THE COMMISSIONER OF INCOME TAX, V. M/S KARNATAKA SOAPS & DETERGENTS LTD

ITA/257/2007

AI Insights

The case involves three Income Tax Appeals filed by the Commissioner of Income Tax and the Deputy Commissioner of Income Tax against M/s Karnataka Soaps & Detergents Ltd. The appeals challenged the orders of the Income Tax Appellate Tribunal (ITAT), Bangalore, which had set aside the orders of the lower authorities and directed the recalculation of book profits by allowing deductions for deferred revenue expenditures. The main legal issue was the interpretation of Section 115JA of the Income Tax Act, 1961, particularly regarding the treatment of deferred revenue expenditures in the computation of book profits. The Tribunal had held that the assessee could claim the entire expenditure as revenue expenditure, which was contested by the revenue.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728945 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 13-10-2014
• Assessment Year: misc
• Other Referred Cases: Apollo Tyres Ltd. vs. Commissioner of Income Tax, Malayalam Manorama vs. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Companies Act, 1956
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI
• Assessee Lawyers: K V ARAVIND
• Keywords: Assessment Year; Book profit; Deferred revenue expenditure; Income tax appeal; MAT income
• Section: 115JB; 115JAA; 115JA; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 13th DAY OF OCTOBER, 2014 PRESENT THE HON' BLE MR. JUSTICE N.KUMAR AND THE HON' BLE MR. JUSTICE B. MANOHAR Income Tax Appeal Nos. 257/2007 c/w 266/2007 c/w 63/2011 Income Tax Appeal No. 257/2007: BETWEEN: 1.THE COMMISSIONER OF INCOME TAX CENTRAL CIRCLE C R BUILDING QUEENS ROAD BANGALORE 2.THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(3) C.R. BUILDING QUEENS ROAD BANGALORE ... APPELLANTS (BY SRI K V ARAVIND, ADVOCATE) AND: M/S KARNATAKA SOAPS & DETERGENTS LTD., BANGALORE PUNE HIGHWAY, BANGALORE-560 055. ... RESPONDENT (BY SRI S PARTHASARTHI, ADVOCATE) … This Income Tax Appeal is filed under Section 260-A of Income Tax Act, 1961 praying to formulate the substantial questions of law and to 2 allow the appeal and set aside the Order dated 15-09-2006 passed by the ITAT, Bangalore in ITA No. 3081/BNG/2004 and confirm the order passed by the Deputy Commissioner of Income Tax , Circle-11(3), Bangalore. Income Tax Appeal No. 266/2007: BETWEEN: 1.THE COMMISSIONER OF INCOME TAX CENTRAL CIRCLE C R BUILDING QUEENS ROAD BANGALORE 2.THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(3) C.R. BUILDING QUEENS ROAD BANGALORE ... APPELLANTS (BY SRI K V ARAVIND, ADVOCATE) AND: M/S KARNATAKA SOAPS & DETERGENTS LTD., BANGALORE PUNE HIGHWAY, BANGALORE-560 055. ... RESPONDENT (BY SRI S PARTHASARTHI, ADVOCATE) … This Income Tax Appeal is filed under Section 260-A of Income Tax Act, 1961 praying to formulate the substantial questions of law and to allow the appeal and set aside the Order dated 15-09-2006 passed by the ITAT, Bangalore in ITA No. 3082/BNG/2004 and confirm the order passed by the Deputy Commissioner of Income Tax , Circle-11(3), Bangalore. 3 Income Tax Appeal No. 63/2011: BETWEEN: 1.THE COMMISSIONER OF INCOME TAX LTU, JSS TOWERS, BSK III STAGE BANGALORE 2.THE DEPUTY COMMISSIONER OF INCOME TAX LTU, JSS TOWERS, BSK III STAGE BANGALORE ... APPELLANTS (BY SRI K V ARAVIND, ADVOCATE) AND: M/S KARNATAKA SOAPS & Detergents Ltd., SANDAL CITY, P.B. NO. 5531 BANGALORE ... RESPONDENT (BY SRI S PARTHASARTHI, ADVOCATE) … This Income Tax Appeal is filed under Section 260-A of Income Tax Act, 1961 praying to formulate the substantial questions of law and to allow the appeal and set aside the Order dated 23.9.2010 passed by the ITAT., Bangalore in ITA No. 883/BNG/2010 and confirm the order passed by the Deputy Commissioner of Income Tax, LTU., Bangalore. These Income Tax Appeals coming on for Hearing this day, N. Kumar J., delivered the following: JUDGMENT The questions of law involved in all these three appeals being the same and the assessee is also the 4 same, these appeals are taken up for consideration together and disposed of by this common order. 2. The assessment years involved in ITA Nos. 257/2007 and 266/2007 are 1999-2000 and 2000- 2001 in respect of which a common order is passed and 2006-2007 out of which ITA No. 63/2011 arises. 3. In all the three cases, the assessee had been taxed on MAT income under Section 115JA of the Income Tax Act, 1961 (for short hereinafter referred to as ‘the Act’). The assessing Authority has refused to reduce deferred revenue expenditure amounting to Rs.5,05,31,525/- for the assessment year 1999-2000 and Rs.14,55,44,365/- for the assessment year 2000- 2001 and a sum of Rs.2,11,66046/- for the assessment year 2006-2007 from the book profit in the MAT computation by observing that the deferred revenue expenditure is shown in the books and there is no provision under Section 115JA of the Act to change the nature of expenses shown in the books of accounts. 5 4. The assessee contended that neither the Income Tax Act nor Schedule-VI of the Companies Act contemplate the concept of deferred revenue expenditure. According to the assessee to compute book profits under Section 115JA of the Act, the deferred revenue expenditure has to be deducted. 5. The Assessing Authority held that under Section 115JA of the Act, the amount equal to 30% of the book profits shall be deemed to be the total income of the assessee chargeable to tax for the relevant previous year, if the total income of the assessee as per the Act is less than 30% of its books of profits. As per Sub-section (2) of Section 115JA of the Act, every assessee, being a company, shall for the purposes of Section 115JA, prepare its profit and loss account in accordance with the provisions of Part-II and Part-III of Schedule-VI of the Companies Act, 1956. Explanation to Section 115JA of the Act provides that book profits mean that the net profit as per the P & L account prepared under Sub-section (2) as increased by the items mentioned in clauses (a) to 6 (f) and reduced by items (i) to (ix). The assessee has not specified whether the deferred revenue expenditure is covered under any of items (i) to (ix). The assessee has also not been able to prove convincingly that the profit and loss account is in accordance with the provisions of Part-II and Part-III of Schedule-VI of the Companies Act. Therefore, it held that the assessee was not justified in deducting the deferred revenue expenditure from the net profit as per the profit and loss account for determining the book profit. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals), who confirmed the said order. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. 6. The Tribunal interpreting Sub-section (2) of Section 115JA of the Act held that every assessee, being a company, is required to prepare for the purpose of this section its profit and loss account for the previous year in accordance with the provisions of Parts-II and III of Schedule-VI to the Companies Act, 7 1956. The Act does not recognize or define the deferred revenue expenditure. It is something that is a fancy of the accounting world. This has been so enunciated for highlighting such an expenditure, for the benefit of which is said to accrue over the years and treat them as justifiable against income that could be earned in the future. It is something like expenditure incurred with the expectation of earning income and increasing the income over the years. It is with this concept based on which, the accounting terminology brought about the word ‘deferred revenue expenditure’. Therefore, the assessee is entitled to prepare as profit and loss account for the purposes of Section 115JA claiming the entire expenditure as revenue expenditure while in the published accounts it was claimed only partly. Therefore, the Tribunal set aside the order passed by the lower authorities and directed the Assessing Authority to recalculate the book profits by treating the net profit as shown by the assessee in the profit and loss account prepared by the assessee for this purpose. Aggrieved by the said order, the revenue is in appeal. 8 7. The learned Counsel for the revenue assailing the impugned order contended that in view of the explanation to Section 115JA of the Act, ‘book profit’ means a net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (2). If any amount is to be increased or decreased, it has to be in terms of the said explanation. The said explanation does not provide for decreasing the amount spent towards deferred expenditure and therefore, for the purpose of levying tax under the Act, the income shown in the profit and loss account is conclusive. The assessee is not entitled to meddle with the said defects by claiming deduction of the entire amount of expenditure incurred in that particular year. He relied on the judgments of the Apex Court as well this Court in support of his contentions and contended that the order passed by the Tribunal is erroneous and requires to be interfered with. 8. Per contra, learned Counsel for the assessee supported the impugned order. 9 9. This Court while admitting the appeals had framed the following substantial questions of law in these three appeals: “1. Whether the Tribunal was correct in upholding the case of the assessee that deferred revenue expenditure towards (advertisement, publicity, distribution and sales promotion) debited to the P & L account and carried to the Balance Sheet and approved by the assessee’s Board as per the Companies Act when maintaining regular books of accounts could be modified and other years expenditure can be claimed during the current assessment year itself when computing Book profits u/s.115JB of the Act contrary to judgment of Apex Court in Apollo Tyres and Malayalam Manorama? 2. Whether the finding of the Tribunal reversing the finding of the appellate authority that before allowing deduction under Sec. 80HHC of the Income Tax Act, the unabsorbed loss and depreciation should be carried 10 forward and set off and only in respect of the balance deductions should be allowed, is perverse, arbitrary and contrary to law? 3. Whether the finding of the Tribunal that the assessee is entitled to prepare profit and loss account for the purposes of Sec.115JAA by claiming the entire expenditure as revenue expenditure while in the published accounts it was claimed only partly, is perverse, arbitary and contrary to law? 4. Whether the Tribunal was correct in upholding the case of the assessee that deferred revenue expenditure (ex- gratia payment spread over 2 years) debited to the P & L account and carried to the Balance Sheet and approved by the assessee’s Board as per the Companies Act when maintaining regular books of accounts could be modified and both the years expenditure claimed during claimed during the current assessment year itself when computing Book profits u/s.115JB of the Act contrary to 11 judgment of Apex Court in Apollo Tyres and Malayalam Manorama?” 10. The learned Counsel for the revenue submitted that the substantial question of law relating to Section 80HHC of the Act is wrongly typed and that he would not press the same. Therefore, the only question of law which requires to be considered is regarding the interpretation to be placed to Section 115JA of the Act in particularly Sub-section (2) read with explanation. 11. The Apex Court in the case of APOLLO TYRES LTD.–vs- COMMISSIONER OF INCOME TAX reported in (2002) 255 ITS 273 dealing with the object of introducing Section 115J in the Income Tax Act held that Section 115J makes the income reflected in the companies books of account as the deemed income for the purpose of assessing the tax. The words ‘in accordance with the provisions of Part-II 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 12 accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-Tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by the 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 obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, they found it difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to re-scrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provision of the Companies Act. Sub-Section (1A) of Section 115J does not empower the authority under the Income 13 Tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes, one for the purpose of Companies Act and another for the purpose of Income Tax both maintained under the same Act. If the legislature intended the Assessing Officer to reassess the Company’s income, then it would have stated in Section 115J that “income of the Company as accepted by the Assessing Officer”. In the absence of the same and on the language of Section 115J, it will have to be held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. The Assessing Officer while computing the income under Section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in 14 accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said Section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J of the Act. 12. In coming to the said conclusion, they relied on the Budget Speech of the then Hon’ble Finance Minister of India made in the Parliament while introducing Section 115J of the Act which is as follows: “It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called “zero- tax” highly profitable companies deserves attention. In 1983, a new s. 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have held and is being withdrawn. I now propose to introduce a provision whereby every 15 company will have to pay a ‘minimum corporate tax’ on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent of its book profit. In other words, a domestic widely-held company will pay tax of at least 15 per cent of its book profit. This measure will yield a revenue gain of approximately Rs.75 crores.” 13. From the aforesaid speech of the Hon’ble Finance Minister of India, it is clear that the IT authorities were unable to bring certain companies within the net income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that Section 115J, was introduced in the Act with a deeming provision which makes the company liable to pay tax or at least 30% of its book profits as shown in its own account. Therefore, the object of this Section is to prevent the mischief. Therefore while applying the Section what is to be borne in mind is 16 whether the assessee is trying to avoid payment of tax by any manipulative process by adjustment of accounts. Sub-Section (2) of Section 115J(1A) makes it clear that every assessee, being a company shall for the purpose of this Section, prepare its profit and loss account for the relevant previous year in accordance with the provision of Parts II and III of Schedule-VI of the Companies Act, 1956. Thereafter, the same shall be placed before the Company at its Annual General Meeting in accordance with the provisions of Section 210 of the Companies Act. When once it is adopted, it attains finality. Therefore, the explanation provides for the purpose of Section 115JA, ‘book profit’ means the net profit as shown in the P & L account for the relevant previous year prepared under Sub-Section (2). Part-I of Schedule-VI of the Companies Act, 1956 deals with the Form of Balance Sheet. Part-II of Schedule-VI deals with the Requirements as to Profit and Loss Account. Clause (2) of Part-II of Schedule- VI which deals with the Profit and Loss Account reads as under: 17 “ The profit and loss account – a) shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account; and b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exception nature”. Part-III of Schedule-VI deals with the Interpretation. Therefore, Part-II of Schedule-VI of the Companies Act specifically provides for preparation of profit and loss account disclosing the expenses in respect of non-recurring transactions or transactions of an exceptional nature. 14. It is not in dispute that the assessee has incurred the expenses as stated above for the years 1999-2000, 2000-01 and 2006-07. The net profit could be determined only after deducting the aforesaid amount. The assessee is seeking for 18 deduction of the said amount which has actually incurred. However, in the P & L account which is printed for the purpose of showing it to the shareholders in order to show that they have earned some profits, they do not want to deduct the entire amount. They want to defer these expenses for the subsequent years in which they intend to earn profits because of the expenditure in those years. Therefore, the figure of profits shown in the printed balance sheet is more than the profit earned by the assessee/company in terms of the books of accounts maintained according to Part-II and Part-III of Schedule VI of the Companies Act. 15. The argument is even though they have incurred the entire expenditure as in the printed P & L account, the same is not shown and a portion of it is shown as deferred expenditure. That portion as deferred expenditure cannot be deducted. There cannot be two balance sheets – one for the purpose of income tax and another for the purpose of showing it to the share holders under the Income Tax Act and 19 therefore, it was contended that the order passed by the Tribunal is incorrect. 16. As is clear from Section 115JA of the Act, it deals with the ‘deemed income’. In other words it is not the actual income earned by the assessee. The object behind it is to prevent the assessee from adjusting the accounts or manipulating the accounts so as to avoid payment of tax on the ground that they have not earned any profit at all. Therefore, the said provision was introduced insisting of preparation of profit and loss account for the relevant previous year in accordance with the provisions of Part-II and III of Schedule-VI to the Companies Act, 1956. Once such an account is prepared and certified by the auditors, the same becomes the basis for levying tax on book profit. When once the assessee has incurred an expenditure and it is deducted in terms of Part-II of Schedule-VI of the Companies Act and the profit is arrived at, merely because in the printed P & L account for the purpose of showing to the shareholders that a profit is made by the Company, 20 the entire expenditure is not deducted and a portion of it is shown as a deferred expenditure, the assessee cannot be denied the benefit of actual expenditure incurred. The assessee is not showing the actual expenditure incurred to avoid payment of tax. On the contrary when the actual expenditure is given deduction to, the profit margin gets reduced. It is by showing it to the P & L account, a portion of it as a deferred payment, artificially the profit has gone up. The object of Section 115JA being to avoid adjustment of account, manipulation of figures to avoid payment of tax. When the assessee has actually incurred expenditure and the tax liability is less when compared with the net profit arrived at after giving deduction to the actual expenditure, the tax payable is on that net profit and not on the fancy figure shown in the P & L account for the purpose of showing profit to the shareholders. In other words, to find out what is net profit one has 21 to look into the books of accounts maintained by the company and the profit and loss account prepared on the basis of such book of accounts. What is shown in the printed balance sheet is for the benefit of the shareholders as it will not reflect the true state of affairs and that cannot be made the basis for levying tax under the Act. This is precisely what the Tribunal has held. Neither under the Companies Act nor under the Income Tax Act, this concept of deferred expenditure is recognized. That is a pathology used by the chartered accountants to show to the shareholders that the company has made profit though it has not earned profits. In other words it is nothing but a window dressing and the authority should not be mislead or guided by this balance sheet which is prepared to satisfy the shareholders. It is the P & L account prepared on the basis of the books of accounts as contemplated in Part-II of Schedule VI which 22 should form and assist to find out what is the profit earned and on that profit, tax is levied. 17. In that view of the matter, the order passed by the Tribunal cannot be found fault with. It is in accordance with law. Hence, the substantial questions of law are answered in favour of the assessee and against the revenue. 18. Accordingly, all the three appeals are dismissed. Sd/- Judge Sd/- Judge Nsu/- "