BASIS OF SOUND COMMER CIAL REASONING OR APPLICATION OF ACCOUNTING PRINCIPLES, SUCH CHANGE I N THE METHOD OF ACCOUNTING COULD BE DISREGARDED BY THE ASSESSING OFFICER. FURTHER, THE METHOD OF ACCOUNTING, WHICH IS EMPLOYE D, HAS TO BE CONSISTENT. IN THE CASE OF ASSESSEE, THE COMPANY FORMED A COMMI TTEE WHICH ADVISED FOR CHANGE IN USEFUL LIFE OF THE ASSET AND CORRESPONDING DEPRECIATION AMOUNT GOT INCREASED CONSIDERABLY. HAD THE DEPRECIATION ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 6 OF 51 CHANGE BEEN EFFECTED FROM RETROSPECTIVE EFFECT, AND THE EFFECT OF SUCH CHANGE BEEN GIVEN IN RESPECTIVE YEARS, THE ENTIRE B URDEN OF DEPRECIATION WOULD NOT HAVE ARRIVED IN THE CURRENT YEAR. THERE NEEDS TO BE CONSISTENT IN THE ACCOUNTING METHOD, ELSE, TH E BOOK PROFITS CAN ALWAYS BE MANAGED BY THE ASSESSEE IN THE YEAR, IN W HICH SUCH PROVISIONS ARE APPLICABLE VIS-A-VIS WHEN SUCH PROVI SIONS ARE NOT APPLICABLE. ANOTHER NEXT BASIC ISSUE TO BE CONSIDERED IS THE NA TURE AND EXTENT OF ADJUSTMENTS WHICH COULD BE CARRIED OUT TO THE NET P ROFIT AS REFLECTED IN THE PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH THE PR OVISIONS OF THE SCHEDULE. THIS ISSUE HAS BEEN CONSIDERED BY SPECIAL BENCH OF T HE INCOME-TAX APPELLATE TRIBUNAL IN CASE OF SUTLEJ COTTON MILLS LIMITED V. ACIT [1993] 45 ITD 22 (CAL.) AND IN THAT CASE IT WAS HELD AS FOLLOWS (EXTRACTED FROM THE HEAD NOTES): 'AS REGARDS THE QUESTION WHETHER THE ASSESSING OFFI CER CAN RECAST THE BOOK PROFITS, AN IMPLIED MANDATE IS GIVEN TO THE AS SESSING OFFICER TO VERIFY AND SATISFY HIMSELF WHETHER THE NET PROFIT W AS AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS Y EAR AND AS TO WHETHER THE PROFIT AND LOSS ACCOUNT WAS PREPARED IN ACCORDANCE WITH PART II AND PART III OF THE SIXTH SCHEDULE TO THE C OMPANIES ACT. IF IN CASE THE ASSESSING OFFICER FINDS THAT THE NET PROFI T WAS NOT AS SHOWN BY THE PROFIT AND LOSS ACCOUNT OR THE PROFIT AND LO SS ACCOUNT WAS NOT PREPARED IN ACCORDANCE WITH PART II AND PART III OF THE SIXTH SCHEDULE TO THE COMPANIES ACT, HE IS ENTITLED TO ADJUST THE PROFIT TO THIS EXTENT, THE POWER TO ADJUST THE BOOK PROFIT WILL HAVE TO BE CONCEDED TO THE ASSESSING OFFICER ACCORDINGLY, THE DIFFERENTIAL CHANGE IN DEPRECIATIO N AMOUNT, THE IMPACT OF WHICH RELATES TO EARLIER YEARS, CANNOT BE ALLOWE D AS DEDUCTION WHILE COMPUTING BOOK PROFIT UNDER MAT PROVISIONS. EVEN ACCOUNTING STANDARD-1 ON ACCOUNTING POLICIES CATEGORICALLY STATES THAT THE PRIMARY CONSIDERATION IN THE SELECTION OF ACCOU NTING POLICIES BY AN ENTERPRISE IS THAT THE FINANCIAL STATEMENTS PREPARED AND PRESE NTED ON THE BASIS OF SUCH ACCOUNTING POLICIES SHOULD REPRESENT A TRUE AND FAI R VIEW OF THE STATE OF AFFAIRS OF THE ENTERPRISE AS AT THE BALANCE SHEET DATE AND OF THE PROFIT OR LOSS FOR THE PERIOD ENDED ON THAT DATE. FOR THIS PURPOSE, ONE OF THE MAJ OR CONSIDERATIONS GOVERNING THE SELECTION AND APPLICATION OF ACCOUNTING POLICIE S AS LAID DOWN IN THE SAID AS IS SUBSTANCE OVER FORM. THE RELEVANT EXTRACTS ARE RE PRODUCED BELOW. B. SUBSTANCE OVER FORM - THE ACCOUNTING TREATMENT AND PRESENTATION IN FINANCIAL STATEMENTS OF TRANSACTION S AND EVENTS ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 7 OF 51 SHOULD BE GOVERNED BY THEIR SUBSTANCE AND NOT MEREL Y BY THE LEGAL FORM.' THE ASSESSEE-COMPANY HAS DELIBERATELY DEVIATED FROM THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE/ ACCOUNTING STANDARD SO AS TO AVOID PAYING TAXES UNDER THE MAT AS WELL. NON-ACCEP TANCE; OF THE METHOD OF ACCOUNTING AS LAID DOWN BY THE RELEVANT A CCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHARTERED ACCOU NTANTS OF INDIA IS ALSO A VIOLATION OF SECTION 211(3A) AND 211(3B) OF THE COMPANIES ACT 1956 WHICH REQUIRES THAT EVERY FINANCIAL STATEMENTS SHALL COMPLY WITH THE ACCOUNTING STANDARDS. THE RELEVANT EXTRACTS OF THE SECTION ARE LISTED BELOW. 211. FORM AND CONTENTS OF BALANCE-SHEET AND PROFIT AND LOSS ACCOUNT . . (3A) EVERY PROFIT AND LOSS ACCOUNT AND BALANCE-SHEE T OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS. (3B) WHERE THE PROFIT AND LOSS ACCOUNT AND THE BALA NCE-SHEET OF THE COMPANY DO NOT COMPLY WITH THE ACCOUNTING STANDARDS , SUCH COMPANIES SHALL DISCLOSE IN ITS PROFIT AND LOSS ACC OUNT AND BALANCE- SHEET, THE FOLLOWING, NAMELY : (A) THE DEVIATION FROM THE ACCOUNTING STANDARDS; (B) THE REASONS FOR SUCH DEVIATION; AND (C) THE FINANCIAL EFFECT, IF ANY, ARISING DUE TO SUCH DEVIATION. (3C) FOR THE PURPOSES OF THIS SECTION, THE EXPRESSI ON 'ACCOUNTING STANDARDS' MEANS THE STANDARDS OF ACCOUNTING RECOMM ENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CON STITUTED UNDER THE CHARTERED ACCOUNTANTS ACT, 1949 (38 OF 1949), A S MAY BE PRESCRIBED BY THE CENTRAL GOVERNMENT IN CONSULTATIO N WITH THE NATIONAL ADVISORY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 210A: PROVIDED THAT THE STANDARDS OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED T O BE THE ACCOUNTING STANDARDS UNTIL THE ACCOUNTING STANDARDS ARE PRESCRIBED BY THE CENTRAL GOVERNMENT UNDER THIS SUBSECTION. I) THUS, FINANCIAL STATEMENTS OF THE COMPANY, IN TH E ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 8 OF 51 ABSENCE OF COMPLIANCE OF RELEVANT ACCOUNTING STANDARD, DOES NOT GIVE A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE COMPANY AS AT THE END OF THE FINANCIAL YEAR. TH E DEVIATION IN ACCOUNTING IS NOTHING BUT A DEVICE DEP LOYED FOR AVOIDANCE OF TAXES. II) RATHER, THE AUTHORIZED REPRESENTATIVE HAD GONE AHEA D BY RELYING ON THE DECISION OF SUPREME COURT IN APOLLOTYRES LIMITED VS CIT (255 ITR 273). THE ASSESSEE IS TAKIN G REFUGE UNDER THE DECISION OF THE SUPREME COURT WHICH IN TU RN HAD NEVER ALLOWED THE TAXPAYERS TO ADOPT ACCOUNTING PRACTICES WHICH ARE NOT IN LINE WITH THE NORMS SO A S TO REDUCE THEIR MAT LIABILITY. III) FURTHER, THE CONSTITUTION BENCH DECISION OF TH E SUPREME COURT IN MCDOWELL AND CO. LTD. V. COMMERCIAL TAX OFFICER (154 ITR 148) IS EQUALLY RELEVANT. IN THE SAID DECISION, SUP REME COURT TOOK A SERIOUS VIEW OF TAX AVOIDANCE DEVICES, AND HELD THAT SUCH DEVICES WILL NOT STAND THE SCRUTINY OF LA W IF THE OBJECT IS ONLY TAX AVOIDANCE. IT SOUGHT THE AID OF EMERGING TECHNIQUES OF INTERPRETATION IN TRYING TO RELATE SUCH TAX AVOIDAN CE DEVICES TO EXISTING LEGISLATION. IT CHOSE TO RELY ON THE FA MOUS BRITISH RULING IN RAMSEY'S CASE, IN ORDER TO EXPOSE THE DEV ICES FOR WHAT THEY REALLY ARE, AND TO REFUSE TO GIVE JUDICIAL BENEDICTION. THE RELEVANT EXTRACTS FROM THE DECISION ARE GIVEN B ELOW THE PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITH IN THE FRAME WORK OF LAW. COLOURABLE DEVICES CANNOT BE PAR T OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTERT AIN THE BELIEF THAT IT IS HONOURABLE TO AVOID THE PAYMENT O F TAX BY RESORTING TO DUBIOUS METHODS. IT IS THE OBLIGATION OF EVERY CITIZEN TO PAY THE TAXES HONESTLY WITHOUT RESORTING TO SUBTERFUGES. IV) IN RESPECT OF ASSESEE'S TAKING REFUGE UNDER THE CASE OF APOLLO TYRES, THE FOLLOWING OBSERVATIONS IN THE CASE OF PADMASUNDARA RAO V. STATE OF TAMIL NADU, (255 ITR 1 47 AT PAGE 153), ARE BEING RELIED. 'COURTS SHOULD NOT PLACE RELIANCE ON DECISIONS WITH OUT DISCUSSING AS TO HOW THE FACTUAL SITUATION FITS IN WITH THE FACT SITUATION OF THE DECISION ON WHICH RELIANCE IS PLACED. THERE IS ALWAYS PERIL IN TREATING THE WORDS OF A SP EECH OR JUDGMENT AS THOUGH THEY ARE WORDS IN A LEGISLATIVE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 9 OF 51 ENACTMENT, AND IT IS TO BE REMEMBERED THAT JUDICIAL UTTERANCES ARE MADE IN THE SET-TING OF THE FACTS OF A PARTICULAR CASE, SAID LORD MORRIN IN HERRINGTON V. BRITISH RAILWAYS BOARD, [1972] 2 WLR 537 (HL). CIRCUMSTANTI AL FLEXIBILITY, ONE ADDITIONAL OR DIFFERENT FACT MAY M AKE A WORLD OF DIFFERENCE BETWEEN CONCLUSIONS IN TWO CASE S.' SIMILAR VIEWS WERE EXPRESSED BY THE APEX COURT IN SUN ENGG. WORKS, (198 ITR 297 AT PAGE 320). V) WHERE INSTANCES COME TO THE LIGHT ON EXAMINATION TH AT EXCESS CLAIMS HAVE BEEN MADE (IN THE AUDITED ACCOUNTS), NOT IN ACCORDANCE WITH THE PROVISIONS OF COMPANIES ACT, THE AO WOULD BE FAILIN G IN HIS DUTY, IF HE DOES NOT MAKE THE CORRECTION CALLED FOR. IF THE INCOME T AX DEPARTMENT COMES ACROSS (CAMOUFLAGED) ACCOUNTS NOT IN ACCORDANCE WIT H THE PROVISIONS OF COMPANIES ACT AND ACCOUNTING STANDARDS, IT WOULD BE DUTY-BOUND TO DISTURB THE BOOK PROFITS. VI) IN A RECENT DECISION BY HYDERABAD TRIBUNAL IN T HE CASE OF RAIN COMMODITIES LIMITED (ITA NO 673/HYD/2009), THE TRIBUNAL WHILE PLACING ITS RELIANCE ON THE APOLLO TYRES LIMITED, Q UOTED AS BELOW. 'ONE OF THE MOOT QUESTION RELEVANCE TO THE ISSUE BE FORE US IS WHETHER THE ASSESSING OFFICER HAS POWER TO ALTER THE NET PROFIT? IN OUR CONSIDERED OPINION, YES. YYE AGREE T HAT IT IS SETTLED LAW THAT ASSESSING OFFICER HAS THE POWER TO ALTERNATE THE NET PROFIT. IN THE FOLLOWING TWO CASE S, THE ASSESSING OFFICER CAN REWRITE THE PROFIT AND LOSS A CCOUNT I.E. TO SAY THAT ASSESSING OFFICER SHOULD RECALCULATE TH E NET PROFIT AND THEN FOLLOW THE ADJUSTMENTS OF MAT AS US UAL: [1] IF IT IS DISCOVERED THAT PROFIT AND LOSS ACCOUNT IS NOT DRAWN UP IN ACCORDANCE WITH PART II AND PORT III OF SCHEDULE VI OF THE COMPANIES ACT . HOWEVER, THE ASSESSING OFFICER CANNOT DISTURB THE NET PROFIT AS SHOWN BY THE ASSESSEE WHE RE THERE ARE NO SUCH ALLEGATIONS, FRAUD OR MISREPRESEN TATION BUT ONLY A DIFFERENCE OF OPINION AS TO WHETHER A PA RTICULAR AMOUNT SHOULD BE PROPERLY SHOWN IN THE PROFIT AND L OSS ACCOUNT OR IN THE BALANCE SHEET2] IF ACCOUNTING POL ICIES, ACCOUNTING STANDARDS NOT ADOPTED FOR PREPARING SUCH ACCOUNTS AND METHOD, RATE OF DEPRECIATION WHICH HAV E BEEN INCORRECTLY ADOPTED FOR PREPARATION OF PROFIT AND LOSS ACCOUNT ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 10 OF 51 THIS ALSO REITERATES THE POINT THAT THE APEX COURT HAD NOT PLACED A BLANKET BAN ON THE ASSESSING OFFICERS TO QUESTION T HE FINANCIAL STATEMENTS IN CASES WHERE THE DEVIATION FROM THE GE NERALLY ACCEPTED ACCOUNTING PRINCIPLES / ACCOUNTING STANDARDS IS APP ARENT. WITHOUT PREJUDICE TO THE ABOVE, THE SECTION 115JB IN EXPLAN ATION [1] PROVIDES THE AS UNDER UNDER: FOR THE PURPOSES OF THIS SECTION, 'BOOK PROFIT' MEA NS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVA NT PREVIOUS YEAR PREPARED UNDER SUB-2, AS INCREASED BY : (G) THE AMOUNT OF DEPRECIATION (I) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISIONS FOR DIMINUTION IN THE VALUE OF ANY ASSET. IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (I) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT OR IN ANY AMOUNT AND AS REDUCED BY, (IIA) THE AMOUNT OF DEPRECIATION DEBITED TO THE PR OFIT AND LOSS ACCOUNT (EXCLUDING THE DEPRECIATION ON ACCOUNT OF REVLAUTION OF ASSETS); OR IN VIEW OF THE ABOVE ALSO ALTHOUGH THE NOMENCLATURE GIVEN BY THE ASSESSEE TO THE CLAIM OF RS.52.74 CRORES IS CHA NGE IN DEPRECIATION RATES, THE NATURE IS THAT IT HAS RESUL TED IN DIMINUTION IN THE VALUE OF THE ASSETS AND ALTERNATI VELY IN THE FORM OF EXCESS DEPRECIATION CLAIM ON ACCOUNT OF REV ALUATION OF ASSETS. IN VIEW OF THE AFORESAID DISCUSSIONS, I HEREBY MAKE AN ADJUSTMENT OF A SUM OF BEING PRIOR PERIOD EXPENSES OF RS. 2,40,48,802/- , PROVISION FOR RAILWAYS EXTRAORDINAR Y ITEMS RS.14,09,30,283/- AND ADJUSTMENT DUE TO CHANGE IN D EPRECIATION RATES AMOUNTING TO RS.52.74 CRORES TO THE RETURNED BOOK PROFITS ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 11 OF 51 OF THE COMPANY FOR THE PURPOSE OF COMPUTATION OF IN COME AS PER MAT. RELEVANT PORTION OF THE ORDER OF LD. CIT(A) 4 . GROUND NO. 2 IS DIRECTED AGAINST THE DISALLOWANCES MADE BY THE AO WHILE CALCULATING BOOK PROFIT UNDER SECTION 115JB O F THE ACT. GROUND NO. 2.1, 2.2 & 2.3 ARE AGAINST ADJUSTMENTS ON ACCOU NT OF PRIOR PERIOD EXPENSES OF RS.2,40,48,802, EXCEPTIONAL ITEM OF RS. 14,09,30,283 AND ADJUSTMENT DUE TO CHANGE IN DEPRECIATION RATE O F RS. 52,74,00,000/-. 4.1 ON THESE GROUNDS, THE LD. AR FURNISHED WRITTEN SUBMISSION AS UNDER: 'SECTION 115JB OF THE INCOME TAX ACT, 1961 PROVIDES FOR MINIMUM ALTERNATE TAX (MAT) ON COMPANIES. A COMPANY IS REQUIRED TO PAY A SPECIFIED PERCENTAGE (18.5%) OF I TS BOOK PROFIT AS INCOME TAX IF THE TAX LIABILITY OF THE COMPANY U NDER REGULAR PROVISIONS IS LOWER THAN THIS AMOUNT. SECTION 115JB OF THE INCOME-TAX ACT MANDATES FOR THE PURPOSE OF THIS SEC TION THE PROFIT AND LOSS ACCOUNT SHALL BE PREPARED IN ACCORD ANCE WITH THE PROVISIONS OF PART II OF SCHEDULE VI OF THE COMPANI ES ACT 1956.BOOK PROFIT IS REQUIRED TO BE CALCULATED BY MA KING CERTAIN ADJUSTMENTS TO THE NET PROFIT, AS SHOWN IN THE PROF IT AND LOSS ACCOUNT. THE ADDITIONS AND DELETIONS TO BE MADE TO THE NET PROFIT ARE LAID OUT IN EXPLANATION 1 TO SECTION 115JB. THIS LIST IS AN EXHAUSTIVE LIST AND NO ADJUSTMENT, APART FROM THOSE MENTIONED IN THIS SECTION, CAN BE MADE TO THE BOOK PROFITS WH ATEVER THE CASE MAYBE. IN VARIOUS CASES, IT HAS BEEN HELD THAT ASSESSING O FFICER HAS AUTHORITY ONLY TO EXAMINE WHETHER THE BOOKS OF ACCO UNTS ARE MAINTAINED ACCORDING TO THE PROVISIONS OF THE COMPA NIES ACT. AO THEREAFTER HAS LIMITED POWERS OF MAKING ADJUSTMENTS AS PROVIDED FOR IN THE EXPLANATION OF SECTION 115JB. THE COMPUTA TION OF BOOK PROFIT STARTS FROM THE NET PROFIT AS SHOWN IN THE P ROFIT & LOSS ACCOUNT AS INCREASED BY ITEMS PRESCRIBED IN (A) TO (I) AND ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 12 OF 51 REDUCED BY ITEMS (I) TO (VIII) OF EXPLANATION 1 OF S ECTION 115JB OF THE ACT. SO, NECESSARILY ANY OF THE AMOUNTS WHICH A RE TO BE ADDED OR REDUCED CAN ONLY BE CONSIDERED IN THE LIGH T OF THE ITEMS SPECIFIED IN THE ACT. REFERENCE IN THIS REGARD MAYBE BE PLACED ON THE DEC ISION OF THE HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT [255 ITR 273] WHEREIN IT WAS HELD THAT: 'THEREFORE, WE ARE OF THE OPINION THAT THE ASSESSIN G OFFICER WHILE COMPUTING THE INCOME UNDER SECTION 115J HAS O NLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AS HAVIN G BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIE S ACT. THE ASSESSING OFFICER THEREAFTER HAS THE LIMITED PO WER OF MAKING INCREASE AND REDUCTIONS AS PROVIDED FOR IN T HE EXPLANATION TO THE SAID SECTION. TO PUT IT DIFFERENT LY, 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 11 5J.' FURTHER, THE HON'BLE SUPREME COURT IN THE CASE OF MALAYALA MANORAMA CO. LTD. V CIT [300 ITR 251 ]REAFFIRMED THE DECISION RENDERED BY IT IN THE CASE OF APOLLO TYRES LTD. V. CIT [2002] 255 ITR 273 AND HAS HELD AS UNDER: 'IF WE EXAMINE THE SAID PROVISION IN THE ABOVE BACK GROUND, WE NOTICE THAT THE USE OF THE WORDS IN ACCORDANCE W ITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT WAS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING AUTHORITY TO RELY UPON THE AUTHENTIC STAT EMENT OF ACCOUNTS OF THE COMPANY. WHILE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY, AN ASSESSING OFFICER UNDER THE INCO ME-TAX ACT HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT WH ICH OBLIGATES THE COMPANY TO MAINTAIN ITS ACCOUNT IN A MANNER PROVIDED BY THE COMPANIES ACT AND THE SAME TO BE SC RUTINIZED AND CERTIFIED BY STATUTORY AUDITORS AND WILL HAVE T O BE APPROVED BY THE COMPANY IN ITS GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMP ANIES WHO ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 13 OF 51 HAS A STATUTORY OBLIGATION ALSO TO EXAMINE AND SATI SFY THAT THE ACCOUNTS OF THE COMPANY ARE MAINTAINED IN ACCORDANC E WITH THE REQUIREMENTS OF THE COMPANIES ACT. IN SPITE OF ALL THESE PROCEDURES CONTEMPLATED UNDER THE PROVISIONS OF THE COMPANIES ACT, THE COURT OBSERVED THAT IT IS DIFFIC ULT TO ACCEPT THE ARGUMENT OF THE REVENUE THAT IT IS STILL OPEN T O THE ASSESSING OFFICER TO RESCRUTINIZE THIS ACCOUNT AND SATISFY HIMSELF THAT THESE ACCOUNTS HAVE BEEN MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT .' IN THE LIGHT OF THE ABOVE, OUR SUBMISSIONS ON EACH OF THE DISALLOWANCES MADE BY THE LD. AO ARE AS UNDER: A) PRIOR PERIOD EXPENSES AND EXTRAORDINARY ITEM: THE LD. AO HAS DISCUSSED THE ALLOWABILITY OF PRIOR PERIOD EXPENSES AT PAGES 12 TO 14 OF THE ASSESSMENT ORDER. HIS MAI N CONTENTIONS ARE AS UNDER: THE BASIC REQUIREMENT OF PREPARING PROFIT AND LOSS ACCOUNTS AS PER PARA II OF THE SCHEDULE UNDER COMPA NIES ACT IS THAT THE P & L SHOULD BE MADE TO DISCLOSE TH E RESULTS OF THE WORKING OF THE COMPANY DURING THE PERIOD COV ERED BY THE ACCOUNTS. REFERENCE HAS BEEN MADE TO SECTION 145 OF THE INCOM E- TAX ACT. AS PER LD. AO, THE ACCOUNTING STANDARD PR ESCRIBED U/S 145(2) PROVIDES FOR ACCRUAL BASIS. THE REASON AS WHY THE AS-5 REQUIRES FOR ADJUSTMENT OF PRIOR PERIOD ITEM IN CURRENT YEAR IS THAT THE INDIA REGULATOR DOES NOT ALLOW FOR REVISION OF EARLIER YEARS FINANC IAL STATEMENTS. FURTHER, THE LD. AO HAS PLACED RELIANCE ON THE CASE DECIDED BY HONBLE KERALA HIGH COURT IN SHREE BHAGA WATHY TEXTILE LTD. VS. ASSTT. CIT- ITA NO. 74/2010 THE LD. AO HAS NOT GIVEN ANY REASON IN HIS ORDER FO R DISALLOWING EXTRAORDINARY ITEM. PRESUMABLY THE S AME HAS BEEN DISALLOWED ON THE BASIS OF ABOVE CONTENTIO N: ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 14 OF 51 OUR SUBMISSIONS: THE PERUSAL OF ABOVE CONTENTION RAISED BY THE LD. A O IN THE ASSESSMENT ORDER WILL CLEARLY REVEAL THAT THE DISAL LOWANCE ON ACCOUNT OF PRIOR PERIOD EXPENSES AND EXCEPTIONAL IT EM IS CLEARLY OUT NON-APPLICATION OF MIND AND OVERRULING JURISPRU DENCE. IT IS A WELL SETTLED LEGAL POSITION THAT SECTION 11 5JB STARTS WITH A NON-OBSTANTE CLAUSE AND HENCE, IS A CODE IN ITSELF. A NON-OBSTANTE CLAUSE IN A STATUTE MAKES THE PROVISION INDEPENDENT OF OTHER PROVISIONS CONTAINED IN THE LAW, EVEN IF THE OTHER PROVISIONS PROVIDE TO THE CONTRARY. IN THIS REGARD, WE SUBMIT THAT AS PER SECTION 115JB (2), IN ORDER TO COMPUTE BOOK PROFITS UNDER THIS SECTION, THE PROFIT & LOSS ACCOUNT SHOULD BE PREPARED IN ACCORDANCE WITH THE PROVISION S COMPANIES ACT. THE RELEVANT PROVISIONS ARE CONTAINED U/S 211( 3A) TO 211(3C) OF THE COM PA NR ACT, 1956 PROVIDE AS UNDER- 211 (1) . (2) EVERY PROFIT AND LOSS ACCOUNT OF A COMPANY SHALL GIV E A TRUE AN FAIR VIEW OF THE PROFIT OR LOSS OF THE COMP ANY FOR THE FINANCIAL YEAR AND SHALL, SUBJECT AS AFORESAID, COMPLY WITH THE REQUIREMENTS OF PART II OF SCHEDULE VI, SO FAR AS THEY ARE APPLICABLE THERETO. PROVIDED THAT NOTHING CONTAINED IN THIS SUB-SECTION SHALL APPLY TO ANY INSURANCE OR BANKING COMPANY OR ANY COMPANY ENGAGED IN THE GENERATION OR SUPPLY OF ELECTRICITY, OR TO ANY OTHER CLASS OF COMPANY FOR W HICH A FORM OF PROFIT AND LOSS ACCOUNT HAS BEEN SPECIFIED IN OR UNDER THE ACT GOVERNING SUCH CLASS OF COMPANY. (3) THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFICIAL GAZETTE, EXEMPT ANY CLASS OF COMPANIES FRO M COMPLIANCE WITH ANY OF THE REQUIREMENTS IN SCHEDULE VI IF, IN ITS OPINION, IT I NECESSARY TO GRANT THE EXE MPTION IN THE PUBLIC INTEREST. ANY SUCH EXEMPTION MAY BE GRAN TED EITHER UNCONDITIONALLY OR SUBJECT TO SUCH CONDITION S AS MAY BE SPECIFIED IN THE NOTIFICATION. (3A) EVERY PROFIT AND LOSS ACCOUNT AND BALANCE SHE ET OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS. ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 15 OF 51 (3B) WHERE THE PROFIT AND LOSS ACCOUNT AND THE BALA NCE SHEET OF THE COMPANY DO NOT COMPLY WITH THE ACCOUNT ING STANDARDS, SUCH COMPANIES SHALL DISCLOSE IN ITS PRO FIT AND LOSS ACCOUNT , AND BALANCE SHEET, THE FOLLOWING, NA MELY:- (A) THE DEVIATION FROM THE ACCOUNTING STANDARDS ,. (B) THE REASONS FOR SUCH DEVIATION ; AND (C) THE FINANCIAL EFFECT, IF ANY, ARISING DUE TO SUCH DEVIATION. (3C) FOR THE PURPOSES OF THIS SECTION, THE EXPRESS ION 'ACCOUNTING STANDARDS' MEANS THE STANDARDS OF ACCOUNTING RECOMMENDED BY THE INSTITUTE OF CHARTERE D ACCOUNTANTS OF INDIA CONSTITUTED UNDER THE CHARTERE D ACCOUNTANTS ACT, 1949 F38 OF 1949). AS MAY BE PRESCRIBED BY THE CENTRAL GOVERNMENT IN CONSULTATIO N WITH THE NATIONAL ADVISORY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECT ION 210A : PROVIDED THAT THE STANDARDS OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO BE THE ACCOUNTING STANDARD S UNTIL THE ACCOUNTING STANDARDS ARE PRESCRIBED BY TH E CENTRAL GOVERNMENT UNDER THIS SUB-SECTION.' A PERUSAL OF THE ABOVE CLEARLY RESTED DOWN THAT AS PER SECTION 211(3A) OF COMPANIES ACT 1956, THE PROFIT & LOSS AC COUNT OF A COMPANY SHOULD BE PREPARED IN ACCORDANCE WITH THE A PPLICABLE ACCOUNTING STANDARDS ISSUED BY ICAI. A FURTHER REFERENCE MAY BE MADE TO GUIDANCE NOTE IS SUED BY ICAI THAT THE ACCOUNTING STANDARDS REFERRED TO IN SECTIO N 115JB ARE THE ONES ISSUED BY ICAI (I.E. REFERRED U/S 211(3C) OF C OMPANIES ACT) AND NOT THE ONES ISSUED U/S 145(2) OF THE INCOME TA X ACT. AN EXTRACT OF THE RELEVANT GUIDANCE NOTE ISSUED BY ICA I IS REPRODUCED HEREUNDER: '19.3 THE VARIATION REGARDING THE ACCOUNTING POLICI ES, ACCOUNTING STANDARDS AND METHOD AND RATES OF DEPREC IATION ARISE IN TWO CASES. FIRSTLY, WHEN THE ACCOUNTING YE AR OF THE COMPANY IS DIFFERENT FROM THE PREVIOUS YEAR UNDER T HE INCOME-TAX ACT AND SECONDLY, .-/HER THE '/A. COMPAN Y HAVING ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 16 OF 51 THE SAME ACCOUNTING YEAR AND PREVIOUS YEAR, PREPARE S ACCOUNTS FOR INCOME- TAX ON DIFFERENT BASES. IT MAY BE NOTED THAT THE REFERENCE TO ACCOUNTING STANDARDS N :MS SE CTION ARE TO THE ACCOUNTING STANDARDS AS REFERRED TO IN SECTI ON 211(3C) OF THE COMPANIES ACT AND NOT THE ACCOUNTING STANDARDS NOTIFIED BY THE CENTRAL GOVERNMENT UNDER SECTION 145(2) OF THE INCOME-TAX ACT. HOWEVER, THE LD. AO HAS APPLIED ACCOUNTING STANDARD ISSUED U/S 145(2) INSTEAD OF AS-5. THE LD. AO HAS FURTHER IGNORED THE AFORESAID CLEAR DECISIONS OF THE HON'BLE SUPREME COURT AND WENT ON TO EXAMINE WH AT WAS NOT CONTEMPLATED U/S 115JB. IT MAY PLEASE BE NOTED THAT IN HIS ORDER, THE LD. AO HAS ACCEPTED THE POSITION THAT PR IOR PERIOD EXPENSES ARE ALLOWED FOR ADJUSTMENT UNDER COMPANIES ACT IN THE CURRENT PERIOD ONLY. IN ADDITION TO THIS, IT IS NOW HERE ALLEGED BY THE LD. AO THAT THE ACCOUNTS OF THE ASSESSEE ARE NO T IN ACCORDANCE WITH PART II OF THE SCHEDULE OF COMPANIE S ACT. ALSO, IT IS IMPERATIVE TO NOTE THAT THE RELIANCE PL ACED BY THE LD. AO ON THE JUDGMENT OF HON'BLE KERALA HIGH COURT IN SREE BHAGAWATHY TEXTILES LTD. V. ASSISTANT COMMISSIONER OF INCOME-TAX [342 ITR 244 ]IS IMPRUDENT. IN THE SAID CASE, IT WAS CLEARLY ON RECORDS THAT PRIOR PERIOD EXPENSES W ERE NOT DEBITED TO 'PROFIT AND LOSS' ACCOUNT BUT TO 'PROFIT AND LOSS APPROPRIATION' ACCOUNT. THE HON'BLE COURT EXAMINED AND HELD IN THE CONCLUDING PARAGRAPH AS UNDER: 'WHAT IS CLEAR FROM THE ABOVE IS THAT THE ASSESSING OFFICER SHOULD START WITH THE PROFIT AVAILABLE IN THE PROFI T AND LOSS ACCOUNT PREPARED IN TERMS OF PARTS II AND III OF SC HEDULE VI TO THE COMPANIES ACT. THE PROFIT UNDER THE SAID PROFIT AND LOSS ACCOUNT ADMITTEDLY IS RS. 1,01,37,664. THE WAY THE ASSESSEE HAS CLAIMED DEDUCTION BASED ON THE PRO FIT AND LOSS APPROPRIATION ACCOUNT IS DETAILED IN THE O RDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS). WHAT IS CLEAR FROM THE SAID ORDER IS THAT THE ASSESSEE MADE A FUR THER DEDUCTION FROM THE PROFIT AVAILABLE UNDER THE PROFI T AND LOSS ACCOUNT PREPARED UNDER THE COMPANIES ACT. OBVI OUSLY, ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 17 OF 51 UNLESS THE DEDUCTION MADE BY THE ASSESSEE IS PERMIS SIBLE IN TERMS OF CLAUSES (I) TO (IX) OF THE EXPLANATION T O SECTION 115JA ABOVE STATED, THE SAME IS INADMISSIBLE. THE ASSESSEE HAS NO CASE THAT THE PRIOR PERIOD EXPENSES IS AN ITEM THAT COULD BE DEDUCTED FROM THE PROFIT IN TERM S OF ANY OF THE CLAUSES COVERED BY THE EXPLANATION TO SECTION 115JA. SO MUCH SO, THE CLAIM IS NOT A DEDUCTION ALLOWABLE FROM THE PROFIT TAKEN FROM THE PROFIT AND LOSS ACCOUNT P REPARED UNDER THE COMPANIES ACT. WHEN THE DEDUCTION IS ADMITTEDLY NOT ADMISSIBLE UNDER THE PROVISIONS OF T HE ACT, THE ASSESSEE WANTS TO BANK ON THE TECHNICALITY THAT THE DEDUCTION, THOUGH WRONGLY ALLOWED IN THE ASSESSMENT BASED ON THE WRONG CLAIM MADE BY THE ASSESSEE, CANN OT BE REVISED IN RECTIFICATION PROCEEDINGS UNDER SECTI ON 154. WE ARE UNABLE TO ACCEPT THIS CONTENTION BECAUSE IT IS THE SETTLED POSITION AS REVEALED FROM THE DECISIONS OF THE SUPREME COURT RELIED ON BY THE ASSESSEE ITSELF THAT THE ASSESSING OFFICER HAS TO START ASSESSMENT BY ADOPTI NG THE PROFIT AVAILABLE IN THE PROFIT AND LOSS ACCOUNT PRE PARED IN TERMS OF PARTS II AND III OF SCHEDULE VI TO THE COM PANIES ACT. IF THE ASSESSEE HAS MADE A CLAIM OF DEDUCTION FROM THIS PROFIT NOT ENUMERATED IN CLAUSES (I) TO (IX) C OVERED BY THE EXPLANATION TO SECTION 115JA, THE ASSESSMENT SO COMPLETED BASED ON THE PROFIT TAKEN FROM THE PROFIT AND LOSS APPROPRIATION ACCOUNT SUBMITTED BY THE ASSESSE E HAPPENS TO BE AN APPARENT MISTAKE WHICH COULD BE RECTIFIED IN PROCEEDINGS TO BE INITIATED UNDER SECT ION 154.' IN FACT, THE CASE OF THE ASSESSEE IS IDENTICAL TO CIT V KHAITAN CHEMICALS & FERTILIZERS LTD., [307 ITR 150], WHERE THE HON'BLE DELHI HIGH COURT WHILE ALLOWING THAT PRIOR PERIOD EXPENSES ARE ALLOWABLE UNDER MAT OBSERVED AS UNDER: 'THE TRIBUNAL WAS CORRECT, IN LAW, IN HOLDING THAT THE ASSESSING OFFICER HAD FAILED TO APPRECIATE THAT THE NET PROFIT FOR THE PURPOSE OF SECTION 115JA IS TO BE COMPUTED ONLY AFTER DEDUCTING THE PRIOR PERIOD EXPENSES/EXTRAORDI NARY ITEMS. THE FUNDAMENTAL FLAW THAT HAD ENTERED INTO T HE ASSESSING OFFICER'S APPROACH WAS THAT HE WAS UNDER AN IMPRESSION THAT THE ASSESSEE WAS CLAIMING A REDUCTI ON IN THE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 18 OF 51 NET PROFIT IN TERMS OF CLAUSES (I ) TO (IX) OF THE EXPLANATION TO SECTION 115JA(2). THE ASSESSEE HAD ALL ALONG CONTEN DED THAT THE NET PROFIT WAS TO BE COMPUTED ON THE BASIS OF T HE PROFIT AND LOSS ACCOUNT WHICH, IN TURN, WAS TO BE IN ACCOR DANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. SUCH A COMPUTATION OF NET PROF IT, IN VIEW OF THE PRESCRIBED ACCOUNTING STANDARD (AS-5). REQUIRES THE PRIOR PERIOD EXPENSES/EXTRAORDINARY ITEMS TO BE SHOWN SEPARATELY. THAT DID NOT MEAN THAT BECAUSE THOSE IT EMS HAD BEEN SHOWN SEPARATELY, THEY DID NOT CONSTITUTE PART OF NET PROFIT. ' PARAGRAPH 5 OF THE ACCOUNTING STANDARD (A S-5) SPECIFICALLY REQUIRES THAT ALL ITEMS OF INCOME AND EXPENSES WHICH ARE 'RECOGNIZED IN A PERIOD' SHOULD BE INCLUD ED IN THE PROFIT OR LOSS FOR THE PERIOD UNLESS AN AS REQUIRES OR PERMITS OTHERWISE, F PERIOD ITEMS', AS GIVEN IN AS-5. CLEAR LY STIPULATES THAT PRIOR PERIOD ITEMS ARE INCOMES OR EXPENSES WHI CH ARISE 'IN THE CURRENT PERIOD' AS A RESULT OF ERRORS OR OM ISSIONS IN THE PREPARATION OF THE FINANCIAL STATEMENTS OF ONE OR MORE PRIOR PERIODS. THEREFORE, THE INCOME OR EXPENSES RE LATABLE TO PRIOR PERIOD ITEMS ARE THOSE WHICH ARISE IN THE CUR RENT PERIOD, I.E.. THE PERIOD RELEVANT FOR THE PURPOSES OF COMPUTING THE NET PROFIT OR LOSS. CLEARLY, PRIOR PE RIOD ITEMS ARE TO BE INCLUDED IN THE DETERMINATION OF NET PROF IT OR LOSS. FURTHERMORE, PARAGRAPH 7 OF AS-5 STIPULATES THAT TH E NET PROFIT OR LOSS, INTER ALIA, COMPRISES OF EXTRAORDIN ARY ITEMS AND THE SAME SHOULD BE DISCLOSED ON THE FACE OF THE STA TEMENT OF PROFIT AND LOSS. FROM THIS, IT IS CLEAR THAT BOT H 'PRIOR PERIOD ITEMS' AS WELL AS 'EXTRAORDINARY ITEMS' ARE TO BE I NCLUDED IN THE DETERMINATION OF NET PROFIT OR LOSS. IF A PRIOR PERIOD ITEM IS AN EXPENSE, IT WILL GO TOWARDS REDUCING THE NET PROFIT OR INCREASING THE LOSS, AS THE CASE MAY BE. ON THE OTH ER HAND, IF THE PRIOR PERIOD ITEM IS AN INCOME, IT WOULD GO TOWARDS INCREASING THE NET PROFIT OR REDUCING THE LOSS, AS THE CASE MAY BE. THE SAME IS THE POSITION WITH EXTRAORDINARY ITEMS WHICH MAY BE INCOMES OR EXPENSES. THE CONCLUSION IS THAT PRIOR PERIOD ITEMS AND EXTRAORDINARY ITEMS FORM PAR T OF THE NET PROFIT OR LOSS. [PARA 10] PARAGRAPH 15 OF AS-5 MAKES IT CLEAR THAT THE NATURE AND AMOUNT OF PRIOR PERIOD ITEMS SHOULD BE SEPARATELY DISCLOSED IN THE STATEMENT OF PROFIT AND LOSS IN A MANNER ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 19 OF 51 THAT THEIR IMPACT ON THE 'CURRENT' PROFIT OR LOSS C AN BE PERCEIVED. TWO APPROACHES HAVE BEEN INDICATED IN PARAGRAPH 19 OF THE SAID ACCOUNTING STANDARD (AS-5) . THE NORMAL APPROACH IS TO INCLUDE PRIOR PERIOD ITEM S IN THE DETERMINATION OF NET PROFIT OR LOSS FOR THE CUR RENT PERIOD. THE ALTERNATIVE APPROACH IS TO SHOW SUCH IT EMS IN THE STATEMENT OF PROFIT AND LOSS AFTER DETERMINATIO N OF CURRENT NET PROFIT OR LOSS. AS INDICATED IN THE ACC OUNTING STANDARD, IN EITHER CASE, THE OBJECTIVE IS TO INDIC ATE THE EFFECT OF SUCH ITEMS ON THE CURRENT PROFIT OR LOSS. IT WAS OBVIOUS THAT BECAUSE OF THE PRESCRIBED AS WHICH HAS TO BE FOLLOWED BY THE ASSESSEE IN VIEW OF THE PROVISIO NS OF SECTION 115JA(2) OF THE ACT, READ WITH SECTION 211 OF THE COMPANIES ACT, THE ASSESSEE WAS REQUIRED TO SHOW TH E PRIOR PERIOD ITEMS/EXTRAORDINARY ITEMS SEPARATELY S O THAT THEIR IMPACT ON THE CURRENT PROFIT OR LOSS COULD BE PERCEIVED. THE FACT, THAT THE ASSESSEE HAD ADOPTED THE ALTERNATIVE APPROACH OF SHOWING SUCH ITEMS IN THE STATEMENT OF PROFIT AND LOSS AFTER DETERMINATION OF CURRENT NET PROFIT OR LOSS, DID NOT MEAN THAT THOSE ITEMS W ERE NOT TO BE TAKEN INTO ACCOUNT IN COMPUTING NET PROFIT AS ENVISAGED IN SECTION 115JA. THUS, WHAT THE ASSESSEE HAD DONE WAS ONLY TO INDICATE PRIOR PERIOD ITEMS/EXTRAO RDINARY ITEMS SEPARATELY. THAT DID NOT MEAN THAT THE FIGURE OF NET PROFIT WAS TO BE ARRIVED AT DE HORS THOSE ITEMS IN VIEW OF THE AFORESAID DISCUSSION, NET PROFIT (AS REFERRED TO IN SECTION 115JA) OF THE ASSESSEE-COMPANY WAS TO BE COMPUTED ONLY AFTER DEDUCTING THE EXPENSES ON PRIOR PERIOD/EXTRAORDINARY ITEMS WHICH WERE BUSINESS EXPENDITURE, BUT WERE SHOWN SEPARATELY IN THE PROFI T AND LOSS ACCOUNT DUE TO THE SPECIFIC REQUIREMENT OF THE AS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA, '(EMPHASIS SUPPLIED) IT IS IMPERATIVE TO TAKE NOTE OF THE CASE OF HON'BLE DELHI HIGH COURT IN COMMISSIONER OF INCOME-TAX V. JAGATJIT INDUSTRIES LTD. [339 ITR 382] WHERE THE HON'BLE COURT ALLOWED PRIOR PERIOD EXPENSES EVEN WHEN THE COMPUTA TION WAS UNDER NORMAL PROVISIONS OF THE ACT AND SECTION 145( 2) WAS APPLICABLE. BY IMPLICATION, THERE IS NO JUSTIFICATI ON TO MAKE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 20 OF 51 ADDITION ON ACCOUNT OF PRIOR PERIOD EXPENSES WHILE APPLYING SECTION 115JB. UNDER MAT, FAVOURABLE VIEW WAS ALSO TAKEN BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF TAMIL NADU CEMENTS CORPORATION LTD V CIT [349ITR58], THE HON'BLE HIGH COURT CLEARLY HELD THAT THE CASE OF SREE BHAGAWATHY TEXTI LES LTD. V. ASSISTANT COMMISSIONER OF INCOME-TAX [342 ITR 244] (AS WAS RELIED UPON BY THE AO) WAS DISTINGUISHABLE AS I T WAS MORE ABOUT THE P&L APPROPRIATION ACCOUNT. THE HON'BLE HI GH COURT HAS HELD AS UNDER: 'IT IS RELEVANT TO NOTE HEREIN THAT THE SAID DECISI ON RENDERED BY THE DELHI HIGH COURT WAS CONSIDERED BY THIS COURT IN THE DECISION REPORTED IN CIT V. SWAMIJI MI LLS LTD. [2012] 342 ITR 250 (MAD), WHEREIN IN PREFERENCE TO THE DECISION OF THE DELHI HIGH COURT REPORTED IN CIT V. KHAITAN CHEMICALS AND FERTILIZERS LTD. [2008] 307 I TR 150 (DELHI) THIS COURT APPLIED THE DECISION OF THE KERA LA HIGH COURT REPORTED IN SREE BHAGAWATHY TEXTILES LTD. V. ASST. CIT ITR 244 (KER), ON THE FACTS AVAILABLE THAT IT W AS MORE ABOUT THE APPROPRIATION CONSIDERING THE NATURE OF T HE EXPENSES CHARGED ON THE APPROPRIATION ACCOUNT, THIS COURT HELD THAT THE ASSESSEE WAS NOT ENTITLED TO HA VE THE DEDUCTION OF AMOUNTS DEBITED IN THE APPROPRIATION ACCOUNT IN THE COMPUTATION OF THE NET PROFIT. AS SU CH, THE COURT REPORTED IN CIT V. SWAMIJI MILLS LTD. [2012] 342 ITR250 (MAD), HAS NO FACTS OF THE CASE HEREIN AND I T IS TOTALLY DISTINGUISHABLE.' IN THE CASE OF GULF OIL CORPORATION LTD V. ACIT [111 ITD 124] NET PROFIT AS PER AUDITED BALANCE SHEET WAS ARRIVED AFTER DEDUCTING PRIOR PERIOD EXPENSES. ASSESSING OFFICER WAS OF THE OPINION THAT NET PROFIT BEFORE DEBITING PRIOR PERIOD EXPENSES SH OULD BE TAKEN AS BASE FOR CALCULATING BOOK PROFIT AS PER SECTION 115 JB OF THE ACT. THE CIT(A) REFERRED TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT [255 ITR 273] IN W HICH IT WAS HELD THAT THE ASSESSING OFFICER IS NOT SUPPOSED TO MAKE ANY ALTERATION IN THE BOOK PROFITS SHOWN IN THE PROFIT & LOSS ACCO UNT PREPARED AS PER COMPANIES ACT. ACCORDING TO HIM, THIS OPTION IS NOT AVAILABLE TO ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 21 OF 51 THE ASSESSEE ALSO. THE CIT(A) OBSERVED THAT THE PRI OR PERIOD EXPENSE CLAIMED BY THE ASSESSEE DO NOT FALL WITHIN THE ADJUSTMENTS THAT CAN BE MADE TO THE NET PROFIT AS PER PROFIT & LOSS ACCOUNT BECAUSE THE EXPENDITURE RELATES TO THE TRANSACTION OF EARLIER YEAR. ACCORDINGLY, HE CONFIRMED THE COMPUTATION OF BOOK P ROFITS MADE BY THE ASSESSING OFFICER. THE ITAT BENCH OF HYDERABAD DELETED THE ADDITION AND HELD THAT: 'THEREFORE, WE ARE IN AGREEMENT WITH THE ARGUMENT O F THE LEARNED COUNSEL THAT THE STARTING POINT FOR COMPUTA TION OF BOOK PROFITS FOR THE PURPOSES OF SECTION 115JB SHOU LD BE RS. 660.81LAKHS WHICH IS THE FINAL BALANCE IN THE PROFI T & LOSS ACCOUNT CARRIED TO BALANCE SHEET. IT MAY ALSO BE NO TED FROM THE ABOVE DISCUSSION THAT EVEN EXTRAORDINARY ITEMS HAVE TO BE DEBITED TO THE PROFIT & LOSS ACCOUNT. HAVING ADO PTED THE FIGURE OF RS. 660.81LAKHS AS THE STARTING POINT, TH E SAME HAS TO BE INCREASED BY THE ITEMS SPECIFIED IN CLAUSES ( A) TO (F) AND HAS TO BE REDUCED BY THE ITEMS SPECIFIED IN CLA USES (I) TO (VII) GIVEN IN THE EXPLANATION. NO OTHER ADJUSTME NT IS PERMITTED BY LAW AND ALSO AS LAID DOWN BY THE SUPRE ME COURT IN THE CASE OF APOLLO TYRES LTD. (SUPRA). NON E OF THE CLAUSES GIVEN IN THE EXPLANATION PROVIDE FOR THE IN CREASE OR DECREASE OF THE BOOK PROFITS BY EXTRAORDINARY ITEMS .' ITAT BENCH OF HYDERABAD IN THE CASE OF DCIT V. M/S. USHODAYA ENTERPRISES (ITA NO. 1419/HYD/2008) FOLLOWED THE DECISION OF RENDERED IN THE CASE OF GULF OIL CORPORATION VS. ACIT [111 ITD 124] WHILE DECIDING THE ISSUE IN FAVOUR OF THE ASSE SSEE DISMISSED THE GROUND OF DEPARTMENT FOR ADDITION OF PRIOR PERI OD EXPENSES TO NET PROFIT AS DECLARED IN THE BALANCE SHEET. WITHOUT PREJUDICE TO OUR ABOVE SUBMISSIONS, WE WOULD LIKE TO MENTION THAT THE LD. AO HAS DISALLOWED PRIOR PERIOD EXPENSES OWING TO THE NATURE OF THE TRANSACTION, I.E. AS PER THE LD. AO, PRIOR PERIOD EXPENSES ARE NOT RELATED TO THE ASSESSMENT Y EAR AND HENCE SHOULD NOT FORM PART OF THE PROFIT AND LOSS ACCOUNT OF THE ASSESSMENT YEAR. EVEN IF THE CONTENTION OF THE LD. A O IS ACCEPTED, THE LD. AO HAS FAILED TO APPLY THE SAME PRINCIPLE F OR PRIOR PERIOD INCOME SHOWN BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSMENT YEAR. DURING THE YEAR UNDER CONSIDERATIO N, THE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 22 OF 51 ASSESSEE HAS SHOWN PRIOR PERIOD EXPENSES AMOUNTING TO RS. 2,40,48,802/- AND PRIOR PERIOD INCOME AMOUNTING TO RS. 5,11,08,612/- IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD PRIOR PERIOD ADJUSTMENT. HOWEVER, THE LD. AO HAS CHERRY P ICKED AND DISALLOWED PRIOR PERIOD EXPENSES ONLY AND CORRESPON DING PRIOR PERIOD INCOME HAS BEEN IGNORED BY THE LD. AO. THERE FORE, EVEN IF THE CONTENTION OF THE LD. AO IS ACCEPTED AND TRANSA CTIONS NOT PERTAINING TO THE ASSESSMENT YEAR ARE IGNORED FOR T HE PURPOSE OF COMPUTING BOOK PROFIT US 115JB, PRIOR PERIOD INCOME SHOULD ALSO BE IGNORED ALONG WITH PRIOR EXPENSES FOR CALCULATING T HE BOOK PROFIT AS PER SECTION 115JB. IN THE LIGHT OF THE ABOVE SUBMISSIONS AND ALSO IN T HE LIGHT OF THE FACT THAT DIRECT PRECEDENT IS AVAILABLE ON SIMILAR ISSUE FROM JURISDICTIONAL HIGH COURT, IT IS PRAYED THAT THE ADDITION ON PRIOR PERIOD EXPENSE AND EXCEPTIONAL IT EM MAV PLEASE BE DELETED. (B) ADJUSTMENT DUE TO CHANGE IN DEPRECIATION RATES DURING THE CAPTIONED ASSESSMENT YEAR I.E. AY 2012-1 3, THERE IS A CHANGE IN THE RATE OF DEPRECIATION CLAIMED BY THE A SSESSEE AS COMPARED TO THE EARLIER YEARS. THE CHANGE WAS NECES SITATED ON ACCOUNT OF TECHNICAL COMMITTEE RECOMMENDATION, THE COPY OF WHICH WAS DULY SUBMITTED BEFORE THE LD. AO. THE IMP ACT OF THIS CHANGE IN ESTIMATED USEFUL LIFE OF ASSETS WAS CLAIM ED BY THE ASSESSEE SEPARATELY IN P&L ACCOUNT AS 'ADJUSTMENT D UE TO CHANGE IN DEPRECIATION RATES' THE LD. AO HAS DISCUSSED THE ALLOWABILITY OF 'ADJUS TMENT DUE TO CHANGE IN DEPRECIATION RATES' UNDER MAT AT PAGES 14 TO 20 OF THE ASSESSMENT ORDER. HIS MAIN CONTENTIONS ARE AS UNDER : THE ASSESSEE HAS DEVIATED FROM RELEVANT ACCOUNTING STANDARDS ISSUED BY ICAI AND THEREFORE, FINANCIAL STATEMENTS OF THE ASSESSEE DO NOT GIVE TRUE AND FAIR VIEW OF THE STATE OF AFFA IRS OF THE COMPANY REFERENCE HAS BEEN TO SECTION 145 OF THE INCOME-TAX , ACT. AS PER ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 23 OF 51 LD. AO, THE ACCOUNTING STANDARD PRESCRIBED U/S 145 (2) SHOULD BE FOLLOWED AND AO CAN INTERFERE IN CASE OF INCONSISTE NCY IN COMPLYING WITH THESE ACCOUNTING STANDARD. THE LD. AO HAS PLACED RELIANCE ON SUTLEJ COTTON MIL LS LTD. VS. ACIT (1993) 45 ITO 22 AND RAIN COMMODITIES LTD. (ITA NO. 673/HYD/2009) TO SUBSTANTIATE THE POWER OF AO TO AD JUST THE BOOK PROFIT. ACCORDING TO LD. AO, THE DECISION OF SUPRE ME COURT IN APOLLO TYRES LTD. VS. CIT (255 ITR 273) DOES NOT PL ACE A BLANKET BAN ON AO TO QUESTION FINANCIAL STATEMENTS WHERE DE VIATION FROM ACCOUNTING STANDARDS IS APPARENT. THE LD. AO CHALLENGED THE COMPETENCY OF TECHNICAL C OMMITTEE AND HAS PLACED RELIANCE ON MCDOWELL AND CO. LTD. V. COM MERCIAL TAX OFFICER (154 ITR 148) TO HOLD THAT ASSESSEE HAS DEL IBERATELY CHANGED THE DEPRECIATION RATES TO AVOID PAYING TAXE S U/S 115JB. AN ALTERNATIVE GROUND HAS BEEN TAKEN BY THE LD. AO THAT WITHOUT PREJUDICE TO ABOVE THE SAID CLAIM SHOULD BE DISALLO WED UNDER CLAUSE (I) OF EXPLANATION 1 OF SECTION 115JB(2) I.E . AMOUNT SET ASIDE AS PROVISIONS FOR DIMINUTION IN THE VALUE OF ANY ASSET. OUR SUBMISSIONS: THE LD. AO HAS IGNORED THE DETAILED SUBMISSION FILE D BY THE ASSESSEE TO SUBSTANTIATE THAT THE CLAIM IS WELL IN ACCORDANC E WITH ACCOUNTING STANDARDS PRESCRIBED BY ICAI. IN THIS REGARD, WE SU BMIT THAT AS PER SECTION 115JB(2), IN ORDER TO COMPUTE BOOK PROFITS UNDER THIS SECTION, THE PROFIT & LOSS ACCOUNT SHOULD BE PREPARED IN ACC ORDANCE WITH THE PROVISIONS OF COMPANIES ACT. THE RELEVANT PROVISION S ARE CONTAINED U/S 211(3A) TO 211(3C) OF THE COMPANIES ACT 1956 WH ICH PROVIDES AS UNDER- '211 (1).. (2) EVERY PROFIT AND LOSS ACCOUNT OF A COMPANY SHALL GIV E A TRUE AND FAIR VIEW OF THE PROFIT OR LOSS OF THE COMPANY FOR THE F INANCIAL YEAR AND SHALL, SUBJECT AS AFORESAID, COMPLY WITH THE REQUIR EMENTS OF PART II OF SCHEDULE VI, SO FAR AS THEY ARE APPLICABLE THERE TO. PROVIDED THAT NOTHING CONTAINED IN THIS SUB-SECTION SHALL APPLY TO ANY INSURANCE OR BANKING COMPANY OR ANY COMPANY ENG AGED IN THE GENERATION OR SUPPLY OF ELECTRICITY, OR TO ANY OTHE R CLASS OF COMPANY ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 24 OF 51 FOR WHICH A FORM OF PROFIT AND LOSS ACCOUNT HAS BEE N SPECIFIED IN OR UNDER THE ACT GOVERNING SUCH CLASS OF COMPANY. (3) THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFICIAL GAZETTE, EXEMPT ANY CLASS OF COMPANIES FROM COMPLIANCE WITH ANY OF THE REQUIREMENTS IN SCHEDULE VI IF, IN ITS OPINION, IT IS NECESSARY TO GRANT THE EXEMPTION IN THE PUBLIC INTEREST. ANY SUCH EXEM PTION MAY BE GRANTED EITHER UNCONDITIONALLY OR SUBJECT TO SUCH C ONDITIONS AS MAY BE SPECIFIED IN THE NOTIFICATION. (3A) EVERY PROFIT AND LOSS ACCOUNT AND BALANCE SHEE T OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS. (3B) WHERE THE PROFIT AND LOSS ACCOUNT AND THE BAL ANCE SHEET OF THE COMPANY DO NOT COMPLY WITH THE ACCOUNTING STANDARDS , SUCH COMPANIES SHALL DISCLOSE IN ITS PROFIT AND LOSS ACC OUNT AND BALANCE SHEET, THE FOLLOWING, NAMELY:- (A) THE DEVIATION FR OM THE ACCOUNTING STANDARD; (B) THE REASONS FOR SUCH DEVIATION ; AND (C) THE FI NANCIAL EFFECT, IF ANY, ARISING DUE TO SUCH DEVIATION. (3C) FOR THE PURPOSES OF THIS SECTION, THE EXPRESS ION 'ACCOUNTING STANDARDS' MEANS THE STANDARDS OF ACCOUNTING RECOMM ENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CONSTIT UTED UNDER THE CHARTERED ACCOUNTANTS ACT, 1949 F38 OF 1949). AS MAY BE PRESCRIBED BY THE CENTRAL GOVERNMENT IN CONSULTATIO N WITH THE NATIONAL ADVISORY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 210A : PROVIDED TH AT THE STANDARDS OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTER ED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO BE THE ACCOUNTING STANDARD S UNTIL THE ACCOUNTING STANDARDS ARE PRESCRIBED BY THE CENTRAL GOVERNMENT UNDER THIS SUB-SECTION.' A PERUSAL OF THE ABOVE CLEARLY RESTED DOWN THAT AS PER SECTION 211(3A) OF COMPANIES ACT 1956, THE PROFIT & LOSS ACCOUNT OF A COMPANY SHOULD BE PREPARED IN ACCORDANCE WITH THE APPLICABLE ACCOU NTING STANDARDS ISSUED BY ICAI. THE APPLICABLE ACCOUNTING STANDARD WITH RESPECT TO DISALLOWANCE OF DEPRECIATION SHALL BE ACCOUNTING ST ANDARD 6, DEPRECIATION ACCOUNTING. THE RELEVANT PARAS OF ACC OUNTING STANDARD 6 WHICH ALLOWS A COMPANY TO REVISE THE USEFUL LIFE OF AN ASSET ARE REPRODUCED HEREUNDER- ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 25 OF 51 RELEVANT PARAGRAPHS OF AS-6 PARA 11 'THE QUANTUM OF DEPRECIATION TO BE PROVIDED IN AN A CCOUNTING PERIOD INVOLVES THE EXERCISE OF JUDGEMENT BY MANAGEMENT IN THE LIGHT OF TECHNICAL, COMMERCIAL, ACCOUNTING AND LEGAL REQUIRE MENTS AND ACCORDINGLY MAY NEED PERIODICAL REVIEW. IF IT IS CO NSIDERED THAT THE ORIGINAL ESTIMATE OF USEFUL LIFE OF AN ASSET REQUIR ES ANY REVISION, THE UNAMORTISED DEPRECIABLE AMOUNT OF THE ASSET IS CHAR GED TO REVENUE OVER THE REVISED REMAINING USEFUL LIFE .' PARA 13 'THE STATUTE GOVERNING AN ENTERPRISE MAY PROVIDE TH E BASIS FOR COMPUTATION OF THE DEPRECIATION. FOR EXAMPLE, THE C OMPANIES ACT, 1956 LAYS DOWN THE RATES OF DEPRECIATION IN RESPECT OF VARIOUS ASSETS. WHERE THE MANAGEMENT'S ESTIMATE OF THE USEFUL LIFE OF AN ASSET OF THE ENTERPRISE IS SHORTER THAN THAT ENVISAGED UNDER THE PROVISIONS OF THE RELEVANT STATUTE, THE DEPRECIATION PROVISION IS APP ROPRIATELY COMPUTED BY APPLYING A HIGHER RATE. IF THE MANAGEMENT'S ESTI MATE OF THE USEFUL LIFE OF THE ASSET IS LONGER THAN THAT ENVISAGED UND ER THE STATUTE, DEPRECIATION RATE LOWER THAN THAT ENVISAGED BY THE STATUTE CAN BE APPLIED ONLY IN ACCORDANCE WITH REQUIREMENTS OF THE STATUTE.' AS PER PARA 24 OF ACCOUNTING STANDARD-5, NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGE IN ACCOUNTING POLICIES, ANY CHANGE IN ACCOUNTING ESTIMATE MAY HAVE AN EFFECT ON THE FI NANCIAL STATEMENTS OF CURRENT YEAR OR FUTURE YEARS. RELEVANT PARAGRAPH OF AS-5 PARA 24 'A CHANGE IN AN ACCOUNTING ESTIMATE MAY AFFECT THE CURRENT PERIOD ONLY OR BOTH THE CURRENT PERIOD AND FUTURE PERIODS. FOR EXAMPLE, A CHANGE IN THE ESTIMATE OF THE AMOUNT OF BAD DEBTS I S RECOGNISED IMMEDIATELY AND THEREFORE AFFECTS ONLY THE CURRENT PERIOD. HOWEVER, A CHANGE IN THE ESTIMATED USEFUL LIFE OF A DEPRECIABL E ASSET AFFECTS THE DEPRECIATION IN THE CURRENT PERIOD AND IN EACH PERI OD DURING THE REMAINING USEFUL LIFE OF THE ASSET. IN BOTH CASES, THE EFFECT OF THE CHANGE RELATING TO THE CURRENT PERIOD IS RECOGNISED AS INCOME OR EXPENSE IN THE CURRENT PERIOD. THE EFFECT, IF ANY, ON FUTURE PERIODS, IS ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 26 OF 51 RECOGNISED IN FUTURE PERIODS.' CONSIDERING THE ABOVE STANDARDS AND TAKING INTO ACC OUNT THE FACT THAT THE MANAGEMENT OF THE COMPANY IS RESPONSIBLE FOR SHOWIN G TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE COMPANY, A MULTI-DIS CIPLINARY EXPERT COMMITTEE OF SENIOR LEVEL OFFICERS WAS FORMED WHICH HAD TAKEN INTO ACCOUNT THE TECHNOLOGICAL CHANGES IN THE TELECOM IN DUSTRY AND PRACTICES BEING FOLLOWED BY OTHER COMPANIES IN THE INDUSTRY A ND THUS TAKING INTO ACCOUNT THE ABOVE FACTORS, DETERMINED THE USEFUL LI FE OF ASSETS AND ACCORDINGLY THE COMPANY HAD CHARGED DEPRECIATION IN THE BOOKS OF ACCOUNTS DURING THE FINANCIAL YEAR 2011-12 BASED ON REVISED LIFE OF ASSETS. THE RECOMMENDATIONS OF COMMITTEE WERE DULY APPROVED BY THE AUDIT COMMITTEE AND ALSO BY THE BOARD OF DIRECTORS. IT WAS EXPLAINED THAT TELECOM INDUSTRY HAS BEEN GOI NG THROUGH FAST PACE OF TECHNOLOGICAL CHANGES AND ACCORDINGLY THE COMPAN Y HAS TO TAKE INTO ACCOUNT THE COST OF MAINTENANCE VIS-A-VIS THE COST OF NEW ASSET AND END OF LIFE IN ORDER TO ENSURE THAT DEPRECIATION IS CHA RGED IN THE BOOKS OF ACCOUNTS BASED ON ABOVE FACTORS AND MAINTENANCE OF ASSETS IN THE LONG RUN MAY NOT BECOME UNVIABLE. THUS, THE CHANGE IN TH E LIFE OF ASSETS AS DETERMINED BY THE COMMITTEE TAKING INTO ACCOUNT ALL THE TECHNOLOGICAL CHANGES IN REGARD TO RELEVANT EQUIPMENT WERE IMPLEM ENTED WHILE FINALIZING THE BALANCE SHEET FOR FINANCIAL YEAR 201 1-12. THIS WAS DONE IN ORDER TO ENSURE PRESENTATION OF TRUE AND FAIR VIEW OF THE BOOKS OF ACCOUNTS OF THE COMPANY. THE BOOKS OF ACCOUNTS OF THE COMPANY ARE AUDITED BY STATUTORY AUDITOR APPOINTED BY OFFICE OF CAG AND THE SUPPLEMENTARY AU DIT IS CONDUCTED BY THE OFFICE OF THE CAG. THE AUDITORS ARE REQUIRED TO LOOK INTO THE MATTER OF ACCOUNTING ESTIMATES FOLLOWED BY COMPANY AND ITS PR OPER DISCLOSURE IN FINANCIAL STATEMENTS. AS PER SA 540,'AUDITING ACCO UNTING ESTIMATES, INCLUDING FAIR VALUE AND RELATED DISCLOSURES', AN A UDITOR IS REQUIRED TO ASSURE, WITH PROPER AUDIT EVIDENCE, THAT ACCOUNTING ESTIMATES FOLLOWED IN THE FINANCIAL STATEMENTS ARE REASONABLE AND DOES NO T INVOLVE MANAGEMENT BIASNESS. AN AUDITOR IS REQUIRED TO DIS CLOSE ACCOUNTING ESTIMATES SIGNIFICANT RISKS AND POSSIBLE MANAGEMENT BIAS IDENTIFIED DURING THE COURSE OF AUDIT. IN THE INSTANT CASE, NO QUALIFICATION HAS BEEN MADE BY THE AUDITORS WITH RESPECT UNREASONABLENESS OF ACCOUNTING ESTIMATES. THE LD. AO HAS FAILED TO ESTABLISH HIS CLAIM AS TO HOW THE ASSESSEE HAS DEVIATED FROM ACCOUNTING STANDARD PRESCRIBED BY ICA I. THEREFORE, THE MAIN CONTENTION OF THE LD. AO THAT PROFIT & IOSS AC COUNT OF ASSESSEE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 27 OF 51 COMPANY FOR AY 2012-13 DOES NOT COMPLY WITH THE ACC OUNTING STANDARDS INCORRECT. MOREOVER, WITHOUT APPRECIATING THE FACT THAT ACCOUN TING STANDARD NOTIFIED U/S 145(2) HAS NO RELEVANCE IN CONTEXT OF SECTION 1 15JB, THE LD. AO HAS HEAVILY RELIED UPON SECTIONL45(2). WE A AGAIN REPRO DUCING THE EXTRACT FROM GUIDANCE NOTE ISSUED BY ICAI CITED ABOVE. IT P ROVIDES THE ACCOUNTING STANDARD REFERRED TO IN SECTION 115JB AR E THE ONES ISSUED BY ICAI (I.E. REFERRED U 211(3C) OF COMPANIES ACT) AND NOT THE ONES ISSUED U/S 145(2). AN EXTRACT IS REPRODUCED HEREUNDER: '19.3 THE VARIATION REGARDING THE ACCOUNTING POLICI ES, ACCOUNTING STANDARDS AND METHOD AND RATES OF DEPRECIATION CAN ARISE IN TWO CASES. FIRSTLY, WHEN THE ACCOUNTING YEAR OF THE COM PANY IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THE INCOME-TAX ACT AND SECONDLY, WHEN THE COMPANY HAVING THE SAME ACCOUNTING YEAR AND PRE VIOUS YEAR, PREPARES ACCOUNTS FOR INCOME TAX ON DIFFERENT BASES . IT MAY BE NOTED THAT THE REFERENCE TO ACCOUNTING STANDARDS IN THE S ECTION ARE TO THE ACCOUNTING STANDARDS AS REFERRED TO IN SECTION 211( 30 OF THE COMPANIES ACT AND NOT THE ACCOUNTING STANDARDS NOTI FIED BY THE CENTRAL GOVERNMENT UNDER SECTION 145(2) OF THE INCO ME-TAX ACT.' FURTHER, THE LD. AO HAS RELIED ON THE DECISION OF S UTLEJ COTTON MILLS LIMITED V. ACIT [1993] 45 IT 22 AND RAIN COMMODITIE S LIMITED (ITA NO 673/HYD/2Q09) TO SUBSTANTIATE THE POWER OF AO T ADJ UST THE BOOK PROFIT. IN EFFECT, THE LD. AO AND THE ASSESSEE ARE ON THE S AME PAGE REGARDING THE POWERS OF THE AO TO ADJUST THE BOOK PROFIT AS P ER SECTION 115JB. INVARIABLY, THE COURTS HAVE HELD THAT AO HAS THE PO WER TO ADJUST THE BOOK PROFIT ONLY IF THE PROFIT AND LOSS ACCOUNT IS NOT P REPARED AS PER PART II OF THE COMPANIES ACT. IN CASE OF SUTLEJ COTTON MILLS L IMITED V. ACIT [1993] 45 ITO 22, IT HAS BEEN HELD THAT: 'IF IN CASE THE ASSESSING OFFICER FINDS THAT THE NE T PROFIT WAS NOT AS SHOWN BY THE PROFIT AND LOSS ACCOUNT OR THE PROFIT AND LOSS ACCOUNT WAS NOT PREPARED IN ACCORDANCE WITH PART II AM. PAR T III OR THE SIXTH SCHEDULE TO THE COMPANIES ACT, HE IS ENTITLED TO AD JUST THE PROFIT. TO THIS EXTENT, THE POWER TO ADJUST THE BOOK PROFIT WI LL HAVE TO BE CONCEDED TO THE ASSESSING OFFICER' HOWEVER, THE LD. AO HAS FAILED TO POINT OUT A SINGL E INSTANCE WHEREIN THE BOOKS OF ACCOUNTS A PREPARED BY THE ASSESSEE ARE NO T AS PER PART II OF SCHEDULE OF THE COMPANIES ACT. THE TINKERING IN THE BOOK PROFITS HAS BEEN DONE BY THE LD. AO ON HIS WHIMS AND FANCIES AND WIT HOUT ANY LEGAL OR ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 28 OF 51 FACTUAL SUPPORT. THEREFORE, IT IS EARNESTLY PRAYED THAT IN THE ABSENCE OF NON-COMPLIANCE OF PART II OF THE COMPANIES ACT WHIL E PREPARING THE PROFIT AND LOSS ACCOUNT, THE AO CANNOT TINKER WITH THE PRO FIT AND LOSS ACCOUNT TO ADJUST THE BOOK PROFITS AND THE ADDITION MADE BY TH E LD. AO MAY BE DELETED. THE LD. AO HAS ALSO CONTENDED THAT THE ASSESSEE HAS EMPLOYED THE METHOD OF CHANGE IN DEPRECIATION RATES AS A TOOL TO AVOID TAX AND HENCE, THE LD. AO HAS OBSERVED THAT THE DECISION OF THE SU PREME COURT IN MCDOWELL CO. LTD. V. COMMERCIAL TAX OFFICER (154 IT R 148) IS RELEVANT. THE RELIANCE IS MISPLACED IN THE LIGHT OF FOLLOWING FACTORS: THE LD. AO FAILED TO APPRECIATE THAT THE ASSESSEE H AS BEEN ASSESSED UNDER MAT. WHATEVER MAT LIABILITY IS PAID, THE SAME IS AVAILABLE BY WAY OF MAT CREDIT FOR 10 YEARS. THE AS SESSEE COMPANY COULD NOT SAVE ANYTHING BY REDUCING MAT LIABILITY. INFACT IN FY 2014-15, THE ASSESSEE HAS BEEN ASSESSED UNDER NORMA L PROVISIONS OF COMPUTATION. THE MAT CREDIT AVAILABLE IS UTILIZE D IN FY 2014-15 AND REMAINING WOULD BE UTILIZED IN YEARS TO COME. NOT EVEN A SINGLE DISCREPANCY COULD BE POINTED OUT BY THE LD. AO IN SUPPORT OF HIS CLAIM THAT THE ACCOUNTS ARE NOT A S PER ACCOUNTING STANDARD OR AS REQUIRED BY COMPANIES ACT. THE LD. AO HAS FAILED IN HI DUTY BY IGNORING STATUT ORY AUDITORS REPORT AND CAG AUDITORS REPORT WHICH IS IN TOTAL D ISREGARD OF SECTION 115JB. AVAILABLE JURISPRUDENCE HAS CLEARLY BEEN IGNORED WH ILE ADJUDICATING THE MATTER. NO WEIGHTAGE HAS BEEN GIVEN TO JURISDI CTIONAL HIGH COURT CASES. THE ADDITION HAS BEEN MADE IN HASTE WITHOUT APPLICA TION OF MIND. THE CONFUSION IS EVIDENT FROM THE FACT THAT RELIANC E HAS BEEN PLACED ON ACCOUNTING STANDARD ISSUED UNDER SECTION 145(2) IGNORING THE NON-OBSTANTE CLAUSE OF 115JB. MOREOVER , WHILE CONSIDERING PRIOR PERIOD EXPENSES, LD. AO HAS IGNOR ED PRIOR PERIOD INCOME. OUR REPLY ON ALTERNATE CONTENTION RAISED BY AO IN ADDITION TO THE ABOVE, THE LD. AO HAS RAISED AN ALTERNATIVE GROUND THAT DEPRECIATION ON ACCOUNT OF CHANGE IN DEPRECIATION R ATES IS IN EFFECT A DIMINUTION IN THE VALUE OF ASSETS. CLAUSE (I) OF EX PLANATION 1 TO SECTION 115JB(2), THE RELEVANT SECTION THAT DEALS WITH DISA LLOWANCE OF AMOUNT SET ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 29 OF 51 ASIDE AS PROVISION ON ACCOUNT OF DIMINUTION OF VALU E OF ASSETS, IS QUOTED AS UNDER: 'EXPLANATION 1. FOR THE PURPOSES OF THIS SECTION, ' BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTI ON (2), AS INCREASED BY- (I) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DI MINUTION IN THE VALUE OF ANY ASSET,' AS PER THE ABOVE CLAUSE, ONLY THE AMOUNT SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET HAS TO BE ADDE D BACK WHILE COMPUTING BOOK PROFITS AS PER SECTION 115JB. HOWEVE R, THE LD. AO HAS FAILED TO OBSERVE THAT NO AMOUNT HAS BEEN SET A SIDE AS PROVISION BY THE ASSESSEE AS DIMINUTION IN THE VALU E OF ASSETS. THE ASSESSEE HAS CHARGED TO THE PROFIT AND LOSS ACCOUNT THE ACTUAL AMOUNT OF DEPRECIATION DUE TO CHANGE IN DEPRECIATIO N RATES. HENCE, THE PROVISION RELIED BY THE LD. AO IS INAPPL ICABLE TO THE FACTS OF THE PRESENT CASE. THEREFORE, IT IS EARNESTLY PRAYED THAT THE EVEN THE ALTERNATIVE CONTENTION RAISED BY THE LD. AO IS FACTUALLY INCORR ECT AND DISALLOWANCE OF 'ADJUSTMENT DUE TO CHANGE IN DEPREC IATION RATES' MADE BY THE LD. AO MAY KINDLY BE DELETED.' 4,2 THE LD. AR FURNISHED FURTHER SUBMISSION VIDE L ETTER DATED 17.02.2016 AS UNDER: CONDITION 1: PROFIT AND LOSS SHOULD BE PREPARED IN ACCORDANCE WITH PART II OF SCHEDULE VI THE PROVISIONS IN RELATION TO PREPARATION OF PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH PART II OF SCHEDULE VI OF COMPAN IES ACT, 1956 ARE CONTAINED IN SECTION 211 OF COMPANIES ACT, 1956 . SUB SECTION 2 OF SECTION 211 PROVIDES AS UNDER: '(2) EVERY PROFIT AND LOSS ACCOUNT OF A COMPANY SHAL L GIVE A TRUE AND FAIR VIEW OF THE PROFIT OR LOSS OF THE COM PANY FOR THE FINANCIAL YEAR AND SHALL, SUBJECT AS AFORESAID, COM PLY WITH THE REQUIREMENTS OF PART II OF SCHEDULE VI, SO FAR AS T HEY ARE APPLICABLE THERETO.' ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 30 OF 51 IT FURTHER PROVIDES VIDE SECTION 3A THAT 'EVERY PROF IT AND LOSS ACCOUNT AND BALANCE SHEET OF THE COMPANY SHALL COMP LY WITH THE ACCOUNTING STANDARDS.' THEREFORE, IT IS CLEAR FROM THE ABOVE THAT THE PROFIT AND LOSS ACCOUNT MUST COMPLY WITH THE AC COUNTING STANDARDS AS CONTEMPLATED IN SUB SECTION 3A OF THE COMPANIES ACT, 1956. SUB-SECTION 3C CLARIFIES THAT 'FOR THE P URPOSES OF THIS SECTION, THE EXPRESSION 'ACCOUNTING STANDARDS' MEAN S THE STANDARDS OF ACCOUNTING RECOMMENDED BY THE INSTITUT E OF CHARTERED ACCOUNTANTS OF INDIA CONSTITUTED UNDER TH E CHARTERED ACCOUNTANTS ACT. 1949 (38 OF 1949). AS MAY BE PRESC RIBED BY THE CENTRAL GOVERNMENT IN CONSULTATION WITH THE NATIONA L ADVISORY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 210A : PROVIDED THAT THE STANDARDS O F ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO BE THE ACCOUNTING STANDARDS UNTIL THE ACCOUNTING STANDARDS ARE PRESCRIBED BY THE CENTRAL GOVERNMENT UNDER THIS SUB-SECTION.' THEREFORE, FOR THE PURPOSE OF MAT, THE PROFIT AND L OSS UNDER SECTION 211 OF COMPANIES ACT CAN BE CARVED OUT ONLY AFTER APPLYING ACCOUNTING STANDARDS PRESCRIBED BY ICAI. THE PROVIS IONS IN RELATION TO CLAIM OF DEPRECIATION CONSIDERING THE USEFUL LIF E OF THE ASSET ARE CONTAINED IN ACCOUNTING STANDARD-6, DEPRECIATION AC COUNTING AS RECOMMENDED BY ICAI. THE RELEVANT PROVISIONS OF ACCOUNTING STANDARD 6 AR E DISCUSSED HEREUNDER- VIDE PARA 11 IT STATES 'THE QUANTUM OF DEPRECIATION TO BE PROVIDED IN AN ACCOUNTING PERIOD INVOLVES THE EX ERCISE OF JUDGEMENT BY MANAGEMENT IN THE LIGHT OF TECHNICA L COMMERCIAL, ACCOUNTING AND LEGAL REQUIREMENTS AND ACCORDINGLY MAY NEED PERIODICAL REVIEW. IF IT IS CONSIDERED THAT THE ORIGINAL ESTIMATE OF USEFUL LIF E OF AN ASSET REQUIRES ANY REVISION, THE UNAMORTIZED DEPREC IABLE AMOUNT OF THE ASSET IS CHARGED TO REVENUE. OVER THE REVISED REMAINING USEFUL LIFE.' VIDE PARA 13 IT STATES THAT 'THE STATUTE GOVERNING AN ENTERPRISE MAY PROVIDE THE B< FOR COMPUTATION OF TH E DEPRECIATION. FOR EXAMPLE, THE COMPANIES ACT, 1956 LAYS DC THE RATES OF DEPRECIATION IN RESPECT OF VARIOUS ASSETS. ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 31 OF 51 WHERE THE MANAGEMENTS ESTIMATE OF THE USEFUL LIFE OF AN ASSET OF THE ENTERPRISE IS SHORTER THAN THAT ENV ISAGE UNDER THE PROVISIONS OF THE RELEVANT STATUTE, THE DEPRECIATION PROVISION APPROPRIATELY COMPUTED BY APPLYING A HIGHER RATE. A PERUSAL OF THE AFORESAID PROVISIONS CONTAINED IN ACCOUNTING STANDARD-6 CLEARLY PROVIDES THAT DEPRECIATION SHOUL D BE CLAIMED CONSIDERING THE USEFUL LIFE OF THE ASSET. THE ORIGI NAL ESTIMATE USEFUL LIFE MAY BE REVISED AND THE RATES OF DEPRECIATION M AY BE DIFFERENT (HIGHER) THAN THE RATES CONTAINED IN SCHEDULE XIV O F COMPANIES ACT, 1956. NOT ONLY ACCOUNTING STANDARD BUT ALSO CIRCULAR ISSU ED UNDER COMPANIES ACT (DATED 07/03/198 CLARIFIES THE POSITI ON THAT THE RATES OF DEPRECIATION CHARGED BY A COMPANY MAY BE H IGHER THAN I RATES CONTEMPLATED IN SCHEDULE XIV. THE RELEVANT EXTRACT OF THE CIRCULAR AS MENTIONED A BOVE IS AS UNDER- 'IT MAY BE CLARIFIED THAT THE RATES AS CONTAINED IN SCHEDULE XIV SHOULD BE VIEWED AS THE MINIMUM RATES, AND, THE REFORE, A COMPANY SHALL NOT BE PERMITTED TO CHARGE DEPRECIA TION AT RATES LOWER THAN THOSE SPECIFIED IN THE SCHEDULE IN RELATION TO ASSETS PURCHASED AFTER THE DATE OF APPLICABILITY OF THE SCHEDULE. HOWEVER, IF ON THE BASIS OF A BONA FIDE T ECHNOLOGIC EVALUATION, HIGHER RATES OF DEPRECIATION ARE JUSTIF IED, THEY MAY BE PROVIDED WITH PROP DISCLOSURE BY WAY OF A NO TE FORMING PART OF ANNUAL ACCOUNT.' A PERUSAL OF THE CIRCULAR CLARIFIES THAT A COMPANY CAN CLAIM DEPRECIATION HIGHER THAN THE RATE CONTAINED IN SCHE DULE XIV PROVIDED: A. IT IS BASED ON A BONAFIDE EVALUATION OF THE LIFE OF THE ASSET, AND B. THE COMPANY HAS DISCLOSED THE FACTS BY WAY OF A NOT E FORMING PART OF ANNUAL ACCOUNTS OF THE COMPANY. WE HUMBLY SUBMIT THAT THE COMPANY FOR THE PURPOSE O F DETERMINING THE USEFUL LIFE OF THE ASS HAD FORMED A COMMITTEE COMPRISING SENIOR OFFICIALS OF THE COMPANY. THE LIF E OF THE ASSET WAS DETERMINED BY THE COMPANY BASED ON THE TECHNICAL RE PORT SUBMITTED BY SUCH COMMITTEE TO THE COMPANY. ALSO, T HE COMPANY ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 32 OF 51 HAS DULY DISCLOSED THIS FACT IN ITS NOTES TO ACCOUN TS FORMING PART ANNUAL ACCOUNT. IT WOULD BE IMPORTANT TO MENTION HERE THAT BEING A PUBLIC SECTOR UNDERTAKING, ACCOUNTS OF THE ASSESSEE COMPANY HAVE BEEN AUDITED BY STATUTORY AUDITOR APPOINTED BY OFFICE OF CAG AND THE SUPPLEMENTARY AUDIT IS CONDUCTED BY THE OFFICE OF T HE CAG. AUDITOR HAS CLEARLY EXPRESSED H, OPINION ON COMPLIANCE OF S ECTION 211 AT PARA NO 5(E) OF THE AUDITOR'S REPORT. IT READS AS F OLLOWS 'THE BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND CASH FLO W STATEMENT DEALT WITH BY THIS REPOT COMPLY WITH THE ACCOUNTING STANDARD REFERRED TO IN SUB-SECTION 3C OF SECTION 211 OF THE COMPANIES ACT, 1956 EXCEPT FOR ACCOUNTING STANDARDS 15 FOR EMPLOYEE BENEFITS IN RESPECT OF NO PROVISION OF LIABILITY FOR LTC.' THEREFORE, OUR HUMBLE SUBMISSION IS, THE BOOK PROFI TS CONSIDERED BY ASSESSEE COMPANY AFTER CONSIDERING REVISED LIFE IS VERY MUCH WITHIN SECTION 211 OF THE COMPANIES ACT. CONDITION 2: ADOPTION OF SAME ANNUAL ACCOUNTS IN AN NUAL GENERAL MEETING SECTION 115JB REQUIRES THAT THE ANNUAL ACCOUNTS INC LUDING PROFIT & LOSS ACCOUNT SHALL BE THE AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS A CCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 21G OF THE COMPANIES ACT, 1956 IN RESPECT OF THE FOLLOWING - THE ACCOUNTING POLICIES THE ACCOUNTING STANDARD ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION THE ASSESSEE COMPANY HAS COMPLIED WITH THE SAME. 4.3 THE AO OBSERVED THAT THE PROFIT AND LOSS A/C FOR P URPOSE OF COMPUTATION OF BOOK PROFIT AS PER SECTION 115JB, SH OULD BE PREPARED AFTER CONSIDERING TRANSACTIONS THE CURRENT PERIOD A ND SHOULD NOT RELATE TO TRANSACTIONS OF PRIOR YEARS. IF THE EXPEN SE OF EARLIER YEARS IS ALLOWED, IT WOULD DEFEAT THE VERY PROVISIONS OF INT RODUCTION OF MAT. HE RELIED ON THE DECISION OF THE HON'BLE HIGH COURT OF KERALA IN THE CASE OF BHAGAWATHY TEXTILES LTD. VS. ACIT - ITA NO. 74/2010. THE AO ALSO OBSERVED THAT AS PER ACCOUNTING STANDARD (AS) - 5 ON NET PROFIT ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 33 OF 51 OR LOSS FOR THE PERIOD, THE PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES, THE PRIOR PERIOD ITEMS RELATE TO THE PAST AND NEEDED SEPARATE DISCLOSURE. HE, FINALLY, OBSERVED T HAT THE REASON WHY AS REQUIRES FOR ADJUSTMENT OF PRIOR PERIOD ITEM IN CURRENT YEAR IS THAT THE INDIAN REGULATORY ENVIRONMENT DOES NOT ALLOW FO R REVISION OF EARLIER YEARS FINANCIAL STATEMENTS. IF PRIOR PERIO D EXPENSE IS ALLOWED, THE APPELLANT WILL TRY TO SHIFT THE EXPENSE TO A PE RIOD WHEN THE MAT PROVISIONS ARE APPLICABLE AS AGAINST WHEN NORMAL PR OVISIONS OF INCOME TAX ARE APPLICABLE. 4.4 I HAVE CAREFULLY CONSIDERED THE ORDER PASSED BY TH E AO AND THE SUBMISSION FILED BY THE LD. AR. SECTION 115JB OF TH E ACT MANDATES THAT P & L A/C SHALL BE PREPARED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI OF THE COMPANIE S ACT, 1956. THE BOOK PROFIT SO CALCULATED IS SUBJECT TO ADJUSTMEN TS TO BE INCREASED BY ITEMS PRESCRIBED IN (A) TO (I) AND REDUCED BY IT EMS (I) TO (VIII) OF EXPLANATION 1 OF SECTION 115JB OF THE ACT. THIS CLEA RLY IMPLIES THAT ANY ADJUSTMENTS CAN ONLY BE CONSIDERED WITH REFERENCE T O THE ITEMS SPECIFIED IN THE ACT. THERE ARE NUMEROUS DECISIONS OF THE HON'BLE COURTS WHEREIN IT IS HELD THAT SECTION 115JB IS A C OMPLETE CODE IN ITSELF. THE AO HAS ONLY LIMITED AUTHORITY TO EXAMIN E WHETHER THE BOOKS OF ACCOUNTS ARE MAINTAINED AS PER PROVISIONS OF COM PANIES ACT OR THE BOOKS PROFIT HAS BEEN ARRIVED AS PER THE RELEVANT S CHEDULE THERETO. THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYR ES LTD. V. CIT [255 ITR 273] HAD HELD: ''THEREFORE, WE ARE OF THE OPINION THAT THE ASSESSI NG OFFICER WHILE COMPUTING THE INCOME UNDER SECTION 115J HAS ONLY TH E POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIE D BY THE AUTHORITIES UNDER THE COMPANIES ACT AS HAVING BEEN PROPERTY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. T HE ASSESSING OFFICER THEREAFTER HAS THE LIMITED POWER OF MAKING INCREASE AND REDUCTIONS AS PROVIDED FOR IN THE EXPLANATION TO THE SAID SECTION. TO PUT IF DIFFERENTLY, THE ASSESSING OFFICER DOES N OT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFIT SHOWN IN T HE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLANA TION TO SECTION 115J. 4.5 THIS DECISION WAS REAFFIRMED BY THE HONBLE SU PREME COURT IN THE CASE OF MALAYALA MANORAMA CO. LTD. V CIT 300 ITR 251. IT WAS HELD AS UNDER: ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 34 OF 51 'IF WE EXAMINE THE SAID PROVISION IN THE ABOVE BACK GROUND, WE NOTICE THAT THE USE OF THE WORDS IN ACCORDANCE WITH THE PROVISIONS OF PARTS 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 TH E 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 TH E COMPANIES ACT WHICH OBLIGATES THE COMPANY TO MAINTAIN ITS ACCOUNT IN A MANNER PROVIDED BY THE COMPANIES ACT AND THE SAME TO BE SC RUTINIZED AND CERTIFIED BY STATUTORY AUDITORS AND WILL HAVE TO BE APPROVED BY THE COMPANY IN ITS GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLI GATION ALSO TO EXAMINE AND SATISFY THAT THE ACCOUNTS OF THE COMPAN Y ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF T HE COMPANIES ACT. IN SPITE OF ALL THESE PROCEDURES CONTEMPLATED UNDER THE PROVISIONS OF THE COMPANIES ACT, THE COURT OBSERVED THAT IT IS DIFFICULT TO ACCEPT THE ARGUMENT OF THE REVENUE THA T IT IS STILL OPEN TO THE ASSESSING OFFICER TO RESCRUTINIZE THIS ACCOU NT AND SATISFY HIMSELF THAT THESE ACCOUNTS HAVE BEEN MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT. ' 4.6 THE AO HAS RELIED ON AS-5, ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (ICAI) TO DISALLOW THE PRIOR PE RIOD EXPENSES. THE SAID STANDARD PROVIDES ONLY FOR SEPARATE DISCLOSURE OF PRIOR PERIOD EXPENSES BUT DOES NOT PROHIBIT THE APPELLANT FROM C LAIMING PRIOR PERIOD EXPENSES IN THE P & L A/C. THE HON'BLE DELHI HIGH C OURT HAS UPHELD ALLOWABILITY OF PRIOR PERIOD EXPENDITURE IN THE CAS E OF CIT V KHAITAN CHEMICALS & FERTILIZERS LTD., [307ITR 150]. THE HON BLE COURT OBSERVED AS UNDER: 'THE TRIBUNAL WAS CORRECT, IN LAW, IN HOLDING THAT THE ASSESSING OFFICER HAD FAILED TO APPRECIATE THAT THE NET PROFI T FOR THE PURPOSE OF SECTION 115J A IS TO BE COMPUTED ONLY AFTER DEDU CTING THE PRIOR PERIOD EXPENSES/EXTRAORDINARY ITEMS. THE FUNDAMENTA L FLAW THAT HAD ENTERED INTO THE ASSESSING OFFICER'S APPROACH W AS THAT HE WAS UNDER AN IMPRESSION THAT THE ASSESSEE WAS CLAIMING A REDUCTION IN THE NET PROFIT IN TERMS OF CLAUSES (I ) TO (IX) OF THE EXPLANATION TO SECTION 115JA(2). THE ASSESSEE HAD ALL ALONG CONTEN DED THAT THE NET PROFIT WAS TO BE COMPUTED ON THE BASIS OF THE P ROFIT AND LOSS ACCOUNT WHICH, IN TURN, WAS TO BE IN ACCORDANCE WIT H THE PROVISIONS ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 35 OF 51 OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. SUCH A COMPUTATION OF NET PROFIT, IN VIEW OF THE PR ESCRIBED ACCOUNTING STANDARD (AS-5). REQUIRES THE PRIOR PERI OD EXPENSES/EXTRAORDINARY ITEMS TO BE SHOWN SEPARATELY . THAT DID NOT MEAN THAT BECAUSE THOSE ITEMS HAD BEEN SHOWN SEPARA TELY, THEY DID NOT CONSTITUTE PART OF NET PROFIT. PARAGRAPH 5 OF THE ACCOUNTING STANDARD (AS-5) SPECIFICALLY REQUIRES THAT ALL ITEM S OF INCOME AND EXPENSES WHICH ARE 'RECOGNISED IN A PERIOD' SHOULD BE INCLUDED IN THE DETERMINATION OF NET PROFIT OR LOSS FOR THE PER IOD UNLESS AN AS REQUIRES OR PERMITS OTHERWISE. THE DEFINITION OF 'P RIOR PERIOD ITEMS', AS GIVEN IN AS-5, CLEARLY STIPULATES THAT PRIOR PER IOD ITEMS ARE INCOMES OR EXPENSES WHICH ARISE 'IN THE CURRENT PER IOD' AS A RESULT OF ERRORS OR OMISSIONS IN THE PREPARATION OF THE FI NANCIAL STATEMENTS OF ONE OR MORE PRIOR PERIODS. THEREFORE, THE INCOME OR EXPENSES RELATABLE TO PRIOR PERIOD ITEMS ARE THOSE WHICH ARI SE IN THE CURRENT PERIOD, I.E.. THE PERIOD RELEVANT FOR THE PURPOSES OF COMPUTING THE NET PROFIT OR TOSS. CLEARLY, PRIOR PERIOD ITEMS ARE TO BE INCLUDED IN THE DETERMINATION OF NET PROFIT IT OR LOSS. FURTHER MORE, PARAGRAPH 7 OF AS- 5 STIPULATES THAT THE NET PROFIT OR LOSS, IN TER ALIA, COMPRISES OF EXTRAORDINARY ITEMS AND THE SAME SHOULD BE DISCL OSED ON THE FACE OF THE STATEMENT OF PROFIT IT AND LOSS. FROM T HIS, IT IS CLEAR THAT BOTH 'PRIOR PERIOD ITEMS' AS WELL AS 'EXTRAORDINARY ITEMS' ARE TO BE INCLUDED IN THE DETERMINATION OF NET PROFIT OR LOSS . IF A PRIOR PERIOD ITEM IS AN EXPENSE, IT WILL GO TOWARDS REDUCING THE NET PROFIT OR INCREASING THE LOSS, AS THE CASE MAY BE. ON THE OTH ER HAND, IF THE PRIOR PERIOD ITEM IS AN INCOME, IT WOULD GO TOWARDS INCREASING THE NET PROFIT OR REDUCING THE LOSS, AS THE CASE MAY BE . THE SAME IS THE POSITION WITH EXTRAORDINARY ITEMS WHICH MAY BE INCOMES OR EXPENSES. THE CONCLUSION IS THAT PRIOR PERIOD ITEMS AND EXTRAORDINARY ITEMS FORM PART OF THE NET PROFIT OR LOSS. [PARA 10] PARAGRAPH 15 OF A5-5 MAKES IT DEAR THAT THE NATURE AND AMOUNT OF PRIOR PERIOD ITEMS SHOULD BE SEPARATELY DISCLOSED I N THE STATEMENT OF PROFIT AND LOSS IN A MANNER THAT THEIR IMPACT ON THE 'CURRENT'PROFIT OR LOSS CAN BE PERCEIVED. TWO APPRO ACHES HAVE BEEN INDICATED IN PARAGRAPH 19 OF THE SAID ACCOUNTING ST ANDARD (AS-5). THE NORMAL APPROACH IS TO INCLUDE PRIOR PERIOD ITEM S IN THE DETERMINATION OF NET PROFIT OR LOSS FOR THE CURRENT PERIOD. THE ALTERNATIVE APPROACH IS TO SHOW SUCH ITEMS IN THE S TATEMENT OF PROFIT AND LOSS AFTER DETERMINATION OF CURRENT NET PROFIT OR LOSS. AS ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 36 OF 51 INDICATED IN THE ACCOUNTING STANDARD, IN EITHER CAS E, THE OBJECTIVE IS TO INDICATE THE EFFECT OF SUCH ITEMS ON THE CURR ENT PROFIT OR LOSS. IT WAS OBVIOUS THAT BECAUSE OF THE PRESCRIBED AS WH ICH HAS TO BE FOLLOWED BY THE ASSESSEE IN VIEW OF THE PROVISIONS OF SECTION 115JA(2) OF THE ACT, READ WITH SECTION 211 OF THE C OMPANIES ACT, THE ASSESSEE WAS REQUIRED TO SHOW THE PRIOR PERIOD ITEMS/EXTRAORDINARY ITEMS SEPARATELY SO THAT THEIR IMPACT ON THE CURRENT PROFIT OR LOSS COULD BE PERCEIVED. THE FACT , THAT THE ASSESSEE HAD ADOPTED THE ALTERNATIVE APPROACH OF SH OWING SUCH ITEMS IN THE STATEMENT OF PROFIT AND LOSS AFTER DET ERMINATION OF CURRENT NET PROFIT OR LOSS, DID NOT MEAN THAT THOSE ITEMS WERE NOT TO BE TAKEN INTO ACCOUNT IN COMPUTING NET PROFIT AS ENVISAGED IN SECTION 115JA. THUS, WHAT THE ASSESSEE HAD DONE WAS ONLY TO INDICATE PRIOR PERIOD ITEMS/EXTRAORDINARY ITEMS SEP ARATELY. THAT DID NOT MEAN THAT THE FIGURE OF NET PROFIT IT WAS TO BE ARRIVED AT DE HORS THOSE ITEMS IN VIEW OF THE AFORESAID DISCUSSION, NET PROFIT (AS REFERRED TO IN SECTION 115JA) OF THE ASSESSEE-COMPANY WAS TO BE CO MPUTED ONLY AFTER DEDUCTING THE EXPENSES ON PRIOR PERIOD/EXTRAO RDINARY ITEMS WHICH WERE BUSINESS EXPENDITURE, BUT WERE SHOWN SEP ARATELY IN THE PROFIT AND LOSS ACCOUNT DUE TO THE SPECIFIC REQ UIREMENT OF THE AS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNT ANTS OF INDIA, '(EMPHASIS SUPPLIED) 4.7 THE AO HAS NOT GIVEN ANY INSTANCE WHEREIN THE A PPELLANT HAS NOT COMPLIED WITH THE PROVISIONS OF PART II AND PART II I OF SCHEDULE VI OF THE COMPANIES ACT, 1956 WHILE PREPARING ITS P & L A/C. IN THE LIGHT OF THE DECISION OF THE HON'BLE JURISDICTIONAL COURT THERE CANNOT BE ANY DISPUTE ABOUT OF ALLOWABILITY OF PRIOR PERIOD EXPENSES IN C OMPUTING BOOK PROFIT WITHIN THE MEANING OF SECTION 115JB OF THE ACT. IT IS ALSO PERTINENT TO MENTION HERE THAT THE APPELLANT COMPANY HAD ALSO DI SCLOSED PRIOR PERIOD INCOME AMOUNTING TO RS.5,11,08,612/- IN THE P & L A /C UNDER THE HEAD PRIOR PERIOD ADJUSTMENT. THIS HAS NOT BEEN COMMENTE D UPON BY THE AO WHILE DISALLOWING PRIOR PERIOD EXPENSES. CONSIDERIN G THE ABOVE AND THE DECISION OF THE HON'BLE DELHI HIGH COURT (SUPRA), I AM OF THE VIEW THAT THE ADJUSTMENT OF RS.2,40,48,802/- BY ADDING BACK P RIOR PERIOD EXPENSES TO THE BOOK PROFIT, MADE BY THE AO, IS NOT AS PER P ROVISIONS OF THE ACT AND IS, THEREFORE, DIRECTED TO BE DELETED. 4.8 THE AO HAS ALSO DISALLOWED RS. 14,09,30,283/- A S AN EXCEPTIONAL ITEM DEBITED TO THE P & L A/C AS IT HAD AN ELEMENT OF PR IOR PERIOD EXPENSE. ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 37 OF 51 THOUGH, NO SPECIFIC FINDING HAS BEEN GIVEN BY THE A O WHILE DISALLOWING THE SAME, IT IS IMPLIED THAT THE SAID ADJUSTMENT WA S MADE ON THE SAME REASONING FOR DISALLOWANCE OF PRIOR PERIOD EXPENSES . SINCE I HAVE HELD IN PARA 4.7 ABOVE THAT DISALLOWANCE OF PRIOR PERIOD EX PENSES IS NOT WARRANTED IN VIEW OF THE FACTS OF THE CASE AND THE DECISION OF THE JURISDICTIONAL HIGH COURT, THE DISALLOWANCE MADE BY THE AO IS ORDERED TO BE DELETED. 4.9 THE APPELLANT CLAIMED DEPRECIATION IN ACCORDANC E WITH THE METHOD FOLLOWED CONSISTENTLY IN THE PAST. BUT IT CLAIMS TO HAVE THE USEFUL LIFE OF ITS FIXED ASSETS EXAMINED BY A TECHNICAL COMMITTEE AND AS THE USEFUL LIFE AS PER THE RECOMMENDATION OF THE COMMITTEE IS REPORTED TO BE SHORTER, IT CHARGED DEPRECIATION AT A HIGHER RATE IN ORDER TO A LIGN THE DURATION OF THE DEPRECIATION CHARGE WITH THE EXPECTED USEFUL LIFE O F THE ASSETS. 4.10 THE AO MADE AN ADJUSTMENT ON ACCOUNT OF CHANGE IN DEPRECIATION RATE AMOUNTING TO RS.52.74 CRORES TO THE BOOK PROFI T OF THE COMPANY FOR THE PURPOSE OF DETERMINATION OF TAX LIABILITY AS PE R PROVISIONS OF SECTION 115JB. THE AO WAS OF THE VIEW THAT THE ACCOUNTING S TANDARD PRESCRIBED U/S 145(2) OF THE ACT SHOULD BE FOLLOWED BY THE APP ELLANT AND IN CASE THAT WAS NOT DONE HE HAD THE AUTHORITY TO MODIFY THE BOO K PROFIT. HE RELIED ON THE DECISIONS IN THE CASE OF SUTLEJ COTTON MILLS LT D. VS. ACIT 45 ITR 22 AND RAIN COMMODITIES LTD. (ITA NO. 673/HYD./2009). THE AO ALSO RELIED ON JUDGEMENT OF THE HON'BLE APEX COURT IN THE CASE OF MCDOWELL AND CO. LTD. VS. COMMERCIAL TAX OFFICER, 154 ITR 148 AND WAS OF THE VIEW THAT THE APPELLANT HAD RESORTED TO A COLORABLE DEVICE IN ORD ER TO REDUCE ITS TAX LIABILITY UNDER MAT. HE WAS ALSO OF THE VIEW THAT T HE EXCESS DEPRECIATION CLAIMED BY THE APPELLANT DUE TO THE HIGHER RATE APP LIED BY IT COULD BE DEEMED TO BE THE AMOUNT SET ASIDE AS PROVISIONS FOR DIMINUTION IN THE VALUE OF THE ASSETS AND SHOULD BE IGNORED WHILE CAL CULATING THE BOOK PROFIT. ACCORDINGLY, HE MADE ADJUSTMENTS TO THE EF FECT THAT THE ENHANCED DEPRECIATION IGNORED AND, CONSEQUENTLY, HIGHER MAT WAS DETERMINED WITH REFERENCE TO THE ADJUSTED HIGHER BOOK PROFIT. THE L D. AR HAD SUBMITTED THAT APPELLANT HAS MAINTAINED ITS ACCOUNT IN ACCORD ANCE WITH THE REQUIREMENT OF THE COMPANIES ACT, 1956 AS WELL AS T HE ACCOUNTING STANDARD-6. THE CHANGE IN THE RATE OF DEPRECIATION WAS ALSO EFFECTED IN KEEPING WITH THE SAME. THE APPELLANT HAD MADE DUE D ISCLOSURE OF THIS FACT BY WAY OF A NOTE FORMING PART OF THE ANNUAL RE PORT. THE LD. AR FURTHER ARGUED THAT THE APPELLANT IS A PUBLIC SECTO R COMPANY AND ITS ACCOUNTS ARE AUDITED BY AUDITORS APPOINTED BY THE C OMPTROLLER AND AUDITOR GENERAL (CAG) AND ARE ALSO SUBJECTED SUPPLE MENTARY AUDIT BY THE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 38 OF 51 OFFICERS OF THE CAG. THE AUDITORS HAVE CERTIFIED TH AT THE BOOKS OF ACCOUNTS OF THE APPELLANT DEPICT TRUE AND FAIR VIEW OF ITS S TATE OF AFFAIRS. THE DECISIONS RELIED UPON (SUPRA) BY THE AO IN FACT SUP PORT ITS CASE IN SO FAR AS THEY LAY DOWN THE PRINCIPLE THAT, IF ACCOUNTS AR E MAINTAINED IN ACCORDANCE WITH THE PROVISION OF THE COMPANIES ACT, THE AO HAS NO AUTHORITY TO DISTURB THE BOOK RESULTS. EXCESS DEPREC IATION CANNOT BE TERMED PROVISION FOR DIMINUTION IN THE VALUE OF THE ASSET. IN FACT, IT HAD MADE SUCH PROVISION SEPARATELY BY WAY OF AN IMPAIRM ENT ACCOUNT BUT HAD DULY ADDED IT BACK TO THE NET PROFIT WHILE COMPUTIN G THE BOOK PROFIT. 4.11 I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS OF THE AO IN THE ASSESSMENT ORDER AND THE SUBMISSION FURNISHED BY TH E LD. AR. THE REQUIREMENT OF SECTION 115JB OF THE ACT IS AS UNDER : I) THE APPELLANT SHOULD PREPARE ITS P & L A/C FOR PREV IOUS YEAR IN ACCORDANCE WITH THE PROVISION OF PART II OF SCHEDUL E VI TO THE COMPANIES ACT AND II) WHILE PREPARING THE ANNUAL ACCOUNTS INCLUDING P & L A/C, THE ACCOUNTING POLICIES, THE ACCOUNTING STANDARDS ADOPT ED FOR PREPARING SUCH ACCOUNTS INCLUDING P & L A/C AND THE METHOD AND RAT ES ADOPTED FOR CALCULATING THE DEPRECIATION SHALL BE THE SAME AS H AS BEEN ADOPTED FOR THE PURPOSE OF REPAIRING SUCH ACCOUNTS INCLUDING P & L A/C AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORD ANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 195 6. 4.12 ACCORDING TO SECTION 350 OF THE COMPANIES ACT , 1956, THE AMOUNT OF DEPRECIATION TO BE DEDUCTED IN PURSUANCE OF CLAU SE (K) OF SUB-SECTION 4 SECTION 349 SHALL BE THE AMOUNT OF DEPRECIATION ON ASSETS AS SHOWN BY THE BOOKS OF THE COMPANY AT THE END OF THE FINANCIA L YEAR EXPIRING AT COMMENCEMENT OF THIS ACT OR IMMEDIATELY THEREAFTER AND AT THE END OF THE EACH SUBSEQUENT FINANCIAL YEAR AND RATE SPECIFI ED IN THE SCHEDULE XIV. THE COMPANIES ACT LAYS DOWN THE DEPRECIATION RATE FOR DIFFERENT TYPES OF ASSETS. ACCORDING TO CIRCULAR NO. 2/89 DAT ED 07.03.1989, ISSUED BY THE DEPARTMENT OF THE COMPANY AFFAIRS, IT MAY B E CLARIFIED THAT THE RATES AS CONTAINED IN SCHEDULE XIV SHOULD BE VIEWED AS THE MINIMUM RATES, THEREFORE, A COMPANY SHALL NOT BE PERMITTED THE CHARGE DEPRECIATION AT RATES LOWER THAN THOSE SPECIFIED IN THE SCHEDULE IN RELATION TO ASSETS PURCHASED AFTER THE DATE OF APPLICABILITY OF THE SCHEDULE. HOWEVER, IF ON THE BASIS OF A BONAFIDE TECHNOLOGICA L EVALUATION, HIGHER RATES OF DEPRECIATION ARE JUSTIFIED, THEY MAY BE PR OVIDED WITH PROPER DISCLOSURE BY WAY OF A NOTE FORMING PART OF THE ANN UAL ACCOUNT. 4.13 ACCOUNTING STANDARD - 6 (RELATING TO DEPRECIA TION ACCOUNTING), ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 39 OF 51 DEALS WITH USEFUL LIFE OF ASSETS AND DEFINES THE SA ME AS EITHER (I) THE PERIOD OVER WHICH A DEPRECIABLE ASSET IS EXPECTED T O BE USED BY THE ENTERPRISE; OR (II) THE NUMBER OF PRODUCTION OR SIM ILAR UNITS EXPECTED TO BE OBTAINED FROM THE USE OF ASSETS BY THE ENTERPRISE. ACCORDING TO CLAUSE-8, DETERMINATION OF USEFUL LIFE OF DEPRECIABLE ASSET IS A MATTER OF ESTIMATION AND NORMALLY BASED ON VARIOUS FACTORS INCLUDING EXP ERIENCE WITH SIMILAR TYPES OF ASSETS. ACCORDING TO CLAUSE -11, THE QUA NTUM OF DEPRECIATION TO BE PROVIDED IN AN ACCOUNTING PERIOD INVOLVES THE EXERCISE OF JUDGEMENT BY THE MANAGEMENT IN THE LIGHT OF TECHNICAL, COMMER CIAL, ACCOUNTING AND LEGAL REQUIREMENTS AND ACCORDINGLY MAY NEED PERIODI CAL REVIEW. IF IT IS CONSIDERED THAT THE ORIGINAL ESTIMATE USEFUL LIFE O F AN ASSET REQUIRES ANY REVISION, THE UNAMORTIZED DEPRECIABLE AMOUNT OF THE ASSET IS CHARGED TO REVENUE OVER THE REVISED REMAINING USEFUL LIFE. AS PER CLAUSE - 13, THE STATUTE GOVERNING AN ENTERPRISE MAY PROVIDE THE BAS IS FOR COMPUTATION OF DEPRECIATION. FOR EXAMPLE, THE COMPANIES ACT LAYS D OWN THE RATES OF DEPRECIATION IN RESPECT OF VARIOUS ASSETS. WHERE TH E MANAGEMENTS ESTIMATE OF THE USEFUL LIFE OF THE ASSET IS SHORTER THAN THAT ENVISAGED UNDER THE PROVISIONS OF THE RELEVANT STATUTE, THE D EPRECIATION PROVISION IS APPROPRIATELY COMPUTED BY APPLYING A HIGHER RATE. I F THE MANAGEMENTS ESTIMATE OF THE USEFUL LIFE OF THE ASSET IS LONGER THAN THAT ENVISAGED UNDER THE STATUTE, DEPRECIATION RATES LOWER THAN THAT ENV ISAGED BY THE STATUTE CAN BE APPLIED ONLY IN ACCORDANCE WITH THE REQUIREM ENT OF THE STATUTE. 4.14 IT IS THUS, CLEAR FROM A COMBINED READING OF THE COMPANIES ACT, 1956 AND THE ACCOUNTING STANDARD-6 THAT THERE IS NO BAR ON THE MANAGEMENT CARRYING OUT REVALUATION OF THE USEFUL L IFE OF AN ASSET AND, ACCORDINGLY, MODIFY THE RATE OF DEPRECIATION SO THA T DEPRECIABLE AMOUNT AND THE REVISE USEFUL LIFE OF THE ASSET ARE ALIGNED WITH EACH OTHER. THE APPELLANT CLAIMS TO HAVE CARRIED OUT BONAFIDE REVAL UATION OF THE USEFUL OF ITS ASSETS THROUGH AN EXPERT TECHNICAL COMMITTEE CO NSISTING OF ITS QUALIFIED PERSONNEL. THE AO HAS NOT POINTED OUT ANY MATERIAL DEFECT IN THE REPORT OF THE TECHNICAL COMMITTEE. HE HAS GONE BY T HE EFFECT OF THE REVISED RATE OF DEPRECIATION APPLIED BY THE APPELLA NT, I.E. THE FACT THAT THE NET PROFIT AS PER THE P & L A/C IS LOWER THAN WHAT IT WOULD HAVE BEEN IF THE CHANGE IN THE DEPRECIATION RATE HAD NOT BEEN EF FECTED. BUT, AS HAS BEEN BROUGHT OUT IN PARA 4.13, AS THE COMPANIES ACT AND ACCOUNTING STANDARD PERMIT THE MANAGEMENT TO CARRY OUT SUCH RE VALUATION (RESULTING IN CHANGE IN DEPRECIATION RATE), IT IS NOT OPEN TO THE AO TO CHALLENGE THE VALIDITY THEREOF SIMPLY BECAUSE IT HAS EFFECT OF RE DUCING THE NET PROFIT. 4.15 THE PROVISIONS OF SECTION 115JB IS APPLICABLE TO A COMPANY WHICH SHOWS HIGHER PROFIT IN ITS ACCOUNTS BUT COMPUTES LO WER OR NIL PROFIT OF BUSINESS UNDER THE REGULAR PROVISIONS OF THE I. T. ACT. COMPANIES HAVE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 40 OF 51 ALSO BEEN FOUND WINDOW DRESSING THEIR ACCOUNTS, SO AS TO REPORT HIGHER PROFITS AND BETTER FINANCIAL HEALTH IN ORDER TO CAT ER TO INVESTORS, CREDITORS ETC. NOT CLAIMING DEPRECIATION OR CLAIMING LOWER DE PRECIATION HAS BEEN ONE OF THE INSTRUMENTS OF SUCH WINDOW DRESSING. IN THE CASE OF THE APPELLANT, THE SITUATION IS THE REVERSE. IT HAS REP ORTED LOWER NET PROFIT IN THE BOOKS ON ACCOUNT OF REVISION IN THE RATE OF DEP RECIATION. PRIMA FACIE THEREFORE, IT IS NOT THE CASE OF WINDOW DRESSING BY MANIPULATING DEPRECIATION. IN THIS REGARD, IT MAY NOT BE OUT OF PLACE TO MENTION THAT: A) IT IS THE PUBLIC SECTOR UNDERTAKING OWNED BY THE GOVERNMENT OF INDIA (MINISTRY OF RAILWAYS). B) ITS ACCOUNTS AUDITED BY THE AUDITORS APPOINTED B Y THE CAG AND ALSO SUBJECTED TO SUPPLEMENTARY AUDIT BY THE OF FICERS OF THE CAG. C) THE AUDITORS HAVE CERTIFIED THAT THE BOOKS OF TH E ACCOUNTS OF THE APPELLANT DEPICT TRUE AND FAIR VIEW OF ITS STAT E OF AFFAIRS. 4.16 THE APPELLANT HAS MAINTAINED ITS ACCOUNTS AS P ER THE COMPANIES ACT AND HAS MADE ADEQUATE DISCLOSURE IN RELATION TO HIGHER CHARGE OF DEPRECIATION. SECTION 115JB OF THE ACT REQUIRES CER TAIN ADJUSTMENTS TO THE NET PROFIT AS PER THE P & L A/C SO AS TO ARRIVE AT BOOK PROFIT FOR THE PURPOSE OF THAT SECTION. DEPRECIATION IS FIRST ADD ED BACK AND THEN THE DEPRECIATION (EXCLUDING THE DEPRECIATION ON ACCOUNT OF REVALUATION OF ASSETS) IS REDUCED. THE NET EFFECT IS THAT ANY ARTI FICIAL DEPRECIATION ON ACCOUNT OF REVALUATION OF ASSETS GETS NEUTRALIZED W HILE CALCULATING THE BOOK PROFIT. HERE, THE APPELLANT HAS NOT REVALUED I TS ASSETS BUT REVISED ITS ESTIMATE OF THE USEFUL LIFE OF THE ASSETS AND, CONS EQUENTLY, INCREASED THE RATE OF DEPRECIATION. SUCH INCREASE IN DEPRECIATION IS NOT PERMITTED TO BE IGNORED WHILE CALCULATING THE BOOK PROFIT U/S 115JB OF THE ACT. THE AO HAS TAKEN AN ALTERNATIVE PLEA THAT THE INCREASED DEPREC IATION MAY BE DEEMED TO BE THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION S FOR DIMINUTION IN THE VALUE OF ANY ASSETS AS PER CLAUSE (I) OF EXPLANATION 1 TO SECTION 115JB AND FOR THAT REASON, IT SHOULD BE ADDED TO TH E NET PROFIT WHILE ARRIVING AT THE BOOK PROFIT. THIS, HOWEVER, DOES NO T APPLY AS IT IS NOT THE CASE OF DIMINUTION IN THE VALUE OF ASSETS BUT DIMIN UTION IN THE USEFUL LIFE THEREOF. FURTHER, IT IS EVIDENT THAT NO AMOUNT HAS BEEN SET ASIDE AS PROVISION BY THE APPELLANT AS DIMINUTION IN THE VAL UE OF ASSETS. THE APPELLANT HAS CHARGED TO ITS P & L A/C ACTUAL AMOUN T OF DEPRECIATION DUE TO CHANGE (INCREASE) IN RATE OF DEPRECIATION WHICH IS PERMISSIBLE UNDER THE COMPANIES ACT, 1956. IT HAS ALREADY BEEN MENTIONED THAT IMPAIRMENT AMOUNT WAS SEPARATELY CALCULATED BY THE APPELLANT A T RS.4,01,13,063/- ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 41 OF 51 AND WAS CHARGED TO THE P & L A/C. THIS AMOUNT REPRE SENTING IMPAIRMENT BEING IN THE NATURE OF DIMINUTION IN THE VALUE OF A SSETS WAS ADDED BACK BY THE APPELLANT UNDER THE REFERRED CLAUSE FOR THE PURPOSE OF COMPUTING BOOK PROFIT. 4.17 IN THE LIGHT OF THE ABOVE, IT IS QUITE CLEAR T HAT THE APPELLANT HAD CORRECTLY COMPUTED THE BOOK PROFIT AND THE UPWARD D IVISION THEREOF BY THE AO BY WAY OF ADJUSTMENT DUE TO CHANGE IN DEPRECIATI ON RATES AMOUNTING TO RS.52.74 CRORES IS NOT IN AS PER PROVISIONS OF L AW. IT IS, THEREFORE, HELD THAT INCREASED MAT LIABILITY ON THE ADJUSTED BOOK P ROFITS IS NOT JUSTIFIED AND THE SAME IS DIRECTED TO BE DELETED. THESE GROUN DS OF APPEAL ARE RULED IN FAVOUR OF THE APPELLANT. (2.2) AT THE TIME OF HEARING BEFORE US, LD. CIT (DR ) RELIED ON THE ASSESSMENT ORDER AND READ OUT THE RELEVANT PORTION FROM THE SAME. (2.2.1) THE LD. AUTHORIZED REPRESENTATIVE (AR) FOR THE ASSESSEE RELIED ON THE PAPER BOOK WHICH CONSISTED OF THE FOLLOWING PARTICULARS: 1. COPY OF PROVISION OF 115B 2. COPY OF ACCOUNTING STANDARD-6 3. LETTER OF MD INTIMATED TO ZONAL OFFICES 4. WRITTEN SUBMISSIONS FILED BEFORE HONBLE CIT(A) DT. 21.01.2016 5. WRITTEN SUBMISSIONS FILED BEFORE HONBLE CIT(A) DT. 17.02.2016 6. COPY OF AUDITED BALANCE SHEET ALONG WITH AUDITOR S REPORT (2.2.2) THE LD. AR FURTHER CONTENDED THAT THE ISSUE IN DISPUTE IS COVERED IN FAVOUR OF THE ASSESSEE BY APEX COURTS DECISION IN THE CAS E OF APOLLO TYRES LTD. VS. CIT [255 ITR 273]; WHICH WAS AFFIRMED IN MALAYALA MANORAMA CO. LTD. V CIT 300 ITR 251. THE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 42 OF 51 LD. AR ALSO SUBMITTED THAT THE ASSESSEE IS PUBLIC S ECTOR UNDERTAKING AND IS SUBJECT TO AUDIT BY STATUTORY AUDITOR APPOINTED BY OFFICE OF C AG (COMPTROLLER AND AUDITOR GENERAL) AND SUPPLEMENTARY AUDIT IS FURTHER CONDUCTED BY THE OFFICE OF THE CAG; AND HE STRONGLY CONTENDED THAT THE AUDIT REPORT SHOULD BE ACCEPTED IN VIEW OF THE FACT THAT NO QUALIFICATION HAS BEEN MADE BY THE AUDITORS WITH RE SPECT TO UNREASONABLENESS OF ACCOUNTING ESTIMATES. (3) WE HAVE HEARD BOTH SIDES ATTENTIVELY. WE HAVE CONSIDERED THE PRECEDENTS AND CASE LAWS BROUGHT TO OUR NOTICE DURING HEARING BEFO RE US AND/OR MENTIONED IN THE ORDERS OF THE AO AND LD. CIT(A). WE HAVE CAREFULLY PERUSED THE MATERIALS ON RECORD WHICH INCLUDES THE PAPER BOOK FILED BY THE ASSESSEE. WE HAVE GIVEN ANXIOUS CONSIDERATION TO RIVAL SUBMISSIONS AND CONTENTIONS. (3.1) THE CONTENTION OF THE AO THAT THE ADDITIONAL CLAIM OF RS. 52.74 CRORES DUE TO CHANGE IN DEPRECIATION RATES HAS RESULTED IN DIMINU TION IN THE VALUE OF ASSETS IS MISPLACED. CLAUSE (I) OF EXPLANATION 1 TO SECTION 11 5JB OF IT ACT PROVIDES THAT THE BOOK PROFIT IS TO BE INCREASED BY THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET. HOWEVER, CLAUSE (I) OF EXPLANATION 1 TO SECTION 115JB OF IT ACT IS NOT APPLICABLE FOR REDUCTION IN BOOK V ALUE OF ASSETS AS A RESULT OF DEPRECIATION. IF THE BOOK VALUE OF CERTAIN ASSETS U NDERGOES REDUCTION AS A RESULT OF DEPRECIATION, SUCH REDUCTION IS DIFFERENT FROM DIMINUTION IN VALUE FOR THE PURPOSES OF CLAUSE (I) OF EXPLANATION 1 TO SECT ION 115JB OF IT ACT. CLAUSE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 43 OF 51 (I) OF EXPLANATION 1 TO SECTION 115JB OF IT ACT IS APPLICABLE TO THOSE SITUATION IN WHICH THE ASSESSEE CLAIMS DIMINUTION IN VALUE OF ASSETS OTHER THAN THROUGH REDUCTION IN VALUE AS A RESULT OF DEPRECIAT ION. FOR EXAMPLE, IF AN ASSESSEE CLAIMS DIMINUTION IN VALUE OF STOCK IN TRA DE SUCH AS, SHARES ETC. (WHICH IS NOT ELIGIBLE FOR DEPRECIATION) AS A RESULT OF EXPECTED FALL IN MARKET PRICE BELOW THE BOOK VALUE OF THE STOCK IN TRADE, SUCH CLAIM ON ACCOUNT OF DIMINUTION IN VALUE OF ASSETS IS HIT BY CLAUSE (I) OF EXPLANATION 1 TO SECTION 115JB OF I T ACT. EVEN IF THE ASSESSEE CLAIMS ADDITIONAL DEPRECIATION FOR EARLIER YEARS BE CAUSE OF CHANGE IN METHOD OF PROVIDING DEPRECIATION RETROSPECTIVELY, SUCH ADD ITIONAL DEPRECIATION FOR EARLIER YEARS, CLAIMED IN A SUBSEQUENT YEAR, CANNOT BE TREATED AS DIMINUTION IN VALUE OF ASSETS, AND IS NOT HIT BY CLAUSE (I) OF EXPLANATION 1 TO SECTION 115JB OF IT ACT. WE MAY MENTION THAT THE HONBLE GUJARAT HIGH COURT, IN CIT V. DINTEX DYECHEM LTD. [2015] 55 TAXMANN.COM 178 (GUJ. ) AND IN DY. CIT V. GUJARAT FILAMENTS LTD. [2014] 369 ITR 384 (GUJ.) HELD THAT ADDITION MADE BY THE AO TO BOOK PROFIT ON ACCOUNT OF ADDITIONAL DEPRECIATION DEBITE D IN ACCOUNTS FOR EARLIER YEARS BECAUSE OF CHANGE IN METHOD OF PROVIDING DEPRECIATI ON RETROSPECTIVELY WAS LIABLE TO BE DELETED. A PERUSAL OF SECTION 115JB (2) OF IT ACT S HOWS THAT THE BOOK PROFIT OF THE ASSESSEE COMPANY IS TO BE ARRIVED AT IN ACCORDANCE WITH STATEMENT OF PROFIT AND LOSS AS PER THE PROVISIONS OF SCHEDULE III OF THE COMPANIES ACT, 2013 OR AS PER THE PROVISIONS OF THE ACT GOVERNING SUCH COMPANIES TO WHICH SECOND PROVISO TO SUB-SECTION (1) OF SECTION 129 OF THE COMPANIES ACT, 2013 (18 OF 2013) IS APPLICABLE. CLAIM OF ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 44 OF 51 DEPRECIATION IN ACCORDANCE WITH THE PROVISIONS OF S CHEDULE III OF THE COMPANIES ACT, 2013 OR AS PER THE PROVISIONS OF THE ACT GOVERNING SUCH COMPANIES TO WHICH SECOND PROVISO TO SUB-SECTION (1 ) OF SECTION 129 OF THE COMPANIES ACT, 2013 (18 OF 2013) IS APPLICABLE; AS THE CASE MAY BE, IS NOT HIT BY CLAUSE (I) OF EXPLANATION 1 TO SECTION 115JB OF IT ACT. THEREFORE, THE AO WAS IN ERROR OF LAW IN HOLDING THAT THE ADDITIONAL CLAI M OF RS. 52.74 CRORES DUE TO CHANGE IN DEPRECIATION RATES HAVE RESULTED IN DIMINUTION IN T HE VALUE OF ASSETS. (3.2) THE LD. AR OF THE ASSESSEE FAILED TO BRING TO OUR ATTENTION ANY JUDICIAL PRECEDENTS OR ANY STATUTORY PROVISIONS TO SHOW THAT THE AUDIT REPORT BY STATUTORY AUDITORS AND/OR THE OPINION OF THE STATUTORY AUDITO R IS BINDING OR FINAL FOR ALL STATUTORY AUTHORITIES; EVEN IF THE STATUTORY AUDITOR IS APPOI NTED BY THE OFFICE OF CAG AND FURTHER EVEN IF THE OFFICE OF CAG CONDUCTS SUPPLEMENTARY AU DIT. THE REPORT(S)/OPINION(S) OF STATUTORY AUDITOR(S) ARE MEANT TO AID AND ASSIST TH E STATUTORY AUTHORITIES AND ARE NOT AIMED TO CURTAIL THEIR DISCRETION, POWER OR ROLE; UNLESS SPECIFICALLY PROVIDED UNDER LAW OR INTENDED BY NECESSARY IMPLICA TION OF SPECIFIC PROVISIONS UNDER LAW, OR SO HELD BY BINDING JUDICIA L PRECEDENTS. THIS APPLIES EVEN IN RESPECT OF REPORT(S)/OPINION(S) OF SUPPLEME NTARY AUDIT CONDUCTED BY THE OFFICE OF CAG. (3.2.1) IN THIS CONTEXT, THE FOLLOWING PORTION OF T HE ORDER OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS CIT 255 ITR 273 , AT PAGE 279 (SUPRA) ARE RELEVANT: ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 45 OF 51 ASSESSING OFFICER UNDER THE INCOME-TAX ACT HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT WHICH OBLIGATES THE COMPANY TO MAINTAIN ITS ACCOUNT IN A MANNER PROVIDED BY THE COMPANIES ACT AND THE SAME TO BE SCRUTINISED AND CE RTIFIED BY THE STATUTORY AUDITORS AND WILL HAVE TO BE APPROVED BY THE COMPAN Y IN ITS GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLIGATION ALSO TO EXAMINE AND SATISFY TH AT THE ACCOUNTS OF THE COMPANY ARE MAINTAINED IN ACCORDANCE WITH THE R EQUIREMENTS OF THE COMPANIES ACT. [EMPHASIS ADDED BY US.] (3.2.1.1) IT IS THUS OBVIOUS, THAT FOR THE PURPOSE OF DETERMINATION OF BOOK PROFITS, THE STATUTORY ROLE OF REGISTRAR OF COMPANI ES TO EXAMINE AND SATISFY THAT THE ACCOUNTS OF THE ASSESSEE ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT; HAS THE MANDATE OF THE SUPREME COURT . IT CAN BE READILY INFERRED THAT REPORT(S)/OPINION(S) OF STATUTORY AUDITOR(S) AND THE REPORTS / OPINIONS / RECOMMENDATIONS AS A RESUL T OF SUPPLEMENTARY AUDIT ARE NOT FINAL: THESE ARE NOT ONLY SUBJECT TO APPROV AL BY THE COMPANY IN ITS GENERAL MEETING, BUT ALSO SUBJECT TO EXAMINATION BY REGISTRAR OF COMPANIES AND HIS SATISFACTION THAT THE ACCOUNTS OF THE ASSES SEE ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES A CT. (3.3) THE LD. AR OF THE ASSESSEE DID NOT BRING ANY JUDICIAL PRECEDENTS OR STATUTORY PROVISIONS TO OUR ATTENTION IN WHICH PREFERENTIAL T REATMENT FOR A PUBLIC SECTOR UNDERTAKING IS PRESCRIBED IN RELATION TO DETERMINAT ION OF ITS TAX LIABILITIES. WE ARE OF THE ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 46 OF 51 VIEW THAT UNLESS SPECIFICALLY PROVIDED UNDER LAW OR INTENDED BY NECESSARY IMPLICATION OF SPECIFIC PROVISIONS UNDER LAW, OR SO HELD BY BINDING JUDICIAL PRECEDENTS; A PUBLIC SECTOR UNDERTAKING CANNOT LEGI TIMATELY CLAIM A PREFERENTIAL TREATMENT IN DETERMINATION OF ITS TAX LIABILITIES . THEREFORE, WE HOLD THAT THE FACT THAT ASSESSEE IS A PUBLIC SECTOR UNDERTAKING IS IRR ELEVANT FOR ADJUDICATION OF THE DISPUTE IN THIS APPEAL BEFORE U S. (3.4) WE NOW COME TO THE CONTENTION OF LD. AR OF TH E ASSESSEE, THAT THE ISSUE IN DISPUTE IS COVERED IN FAVOUR OF THE ASSESSEE BY DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS CIT (SUPRA). THE A O DID NOT ACCEPT THIS CONTENTION OF THE ASSESSEE, TAKING NOTE OF THE ORDER OF HONBLE S UPREME COURT IN THE CASE OF PADMASUNDARA RAO V. STATE OF TAMIL NADU (255 ITR 14 7 AT PAGE 153) IN WHICH IT WAS HELD AS UNDER: COURTS SHOULD NOT PLACE RELIANCE ON DECISIONS WITH OUT DISCUSSING AS TO HOW THE FACTUAL SITUATION FITS IN WITH THE FACT SITUATI ON OF THE DECISION ON WHICH RELIANCE IS PLACED. THERE IS ALWAYS PERIL IN TREATI NG THE WORDS OF A SPEECH OR JUDGMENT AS THOUGH THEY ARE WORDS IN A LEGISLATIVE ENACTMENT, AND IT IS TO BE REMEMBERED THAT JUDICIAL UTTERANCES ARE MADE IN THE SET-TING OF THE FACTS OF A PARTICULAR CASE, SAID LORD MORRIN IN HERRINGTON V. BRITISH RAILWAYS BOARD, [1972] 2 WLR 537 (HL). CIRCUMSTANTIAL FLEXIBILITY, ONE ADDITIONAL OR DIFFERENT FACT MAY MAKE A WORLD OF DIFFERENCE BETWEEN CONCLUS IONS IN TWO CASES. (3.4.1) SIMILAR VIEWS WERE EXPRESSED BY THE APEX CO URT IN THE CASE OF SUN ENGINEERING WORKS (198 ITR 297 AT PAGE 320). ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 47 OF 51 (3.4.2) WITH THIS BACKGROUND, WE NOW CONSIDER THE FACTS OF THIS CASE AND RELEVANT PROVISIONS OF LAW. PROVISIONS UNDER PARAGRAPHS 11 A ND 13 OF ACCOUNTING STANDARD-6 (AS-6) HAVE BEEN NOTED BY LD. CIT(A) AND RELEVANT P ORTIONS OF THE ORDER OF LD. CIT(A) HAVE ALREADY BEEN REPRODUCED EARLIER IN THIS ORDER. VIDE PARAGRAPH 11 OF AS-6, MANAGEMENT OF THE COMPANY IS VESTED WITH POWER TO E XERCISE JUDGMENT IN THE LIGHT OF TECHNICAL, COMMERCIAL, ACCOUNTING AND LEGAL REQUIRE MENTS AND IT PERMITS MANAGEMENT TO PERIODICALLY REVIEW THE ORIGINAL ESTIMATE OF USEFUL LIFE OF AN ASSET. FURTHER, UNDER PARAGRAPH 13 OF AS-6, IT IS PERMITTED FOR THE COMPA NY TO APPLY THE HIGHER RATE OF DEPRECIATION WHERE THE MANAGEMENT ESTIMATES OF THE USEFUL LIFE OF AN ASSET IS SHORTER THAN THAT ENVISAGED UNDER THE PROVISION OF THE RELE VANT STATUTES (HERE, THE COMPANIES ACT, 1956). THE PROVISIONS REGARDING RATES OF DEPR ECIATION CHARGED BY A COMPANY WERE EXPLAINED IN CIRCULAR DATED 07/03/1989 ISSUED UNDER THE COMPANIES ACT, THE RELEVANT PORTION OF WHICH IS REPRODUCED AS UNDER: IT MAY BE CLARIFIED THAT THE RATES AS CONTAINED IN SCHEDULE XIV SHOULD BE VIEWED AS THE MINIMUM RATES, AND, THEREFORE, A COMP ANY SHALL NOT BE PERMITTED TO CHARGE DEPRECIATION AT RATES LOWER THAN THOSE SP ECIFIED IN THE SCHEDULE IN RELATION TO ASSETS PURCHASES AFTER THE DATE OF APPL ICABILITY OF THE SCHEDULE. HOWEVER, IF ON THE BASIS OF A BONA FIDE TECHNOLOGICAL EVALUATIO N , HIGHER RATES OF DEPRECIATION ARE JUSTIFIED, THEY MAY BE PR OVIDED WITH PROPER DISCLOSURES BY WAY OF A NOTE FORMING PART OF ANNUAL ACCOUNT . [EMPHASIS ADDED BY US.] (3.4.2.1) IT IS, THEREFORE, OBVIOUS THAT UNDER AS-6, HIGHER RATES OF DEPRECIATION FOR ASSETS HAVE TO BE BASED ON BONA FIDE TECHNOLOGICAL EVALUATION OF THE USEFUL ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 48 OF 51 LIFE OF THE DEPRECIABLE ASSETS. FOR A BONA FIDE TE CHNICAL EVALUATION, IT IS NECESSARY THAT THE EVALUATION SHOULD BE MADE BY A C OMPETENT PERSON OR BODY HAVING THE REQUISITE TECHNICAL KNOWLEDGE AND EXPERT ISE. IT IS FURTHER NECESSARY THAT SUCH AN EVALUATION LEADING TO HIGHER RATE OF DEPRECIATION IS A BONA FIDE EVALUATION, ESPECIALLY WHEN SUCH AN EVALU ATION RESULTS IN TAX BENEFIT FOR THE COMPANY. A SELF SERVING EVALUATION , WHICH IS NOT BONA FIDE, LEADING TO CLAIM OF REDUCED TAX BURDEN FOR THE ASSE SSEE WILL BE A COLOURABLE DEVICE WITHIN THE MEANING OF THE LANDMARK DECISION OF HON BLE SUPREME COURT IN THE CASE OF MCDOWELL AND CO. LTD. VS. COMMERCIAL TAX OFFICER 15 4 ITR 148 (SC) . A COLOURABLE DEVICE TO EVADE TAX HAS TO BE REJECTED. (3.4.3) WE HAVE ALREADY HELD IN FOREGOING PARAGRAP H (3.2.1.1) THAT FOR THE PURPOSE OF DETERMINATION OF BOOK PROFITS, THE STATUTORY ROL E OF REGISTRAR OF COMPANIES TO EXAMINE AND SATISFY THAT THE ACCOUNTS OF THE ASS ESSEE ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES A CT, HAS THE MANDATE OF THE SUPREME COURT ; AND FURTHER, THAT REPORT(S)/OPINION(S) OF STATUTORY AUDITOR(S) AND THE REPORTS / OPINIONS / RECOMMENDAT IONS AS A RESULT OF SUPPLEMENTARY AUDIT ARE NOT FINAL : THESE ARE NOT O NLY SUBJECT TO APPROVAL BY THE COMPANY IN ITS GENERAL MEETING, BUT ALSO SUBJEC T TO EXAMINATION BY REGISTRAR OF COMPANIES AND HIS SATISFACTION THAT TH E ACCOUNTS OF THE ASSESSEE ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT. ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 49 OF 51 HOWEVER, ON THE PERUSAL OF RECORDS BEFORE US, WHICH INCLUDES THE ASSESSMENT ORDER, THE ORDER OF THE LD. CIT(A), THE PAPER BOOK FILED B Y THE ASSESSEE, FORM 35, FORM 36 ETC; WE FIND THAT THE BOTH THE LOWER AUTHORITIES, A O AS WELL AS LD. CIT(A), HAVE NOT CONSIDERED WHETHER, AFTER EXAMINATION BY REGISTRAR OF COMPANIES, WHETHER REGISTRAR OF COMPANIES WAS SATISFIED THAT THE ACCOUNTS OF THE AS SESSEE ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES A CT. FURTHER, ON PERUSAL OF RECORDS, WE FIND THAT THE RELEVANT INFORMATION, WHETHER, AFT ER EXAMINATION BY REGISTRAR OF COMPANIES, WHETHER REGISTRAR OF COMPANIES WAS SATIS FIED THAT THE ACCOUNTS OF THE ASSESSEE ARE MAINTAINED IN ACCORDANCE WITH THE REQU IREMENTS OF THE COMPANIES ACT; IS NOT AVAILABLE ON OUR RECORDS. NEITHER OF THE TWO SI DES, IN THE COURSE OF APPELLATE PROCEEDINGS IN ITAT HAS PROVIDED DETAILS REGARDING CONSTITUTION OF THE COMMITTEE WHICH RECOMMENDED LOWER USEFUL LIFE OF THE ASSETS AND HIG HER RATE OF DEPRECIATION. FURTHERMORE, THE INFORMATION REGARDING TECHNICAL QU ALIFICATIONS, KNOWLEDGE AND EXPERTISE OF THE COMMITTEE MEMBERS IS ALSO NOT AVAI LABLE ON OUR RECORDS. MOREOVER, A COPY OF THE REPORT OF THE COMMITTEE IS ALSO NOT AVA ILABLE ON OUR RECORDS. ON PERUSAL OF THE RECORDS, WE FIND THAT THE QUERY OF THE AO FROM THE ASSESSEE AS TO WHY THE USEFUL LIFE OF RADIO EQUIPMENT HAS BEEN TAKEN BY THIS COMM ITTEE TO THE THREE YEARS, WHEN BSNL (BHARAT SANCHAR NIGAM LIMITED) CONSIDERS THE U SEFUL LIFE OF RADIO EQUIPMENT TO BE 12 TO 15 YEARS, HAS REMAINED UNANSWERED. IMPORTANTL Y, THE LOWER AUTHORITIES, THE AO AS WELL AS THE LD. CIT (A), HAVE ALSO NOT CONSIDERED W HETHER THE REGISTRAR OF COMPANIES HAS ACCEPTED THE DECISION OF THE ASSESSEE COMPANY T O CHARGE HIGHER RATE OF ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 50 OF 51 DEPRECIATION AND TO REDUCE THE USEFUL LIFE OF CERTA IN DEPRECIABLE ASSETS WITH RETROSPECTIVE EFFECT, AS A RESULT OF WHICH THE ASSE SSEE HAS MADE ADDITIONAL CLAIM OF DEPRECIATION AMOUNTING TO RS. 52.74 CRORES. SINCE T HE RELEVANT INFORMATION IS NOT ON OUR RECORDS, WE RESTORE THE MATTER TO THE FILE OF THE A O WITH THE DIRECTION TO PASS FRESH ORDER ON THIS ISSUE. THUS, THE ORDER OF THE LD. CI T(A) IS SET ASIDE ON THIS LIMITED ISSUE AND THE MATTER IN DISPUTE IN THE PRESENT APPEAL BEF ORE US IS RESTORED TO THE FILE OF THE AO FOR FRESH ORDER ON THIS LIMITED ISSUE. IN THE RE SULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28/11/2018. SD/- SD/- (S.K. YADAV) (ANADEE NATH MISSHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28.11.2018 POOJA/- COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI ITA NO.-2743/DEL/2016. M/S RAILTEL CORPORATION OF INDIA LTD. PAGE 51 OF 51 DATE OF DICTATION 15.11.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 26 .11.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT .11.2018 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER
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