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THE COMMISSIONER OF INCOME TAX (CENTRAL-II) Vs. GOETZE (INDIA) LIMITED
January, 04th 2014
$~
*       IN THE HIGH COURT OF DELHI AT NEW DELHI
+            INCOME TAX APPEAL No. 1179/2010

                                                 Reserved on: 22nd October, 2013
                                             Date of decision: 9th December, 2013

                                                       (Assessment Year 2000-01)
        THE COMMISSIONER OF INCOME TAX
        (CENTRAL-II)                       ..... Appellant
                     Through Mr. Rohit Madan, Advocate.

                                   versus

        GOETZE (INDIA) LIMITED              ..... Respondent
                      Through Mr. S. Ganesh, Sr. Advocate with
                      Ms. Geetanjali Mohan and Ms. Mansi
                      Gautam, Advocates.

                                   ITA No. 1366/2010
                                                  (Assessment Year 2000-01)
        THE COMMISSIONER OF INCOME TAX
        (CENTRAL-II)                   ..... Appellant
                                   Through Mr. Rohit Madan, Advocate.

                                   versus

        FEDERAL-MOGUL GOETZE (INDIA) LIMITED ..... Respondent
                                   Through Mr. S. Ganesh, Sr. Advocate with
                                   Ms. Geetanjali Mohan and Ms. Mansi
                                   Gautam, Advocates.

+            INCOME TAX APPEAL No. 1979/2010

                                                       (Assessment Year 2001-02)
        THE COMMISSIONER OF INCOME TAX
        (CENTRAL-II)                       ..... Appellant
                     Through Mr. Rohit Madan, Advocate.


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010                  Page 1 of 40
                                   versus

        FEDERAL MOGUL GOETZE (INDIA) LIMITED ......Respondent
                                   Through Mr. S. Ganesh, Sr. Advocate with
                                   Ms. Geetanjali Mohan and Ms. Mansi
                                   Gautam, Advocates.

                                   ITA No. 2106/2010
                                                  (Assessment Year 2001-02)
        THE COMMISSIONER OF INCOME TAX
        (CENTRAL-II)                   ..... Appellant
                                   Through Mr. Rohit Madan, Advocate.

                                   versus

        MOGUL GOETZE (INDIA) LIMITED                     ..... Respondent
                                   Through Mr. S. Ganesh, Sr. Advocate with
                                   Ms. Geetanjali Mohan and Ms. Mansi
                                   Gautam, Advocates.

        CORAM:
        HON'BLE MR. JUSTICE SANJIV KHANNA
        HON'BLE MR. JUSTICE SANJEEV SACHDEVA

SANJIV KHANNA, J.:

ITA Nos. 1179/2010 and 1366/2010

        These two appeals by the Revenue under Section 260A of the

Income Tax Act, 1961 (Act, for short) relate to Assessment Year 2000-

01. We note that the name of the assessee- Goetze (India) Limited

underwent a name change and is now known as Federal-Mogul Goetze

(India) Limited. In ITA Nos. 1179/2010 and 1366/2010 by order dated

16th May, 2012, the following substantial question of law was framed:-

              "Whether the Income Tax Appellate Tribunal was
              right in setting aside the order passed by the

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 2 of 40
              Commissioner of Income Tax under Section 263
              of the Income Tax Act, 1961?"

2.      The respondent-assessee for the assessment year 2000-01 had

filed return of income on 31st November, 2000 declaring loss of

Rs.3,05,26,654/- under normal provisions and positive book profit of

Rs.2,86,09,379/- under Section 115JA of the Act. This return was

subsequently revised on 28th March, 2002 and the positive book profit

declared under Section 115JA was reduced to Rs.1,92,73,285/-. By

assessment order dated 28th February, 2003, income declared under

Section 115JA was accepted but some additions were made on income

computed under the normal provisions and it was enhanced to

Rs.2,45,57,950/-.

3.      Commissioner of Income Tax, thereafter passed an order under

Section 263 of the Act observing that income computed under Section

115JA by the Assessing Officer was erroneous and prejudicial to the

interest of the Revenue on two accounts; (a) the Assessing officer had

wrongly allowed deduction of Rs.1.53 crores made in the revised

return and excluded this figure from the book profits; (b) expenditure

of Rs.183.63 lacs was incurred for earning of exempt dividend income

under Section 14A of the Act but this expenditure was not disallowed

though the respondent-assessee had earned dividend income of

Rs.157.85 lacs, which was exempt under Section 10(33) of the Act.


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010       Page 3 of 40
4.       Consequently, the Assessing Officer vide order dated 5 th

January, 2005 passed an order giving effect to the order passed by the

Commissioner under Section 263 of the Act. The respondent-assessee

preferred an appeal before the Commissioner of Income tax (Appeals)

against the said order but the same was rejected on the two issues in

question vide order dated 29th November, 2006 read with order dated

23rd June, 2008 under Section 154 of the Act.

5.       The respondent-assessee preferred further appeal before the

tribunal being ITA No. 409/Del/2007 and also preferred an appeal

against the order of Commissioner of Income Tax under Section 263,

which was registered as ITA No. 208/Del/2005. The said appeals have

been allowed, with the order under section 263 being quashed/set

aside.

6.       The first question raised is whether the order under Section 263

of the Act is justified and in accordance with law. Section 263 has

been elucidated and explained in Commissioner of Income Tax versus

Nagesh Knitwears Private Limited, (2012) 345 ITR 135 (Delhi). In

the said decision, reference was made to Malabar Industrial Company

Limited versus CIT, (2000) 243 ITR 83 (SC) and decisions of Delhi

High Court in Nabha Investments Private Limited versus Union of

India, (2000) 246 ITR 41 (Delhi) and ITO versus DG Housing

Projects Limited, (2012) 343 ITR 329 (Delhi). It has been observed in

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010          Page 4 of 40
Nagesh Knitwears Private Limited (Supra):-


                 "10. Revenue does not have any right to appeal
                 to the first appellate authority against an order
                 passed by the Assessing Officer. Section 263
                 has been enacted to empower the CIT to
                 exercise power of revision and revise any order
                 passed by the Assessing Officer, if two
                 cumulative conditions are satisfied. Firstly, the
                 order sought to be revised should be erroneous
                 and secondly, it should be prejudicial to the
                 interest of the Revenue. The expression
                 ,,prejudicial to the interest of the Revenue is of
                 wide import and is not confined to merely loss
                 of tax. The term ,,erroneous means a
                 wrong/incorrect decision deviating from law.
                 This expression postulates an error which
                 makes an order unsustainable in law.

                 11. The Assessing Officer is both an
                 investigator and an adjudicator. If the Assessing
                 Officer as an adjudicator decides a question or
                 aspect and makes a wrong assessment which is
                 unsustainable in law, it can be corrected by the
                 Commissioner in exercise of revisionary power.
                 As an investigator, it is incumbent upon the
                 Assessing Officer to investigate the facts
                 required to be examined and verified to
                 compute the taxable income. If the Assessing
                 Officer fails to conduct the said investigation,
                 he commits an error and the word ,,erroneous
                 includes failure to make the enquiry. In such
                 cases, the order becomes erroneous because
                 enquiry or verification has not been made and
                 not because a wrong order has been passed on
                 merits.

                 12. Delhi High Court in Gee Vee
                 Enterprises v. Additional  Commission    of
                 Income-Tax, Delhi-I, (1975) 99 ITR 375, has
                 observed as under:-


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 5 of 40
                     "The reason is obvious. The position and
                 function of the Income-tax Officer is very
                 different from that of a civil court. The
                 statements made in a pleading proved by the
                 minimum amount of evidence may be accepted
                 by a civil court in the absence of any rebuttal.
                 The civil court is neutral. It simply gives
                 decision on the basis of the pleading and
                 evidence which comes before it. The Income-
                 tax Officer is not only an adjudicator but also
                 an investigator. He cannot remain passive in the
                 face of a return which is apparently in order but
                 calls for further inquiry. It is his duty to
                 ascertain the truth of the facts stated in the
                 return when the circumstances of the case are
                 such as to provoke an inquiry. The meaning to
                 be given to the word "erroneous" in section 263
                 emerges out of this context. It is because it is
                 incumbent on the Income-tax Officer to further
                 investigate the facts stated in the return when
                 circumstances would make such an inquiry
                 prudent that the word "erroneous" in section
                 263 includes the failure to make such an
                 inquiry. The order becomes erroneous because
                 such an inquiry has not been made and not
                 because there is anything wrong with the order
                 if all the facts stated therein are assumed to be
                 correct."


7.      Reference was also made to decisions of the Supreme Court in

Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara

Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it

has been observed that where the Assessing Officer had accepted a

particular contention or issue without inquiry whatsoever, the order

was erroneous and prejudicial to the interest of Revenue. These two

decisions were explained in the case of DG Housing Project Limited

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 6 of 40
(supra) in the following words:-


                 "These two decisions show that it is not
                 necessary for the Commissioner to make further
                 inquiries before cancelling the assessment order
                 of the Income-tax Officer. The Commissioner
                 can regard the order as erroneous on the ground
                 that in the circumstances of the case the
                 Income-tax Officer should have made further
                 inquiries before accepting the statements made
                 by the assessee in his return.

                 14. The aforesaid observations have to be
                 understood in the factual background and
                 matrix involved in the said two cases before the
                 Supreme Court. In the said cases, the Assessing
                 Officer had not conducted any enquiry or
                 examined evidence whatsoever. There was total
                 absence of enquiry or verification. These cases
                 have to be distinguished from other cases (i)
                 where there is enquiry but the findings are
                 incorrect/erroneous; and (ii) where there is
                 failure to make proper or full verification or
                 enquiry."

8.      In Nagesh Knitwears Private Ltd. (supra), reference was made to

CIT Vs. Sunbeam Auto Ltd. (2011) 332 ITR 167, with the following

quote from the later decision:-

                 "15. In the case of CIT v. Sunbeam Auto Ltd
                 (2011) 332 ITR 167 (Delhi), the Delhi High
                 Court was considering the aspect, when there is
                 no proper or full verification and it was held as
                 under (page 179)

                    "We have considered the rival submissions
                 of the counsel on the other side and have gone
                 through the records. The first issue that arises
                 for our consideration is about the exercise of
                 power by the Commissioner of Income-tax




ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 7 of 40
                 under section 263 of the Income-tax Act. As
                 noted above, the submission of learned counsel
                 for the Revenue was that while passing the
                 assessment order, the Assessing Officer did not
                 consider this aspect specifically whether the
                 expenditure in question was revenue or capital
                 expenditure. This argument predicates on the
                 assessment order, which apparently does not
                 give any reasons while allowing the entire
                 expenditure as revenue expenditure. However,
                 that by itself would not be indicative of the fact
                 that the Assessing Officer had not applied his
                 mind on the issue. There are judgments galore
                 laying down the principle that the Assessing
                 Officer in the assessment order is not required
                 to give detailed reason in respect of each and
                 every item of deduction, etc. Therefore, one has
                 to see from the record as to whether there was
                 application of mind before allowing the
                 expenditure in question as revenue expenditure.
                 Learned counsel for the assessee is right in his
                 submission that one has to keep in mind the
                 distinction between "lack of inquiry" and
                 "inadequate inquiry". If there was any inquiry,
                 even inadequate that would not by itself give
                 occasion to the Commissioner to pass orders
                 under section 263 of the Act, merely because he
                 has a different opinion in the matter. It is only
                 in cases of "lack of inquiry" that such a course
                 of action would be open. In Gabriel India Ltd.
                 [1993] 203 ITR 108 (Bom), law on this aspect
                 was discussed in the following manner (page
                 113):

                 ... From a rending of sub-section (1) of section
                 263, it is clear that the power of suo motu
                 revision can be exercised by the Commissioner
                 only if, on examination of the records of any
                 proceedings under this Act, he considers that
                 any order passed therein by the Income-tax
                 Officer is ,,erroneous in so far as it is prejudicial
                 to the interests of the Revenue. It is not an
                 arbitrary or unchartered power, it can be

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010                 Page 8 of 40
                 exercised only on fulfilment of the
                 requirements laid down in sub-section (1). The
                 consideration of the Commissioner as to
                 whether an order is erroneous in so far as it is
                 prejudicial to the interests of the Revenue, must
                 be based on materials on the record of the
                 proceedings called for by him. If there are no
                 materials on record on the basis of which it can
                 be said that the Commissioner acting in a
                 reasonable manner could have come to such a
                 conclusion, the very initiation of proceedings
                 by him will be illegal and without jurisdiction.
                 The Commissioner cannot initiate proceedings
                 with a view to starting fishing and roving
                 enquiries in matters or orders which are already
                 concluded. Such action will be against the well-
                 accepted policy of law that there must be a
                 point of finality in all legal proceedings, that
                 stale issues should not be reactivated beyond a
                 particular stage and that lapse of time must
                 induce repose in and set at rest judicial and
                 quasi-judicial controversies as it must in other
                 spheres of human activity. (See Parashuram
                 Pottery Works Co. Ltd. v. ITO [1977] 106 ITR
                 1 (SC) at page 10) ... From the aforesaid
                 definitions it is clear that an order cannot be
                 termed as erroneous unless it is not in
                 accordance with law. If an Income-tax Officer
                 acting in accordance with law makes a certain
                 assessment, the same cannot be branded as
                 erroneous by the Commissioner simply
                 because, according to him, the order should
                 have been written more elaborately. This
                 section does not visualise a case of substitution
                 of the judgment of the Commissioner for that of
                 the Income-tax Officer, who passed the order
                 unless the decision is held to be erroneous.
                 Cases may be visualised where the Income-tax
                 Officer while making an assessment examines
                 the accounts, makes enquiries, applies his mind
                 to the facts and circumstances of the case and
                 determines the income either by accepting the
                 accounts or by making some estimate himself.

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 9 of 40
                 The Commissioner, on perusal of the records,
                 may be of the opinion that the estimate made by
                 the officer concerned was on the lower side and
                 left to the Commissioner he would have
                 estimated the income at a figure higher than the
                 one determined by the Income-tax Officer. That
                 would not vest the Commissioner with power to
                 re-examine the accounts and determine the
                 income himself at a higher figure. It is because
                 the Income-tax Officer has exercised the quasi-
                 judicial power vested in him in accordance with
                 law and arrived at a conclusion and such a
                 conclusion cannot be formed to be erroneous
                 simply because the Commissioner does not feel
                 satisfied with the conclusion ... There must be
                 some prima facie material on record to show
                 that tax which was lawfully exigible has not
                 been imposed or that by the application of the
                 relevant statute on an incorrect or incomplete
                 interpretation a lesser tax than what was just
                 has been imposed ... "

9.      Thereafter, it was observed and elucidated in Nagesh Knitwears

Private Limited (Supra), when and how power under Section 263 can

be exercised where there was no proper or full verification and when

the twin pre-conditions are satisfied:-


                 "Thus, in cases of wrong opinion or finding on
                 merits, the CIT has to come to the conclusion
                 and himself decide that the order is erroneous,
                 by conducting necessary enquiry, if required
                 and necessary, before the order under Section
                 263 is passed. In such cases, the order of the
                 Assessing Officer will be erroneous because the
                 order passed is not sustainable in law and the
                 said finding must be recorded. CIT cannot
                 remand the matter to the Assessing Officer to
                 decide whether the findings recorded are
                 erroneous. In cases where there is inadequate

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010            Page 10 of 40
                 enquiry but not lack of enquiry, again the CIT
                 must give and record a finding that the
                 order/inquiry made is erroneous. This can
                 happen if an enquiry and verification is
                 conducted by the CIT and he is able to establish
                 and show the error or mistake made by the
                 Assessing Officer, making the order
                 unsustainable in Law. In some cases possibly
                 though rarely, the CIT can also show and
                 establish that the facts on record or inferences
                 drawn from facts on record per se justified and
                 mandated further enquiry or investigation but
                 the Assessing Officer had erroneously not
                 undertaken the same. However, the said finding
                 must be clear, unambiguous and not debatable.
                 The matter cannot be remitted for a fresh
                 decision to the Assessing Officer to conduct
                 further enquiries without a finding that the
                 order is erroneous. Finding that the order is
                 erroneous is a condition or requirement which
                 must be satisfied for exercise of jurisdiction
                 under Section 263 of the Act. In such matters,
                 to remand the matter/issue to the Assessing
                 Officer would imply and mean the CIT has not
                 examined and decided whether or not the order
                 is erroneous but has directed the Assessing
                 Officer to decide the aspect/question.

                 This distinction must be kept in mind by the
                 CIT while exercising jurisdiction under Section
                 263 of the Act and in the absence of the finding
                 that the order is erroneous and prejudicial to the
                 interest of Revenue, exercise of jurisdiction
                 under the said section is not sustainable. In
                 most      cases     of    alleged     "inadequate
                 investigation", it will be difficult to hold that
                 the order of the Assessing Officer, who had
                 conducted enquiries and had acted as an
                 investigator, is erroneous, without CIT
                 conducting verification/inquiry. The order of
                 the Assessing Officer may be or may not be
                 wrong. CIT cannot direct reconsideration on
                 this ground but only when the order is

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 11 of 40
                 erroneous. An order of remit cannot be passed
                 by the CIT to ask the Assessing Officer to
                 decide whether the order was erroneous. This is
                 not permissible. An order is not erroneous,
                 unless the CIT hold and records reasons why it
                 is erroneous. An order will not become
                 erroneous because on remit, the Assessing
                 Officer may decide that the order is erroneous.
                 Therefore CIT must after recording reasons
                 hold that the order is erroneous. The
                 jurisdictional precondition stipulated is that the
                 CIT must come to the conclusion that the order
                 is erroneous and is unsustainable in law. We
                 may notice that the material which the CIT can
                 rely includes not only the record as it stands at
                 the time when the order in question was passed
                 by the Assessing Officer but also the record as
                 it stands at the time of examination by the CIT
                 [see CIT v. Shree Manjunathesware Packing
                 Products, 231 ITR 53 (SC)]. Nothing
                 bars/prohibits the CIT from collecting and
                 relying upon new/additional material/evidence
                 to show and state that the order of the
                 Assessing Officer is erroneous.

                 It is in this context that the Supreme Court
                 in Malabar Industrial Co. Ltd. v. Commissioner
                 of Income Tax, (2000) 243 ITR 83 (SC), had
                 observed that the phrase ,,prejudicial to the
                 interest of Revenue has to be read in
                 conjunction with an erroneous order passed by
                 the Assessing Officer. Every loss of Revenue as
                 a consequence of an order of the Assessing
                 Officer cannot be treated as prejudicial to the
                 interest of Revenue. Thus, when the Assessing
                 Officer had adopted one of the courses
                 permissible and available to him, and this has
                 resulted in loss to Revenue; or two views were
                 possible and the Assessing Officer has taken
                 one view with which the CIT may not agree;
                 the said orders cannot be treated as an
                 erroneous order prejudicial to the interest of
                 Revenue unless the view taken by the

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 12 of 40
                 Assessing Officer is unsustainable in law. In
                 such matters, the CIT must give a finding that
                 the view taken by the Assessing Officer is
                 unsustainable in law and, therefore, the order is
                 erroneous. He must also show that prejudice is
                 caused to the interest of the Revenue."


10.     In the facts of the present case, as we examine the factual

position, the Commissioner in her order under Section 263 has

recorded specific findings as to why and for what reason she felt that

the order passed by the Assessing Officer on two accounts was

erroneous and prejudicial to the interest of Revenue. For the reasons

set out in the order, which we need not at this stage elaborate as this is

a question of merits, we reject the contention of the respondent-

assessee and also the findings and reasoning of the tribunal that the

Commissioner could not have invoked power and jurisdiction under

Section 263 of the Act, because the Assessing Officer had taken a

probable view, which may be debatable and not acceptable to the

Revenue. When an Assessing Officer takes a view but the said view is

not correct, erroneous as per the findings recorded by the

Commissioner, along with the finding that the order passed by the

Assessing Officer was prejudicial to the interest of the Revenue, then

the order of the Commissioner cannot be set aside on the ground that

the two views were possible or probable. In such cases, the order

under Section 263 of the Act can be set aside if the findings accorded

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 13 of 40
by the Commissioner taking the particular view, whether on facts or in

law, is wrong or incorrect or the order of the Assessing Officer was not

prejudicial to the interest of the Revenue. The first aspect is essentially

a question of merits and not a question relating to whether or not two

views were possible. Commissioner can examine the issue on merits

even when the same issue was examined by the assessing officer.

Principles of change of opinion do not apply. If an order of the

assessing officer is held to be erroneous and prejudicial to the interest

of the revenue, it can be revised. The contention of the assessee and

the reasoning of the tribunal in this regard is clearly fallacious as

Revenue does not have any right to appeal against the order of the

Assessing Officer. It is in these circumstances that power of revision

has been conferred on the Commissioner under Section 263 of the Act

to correct erroneous orders which are also prejudicial to the interest of

Revenue. Observations of the Supreme Court in the case of Malabar

Industrial Company Limited (supra) have to be understood in the

context in which they were made. An order will not be erroneous, if

the Commissioner does not decide whether the order of the assessing

officer is erroneous but observes that two views are possible and yet

remits the issue for fresh decision by the Assessing Officer. However,

it would be incorrect to state as a broad proposition that an order of the

Assessing officer cannot be erroneous, if the Assessing Officer has

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010           Page 14 of 40
taken one of the two views possible. In such cases the order of the

assessing officer is erroneous provided the Commissioner holds and is

able to demonstrate that the view taken by the Assessing Officer was

not plausible, being legally unsustainable and incorrect. But the said

finding must be recorded. This would satisfy the statutory requirement

that the order passed and made subject matter of revision was

erroneous, subject to the second condition that the order under review

should also be prejudicial to the interest of the Revenue.

11.     This brings us to the question of computation under Section

115JA of the Act and the order passed by the Commissioner on merits

directing that Rs.1.53 crores should be added to the book profits on

account of transfer from the revaluation reserve.       The question is

whether the Commissioner was right in holding that the order of the

assessing officer on the said aspect was erroneous on merit? The

following facts may be noticed:

(i) Respondent-assessee had passed entries in the books of accounts on

30th June, 1986 debiting Rs.40.84 crores to the asset revaluation

account and crediting the same to capital reserve. This entry was not

routed through the profit and loss account. Thus, the profit and loss

account did not reflect this entry.

(ii)    The respondent-assessee had claimed depreciation on the

enhanced value of the assets, which stood enhanced w.e.f. 30th June,

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010         Page 15 of 40
1986 by Rs.40.84 crores.

(iii)   In the year in question, Rs.1.53 crores was withdrawn from this

reserve and was credited to the depreciation account. Thus reducing the

enhanced value of the assets and increasing the book profits.

(iv)    As per the annual report and audit report filed with the Registrar

of Companies by the respondent-assessee, Rs.1.53 crores was credited

to the profit and loss account and this enhanced the profits by this

figure. The book profits calculated and audited in accordance with the

provisions of Companies Act included this amount of Rs.1.53 crores.

(v)     In the return filed on 30th November, 2000, Rs.1.53 crores was

included in the computation sheet declaring the book profits as per

Section 115JA of the Act.

(vi)    In the revised return filed on 28th March, 2002, book profits

were recalculated for the purpose of the income tax return, and not for

the purpose of the return or statements filed before Registrar of

Companies, by reducing this amount of Rs.1.53 crores from the book

profits on which tax under section 115JA was payable.

12.     Before       the     Commissioner,             the   respondent-assessee     had

submitted that the reserve was created prior to 1 st day of April, 1997

and, therefore, withdrawal from the reserve was required to be reduced

from the profit and loss account in terms of clause (i) of proviso of

Explanation to Section 115JA. The said Explanation was amended by

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010                       Page 16 of 40
Finance Act, 2000 with effect from 1st April, 2001 to exclude reserves

created on or after 1st day of April, 1997 but ending before the 1st day

of April, 2001, otherwise than by debit to the profit and loss account.

Reliance was placed upon the decision of the tribunal in the case of

SRF Limited versus ACIT, reported in (1993) 47 ITD 504.

13.     The Commissioner rejected the said contentions observing that

clause (i) was applicable only when the amounts were withdrawn from

any reserve which had been credited to profit and loss account. Once

sub-clause (i) was not applicable, book profits calculated in accordance

with the provisions of the Companies Act cannot be disturbed or

recalculated in terms of the judgment of the Supreme Court in Apollo

Tyres Limited versus Commissioner of Income Tax, (2002) 255 ITR

273 (SC).           It was observed that the respondent had claimed

depreciation on enhanced value and as per accounting standards,

withdrawal from the capital reserve was to be debited to the

depreciation account and credited to the profit and loss account.

Withdrawals from the reserve were required to be credited to profit and

loss account, as at the time of creation of reserve it was not routed

through the profit and loss account. Judgment of the tribunal in the

case of SRF Limited (supra) was not applicable as it was not in

consonance with the law declared by the Supreme Court in Apollo

Tyres Limited (supra).

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010        Page 17 of 40
14.     Tribunal in the impugned order on merits did not agree with the

Commissioner and has observed that clause (i) permits reduction of

amount withdrawn from any reserve if such amount was credited to

profit and loss account. The proviso, which incorporates an exception,

was inapplicable as the provision/reserve was not created during the

period 1st April, 1997 till 30th March, 2001. Thus, book adjustment for

these years was permissible and not barred under the proviso.

15.     In order to appreciate the controversy on merits, we would like

to reproduce the relevant portion of Section 115JA, which reads as

under:-

                 "115JA. Deemed income relating to certain
                 companies.--(1) Notwithstanding anything
                 contained in any other provisions of this Act,
                 where in the case of an assessee, being a
                 company, the total income, as computed under
                 this Act in respect of any previous year relevant
                 to the assessment year commencing on or after
                 the 1st day of April, 1997 2but before the 1st
                 day of April, 2001 (hereafter in this section
                 referred to as the relevant previous year) is less
                 than thirty per cent. of its book profit, the total
                 income of such assessee chargeable to tax for
                 the relevant previous year shall be deemed to
                 be an amount equal to thirty per cent. of such
                 book profit.

                 (2) Every assessee, being a company, shall, for
                 the purposes of this section prepare its profit
                 and loss account for the relevant previous year
                 in accordance with the provisions of Parts II
                 and III of Schedule VI to the Companies Act,
                 1956 (1 of 1956);


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 18 of 40
                 Provided that while preparing profit and loss
                 account, the depreciation shall be calculated on
                 the same method and rates which have been
                 adopted for calculating the depreciation for the
                 purpose of preparing the profit and loss account
                 laid before the company at its annual general
                 meeting in accordance with the provisions of
                 section 210 of the Companies Act, 1956 (1 of
                 1956):

                 Provided further that where a company has
                 adopted or adopts the financial year under the
                 Companies Act, 1956 (1 of 1956), which is
                 different from the previous year under the Act,
                 the method and rates for calculation of
                 depreciation shall correspond to the method and
                 rates which have been adopted for calculating
                 the depreciation for such financial year or part
                 of such financial year falling within the
                 relevant previous year.

                 Explanation.--For the purposes of this section,
                 "book profit" means the net profit as shown in
                 the profit and loss account for the relevant
                 previous year prepared under sub-section (2),
                 as increased by--

                 (a) the amount of income-tax paid or payable,
                 and the provision therefor ; or

                 (b) the amounts carried to any reserves by
                 whatever name called; or

                 (c) the amount or amounts set aside to
                 provisions made for meeting liabilities other
                 than ascertained liabilities; or

                 (d) the amount by way of provision for losses
                 of subsidiary companies; or

                 (e) the amount or amounts of dividends paid or
                 proposed; or


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010            Page 19 of 40
                 (f) the amount or amounts of expenditure
                 relatable to any income to which any of the
                 provisions of Chapter III applies;

                 if any amount referred to in clauses (a) to (f) is
                 debited to the profit and loss account, and as
                 reduced by,--

                 (i) the amount withdrawn from any reserves or
                 provisions if any such amount is credited to the
                 profit and loss account:

                 Provided that, where this section is applicable
                 to an assessee in any previous year (including
                 the relevant previous year), the amount
                 withdrawn from reserves created or provisions
                 made in a previous year relevant to the
                 assessment year commencing on or after the 1st
                 day of April, 1997, but ending before the 1st
                 day of April, 2001 shall not be reduced from
                 the book profit unless the book profit of such
                 year has been increased by those reserves or
                 provisions (out of which the said amount was
                 withdrawn) under this Explanation; or

                 (ii) the amount of income to which any of the
                 provisions of Chapter III applies, if any such
                 amount is credited to the profit and loss
                 account; or

                 (iii) the amount of loss brought forward or
                 unabsorbed depreciation, whichever is less as
                 per books of account."

16.     Sub-section (1) begins with a non-obstante expression, which

gives overriding effect to the provisions of Section 115JA.                Sub-

Section 2 states that the assessee being a company shall prepare profit

and loss accounts for the previous year in accordance with the

provisions of Parts II and III of Schedule VI of the Companies Act,

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 20 of 40
1956. First and the second proviso to Section 115JA need not be

examined as they are not relevant. Explanation in the first part refers

to increase of the book profits by the amounts specified in sub-paras

(a) to (g). Thereafter, the Explanation states that, it shall be reduced

under clauses (i) to (iii). Clause (i) states that the book profit shall be

reduced by the amount withdrawn from the reserve or provision if any

such amount was credited to the profit and loss account. The proviso

to the said clause states that such reduction shall not be made if the

amount was withdrawn from the reserves or provisions during the

period 1st April, 1997 and 31st March, 2001, unless the book profit of

such year was increased by the reserve or provision out of which the

said amount was withdrawn. The core dispute and issue relates to

clause (i) and the proviso appended to it.

17.     The contention of the respondent-assessee is simple that the

amount withdrawn from the reserve or provision must be reduced once

the said amount was credited to the profit and loss account. It is stated

that Rs.1.53 crores was withdrawn from the reserve and credited to the

profit and loss account and, therefore, this reduction is mandated and

required and we need not go into the question whether such reduction

is justified and equitable or even the reason/purpose behind the

provision. As the language of the statue is clear, the proviso is not

applicable as the reserve was not created during the period 1 st April,

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010           Page 21 of 40
1997 and 31st March, 2001 but was created earlier on 30th June, 1986.


18.     The said contention though attractive and appealing has been

specifically rejected by this Court in CIT versus SRF Limited, ITR

No. 164/1995 decided on 4th August, 2011. We note that the High

Court reversed the decision of the tribunal in the case of SRF Limited

(supra) on the said aspect. In the impugned order in the present case,

tribunal followed their decision in the case of SRF Limited. The

reasoning given by the Division Bench in the case of SRF Limited,

which dealt with Sections 115J and 115JB is as under:-

                 "20. As would be evident on a bare perusal of
                 both section 115JB and Section 115J the
                 explanation defines as to the manner in which
                 book profit for the purposes of levy of MAT is
                 to be calculated. Broadly, in both Sections,
                 book profit means net profit as shown in the
                 profit and loss account which is to be increased
                 and reduced in terms of provisions contained
                 therein. Book profits are required to be
                 calculated bearing in mind the provisions part II
                 and III of Schedule VI of the Companies Act,
                 1956.

                 21. Before we proceed further we may notice
                 the relevant distinction in clause (i) of the
                 Explanation appended to Sections 115JB and
                 115J, respectively. In clause (i) of the
                 explanation in Section 115JB, in the bracketed
                 portion, the following words appear "excluding
                 a reserve created before the 1st day of April,
                 1997, otherwise than by way of a debit to the
                 profit and loss account". There is no such
                 mention in clause (i) to the explanation
                 contained in Section 115J. Furthermore, in the

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 22 of 40
                 proviso appended to clause (i) to the
                 explanation in Section 115JB, there is a
                 reference to the effect that where the section is
                 applicable to an assessee in any previous year,
                 the amount withdrawn from reserves created or
                 provisions made in the previous year relevant to
                 the assessment year commencing on or after 1st
                 April, 1997, shall not be reduced from the book
                 profit unless the book profit of such year has
                 been increased by the reserves of provisions. As
                 against this in the proviso to clause (i) of the
                 explanation contained in Section 115J, the
                 wording is identical save and to the extent date
                 mentioned in the proviso is: "on or after 1st day
                 of April, 1998". A conjoint reading of clause (i)
                 to the explanation appended to Section 115JB,
                 read with, the proviso gives a clear clue that it
                 covers period both prior to 01.04.1997 as well
                 as that which commences on or after
                 01.04.1997. As indicated above, the bracketed
                 portion, which appears in clause (i) to the
                 explanation appearing in Section 115JB, does
                 not find mention in Section 115J.

                 21.1 This is in so far as the distinction in the
                 two Sections goes. The issue, therefore is,
                 whether the assessee ought to be allowed to
                 deduct the amount withdrawn from the
                 revaluation reserves by invoking the provisions
                 of clause (i) of the explanation given in Section
                 115J. It is not disputed that when the
                 revaluation reserves were first created in 1983
                 and 1986, the increase in the value of the assets
                 was reflected by debiting the asset account and
                 crediting the revaluation reserve account. The
                 profit and loss account by this methodology
                 was kept undisturbed. In these circumstances,
                 can it be said that when the amount is
                 withdrawn from the reserves it reflects the
                 difference in the depreciation calculated on the
                 revalued or the enhanced value of the assets and
                 that which is calculated on the historical cost.
                 In other words can the assessee be permitted to

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 23 of 40
                 reduce the amount withdrawn from the
                 revaluation reserve if in the first instance was
                 created not by crediting any amount to the
                 profit and loss account but to the revaluation
                 reserve account.
                 22. Mr Ganesh has argued that clause (i)
                 appended to the explanation appearing in
                 Section 115J would have to be given its full
                 play. As noticed above, it was his contention
                 that the only situation in which such a reduction
                 is not permissible where reserves are created by
                 an assessee on or after 01.04.1988. Therefore,
                 his contention is, that since, the revaluation
                 reserves were created in 1983 and 1986 the
                 assessee ought to be allowed a reduction of the
                 amounts drawn from the revaluation reserve. In
                 our view at first blush this argument appears to
                 be both plausible and attractive as well.
                 However, a closer scrutiny would show that
                 clause (i) appended to the explanation
                 appearing in Section 115J would get triggered
                 only if amount is withdrawn from reserves or
                 provisions, if such reserve or provision was
                 created by crediting the amount to the profit
                 and loss account. Admittedly, such is not the
                 situation in the instant case. The intention of the
                 legislature in inserting clause (i) appended to
                 the explanation to Section 115J is to counter a
                 situation where credit is made to the profit and
                 loss account in the first instance at the time of
                 creation of the reserve. When such a situation
                 arises the book profit would stand increased
                 and thus consequently, any withdrawal from the
                 revaluation reserve would stand squared off by
                 reducing the amount from the book profit.
                 Since such a situation did not arise in the
                 instant case, the assessee in our view cannot be
                 allowed reduction in the amount. To that extent
                 the Assessing Officer is right in his conclusion.
                 We are fortified in our view by the observations
                 made in this regard by the Supreme Court. The
                 Supreme Court has considered the matter from
                 various angles. One such angle from which the

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 24 of 40
                 matter has been considered and the resultant
                 view and the observations made by the supreme
                 court completely negate, in our opinion, the
                 submissions made by Mr Ganesh before us. We
                 can do no better than extract the observation of
                 the Supreme Court in that regard:

                 "The matter could be examined from another
                 angle. To recapitulate the facts, the fixed assets
                 of the assessee were revalued in the earlier
                 assessment year 2000-01 (i.e., financial year
                 ending March 31, 2011) (sic March 29, 2000)
                 and amount of enhancement in valuation was
                 288,58,19,000 which was credited to the
                 revaluation reserve. In other words, at the time
                 of revaluation of assets, the said figure of Rs
                 288,58,19,000 was added to the historical cost
                 of assets on the assets side of the balance sheet
                 and in order to equalize both sides of the
                 balance sheet the revaluation reserve to that
                 extent was created on the liabilities side. Thus,
                 the figure of profit remained untouched so far
                 as the revaluation of assets to the tune of Rs
                 288,58,19,000 is concerned. The profits were
                 not increased by the said amount when the asset
                 was revalued. During the assessment year in
                 question, i.e., the assessment year 2001-02, an
                 amount of Rs 26,11,74,000, being the
                 differential depreciation, was transferred out of
                 the said revaluation reserve of Rs
                 288,58,19,000 and credited to the profit and
                 loss account which the Assessing Officer
                 disallowed by placing reliance on the proviso to
                 clause (i) of the Explanation to Section
                 115JB(2). Consequently, the Assessing officer
                 added back the said amount of Rs 26,11,74,000
                 to the net profits. We agree with the Assessing
                 Officer. Under the provisions, as they then
                 existed certain adjustments were required to be
                 made to the net profit as shown in the profit and
                 loss account. One such adjustment stipulated
                 that the net profit shall be reduced by the
                 amount(s) withdrawn from any reserves, if any

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 25 of 40
                 such amount is credited to the profit and loss
                 account. Thus, if the reserves created had gone
                 to increase the book profits in any year when
                 the provisions of Section 115JB were
                 applicable, the assessee became entitled to
                 reduce the amount withdrawn from such
                 reserves if such withdrawal iscredited to the
                 profit and loss account. Now, from the above
                 facts, it is clear that neither the said amount of
                 Rs 288,58,19,000 nor Rs 26,11,74,000 had ever
                 gone to increase the book profits in the said
                 year ending march 31, 2000 (being the financial
                 year). Thus, when such amount(s) has not gone
                 to increase the book value at the time of
                 creation of reserve(s), there is no question of
                 reducing the amount transferred from such
                 revaluation reserves to the profit and loss
                 account. Thus, the proviso to clause (i) of the
                 Explanation to section 115JB(2) comes in the
                 way of the claim for reduction made by the
                 assessee. In our view, the reduction under
                 clause (i) to the Explanation could have been
                 availed of only if such revaluation reserve had
                 gone to increase the book profits."
                                                  (emphasis is ours)
                 23. Mr Ganesh had tried to take advantage of
                 the fact that in the observations extracted
                 hereinabove there is a reference to the proviso
                 appended to clause (i) of the explanation to
                 Section 115JB. A closer scrutiny of the
                 observations made by the Supreme Court would
                 show that the main burden of the rationale
                 supplied by the Supreme Court is not pivoted
                 on the proviso. As noticed by us hereinabove
                 clause (i) of the explanation appearing in
                 Section 115JB read with the proviso covers the
                 period both before and after 01.04.1997. Even
                 though this is not specifically mentioned in
                 clause (i) to the explanation to Section 115J, the
                 plain reading of the said clause would show that
                 it only applies in those situations where credit is
                 made to the profit and loss account at the time
                 of creation of the reserve or the provision.

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 26 of 40
                 24. If there was any doubt it stands clarified by
                 having regard to the "Memorandum Explaining
                 the Provisions in the Finance Bill, 1989" (in
                 short the memorandum). The memorandum,
                 according to us, clearly indicates that the
                 proviso was inserted to clause (i) of the
                 explanation appended to Section 115J to deal
                 with a situation where some delinquent
                 companies were taking advantage of clause (i)
                 of the explanation appended to Section 115J by
                 reducing their net profit by the amount
                 withdrawn from the reserve created or
                 provision made in the same year itself, though
                 the reserve when created was not added to the
                 book profit. It was to clarify this position that
                 the memorandum stated that clause (i) to the
                 explanation contained in Section 115J would
                 apply to amounts withdrawn from the reserves
                 or provision only if reserves had been created
                 before 01.04.1988 or where reserves or
                 provisions have been made after 01.04.1988
                 and have gone to increasethe book profits in
                 any year when the provisions of Section 115J of
                 the Income-Tax Act were applicable.

                 25. A close reading of the memorandum to the
                 amendment would show that the initial object
                 of allowing reduction under clause (i) to the
                 explanation contained in Section 115J was not
                 diluted. In other words the reduction of the
                 amount withdrawn from the reserves created or
                 provisions made was only available if such an
                 amount in the first instance have been credited
                 to the profit and loss account. This is clear if
                 one adverts to the following extract from the
                 memorandum:

                 "....Under the existing provisions certain
                 adjustments are made to the net profit as shown
                 in the profit and loss account. One such
                 adjustment stipulates that the net profits is to be
                 reduced by the amount withdrawn from

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 27 of 40
                 reserves or provisions, if any, such amount is
                 credited to the profit and loss account......"
                 (emphasis is ours)

                 26. Therefore, the submission of Mr Ganesh
                 that it is only when the proviso is attracted that
                 the assessee would be disabled from seeking
                 reduction in terms of clause (i) to the
                 explanation appended to Section 115J even
                 though the reserves when created or provision
                 made did not get reflected in the profit and loss
                 account, is a submission, according to us, that
                 cannot be accepted."

19.     Learned counsel appearing for the respondent-assessee tried to

distinguish the said judgment on two grounds. It was submitted that

book profits computed in the case of SRF Limited filed under Section

115J showed loss of Rs.10.50 crores, but the Assessing Officer had

calculated the book profits at a positive figure of Rs.2.15 crores. Thus,

substantial addition was made to the book profits.             Secondly, the

Assessing Officer had observed that transfer from the valuation reserve

was essentially an equalisation device meant to ensure that the

depreciation continued in the books at the original cost, prior to such

valuation and that the accounts presented a true and correct picture of

net profits. The amount withdrawn from the valuation reserve was,

therefore, not covered under clause (i) of the Explanation. It was also

highlighted that in the case of Indo Rama Synthetics India Limited

versus Commissioner of Income Tax, (2011) 330 ITR 363 (SC) the

reserve was created in the Assessment Year 2000-01, i.e., financial

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 28 of 40
year ending 31st March, 2000 (wrongly mentioned as financial year

ending 31st March, 2011). The assessment year involved in the case of

Indo Rama Synthetics India Limited (supra) was Assessment Year

2001-02 and differential amount of Rs.26,11,74,000/- being the

differential depreciation was transferred out of the revaluation reserve

and credited to the profit and loss account.

20.     In SRF Limited (supra) the attempt to distinguish decision of the

Supreme Court in the case of Indo Rama Synthetics India Limited

(supra) was as the reserve was created during the financial year ending

31st March, 2000 and in the next year amount of Rs.26,11,74,000/-

being differential depreciation was transferred out of revaluation

reserve and taken to the profit and loss account, was specifically

rejected. The Supreme Court it was observed had held that under

clause (i) to Explanation the said amount shall not be reduced from the

profit and loss account. This could be only reduced when reserves

were created by increasing book profits in any year when the MAT

provisions were applicable. Rs.26,11,74,000/- had never reflected in

increase of the book profits in the year ending 31st March, 2000 and,

therefore, there was no question of reducing the said amount and the

proviso to clause (i) of the Explanation was fully applicable. The said

judgment as held in SRF Ltd. (supra) indicates, explains and elucidate

the reason why the Legislature has carved out exception in respect of

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010         Page 29 of 40
reserves or provisions in the proviso. The proviso is applicable not

only when the reserve or provision was created during this period on

1st April, 1997 to 31st March, 2001, but whenever reserve/provision

was created unless the book profits had been increased by those

reserves or provisions at the time of creation and out of the said

increase, the amount has been withdrawn.

21.     Literal interpretation in the manner suggested by the appellant of

clause (i) to Explanation 115JA and specially its proviso will lead to

absurdities and incongruities. Minimum alternation taxation on book

profits became a part of the Act, i.e., Income Tax Act, 1961, by

Finance Act, 1987 with effect from 1st April, 1988 with insertion of

Section 115J. The said Section became applicable with effect from 1 st

April, 1989 and was applicable till 1st April, 1991. Clause (i) of the

Explanation and the proviso thereto, which was introduced by Finance

Act, 1989 with retrospective effect from 1st April, 1988 were as under:

             "i)       the amount withdrawn from reserves
             (other than the reserves specified in section
             80HHD) or provisions, if any such amount is
             credited to the profit and loss account:

             Provided that, where this section is applicable to an
             assessee in any previous year (including the
             relevant previous year), the amount withdrawn
             from reserves created or provisions made in a
             previous year relevant to the assessment year
             commencing on or after the 1st day of April, 1988
             shall not be reduced from the book profit unless the
             book profit of such year has been increased by

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010            Page 30 of 40
             those reserves or provisions (out of which the said
             amount was withdrawn) under this Explanation;
             or"

22.     Reading of the proviso to Section 115J elucidates that reference

to the date 1st April, 1988 is not with reference to the date on which

reserve or provision was created but with reference to the date on

which an amount was withdrawn from reserves created or provision

made. Thus, amount withdrawn from the reserves created or provision

made after 1st day of April, 1988 as per the proviso to clause (i) of

Explanation could be adjusted only if the book profit had been

increased at the time of creation of those reserves or provision made

and not otherwise. Section 115JA was inserted by Finance (No.2) Act,

1996 with effect from 1st April, 1997. The words "1st day of April,

1997" in the proviso to clause (i) of the Explanation is not with

reference to the date on which reserve was created or provision was

made but with reference to the amount withdrawn from the reserve

created or provision made. The proviso specifically stipulates that

reduction under clause (i) would not be allowable unless book profits

were increased by the reserves or provisions made at the time of

increase. The increase may relate to any period and even can be before

1st day of April, 1997. The words "but ending before the 1 st day of

April, 2001" are the cause of confusion but these words were inserted

by Finance Act, 2000 with effect from 1st April, 2001 and would




ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010          Page 31 of 40
accordingly be applicable to the Assessment Year 2001-02 and not the

assessment year in question. These words were introduced as the

Legislature had inserted a new provision for minimum alternative tax

by inserting Section 115JB with effect from 1st April, 2001. The

original clause (i) to Explanation 1 to Section 115JB was as under:-

             "(i)      the amount withdrawn from any reserves
             or provisions, if any such amount is credited to the
             profit and loss account:

             Provided that, where this section is applicable to an
             assessee in any previous year (including the
             relevant previous year), the amount withdrawn
             from reserves created or provisions made in a
             previous year relevant to the assessment year
             commencing on or after the 1st day of April, 2001
             shall not be reduced from the book profit unless the
             book profit of such year has been increased by
             those reserves or provisions (out of which the said
             amount was withdrawn) under this Explanation;
             or"

23.     As there was possibility of ambiguity and doubt, the said clause

(i) and the proviso was substituted by Finance Act, 2002 but with

retrospective effect from 1st April, 2001 as under:-

                        "(i) the amount withdrawn from any reserve
                        or provision (excluding a reserve created
                        before the 1st day of April, 1997 otherwise
                        than by way of a debit to the profit and loss
                        account), if any such amount is credited to
                        the profit and loss account:

                        Provided that where this section is
                        applicable to an assessee in any previous
                        year, the amount withdrawn from reserves
                        created or provisions made in a previous

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 32 of 40
                        year relevant to the assessment year
                        commencing on or after the 1st day of April,
                        1997 shall not be reduced from the book
                        profit unless the book profit of such year
                        has been increased by those reserves or
                        provisions (out of which the said amount
                        was withdrawn) under this Explanation or
                        Explanation below the second proviso to
                        Section 115JA, as the case may be; or"

24.     In view of the aforesaid discussion, it is crystal clear that under

proviso to clause (i) of the Explanation to Section 115JA reserve or

provision made may relate to any period and not during the period

between 1st April, 1997 and 31st March, 2001. These two dates are

relevant as Section 115JA is applicable during this period. Clause (i)

operates when an amount is withdrawn from provision made or reserve

created but as per the proviso adjustment can be made only when at the

time of creation of reserve or the provision, the amount in question was

duly accounted for by increasing the book profits by the said reserve or

provision.

25.     Thus, the respondent-assessee is clearly misreading the said

proviso and the purport and the purpose behind the proviso of clause

(i) to the explanation of Section 115JA.

26.     The distinction and facts pointed out, as far as case of SRF

Limited (Supra) is concerned, are not the basis or the foundation of the

ratio in the said decision. The exact figure on account of revaluation of

assets withdrawn from the reserve was not indicated or mentioned.

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 33 of 40
The contention that the Assessing Officer had given a finding that the

transfer from the reserve was essentially an equalisation device, i.e., to

ensure that depreciation to be provided in the books at the original cost

prior to revaluation and, therefore, the amount withdrawn should not

be covered under clause (i) of the Explanation cannot be accepted as

the basis or the foundation of the decision in SRF case. The Assessing

Officer in the said case had recorded that transfer from revaluation

reserve either should have been credited to the profit and loss account

or reduced from the depreciation provided in the books.

27.     In the facts of the present case, it is apparent that the respondent-

assessee had credited the same amount to the depreciation account and

also the profit and loss account in the year in question. On being asked

why both the heads were duly credited, learned counsel for the

respondent-assessee could not give any explanation or answer. It could

not be also answered why the revaluation or reduction of Rs.1.53

crores was made to the revaluation reserve. Commissioner in her order

has specifically recorded that enhanced depreciation on re-valued

reserve was claimed in the earlier assessment years.

28.     Commissioner in her order under Section 263 on the second

aspect has recorded that the Assessing Officer had failed to disallow

expenditure in respect of exempt income as per the mandate of Section

14A of the Act.             Commissioner held that the said provision was

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010             Page 34 of 40
applicable and the Assessing Officer had erred and had passed an

erroneous order prejudicial to the interest of the Revenue as the

respondent-assessee had earned gross exempt dividend income of

Rs.1.34 crores and Rs.23.43 lacs, but no disallowance under Section

14A was made. She worked out and calculated the disallowance of

expenditure under Section 14A to be Rs.183.63 lacs.

29.     It is accepted and admitted that the Assessing Officer had not

applied Section 14A and no deduction under the said Section was

made. In respect of the present assessment year, i.e., Assessment Year

2000-01, the contention of the respondent-assessee is that in view of

the proviso to Section 14A, the said provision could not have been

invoked in a revision. It is not possible to accept the said contention.

Section 14A was introduced by Finance Act, 2001, which was tabled in

the Parliament on 28th February, 2001.                 The said provision was

introduced with retrospective effect from 1st April, 1962 and reads as

under:-


                 "14-A. Expenditure incurred in relation to
                 income not includible in total income.-For the
                 purposes of computing the total income under
                 this Chapter, no deduction shall be allowed in
                 respect of expenditure incurred by the Assessee
                 in relation to income which does not form part
                 of the total income under this Act:

                 Provided that nothing contained in this section
                 shall empower the Assessing Officer either to

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 35 of 40
                 reassess under Section 147or pass an order
                 enhancing the assessment or reducing a refund
                 already made or otherwise increasing the
                 liability of the Assessee under Section 154, for
                 any assessment year beginning on or before the
                 1st day of April, 2001."

30.     Interpreting the said provision in Honda Siel Power Products

Limited versus Deputy Commissioner of Income Tax and Another ,

(2012) 340 ITR 53 (Delhi), it has been held as under:-


                "8. The Petitioner has relied upon the proviso to
                Section 14A of the Act. The proviso according to
                us is not applicable in view of the factual matrix
                of the present case and does not protect or come
                to the aid of the Petitioner. In the present case,
                after return of income for the assessment year
                2000-01 was filed on November 30, 2000, the
                case was taken up in scrutiny. Assessment order
                under Section 143(3) of the Act was passed on
                March 7, 2003. The proviso only bars
                reassessment/rectification and not original
                assessment on the basis of the retrospective
                amendment. The proviso does not stipulate and
                state that Section 14A of the Act cannot be relied
                upon during the course of the original assessment
                proceedings. The Assessing Officer was,
                therefore, required to disallow expenses incurred
                for earning exempt or tax free income. Failure on
                the part of the Assessing Officer to apply
                Section 14A when he passed the assessment
                order under Section 143(3) of the Act dated
                March 7, 2003 has prima facie resulted in
                escapement of income. The proviso is not
                intended to apply to the cases of the present
                nature. The object and purpose of the proviso is
                to ensure that the retrospective amendment is not
                made as a tool to reopen past cases, which have
                attained finality."


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010            Page 36 of 40
31.     In view of the aforesaid legal position, we hold that the

Commissioner was justified in invoking Section 263 of the Act as the

order of the Assessing Officer was erroneous and prejudicial to the

interest of the Revenue.              The assessment order was made on 28 th

February, 2003, which is after Section 14A of the Act was enacted.

The Assessing Officer should have been applied the said Section.

Failure to invoke Section 14A had resulted in an order both erroneous

and prejudicial to the interest of the Revenue.

32.     On the question of quantum of deduction to be made under

Section 14A, the tribunal has not gone into the said question of

quantum. The deduction or quantum has to be decided in light of

decision of the Delhi High Court in the case of Maxopp Investment

Limited versus Commissioner of Income Tax, (2012) 347 ITR 272

(Delhi) and other cases.

33.     In view of the aforesaid position, the substantial question of law

is decided in favour of the Revenue and it is held that the

Commissioner had rightly invoked Section 263 of the Act as the order

of the Assessing Officer was erroneous and prejudicial to the interest

of the Revenue to the extent that adjustment of Rs.1.35 crores should

not have been allowed under clause (i) to Explanation to Section 115JA

and deduction should have been also made towards expenditure to earn

dividend income, which did not form part of taxable income under

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010              Page 37 of 40
Section 14A of the Act. However, on the question of quantum of

deduction to be made under Section 14A, the matter is remanded to the

tribunal.

ITA Nos. 2106/2010 and 1979/2010

34.     These appeals by the Revenue relates to Assessment Year 2001-

02.     The respondent-assessee, as noticed above, namely, Federal-

Mogul Goetze (India) Limited, had filed return of income on 31 st

October, 2001 declaring ,,nil income after setting for brought forward

losses and depreciation. Tax payable under Section 115JB was also

computed at ,,nil. The return was taken up for scrutiny assessment and

assessment order under Section 143(3) dated 29th March, 2004 was

passed. Total income under the normal provisions in spite of various

disallowances etc. was computed at ,,nil but income taxable under

Section 115JB was computed at Rs.90,40,4,412/-.

35.     In this year, i.e., the Assessment Year 2001-02, the Assessing

Officer had noticed that there was withdrawal of Rs.1,49,55,335/- from

the valuation reserve, but the amount had not been added to the profit

and loss accounts filed with the income tax return for computing book

profits under Section 115JB. The assessee had placed reliance on

clause (i) of Explanation below Section 115JB (2) but the Assessing

Officer rejected the said contention. The assessee did not succeed in

the first appeal and the tribunal has observed that reliance placed on

ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010       Page 38 of 40
the order of the tribunal for the Assessment Year 2000-01 in ITA No.

208/Del/2005 was distinguishable as it related to the jurisdiction of the

Commissioner under Section 263 of the Act. In other words, tribunal

did not accept the plea of the respondent-assessee.

36.     By order dated 16th May, 2012, the following substantial

questions of law were framed in the present appeals:-

               "(i)   Whether the Income Tax Appellate
             Tribunal was right in holding that while
             computing book profit under Section 115JA (sic.
             Section 115JB) of the Income Tax Act, 1961, no
             disallowance under Section 14A was required to
             be made?

             (ii) Whether the Income Tax Appellate Tribunal
             was right in deleting interest under Section 234D
             of the Income Tax Act, 1961?"

37.     Learned counsel for the respondents-assessee, during the course

of hearing, has fairly conceded that the first question has to be

answered in favour of the Revenue and against the assessee in view of

specific provisions in the Explanation 1 below Section 115JB(2) clause

(f).    The Assessing Officer it is stated had made an addition of

Rs.88,292/- to the book profits towards expenditure incurred having

nexus with dividend income, which were exempt under Section 10(33).

Recording the said statement, the first question is answered in favour

of the appellant-Revenue and against the respondent-assessee.


ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010         Page 39 of 40
38.     Question No. (ii) is required to be answered in favour of the

appellant-Revenue and against the respondent-assessee in view of

Explanation 2 to Section 234D, which was inserted by Finance Act,

2012 with retrospective effect to assessments made on or after 1st June,

2003. We clarify that we are not required to examine the constitutional

validity of the said amendment with retrospective effect in the present

appeals.



                                                         (SANJIV KHANNA)
                                                             JUDGE




                                                       (SANJEEV SACHDEVA)
                                                              JUDGE
DECEMBER 09th, 2013
VKR




ITA Nos. 1179/2010, 1366/2010, 1979/2010 & 2106/2010               Page 40 of 40

 
 
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