This is an appeal filed by the assessee. The relevant assessment year is 1989-90. The appeal is directed against the order of the Commissioner (Appeals)-VII at Madras and arises out of the assessment completed under section 143(3) read with section 147 of the Income Tax Act, 1961.
We heard Mrs. Aarti Vissanji, the learned counsel appearing for the assessee and Shri D.Z. Patel, the learned Departmental Representative appearing for the revenue.
The first ground raised by the assessee in this appeal is that the Commissioner (Appeals) has erred in not holding that the reopening of the assessment was bad in law. This ground is narrated in detail by the assessee in three paragraphs under main ground "A." We considered this issue in the light of the discussion available in the orders of the lower authorities. We find that the assessing officer has rightly issued notice under section 148 and reopened the assessment under section 147 and, therefore, the ground raised by the assessee against reopening of the assessment is liable to be dismissed.
The second ground raised by the assessee is that the Commissioner (Appeals) has erred in treating cash compensatory support received by the assessee-company as its income, following the retrospective amendment to section 28 of the Income Tax Act and ignoring the relevant Tribunal decisions. Cash compensatory support is liable for taxation as a result of the amendment brought in by the Finance Act, 1990 in section 28 of the Income Tax Act by retrospective insertion of clauses (iiia), (iiib) and (iiic). This legislative amendment has superseded the impact of the various Tribunal decisions pointed out by the assessee-company. The Commissioner (Appeals) is right in law in holding that the cash compensatory support was rightly brought to tax. This ground is, therefore, liable to be dismissed.
The third ground raised by the assessee is regarding the computation of book profit under section 115J of the Income Tax Act. In the Profit & Loss Account and the balance sheet prepared by the assessee under the provisions of the Companies Act, 1956 and in tune with Schedule VI thereto, the assessee-company had not recognized/reflected the gratuity liability arising as at the close of the accounting, period. According to the assessee, the liability towards gratuity was worked out on the basis of actuarial valuation and it was actually a liability subsisting at the closing of the accounting period. In the income-tax assessment, when the book profit was to be computed, the assessee submitted before the assessing authority that the gratuity liability being a subsisting liability, the amount should be deducted from the book profit and the provisions of section 115J should be applied only on such reduced profit. This was not accepted by the lower authorities and hence, this ground in the present appeal.
The learned counsel, Smt. Aarti Vissanji argued on this point at length. She invited our attention to pages 12 and 17 of the paper book filed before us, relating to the auditors report as well as notes on account forming part of Profit & Loss Account and balance sheet as on 31-3-1989. She invited our attention to the qualification recorded by the auditors in their report regarding non-provision of gratuity and also the notes to account where it has been stated that liability towards gratuity payable to employees based on actuarial valuation worked out to Rs. 12,53,895. The learned counsel invited our attention to the provisions of law contained in section 115J where it is stated that for the purpose of section 115J, the book profit has to be worked out on the basis of the Profit & Loss Account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 which, in fact provide that all charges to the profit and loss account should be provided and only after such provision, the book profit of a company should be construed for the purpose of section 115J. She submitted that in the present case, there is no dispute regarding the liability of the assessee-company towards gratuity. The gratuity liability has been worked out on the basis of actuarial valuation. The non-providing of gratuity liability in the accounts has been qualified by the statutory auditors in their report. All these matters are writ at large in the accounts and reports of the assessee-company and made available to the assessing authority and were existing at the time of computing the book profit for the purpose of section 115J. It is her case that the non-providing of gratuity liability in the accounts by the assessee cannot be a valid ground for the assessing officer to ignore the submission of the assessee altogether for the reason that correct and proper book profit for the purpose of section 115J can be computed only if such legitimate charge is provided for in the accounts. She submitted that computation of book profit for the purpose of section 115J should not be an empty formality. The provisions of the Companies Act, 1956 provide for deducting all legitimate expenditure and charges in arriving at the profit or loss of a company. So long as the gratuity liability is an ascertained liability, it was necessary for the assessee to debit the same in its profit & loss account. Even though this has not been done by the assessee-company, that omission is not a reason for the assessing officer to overlook that crucial factor and work out the book profit for the purpose of section 115J on an erroneous assumption that the profit declared by the assessee in its accounts was correct. The assessing officer must note that by non-providing for the gratuity liability, the profit as per the profit & loss account of the assessee-company did not show the correct profit. Non-consideration of relevant facts in finalising an assessment is against law not only under Income Tax Act but also under the Companies Act, in the present case. Every assessment should be made in accordance with law. The learned counsel, therefore, submitted that the Commissioner (Appeals) should have been directed the assessing officer to deduct the gratuity liability from the book profit of the assessee-company and technicalities should not have fettered the deliverance of justice in the present case.
We considered the issue in a very detailed manner. It is true that the auditors of the assessee-company have qualified the non-provision made for gratuity liability. The gratuity liability has been quantified by the assessee-company on the basis of actuarial valuation and the same has been given in the notes to accounts forming part of the profit & loss account and balance sheet. But, at the same time, the assessee has not explained the reasons why the provision for gratuity liability was not made in the accounts and why the liability was not debited to profit & loss account while working out the profit for the relevant year. We do not know what prompted the assessee to withhold such an item of deduction from the profit & loss account. Moreover, when the assessee put forward this claim before the assessing authority at the time of assessment in the context of section 115J, the assessee has not made any attempt to explain whether the profit & loss account of the assessee-company was revised or the auditors have issued any supplementary report or the assessee-company was contemplating any such damage control exercise regarding the statement of its accounts. The assessee has not done anything in that direction.
Now, the question is whether in spite of the profit reflected in the profit & loss account prepared by the assessee-company should the assessing authority have gone further and made adjustment to the profit declared by the assessee as per its accounts for making provision for the gratuity liability. Section 115J has provided for certain items by which the book profit should be increased and certain other items by which the book profit should be decreased. Those items of adjustment by way of increase/decrease are very much specified in the provisions contained in section 115J. This particular item agitated in this appeal does not come in those items specified for adjustment by the Assessing Authority. The Supreme Court in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC), has held that assessing officer has no power to scrutinise the accounts prepared in accordance with Parts II and III of Schedule VI to the Companies Act scrutinized and certified by statutory auditors, except as provided in Explanation to section 115J. The assessing officer is bound to accept the authenticity of the accounts with reference to the provisions of the Companies Act. Where the auditors have certified the accounts to be true and fair, of course subject to the qualification that provision was not made for gratuity liability, still qualified as true and fair, the assessing officer had no onus cast on him to go beyond that accounts and make adjustments in favour of the assessee especially when no reason has been put forward as to why the liability was not made a charge to the profit & loss account. Therefore, we find that the Commissioner (Appeals) was right in law in holding that the gratuity need not be adjusted while working out the book profit for the purpose of section 115J. This ground is also liable to be dismissed.
The last ground raised by the assessee is regarding the set off of losses in the light of section 115J. This ground is also liable to be dismissed in the light of the decision of the Supreme Court in the case of Karnataka Small Scale Industries Development Corpn. Ltd. v. CIT (2002) 258 ITR 770 (SC).