Opinion Of Eminent Legal Luminaries On Controversial Issues

Book profit – AO has no jurisdiction to change book profit

QUERY: Assessee changed its method of providing depreciation from ‘Straight Line Method (SLM) to “Written Down Value (WDV) during the year under consideration which resulted into shortfall in depreciation. Such shortfall was charged to P & L Account. AO disallowed claim of such additional depreciation on the count that Sec. 205 of the Companies Act does not entitled an assessee to claim depreciation for earlier years placing reliance on “McDowell and Co. v. CTO – 154 ITR 148”. Whether the change in method of accounting for depreciation was in accordance with Accounting Standards issued under the Companies Act? Whether AO has jurisdiction to go behind the “book profits” shown in P & L Account except to the extent of prescribed adjustments once it is found that books of accounts are certified by authorities under the Companies Act? What is the treatment of income on account of change in the method of depreciation? What is the treatment of additional claim / write back of depreciation in the books of account upon change in the method calculating the same?
ANSWER: Para 15 of Accounting Standard (AS 6) : “Depreciation Accounting” as per Companies (Accounting Standards) Rules, 2006 reads as under:
“The method of depreciation is applied consistently to provide comparability of the results of the operation of enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation is recalculated. In accordance with the new method from the date of asset coming into use. The definition or surplus arising from retrospective re-computation of depreciation in accordance with the new method is adjusted in the account in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss account. In case the change in the method result in surplus, the surplus is credited to the statement of profit and loss. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed”.
So the assessee has changed method depreciation from SLM to WDV and shortfall (deficiency) is charged to profit and loss account as per accounting standard. Thus prepared accounts is per schedule VI of the Companies Act, 1956 (i.e. schedule III of the Companies Act, 2013) and certified by the authorities under the Companies Act. Therefore the Assessing Officer has no jurisdiction to go behind the “book profit” shown in P & L account except to the extent of prescribed adjustment mentioned under section 115JB of the Income tax Act, 1961. As per the Supreme Court in Apollo Tyres Ltd. v. CIT [255 ITR 273], while interpreting similar provision under section 115J of the Act, the Court has held that
“The Assessing Officer, while computing the books profits of a company under section115J of the Income tax Act, 1961, has only the power of examining whether books of account are certified by the authorities under the Companies Act as having been properly maintained in 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 section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words” in accordance with the provisions of Part II and III of Schedule VI to the Companies Act”, in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the Company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in the manner provided by the Act and the same is scrutinized and certified by the Statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirement of the Companies Act. Sub-section (1A) if section 115J does not empower the Assessing Officer to embark upon a fresh enquiry to regard to the entries made in the books of account of the company”
This view has been reaffirmed by the Supreme Court in Malyala Manorama Co. v. CIT [300 ITR 251].

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