Judgment:
1. The appeal by the assessee is directed against the order dt. 8th February, 1994, of the CIT, Bhopal, passed under s. 263 of the IT Act, 1961, for asst. yr. 1990-91.
2. The assessee has paid Tribunal fee of Rs. 250. The Registry intimated the assessee that the Tribunal fee paid by the assessee is deficient by a sum of Rs. 1,250. On receipt of the said intimation, it was stated in the assessee's letter dt. 29th July, 1994, that the assessee had paid adequate Tribunal fee, as the total income determined by the AO in the assessment was 'nil'. This was reiterated in the assessee's application dt. 30th June, 1998, filed during the course of hearing before us. It was also stated herein that though the assessee's income before set off of unabsorbed depreciation was more than Rs. 1,00,000 but it was reduced to nil after set off of brought forward unabsorbed depreciation. In support, reliance was placed on the decision of Tribunal, Hyderabad Bench in Andhra Pradesh State Electricity Board vs. ITO (1994) 49 TTJ (Hyd) 315 : (1994) 49 ITD 552 (Hyd). On consideration of the factual position and in view of the decision (supra), we are of the view that the fee payable by the assessee was Rs. 250 only as the total income after set off of unabsorbed depreciation of earlier years was nil.
3. The assessee is a private limited company and derives income from rent charges of hotel, bar and restaurant. For the asst. yr. 1990-91, the assessee filed return on 28th November, 1990, declaring loss of Rs. 23,92,423 after setting off of income of Rs. 4,39,423 for the assessment year under consideration against carried forward losses of Rs. 28,32,170. The AO completed the assessment on total income at nil vide his order dt. 30th October, 1991, under s. 143(3) of the Act. The assessment was sought to be revised by the CIT as on scrutiny of the records he found that profit under s. 115J remained to be brought to tax. He issued a show cause notice dt. 25th January, 1994, giving calculation of book profit under s. 115J as per which the income required to be assessed under s. 115J worked out to Rs. 3,62,099. In response thereto, written submission dt. 8th February, 1994, was filed before the CIT and the matter was discussed by Shri S. N. Chhajed, C.A.with the CIT. It was stated by Shri Chhajed that the order passed by the AO was neither erroneous nor prejudicial to the interests of Revenue, as the AO has considered all the facts and circumstances of the case and after taking into consideration the C/F of book profits/loss for the previous year has not taken any action as contemplated in the notice. It was further stated that in the course of assessment proceedings, vide letter dt. 22nd October, 1991, in point No. 18 the assessee had pointed out that after various adjustments there was no profit at all and, in fact, there was a loss of Rs. 36,810. A copy of the said statement was again filed before the CIT.The invoking of provisions of s. 263 was challenged relying on the following decisions : (ii) CIT vs. Shree Govindram Seksaria Charitable Trust, (1987) 166 ITR 580 (MP).
4. Inviting the attention of the CIT on the calculation of book profit filed before the AO, it was submitted by Shri Chhajed that as per P&L a/c, there was net profit of Rs. 11,35,206. According to him, the adjustment of Rs. 71,792 representing convertible foreign exchange reserve has made by the CIT in his notice was not permissible under s.
115J(1)(b). Further the assessee was entitled to deduction of Rs. 1,05,832 being 50 per cent of the profits derived from provisions of service to the foreign tourists computed as per sub-s. (3) of s. 80HHC r/w s. 115J(1A) Expln. cl. (iii). Thus, the balance amount will work out to Rs. 10,29,374 as against which a deduction of Rs. 10,66,184 was permissible under s. 205 of the Companies Act. It was, thus, argued before the CIT that there will be no positive income liable to be taxed under s. 115J. A statement of profit or loss before depreciation, unabsorbed depreciation and net loss or profit for asst. yrs. 1986-87 to 1990-91 was also submitted. In support of his contentions, reliance was placed on Tribunal Special Bench, Hyderabad decision in Surana Steels (P) Ltd. vs. Dy. CIT (1993) 46 TTJ (Hyd) 458 (DB) : (1993) 45 ITD 1 (Hyd)(SB) and Tribunal Indore Bench decision in Brite Automotive & Plastics Ltd. vs. Dy. CIT (1994) 47 TTJ (Ind) 217 : (1993) 47 ITD 591 (Ind).
5. The submissions of Shri Chhajed did not find favour with the CIT.According to the CIT, the scope of s. 263 is very wide. It takes into account any type of error in the order passed by the AO. This error may be with reference to non-verification of facts or wrong interpretation of the provisions of law. There are many decisions holding that where the AO accepts the contention of the assessee without due enquiry as a result of which prejudice is caused to the Revenue, the provisions of s. 263 have to be invoked. According to him, in the instant case when the assessee submitted the working of profit liable to tax under s.
115J, the AO accepted the same without making any enquiry. This has been caused due to incorrect interpretation of provisions of s. 205 of the Companies Act. According to him, the contention of the assessee that proper enquiry was made by the AO is not borne out form the record. Simply because some information had been furnished by the assessee does not mean that the AO had applied his mind. He, therefore, held the view that the provisions of s. 263 are applicable as error has crept in the assessment and as a result thereof prejudice has been caused to the Revenue. On assessee's contention on merits he observed that with due respect he was not in agreement with the views expressed by the Tribunal insofar as the interpretation of s. 205 of the Companies Act is concerned. He went on to observe further that if the said interpretation is accepted, it would mean that the legislature has used certain terms which are redundant and will make the whole provisions unworkable. Such an interpretation is beyond the rules of jurisprudence. According to him, when s. 205 uses the word 'depreciation' or 'loss' whichever is less and there was no loss before depreciation, it cannot be said that one term includes the other. If that is accepted, then depreciation will always be more than the loss including depreciation and provisions of s. 205 r/w s. 115J will become meaningless. With these observations, he set aside the order of the AO with a direction to him to apply his mind regarding computation of profit under s. 115J and passed a fresh speaking order considering the assessee's contentions as to the adjustment proposed with regard to the amount of Rs. 71,792 and assessee's claim of deduction of Rs. 1,05,832 after allowing a reasonable opportunity of being heard to the assessee.
7. Shri S. K. Jain, the learned advocate for the assessee vehemently argued that the decision of Indore Bench of the Tribunal in Brite Automotive & Plastics Ltd. (supra) rendered on 10th May, 1993, was available when the CIT passed the impugned order. It has been held therein that the expression 'the amount of the loss' appearing in cl.
(b) of the first proviso to s. 205(1) of the Companies Act should be construed to mean the loss including depreciation and unabsorbed depreciation. Therefore, the computation of loss must necessarily include the amount of depreciation and unabsorbed depreciation. This decision has not been followed by the CIT. According to him, the CIT is bound to follow the decision of the Indore Bench of the Tribunal within whose jurisdiction he is operating. According to Shri Jain, judicial discipline will come to an end if the subordinate authority is allowed to flout the decision of an higher authority. He referred to the decision of Bombay High Court in K. Subramanian, ITO & Anr. vs. Siemens India Ltd. & Anr. (1985) 156 ITR 11 (Bom). Relying on the Calcutta High Court decision in Russell Properties (P) Ltd. vs. A. Chowdhury, Addl.
CIT & Ors. (1977) 109 ITR 229 (Cal), Shri Jain argued that an order passed by the AO following the decision of the Tribunal cannot be held to be erroneous and such an order cannot be revised. He also referred to the Bombay High Court decision in CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) wherein their Lordships have held that if the AO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the CIT simply because according to him, the order should have been written more elaborately. He also referred to the decision in CIT vs. Orissa State Financial Corpn. (1993) 203 ITR 747 (Ori) wherein it has been held that if the AO followed the decision of the Tribunal in earlier year, his order is not erroneous and cannot be revised under s. 263. Inviting our attention to the decision in Govindram Seksaria Charitable Trust (supra), Shri Jain argued that the AO was alive to the relevant provisions of law and the facts before passing the assessment order and, therefore, the provisions of s. 263 were not attracted.
8. Shri Brijesh Gupta, the learned Departmental Representative, on the other hand, carried us through the assessment order dt. 30th October, 1991, and pointed out that there is no application of mind at all by the AO, as in the entire assessment order the mention of s. 115J is conspicuous by its absence. If that be so, the CIT was justified in holding that the AO had accepted the working of profit under s. 115J without making any enquiry and without application of mind. Shri Gupta further submitted that different Benches of the Tribunal had given varying interpretation of s. 205 of the Companies Act at the time when he passed the order under s. 263 on 8th February, 1994. The Andhra Pradesh High Court has already rendered its decision in V. V.Trans-Investments (P) Ltd. vs. CIT (1994) 207 ITR 508 (AP) wherein the interpretation of s. 205 of the Companies Act in favour of the Revenue was given. It was the only decision of High Court which was available when the CIT passed the impugned order under s. 263, though the judgment (supra) has not specifically been referred to by him. Shri Gupta further argued that the Tribunal and the High Courts interpreted the provisions of law in a given statute and what has to be followed is the correct position of law. The expression 'loss' as it appears in s.
205(1), first proviso, cl. (b) of the Companies Act, r/w s. 115J of the IT Act, 1961, has been interpreted to mean by M.P. High Court in Krishna Oil Extraction Ltd. vs. CIT (1998) 230 ITR 806 (MP) as excluding depreciation. The interpretation given to the word 'loss' by the CIT in the impugned order is in accord with the interpretation given to the word 'loss' in the decision (supra) of the jurisdictional High Court. He, therefore, submitted that looking from this angle also the order of the CIT deserves to be sustained.
9. We have carefully considered the arguments advanced by the parties.
Perusal of the impugned order of the CIT would go to reveal that he exercised his revisionary jurisdiction for the sole reason that profit under s. 115J remained to be brought to tax. This is factually correct.
The assessment order is totally silent on income under s. 115J of the Act. Why was it so The contention of the assessee before the CIT was that as per computation of book profit under s. 115J submitted before the AO, there was negative book profit of Rs. 36,810 on account of adjustment inter alia, of brought forward business loss amounting to Rs. 10,66,184 of the earlier years. The AO accepted that said computation and hence he passed regular assessment under s. 143(3) and did not compute book profit under s. 115J, as there was no book profit at all. This plea canvassed by the assessee has been rejected by the CIT for the reason that the AO accepted the working of book profit submitted by the assessee without making any enquiry and without applying his mind. The assessment order speaks for itself. Sec. 115J was enacted with the objective of bringing the zero tax prosperous companies within the taxable net. There were companies which had, in fact, large profits in its books but for the purpose of IT Act by virtue of various deductions claimed by them very little taxable income was disclosed. To bring such type of companies within the taxable net, s. 115J had been brought on the statute book. It is not in dispute that the assessee-company in hand is one such company, s. 115J was in operation for the asst. yrs. 1988-89 to 1990-91. The AO was concerned with the assessment of the assessee-company for the asst. yr. 1990-91.
It was, therefore, obligatory on his part to have examined the applicability of the provisions of s. 115J in the light of the claim made by the assessee. This had not been done, as there is no inkling in the assessment order nor in the records scrutinised by the CIT that the AO had done so. In CIT vs. Emery Stone Mfg. Co. (1995) 213 ITR 843 (Raj), their Lordships of Rajasthan High Court have observed at p. 848 of the report that in a case where there is non-application of mind with regard to any provision of law, the proper course is to set aside the assessment order and send the matter back to the AO for determining the said issue in accordance with the provisions of law. At p. 850 of the said report, their Lordships went on to observe further that simply because the facts have been disclosed by the assessee, it does not give immunity from revisional jurisdiction which the CIT can exercise under s. 263 and as such even in a case where the facts have been disclosed by the assessee to the AO and the correct provisions of law have not been examined by the AO, the power under s. 263 can be invoked. In the case of the assessee before us, the assessee furnished the working of book profit under s. 115J before the AO, who did not examine the same with reference to the relevant provisions of s. 115J. Thorough perusal of the assessment order leaves the impression that the applicability of the provisions of s. 115J to the case of the assessee escaped the attention of the AO altogether, otherwise, had he examined the applicability of the said provision, there should have been some whisper at least in the assessment order which, of course, is not.
Nothing prevented the AO to say in the assessment order that as per working given by the assessee, there is no book profit and hence there is no liability to tax under s. 115J, had he applied his mind to this aspect of the matter. Curiously enough, there is no mention at all of s. 115J in the entire assessment order what to say of any enquiry or application of mind on the working of book profit submitted by the assessee. To say the least, arbitrary exercise of quasi-judicial power by the AO would certainly invite invocation of s. 263 of the Act by the CIT. We have scrutinised the decision of Hon'ble M.P. High Court in Ratlam Coal Ash Co. (supra). To our mind, this decision will not come in the way of the CIT. Their Lordships have observed therein that it is well settled that where assessment is made accepting what the assessee stated in the return without making any enquiries, CIT would be justified in holding the assessment order to be erroneous. In the said case, the Tribunal had found that the assessee had furnished all the requisite information about the receipt of Rs. 73,500 and expenses of Rs. 44,873 and considering all facts the AO framed an assessment on total income of Rs. 35,000 as against the total income declared in the return at Rs. 26,324. It was, thus, obvious that on the information furnished by the assessee, the AO had applied his mind and did not accept the income shown in the return, whereas in the case before us, there is no trace of application of mind by the AO on the working of book profit submitted by the assessee to him. Another decision relied upon by the assessee, namely, Shri Govindram Seksaria Charitable Trust (supra) has been perused by us. In that case, the CIT had set aside the assessment orders observing that exemption under s. 11 of the Act had been allowed without examining in detail the applicability of the provisions of s. 13(1)(c)(ii) of the Act. However, the Tribunal found that to the audit objection that the assessee was not entitled to the benefit of exemptions by virtue of the provisions of s. 13(1) of the Act, the AO had given detailed replies showing that he was alive to the relevant provisions of law and the facts before passing the assessment order. It was in this backdrop that the Tribunal's order vacating the CIT's order under s. 263 was upheld by the Hon'ble High Court of M.P.As stated earlier in the case in hand, there is nothing on the record to show that the AO was alive to the provisions of s. 115J and the avowed objective behind the said section to bring zero tax prosperous companies within the taxable net. The decision (supra) of the Hon'ble M.P. High Court does not, thus, render any help to the assessee. Rather it strengthens the hand of the CIT, as the assessment order goes to prove that the AO was totally oblivious of the provisions of s. 115J which made the CIT to say that the profit under s. 115J remained to be brought to tax.
10. It is now well settled that two conditions must exist to enable the CIT to exercise his revisionary power under s. 263 of the Act. These are that the order of the AO must be found to be erroneous and by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. The expression 'erroneous' has been defined in Black's Law Dictionary. According to the definition, 'erroneous' means 'involving error'; deviating from the law. It is, thus, clear that an order cannot be termed as erroneous unless it is not in accordance with law. The words 'prejudicial to the interests of the Revenue' occurring in s. 263 have not been defined. In Addl. CIT vs.
Mukur Corpn. (1978) 111 ITR 312 (Guj), their Lordships of Gujarat High Court agreeing with the observations made in Dawjee Dadabhoy & Co. vs.
S. P. Jain (1957) 31 ITR 872 (Cal) observed that the words 'prejudicial to the interest of the Revenue' must mean that the orders of the assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the state has not been realised or cannot be realised. In a recent decision in CIT vs. Smt.
Minalben S. Parikh (1995) 215 ITR 81 (Guj), their Lordships of Gujarat High Court have observed as under (head note) : "The well settled principle in considering the question as to whether an order is prejudicial to the interests of the Revenue or not is to address oneself to the question whether the legitimate revenue due to the exchequer has been realised or not or can be realised or not if the orders under consideration are allowed to stand. For arriving at this conclusion, it becomes necessary and relevant to consider whether the income in respect of which tax is to be realised has been subjected to tax or not or if it is subjected to tax whether it has been subjected to tax at the rate at which it could yield the maximum revenue in accordance with law or not." 11. If we apply the principles of law enunciated above to the facts of the assessee's case, we notice that the finding of the CIT is that income of Rs. 3,62,099 liable to tax under s. 115J has not been brought to tax by the AO. There has been conflicting decisions of the Tribunals over the interpretation of the phrase 'loss or depreciation whichever is less' occurring in cl. (iv) of Explanation to s. 115J. The controversy was whether the word 'loss' is to be taken as including depreciation or excluding depreciation. In Butt Welded Tools (P) Ltd. vs. Asstt. CIT (1991) 39 ITD 432 (Mad) Madras Bench of the Tribunal (SMC) had taken a view that the word 'loss' includes depreciation. In V. V. Trans-Investments (P) Ltd. vs. ITO (1992) 43 TTJ (Hyd) 466 : (1992) 42 ITD 242 (Hyd). Hyderabad Bench of the Tribunal (DB) had held that while computing book profit under s. 115J, the assessee is entitled to deduction of depreciation or loss, whichever is less, only in the eventuality when in a given year there is a loss as well as depreciation. In such a case, the lesser amount would be allowed to be deducted as per the provisions of the income-tax. However, in a case where there is a profit in a year but after adjustment of depreciation it results in a loss, no adjustment in book profit under s. 115J can be allowed. In Brite Automotive & Plastics Ltd. vs. Dy. CIT (supra), Indore Bench of the Tribunal had taken a view similar to that of Tribunal Madras Bench decision in Butt Welded Tool (P) Ltd. (supra).
When this decision was cited before the CIT he observed that with due respect he is not in agreement with the interpretation of s. 205 of the Companies Act given by the Tribunal. It is, thus, obvious that the issue which was being considered by the CIT was of debatable nature.
Two different interpretation were available-one in favour of the assessee and the other in favour of the Revenue. A question came for consideration before Gujarat High Court in CIT vs. M. M. Khambhatwala (1992) 198 ITR 144 (Guj) whether in a case where the issue is debatable, power under s. 263 could be exercised by the CIT The question was answered by their Lordships in the affirmative. They observed that revisional power under s. 263 is not comparable with the power of rectification of mistake under s. 154 of the Act. It was only in the context of s. 154 of the Act that Supreme Court has in T. S.Balaram, ITO vs. Volkart Bros. (1971) 82 ITR 50 (SC), observed that, when the issue is debatable, the power of rectification cannot be exercised. According to their Lordships of Gujarat High Court, this decision of the Supreme Court has no application whatsoever so far as powers under s. 263 are concerned. At this stage, we are reminded of the observations of Madras High Court in the celebrated case of Venkata Krishna Rice Co. vs. CIT (1987) 163 ITR 129 (Mad), wherein their Lordships said that the prejudice that is contemplated under s. 263 is prejudice to the income-tax administration as a whole. As stated earlier, the intention of the legislature in bringing s. 115J on the statute book was mobilisation of additional resources. In Circular No.495, dt. 22nd September, 1987, it is stated, thus : "It is accepted canon of taxation to levy tax on the basis of ability to pay. However, as a result of various tax concessions and incentives certain companies making huge profit and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax. Accordingly, as a measure of equity s. 115J has been introduced by Finance Act, 1987. By virtue of the new provisions, in the case of a company, whose total income as computed under the provisions of IT Act is less than 30 per cent of the book profit computed under s. 115J, the total income chargeable to tax will be 30 per cent of the book profit as computed." 12. Bearing in mind, the legislative intent behind enactment of s.
115J, the CIT observed that if the interpretation as given by the Tribunal in Brite Automotive & Plastics Ltd. (supra) is accepted, it would mean that the legislature has used certain terms which are redundant and will make the whole provisions unworkable. Such an interpretation is beyond the rules of jurisprudence. There is nothing offensive specially when we keep in mind that the CIT has to ensure that the prejudice to the interests of the income-tax administration as a whole is not caused. At the time when the CIT exercised his revisionary powers under s. 263 in this case, he did not have the benefit of the decision of jurisdictional High Court on the issue. It may not be out of place to mention that the latest decision of the jurisdictional High Court in Krishna Oil Extractions Ltd. vs. CIT (supra) is in favour of the Revenue, wherein their Lordships have held that the 'loss' as it appears in s. 205(1), first proviso, cl. (b), of the Companies Act, 1956, r/w s. 115J of the Act means excluding depreciation. The decision (supra) of the Hon'ble M.P. High Court is only declaratory. It has only declared the law as it then was when the CIT exercised his jurisdiction under s. 263 of the Act.
13. In taking the above view, we are supported by the decision of Madras High Court in CIT vs. Seshasayee Paper Boards Ltd. (1996) 217 ITR 358 (Mad).
14. For the reasons aforesaid, we hold that the CIT was perfectly justified in setting aside the assessment order. We uphold his order and reject the appeal of the assessee.