AO Cannot Go Beyond Net Profit in P&L Except as Permitted under Explanation to Section 115J: Bombay HC in Mahindra Case [Read Order]

In a recent ruling, the Bombay High Court held that an Assessing Officer cannot go beyond the net profit shown in the profit and loss account except to the extent permitted in the Explanation to Section 115J of the Income Tax Act, 1961.

Mahindra & Mahindra Ltd., the assessee, had filed its return of income for the assessment year 1990-91. While completing the assessment, the Assessing Officer made certain adjustments to the book profits declared by the company, questioning provisions made in the profit and loss account towards warranty claims, gratuity liability, and the write-off of deposits.

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The Assessing Officer held that the accounts were not drawn up in accordance with Part II and III of Schedule VI to the Companies Act and recast the book profits under Section 115J. The Commissionerof Income Tax (Appeals) upheld this approach, and the Income Tax Appellate Tribunal confirmed the disallowance.

The assessee’s counsel argued before the High Court that the Assessing Officer had no power to re-examine or recast the profit and loss account prepared under the Companies Act and duly certified by statutory auditors and approved by the shareholders.

They argued that under Section 115J(1A), the Assessing Officer can only make specific adjustments mentioned in the Explanation and cannot go beyond that. Reliance was placed on the Supreme Court’s ruling in Apollo Tyres Ltd. v. CIT and Malayala Manorama Co. Ltd. v. CIT, which had explained the limited jurisdiction of the Assessing Officer in matters of book profits.

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The revenue’s counsel argued that the provisions in question were made “below the line” and not in accordance with the Companies Act, and the Assessing Officer was entitled to disallow them. They submitted that the computation of book profits had to be corrected to reflect the true income of the assessee.

The Division Bench comprising Chief JusticeAlok Aradhe and Justice M.S. Karnik observed that once the accounts of a company are prepared in accordance with the Companies Act, scrutinised and certified by the statutory auditors, and approved by the shareholders, the Assessing Officer has no jurisdiction to question their correctness.

The court explained that the jurisdiction of the Assessing Officer under Section 115J is confined only to increasing or reducing the net profit as provided in the Explanation, and he cannot go beyond these limits. The court pointed out that the “above the line/below the line” distinction relied upon by the Revenue had no legal basis.

The court held that the Assessing Officer had exceeded his authority in recasting the profit and loss account and disallowing provisions beyond what is permitted in Section 115J. The order of the tribunal was set aside, and the question of law was answered in favour of the assessee.

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