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Bombay High Court
M/S. Mahindra And Mahindra Ltd vs The Commissioner Of Income-Tax, … on 2 May, 2025
Author: M. S. Karnik
Bench: M. S. Karnik
2025:BHC-OS:7367-DB
416.03-itxa.docx
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 416 OF 2003
BASAVRAJ M/s. Mahindra & Mahindra Ltd.
GURAPPA
PATIL Gateway Building,
Digitally signed by
BASAVRAJ GURAPPA
Apollo Bunder,
PATIL
Date: 2025.05.02
Mumbai - 400 039 .. Appellant
20:30:08 +0530
Versus
Commissioner of Income-tax,
City -II, Aayakar Bhavan,
M. K. Road, Mumbai 400 020. .. Respondent
Mr. J. D. Mistri, Senior Advocate a/w Mr. B. V. Jhaveri
and Ms. Bhargavi Raval for the appellant.
Mr. N. C. Mohanty a/w Sanaita Choure for respondent.
CORAM: ALOK ARADHE, CJ. &
M. S. KARNIK, J.
RESERVED ON : APRIL 24, 2025
PRONOUNCED ON : MAY 2, 2025
JUDGMENT (PER : CHIEF JUSTICE)
1. This appeal under Section 260A of the Income Tax Act,
1961 (1961 Act) has been filed by the assessee. The subject
matter of the appeal pertains to Assessment Year 1990-91. The
appeal was admitted on the following substantial questions of
law:
“(i) Whether, on the facts and in circumstances of the
case as well as in law, the Tribunal was right in disallowing
write-off of the deposits and interest thereon as the
business loss of Rs.200.47 lakhs incurred by the appellant
company u/s.28 of the Act in the course of its business?
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(ii) Whether the Assessing Officer, while determining the
book profit under section 115J of the Act, can question the
correctness of the profit and loss account prepared and
certified by the statutory auditors of the appellant company
as having been prepared in accordance with the
requirements of Parts II and III of Schedule VI to the
Companies Act, 1956?”
2. Thereafter, during the course of hearing, following
additional substantial question of law was framed:
Additional substantial question of law:
Whether the Tribunal committed an error of law in not
allowing miscellaneous expenses of Rs.49,18,786/-
(Rupees forty-nine lac eighteen thousand seven hundred
eighty-six only) incurred by the appellant for MMC under
Section 37 of the 1961 Act on the ground of commercial
expediency as well as on the ground of the expenses where
so incurred in order to preserve the reputation of estate
and business of the assessee?
(I) FACTS:
3. Facts leading to filing of this appeal, briefly stated, are that
the assessee is a public limited company and is engaged in the
manufacture of Jeeps, Tractors, Implements and other products.
The assessee filed the return of income for the period from 1 st
April 1989 to 31st March 1990 (Assessment Year 1990-91)
declaring a total income of Rs.3,50,20,837/- (Rupees three
crores fifty lac twenty thousand eight hundred thirty-seven
only). The Assessing Officer, by an order of assessment dated
26th March 1993, inter alia; held that the assessee had placed
deposits with certain concerns, who have declined to pay the
deposits and interest on the ground that the deposits are linked
to the amounts provided to M/s. Machinery Manufacturers
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Corporation Ltd. (MMC) by them, which have now become
irrecoverable as MMC was directed to be wound-up by this Court
by an order passed on 16th April 1989. It was further held that
amount of deposit and interest due to the assessee has been
adjusted by various concerns against loan given by them to
MMC. Therefore, the assessee cannot claim to have not
recovered its dues. It was also held that the assessee had
liquidated the liability of MMC which act is for consideration other
than business. The Assessing Officer, therefore, disallowed a
sum of Rs.49,18,786/- (Rupees forty-nine lac eighteen thousand
seven hundred eighty-six only) claimed under the head
miscellaneous expenses as well as a sum of Rs.200.47 lac
claimed by the assessee on account of deduction of write-off of
deposits and interest.
4. The assessee filed an appeal before the Commissioner of
Income Tax (Appeals), who by an order dated 8 th December
1994, inter alia; held that the assessee did not incur the
expenditure to carry on the business and the business of the
MMC was not the business carried out by the assessee.
Therefore, the expenses incurred by the assessee are not
admissible under Section 37(1) of the 1961 Act. The
Commissioner of Income Tax (Appeals), while computing the
book profit under Section 115J of the 1961 Act, disallowed the
following three deductions: (a) provision for warranties claim
Rs.87,02,000/- (b) provision for past service gratuity liability
Rs.2,42,14,000/- and (c) write-off certain deposits and interest
thereon Rs. 2,47,00,000/-. The Commissioner of Income Tax
(Appeals) further held that the provision for warranties made by
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the assessee cannot be allowed. The appeal preferred by the
assessee was partly allowed.
5. Being aggrieved by the aforesaid order, the assessee
preferred an appeal before the Income Tax Appellate Tribunal
(Tribunal). The Tribunal, by an order dated 25th February 2003
confirmed the following disallowance: (a) Deposits – Rs.142.50
lac and (b) Interest – Rs.57.97 lac. The Tribunal, inter alia; held
that insofar as challenge to confirmation and not deleting the
disallowance in respect of sum of Rs.49,18,786/- (Rupees forty-
nine lac eighteen thousand seven hundred eighty-six only) as
well as a sum of Rs.200.47 lac is concerned, the said claim
cannot be allowed in view of the order passed by the Tribunal in
assessee’s own case being ITA No.6886/Bom/92 for the
Assessment year 1989-90. The Tribunal further held that the
provision for warranties made by the assessee on the estimated
basis in view of the past experience cannot be termed as an
ascertained liability. It was also held that a provision for past
services liability in respect of retirement gratuity for an amount
of Rs.242.14 lac has be to added back. It was also held that the
amount was debited in the profit and loss account below the line
and hence, it cannot be said that the profit and loss account was
prepared as per Part II and III of Schedule VI to the Companies
Act and cannot be disturbed. In the aforesaid factual
background, this appeal arises for our consideration.
(II) SUBMISSIONS ON BEHALF OF THE ASSESSEE:
6. Learned senior counsel for the appellant has submitted that
the first substantial question of law has been answered in favour
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of the assessee in its own case in MAHINDRA & MAHINDRA
LTD. VS. COMMISSIONER OF INCOME TAX1. It is further
submitted that the revenue has accepted the aforesaid decision
and has not challenged the same. Therefore, the first substantial
question of law deserves to be answered in favour of the
assessee. It is further submitted that Section 115J(1A) of the
1961 Act does not empower the Assessing Officer to embark on
fresh inquiry with regard to the entries made in the books of
account of the company. It is contended that it is not open for
the Assessing Officer to re-scrutinize the company’s income and
as the Assessing Officer, while computing the income under
Section 115J of the 1961 Act, has limited power to examine
whether the books of account are certified by the authorities
under the Companies Act and having been properly maintained
in accordance with the Companies Act.
7. Learned senior counsel further contended that as Schedule
VI of the Companies Act does not prescribe any form for
preparation of profit and loss account, a concept of ‘below the
line’ is unknown to law. A copy of the profit and loss account of
the assessee has also been produced. In support of his
submission, learned senior counsel has placed reliance on
APOLLO TYRES LTD. VS. COMMISSIONER OF INCOME
TAX2, ROTORK CONTROLS INDIA P. LTD. VS.
COMMISSIONER OF INCOME TAX3, BHARAT EARTH
MOVERS VS. COMMISSIONER OF INCOME TAX4 and
1
[2023] 456 ITR 723 (Bom)
2
[2002] 255 ITR 273 (SC)
3
[2009] 314 ITR 62 (SC)
4
[2000] 245 ITR 428 (SC)
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COMMISSIONER OF INCOME TAX VS. KHAITAN
CHEMICALS AND FERTILIZERS LTD.5
(III) SUBMISSIONS ON BEHALF OF THE REVENUE:
8. On the other hand, learned counsel for the revenue
submits that the decision in the assessee’s own case in respect
of the previous assessment year does not apply to the facts of
the case, as in the assessment year in question, loss has not
been caused to the assessee in the course of business but is a
capital loss. Our attention has been invited to the findings
recorded by the authorities under the Act. It is contended that
the amount was shown to be debited in the profit and loss
account below the line and therefore, it cannot be said that the
profit and loss account was prepared as per part II and III of
Schedule VI of the Companies Act and therefore, it was not open
for the authorities to interfere with the same. In support of his
submissions, reliance has been placed on the supreme court
judgment in the case of PRINCIPAL COMMISSIONER OF
INCOME TAX-6 VS KHYATI REALTORS PVT. LTD.6(IV) CONSIDERATION:
9. We have considered the submissions made by both the
sides and have perused the record. The first substantial
question of law and the additional substantial question of law are
inter-linked. Therefore, we propose to deal with the same,
analogously. The Supreme Court, in CIT VS DELHI SAFE5
[2008] 307 ITR 150 (Delhi)
6
AIR 2022 SC 4030Basavraj Page|6
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416.03-itxa.docxDEPOSIT CO. LTD.7 examined the question, whether an
expenditure incurred on account of commercial expediency is
admissible as deduction under Section 37 of the 1961 Act. The
Supreme Court held that the expenditure incurred was a
deductible expenditure. The relevant paragraph reads as under:
“The first question which needs to be examined is whether
the amount in question can be treated as an expenditure
laid out or expended wholly and exclusively for the
purposes of the business of the assessee which is
admissible as a deduction under section 37 of the Act. It is
no doubt true that the solution to a question of this nature
sometimes is difficult to arrive at. But, however difficult the
task may be, a decision on that question should be given
having regard to the decisions bearing on the question and
ordinary principles of commercial trading and of
commercial expediency. The facts found in the present
case are that the assessee was carrying on business as a
partner of the managing agency firm and it also had other
businesses. The managing agency agreement with the
managed company was a profitable source of income and
that the assessee had continuously earned income from
that source. But on account of the negligence on the part
of one of its partners, there arose a serious dispute which
could have ordinarily resulted in a long drawn out litigation
between the managing agency firm and the managed
company affecting seriously the reputation of the assessee
in addition to any pecuniary loss which the assessee as a
partner was liable to bear on account of the joint and
several liability arising under the law of partnership. The
settlement arrived at between the parties prevented
effectively the hazards involved in any litigation and also
helped the assessee in continuing to enjoy the benefit of
the managing agency which was a sound business
proposition. It also assisted the assessee in retaining the
business reputation unsullied which it had built up over a
number of years. It is also material to notice here that it
was not shown that the settlement was a gratuitous7
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416.03-itxa.docxarrangement entered into by the assessee to benefit the
defaulting partner exclusively even though he might have
been benefitted to some extent. It is no doubt true that it
was voluntary in character but on the facts and in the
circumstances of the case whether it would make any
difference at all is the point for consideration.”
10. In the instant case, the claim of the assessee for the
expenditure of 42.89 lac and the deduction of write-off
Rs.622.01 lac being the amount lent to MMC including interest
due and advances for purchase of machinery given in the course
of dealing with MMC was disallowed by the authorities under the
Act for the preceding year i.e. the year 1989-90. The assessee
filed an appeal viz. ITXA No.626 of 2002 which was decided by a
Division Bench of this Court vide order dated 9 th June 2023 in
MAHINDRA & MAHINDRA LTD. VS. COMMISSIONER OF
INCOME TAX (SUPRA). In the aforesaid appeal, the following
substantial question was formulated:
“Whether on the facts and in the circumstances of the case
as well as in law the Tribunal was right in not allowing
expenses of Rs.42.89 lakhs incurred by the appellant-
company for MMC and not allowing deduction of write-off
of Rs.622.01 lakhs (not Rs.578.09 lakhs as originally put)
under section 28 of the Act being the amount lent to MMC
including interest due thereon and advances for purchase
of machinery given in the course of business dealing with
MMC?”
11. The Division Bench of this Court allowed the appeal
preferred by the assessee. The relevant extract of the judgment
of the Division Bench reads as under:
“17. Admittedly, MMC was a subsidiary of appellant.
Admittedly there was reference by IDBI to BIFR toBasavraj Page|8
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416.03-itxa.docxformulate a scheme of rehabilitation of MMC. As per the
scheme and as per the copy of the order dated 23rd
September 1988 passed by BIFR available on record, it was
just and equitable to wind up MMC. In the said order of
BIFR, there is also a reference that appellant had already
invested money to revive MMC. In fact it is also recorded
that appellant was directed to amalgamate MMC with itself
which appellant refused to because that would make
appellant itself a sick company. It is also recorded in the
order that appellant felt it would not be prudent to give
blanket guarantee in respect of MMC because that was not
viable. It is, therefore, certain that appellant had incurred
the expenses of Rs.42,89,185/- for MMC and also had
debts recoverable from MMC. The issue is whether
appellant could claim these expenses and deductions under
Section 28 of the Act.
22. Let us examine whether the expenditure incurred or
the deduction claimed arose in carrying on business of
appellant or incidental to it. As noted earlier and at the cost
of repetition, MMC was a group company of appellant and
appellant held almost 27% of the equity share capital in
MMC. It cannot be disputed that MMC was part of appellant
group because the order of BIFR also confirms that. The
order of BIFR passed on 23rd September 1988 also records
that. Order of BIFR also mentions that appellant had spent
substantial money to keep MMC afloat and revive MMC.
The Chairman of appellant and the Deputy Managing
Director of appellant also attended the hearings before
BIFR. MMC also had public shareholders. Therefore, the
fact that commercial expediency required appellant to incur
expenditure or give advances or give ICDs cannot be
dismissed lightly.
24. In the case at hand also appellant had (a) incurred
expenditure of Rs.42,89,185/- towards salary of staff and
officers of MMC; (b)(i) an amount of Rs.43.92 lakhs was
due from MMC; (ii) advances against purchases of
machines from MMC, and those machines were not
received, amounting to Rs.108 lakhs; (iii) unpaid interest
due from MMC on ICDs was Rs.17.59 lakhs; (iv)
rehabilitation assistance of Rs.212 lakhs was given to MMC;
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(v) there were liabilities against guarantees given by the
assessee to IDBI in respect of IDBI loans to MMC
amounting to Rs.247.29 lakhs etc. which total to Rs.622.01
lakhs after giving credit of Rs.6.79 lakhs towards
miscellaneous head.
25. One can understand the Assessing Officer had
disallowed these amounts after arriving at a conclusion
that the decision to incur the expenses mentioned above or
the debts mentioned above was not bona fide. That is not
the case. Whether to treat the debt as bad debt or as
business loss/deduction under Section 28 of the Act is a
commercial or business decision of the assessee based on
the relevant material in possession of the assessee. Once
the assessee records the amounts as business loss/
deductions in his books of account that would prima facie
establish that it was not recoverable loss unless the
Assessing Officer for good reasons holds otherwise. The
burden would be on the Assessing Officer to make out
cogent reasons, which is not so in the case here. It is also
not in dispute that the amounts spent were
against/recoverable from group company MMC. It is quite
obvious for reasons mentioned above that the amounts in
question were incurred by appellant for the business
expediency of the group company. It is not disputed that
there existed a nexus between appellant and MMC. Such
expenditure/debt should be treated as having been
incurred for the purpose of business and directly relatable
to the business of appellant and thus eligible for deduction
as business expenditure in their return of business income.
Otherwise it would not reflect the true profit and gain of
appellant. A sum of money expended, not of necessity and
with a view to a direct and immediate benefit to the trade,
but voluntarily and on the grounds of commercial
expediency, and in order indirectly to facilitate the carrying
on the business, may yet be expended wholly and
exclusively for the purposes of the trade as held in British
Insulated and Helsby Cables Ltd. V/s. Atherton [1926] AC
205.”
27. In the case at hand also the expenditure incurred
were wholly incurred for the purpose of commercial
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expediency because MMC was a group company of
appellant and appellant was, as could be seen from the
orders passed by BIFR, keen in the preservation of MMC
and to keep it as a going concern. The nexus between
appellant and MMC is also not disputed. The Assessing
Officer failed to appreciate the claim in the proper
perspective. Appellant participated in the rehabilitation
scheme of MMC and lent rehabilitation assistance by paying
amounts to MMC as well as by converting its existing ICDs
with MMC into rehabilitation assistance. Appellant also
provided a guarantee of Rs.200 lakhs to IDBI for the
rehabilitation assistance disbursed by IDBI to MMC. If there
was no commercial expediency, there was no reason for
appellant to incur these amounts or participate in the
rehabilitation scheme of MMC. Appellant was also the
managing agents of MMC and MMC was also a Mahindra
Group Company. It is certainly not necessary for the name
of Mahindra and Mahindra to be used in the name of MMC
to prove it was a group company. These expenditure/debts
should be treated as having been incurred for the purpose
of business and directly relatable to the business of the
assessee and thus eligible for deduction as business
expenditure/loss in assessee’s return of business income.
The expenditure incurred by appellant or the debts that
were recoverable from MMC, in our view, therefore, would
certainly be deductible expenditure under Section 28 of the
Act.
28. In the circumstances, we answer the substantial
question of law in negative. The ITAT was not right in not
allowing the claims of assessee. Appeal is allowed and
accordingly disposed of.”
12. It is relevant here to mention that the claim of the
assessee in so far as it pertains to not allowing the deduction of
42.89 lacs and 622.01, has been dealt with in the following
manner in the impugned order dated 25th February 2003 by the
Tribunal.
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“5. Grounds of appeal No.4 & 5 are raised as under:
4. The CIT(A) was wrong in confirming and not
deleting the expenditure of Rs.49,18,786/- incurred
by the Appellant in respect of Machinery Manufactures
Corporation Limited.
5. The CIT(A) was in error in confirming and not
deleting the disallowance of the following amounts,
which were due to it from certain concerns:-
Deposits Rs.142.50 lakhs
Interest Rs. 57.97 lakhs
——————————
Total Rs.200.47 lakhs
=================
5.1 The learned counsel for the assessee fairly
conceded that the above two grounds stand covered
against the assessee by the decision of the Tribunal in
the assessee’s own case in ITA No.6886/Bom/92 for
the Assessment Year 1989-90. Respectfully following
the precedent established in the assessee’s own case
for the immediately preceding assessment year, we
dismiss both the above grounds of appeal”.
13. Thus, it is evident that the revenue, while negating the
claim of the assessee for allowing the expenses, has relied upon
the order passed by it in ITA No.6886/Bom/92 for the
Assessment Year 1989-90. The aforesaid order passed by the
Tribunal was set aside by a Division Bench of this Court in
MAHINDRA & MAHINDRA LTD. VS. COMMISSIONER OF
INCOME TAX (SUPRA). The order passed by the Division
Bench of this Court has been accepted by the revenue and it has
not filed any SLP against the judgment of the Division Bench of
this Court. We are in consonance with the view taken by Division
Bench of this Court in assessee’s own case in MAHINDRA &
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416.03-itxa.docx(SUPRA) for the following reasons. Admittedly, MMC is a
subsidiary of the assessee and assessee holds 27% equity
capital of MMC since its incorporation. The assessee promoted
the MMC on 15th May 1946. From the date of incorporation of
the assessee, it was the managing agent of the MMC and the
assessee has acted as a managing agent till 1974 when the
Companies Act, 1974 abolished the Managing Agency System.
However, due to severe recession in the textile industry, MMC
started making losses. Thereupon, the MMC was wound-up.
The assessee, in its board meeting held on 27 th March 1989
agreed to incur expenditure for maintenance of MMC. Thereafter
on 10th July 1990 the Board of Directors of the assessee agreed
to resolve the dispute to meet the expenditure till the affairs of
MMC were wound-up. The Board of Directors approved the
expenditure of Rs.49,19,000/- (Rupees Forty-nine lac nineteen
thousand only) made by the assessee in the previous relevant
Assessment Year 1990-91. The assessee held substantial
portion of equity capital of MMC and MMC was regarded in public
and official circles as a Mahindra Company. The assessee, in
order to protect and preserve the assets and to protect the value
of goodwill attached to the assessee by various sections of the
society and on the ground of commercial expediency, incurred
expenditure, which is permissible as deduction.
14. The contention urged on behalf of the revenue in
opposition to the aforesaid claim has already been dealt with by
a Division Bench of this Court. Therefore, even otherwise, the
assessee is entitled to deduction of sum of Rs.49,18,786/-
(Rupees forty-nine lac eighteen thousand seven hundred eighty-
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six only) as well as a sum of Rs.200.47 lac. For the reasons
assigned by us supra, we agree with the view taken in
assessee’s own case in MAHINDRA & MAHINDRA LTD. VS.
COMMISSIONER OF INCOME TAX (SUPRA) in respect of the
previous assessment year, which even otherwise squarely
applies in respect of the first and additional substantial question
of law. We, therefore, find force in the submissions made by the
learned senior counsel for the assessee that the first substantial
question of law as well as additional substantial question of law
deserves to be answered in favour of the assessee.
15. Now, we advert to second substantial question of law. The
levy of minimum income tax was came into force w.e.f. 1 st April
1984 by the Finance Act, 1983. The said Finance Act introduced
a new Chapter VI-B in the Act of 1961. Chapter VI-B consisting
Section 80VVA was omitted by Finance Act, 1987 w.e.f. 1 st April
1988 and a new provision viz. Section 115J was introduced in
the Statute w.e.f. Assessment Year 1988-89. The relevant
extract of Section 115J of the Act 1961 is extracted below for
facility of reference:
“115J(1) Notwithstanding anything contained in any other
provision of this Act, where in the case of an assessee
being a company (other than a company engaged in the
business of generation or distribution of electricity), 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, 1988 but
before the 1st day of April, 1991 (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.
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(1A) 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).
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 (1A), as increased by:
(a) the amount of income-tax paid or payable, and
the provision therefor; or
(b) the amounts carried to any reserves (other than
the reserves specified in section 80HHD or sub-
section (1) of section 33AC), 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
(f) the amount or amounts of expenditure relatable to
any income to which any of the provisions of Chapter
III applies; or
(g) the amount withdrawn from the reserve account
under section 80HHD, where it has been utilised for
any purpose other than those referred to in sub-
section (4) of that section; or
(h) the amount credited to the reserve account under
section 80HHD, to the extent that amount has not
been utilised within the period specified in sub-section
(4) of that section; or
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(ha) the amount deemed to be the profits under sub-
section (3) of section 33AC,
if any amount referred to in clauses (a) to (f) is debited or,
as the case may be, the amount referred to in clauses (g)
and (h) is not credited to the profit and loss account, and
as reduced by:
(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
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 amounts as arrived at after increasing the net
profit by the amounts referred to in clauses (a) to (f)
and reducing the net profit by the amounts referred
to in clauses (i) and (ii) attributable to the business,
the profits from which are eligible for deduction under
section 80HHC or section 80HHD; so, however, that
such amounts are computed in the manner specified
in sub-section (3) or sub-section (3A) of section
80HHC or sub-section (3) of section 80HHD, as the
case may be; or
(iv) the amount of the loss or the amount of
depreciation which would be required to be set off
against the profit of the relevant previous year as ifBasavraj Page|16
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416.03-itxa.docxthe provisions of clause (b) of the first proviso to sub-
section (1) of section 205 of the Companies Act, 1956
(1 of 1956), are applicable.”
16. Thus, Section 115J of the 1961 Act mandates that in case
of a company whose total income as computed under the
provisions of the Act 1961 is less than 30% of the book profit,
the total income chargeable to tax will be 30% of the book
profit, as shown in the profit and loss account prepared in
accordance with the provisions of Part II and III of Schedule VI
of the Companies Act 1956, after certain adjustments.
Explanation to Section 115J (1A) provides that net profit so
computed is to be increased by certain amounts and it is to be
reduced by certain amounts which are mentioned therein. The
provision does not contain any reference to concept of ‘above
the line’ or ‘below the line’.
17. The Supreme Court, in APOLLO TYRES LTD. VS.
COMMISSIONER OF INCOME TAX (SUPRA) dealt with the
issue whether the Assessing Officer can question the correctness
of profit and loss account prepared by the assessee and certified
by the statutory auditors of the Company as having been
prepared in accordance with the requirements of part II and III
of Schedule VI to the Companies Act. It was held that sub
section (1A) of Section 115J mandates the company to maintain
its accounts in accordance with the requirements of Companies
Act and is bodily lifted from the Companies Act into the Act of
1961 for the limited purpose of making the said account so
maintained as a basis for computing the company’s income for
levy of income-tax. It was also held that the provision does not
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416.03-itxa.docx
empower the authority under the Act to probe into the account
accepted by the authorities under the Companies Act. It was
also held that if the legislature intended the Assessing Officer to
reassess the company’s income, then it would have stated in
Section 115-J that “income of the company is accepted by the
Assessing Officer”. The aforesaid principle was reiterated by the
Supreme Court in MALAYALA MANORAMA COMPANY
LIMITED VS. COMMISSIONER OF INCOME TAX,
TRIVANDRUM.8 Thus, from the aforesaid enunciation of law by
the Supreme Court, it is evident that the Assessing Officer does
not have jurisdiction to go behind the net profit shown in profit
and loss account except to the extent provided in Explanation to
Section 115J. For the aforementioned reasons the second
substantial question of law also deserves to be answered in
favour of the assessee.
(V) CONCLUSION:
18. In view of the preceding analysis, the substantial questions
of law are answered in favour of the assessee. The order dated
25th February 2003 passed by the Tribunal in ITA No.3101/M/95
is quashed and set aside.
19. In the result, the appeal is allowed.
(M.S.KARNIK, J.) (CHIEF JUSTICE) 8 [2008] 300 ITR 251 Basavraj Page|18 ::: Uploaded on - 02/05/2025 ::: Downloaded on - 03/05/2025 10:34:04 :::
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