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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

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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.

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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

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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.

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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

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(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,

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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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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:

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“ 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

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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

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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,

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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

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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

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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/-