CIT vs. Binani Cement Ltd (Calcutta High Court)

The assessee debited an amount of Rs. 919.52 lakhs to the Profit and Loss Account in accordance with a scheme of arrangement for the transfer of its investment division to Daisy Commercials Pvt Ltd (hereinafter referred to as ‘DCPL’). According to the sanctioned scheme, the assessee transferred its investment division worth Rs.23.16 crores to DCPL. The shareholders of the assessee company were issued shares of the value of Rs.13.96 crores in DCPL. The assessee reduced its share capital by Rs.13.96 crores. The difference between the investment value of Rs.23.16 crores and the share capital reduction of Rs.13.96 cores, that is, Rs.9.20 crores was debited to the Profit & Loss Account for the year ended March 31, 2006. This was allowed by the AO in computing the book profits. The CIT revised the assessment u/s 263 and held that not adding back the aforesaid amount of Rs 919.52 lakhs in computing the book profit u/s.115JB of the Act made the assessment order erroneous and prejudicial to the interests of the revenue. The Tribunal accepted the claim of the assessee. On appeal by the department to the High Court HELD dismissing the appeal:

(i) What is required of us is to examine the legality of exercise of power under Section 263 of the Act by the CIT. It is a fact that the assessee incurred loss of a sum of Rs.9.20 crores by resorting to transfer of its investment division to Daisy Commercials Private Ltd. The loss was debited to the profit and loss account. The assessment was under Section 115JB of the Act. The assessing officer did not question the act of debiting loss arising out of the transfer to the P/L account. The CIT was of the opinion that the loss could not have been debited to the P/L account and the amount was required to be added back for computation of book profit under Section 115JB.

(ii) The accounting standards laid down by the institute however provide for recognition of the profit or loss arising out of investment in the profit and loss account. Reference in this regard may be made to Clauses 21 and 25 of Accounting Standard 13. The disclosure made in the financial statements is in pursuance of the requirement of Clause- 25 quoted above and is also in pursuance of Clause 2(b) of Part II of Schedule VI to the Companies Act, 1956 which is not to be construed as any qualification indicating any inaccuracy in the accounts. There was, thus no mistake on the part of the assessee in debiting the loss to the profit and loss account. Once it is realized that the assessee had correctly debited the profit and loss account for the loss arising out of the transfer of investment division, there remains no difficulty in realizing that the CIT proceeded on a wrong premise which was responsible for exercise of jurisdiction under Section 263 which he would not have done if he had realized the correct position.

(Apollo Tyres Ltd vs. CIT (2002) 255 ITR 273, Malayala Manorama Co. Ltd vs. CIT (2008) 300 ITR 251, CIT vs. Adbhut Trading Company Pvt. Ltd (2011) 338 ITR 94, Commissioner of Income Tax vs. Hari Machine Ltd (2009) 311 ITR 285 (Del.) referred)