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The Tax Publishers Dy. CIT v. Transafe Services Ltd. [ITA No. 694-695/Kol /2013 & C.O. No. 50-51/Kol /2013, dt. 11-5-2016] : 2016 TaxPub(DT) 2699 (Kol-Trib) Effect of fraud of earlier years considered in subsequent years *Facts:* Assessee-company in the business of logistics during assessment year 2007-08/08-09/09-10 it was found that the senior management had reported excess profits through fraudulent accounting. This was unearthed through an investigation by KPMG and revised returns were filed for assessment year 08-09/09-10. Since the time limit had barred for filing a revised return or for rectification the returns of assessment year 2007-08 could not be corrected which was factually a scrutiny assessment under section 143(3). The assessing officer did not agree with the under reporting of profits and losses in the revised return on the plea that the matter was sub judice and no annual report was revised for the assessment year 2008-09/09-10. The said fraud adjustments were carried out in assessment year 2010-11 in the financial accounts as prior period adjustments which were added back in computing the taxable income. The Commissioner (Appeals) on appeal allowed the revised return losses as the fact of fraud was proven and the report corroborated the same. However the MAT profits were not adjuted under section 115JB as they were based on the annual report which had the original figures. There were cross appeals arising out of the order of Commissioner (Appeals)s deletion of the additions of the assessing officer and the assessee on MAT points primarily to ITAT. Held in favour of the assessee that the losses on a/c of fraud are allowable and the revised returns ought to have to be considered in full. The MAT figs. do not need any disturbance however as these is based on annual reports and figures reported under section schedule VI of the companies act- against the assessee. (Note: The prospective adjustment in assessment year 2010-11 will also consequentially have a MAT impact thus a timing difference only) As for the Allowability of the fraud losses real income concept was applied - CIT v. Lakshmi Machine Works (2007) 290 ITR 667 (SC) observed as under: ".... It is important to note that tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to the Law and Practice of Income Tax by Kanga and Palkhivala, the word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of the income-tax, profits have got to be assessed provided they are real profits. Such profits have got to be ascertained on ordinary principles of commercial trading and accounting. However, the Income-tax Act has laid down certain rules to be applied in deciding how the tax should be assessed and even if the results is to tax as profits what cannot be construed as profits, still the requirement of the Income-tax Act must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [See : page 455 of The Law and Practice of Income Tax by Kanga and Palkhivala..." As for MAT adjustment sought by the assessee - Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) where in it was held that: "The assessing officer, while computing the book profit of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the 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 provisions of Parts 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. While so looking into the 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 a manner provided by that Act and the same to be scrutinized and certified by 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 requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account the company." In the case in hand, we find that the assessee has filed the revised return declaring the loss as several financial irregularities were noticed in its books of accounts but the revised financial statements were not approved in the AGM of the company. In view of above, we dismiss the grounds No. 3 to 5 of assessee's CO.

The Tax Publishers

Dy. CIT v. Transafe Services Ltd. [ITA No. 694-695/Kol /2013 & C.O. No. 50-51/Kol /2013, dt. 11-5-2016] : 2016 TaxPub(DT) 2699 (Kol-Trib)

Effect of fraud of earlier years considered in subsequent years

Facts:

Assessee-company in the business of logistics during assessment year 2007-08/08-09/09-10 it was found that the senior management had reported excess profits through fraudulent accounting. This was unearthed through an investigation by KPMG and revised returns were filed for assessment year 08-09/09-10. Since the time limit had barred for filing a revised return or for rectification the returns of assessment year 2007-08 could not be corrected which was factually a scrutiny assessment under section 143(3). The assessing officer did not agree with the under reporting of profits and losses in the revised return on the plea that the matter was sub judice and no annual report was revised for the assessment year 2008-09/09-10. The said fraud adjustments were carried out in assessment year 2010-11 in the financial accounts as prior period adjustments which were added back in computing the taxable income. The Commissioner (Appeals) on appeal allowed the revised return losses as the fact of fraud was proven and the report corroborated the same. However the MAT profits were not adjuted under section 115JB as they were based on the annual report which had the original figures. There were cross appeals arising out of the order of Commissioner (Appeals)s deletion of the additions of the assessing officer and the assessee on MAT points primarily to ITAT.

Held in favour of the assessee that the losses on a/c of fraud are allowable and the revised returns ought to have to be considered in full. The MAT figs. do not need any disturbance however as these is based on annual reports and figures reported under section schedule VI of the companies act- against the assessee.

(Note: The prospective adjustment in assessment year 2010-11 will also consequentially have a MAT impact thus a timing difference only)

As for the Allowability of the fraud losses real income concept was applied - CIT v. Lakshmi Machine Works (2007) 290 ITR 667 (SC) observed as under:

".... It is important to note that tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to the Law and Practice of Income Tax by Kanga and Palkhivala, the word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of the income-tax, profits have got to be assessed provided they are real profits. Such profits have got to be ascertained on ordinary principles of commercial trading and accounting. However, the Income-tax Act has laid down certain rules to be applied in deciding how the tax should be assessed and even if the results is to tax as profits what cannot be construed as profits, still the requirement of the Income-tax Act must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [See : page 455 of The Law and Practice of Income Tax by Kanga and Palkhivala..."

As for MAT adjustment sought by the assessee - Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) where in it was held that:

"The assessing officer, while computing the book profit of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the 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 provisions of Parts 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. While so looking into the 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 a manner provided by that Act and the same to be scrutinized and certified by 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 requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account the company."

In the case in hand, we find that the assessee has filed the revised return declaring the loss as several financial irregularities were noticed in its books of accounts but the revised financial statements were not approved in the AGM of the company. In view of above, we dismiss the grounds No. 3 to 5 of assessee's CO.