Slump Sale, MAT and AMT

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1 Special Story CA Haresh Kenia Slump Sale, MAT and AMT Introduction The Income-tax Act provides for the requirement of audit report and certification from Accountants under various provisions of the Act with the objective of bringing transparency and ensuring authenticity and accuracy of accuracy of various deductions/exemptions and is to examine, verify, certify and opine as to provisions of the Act is in accordance with the There is a basic difference between the audit The subject of certification/ Audit reports by assessee to the rigours of heavy payment Besides this, the serious part of consequence that and certify the aspects required by the Incometax Act in order to assess the true income of SS-V-25 Income Tax Review 35

2 of manner in which the interpretations accountant is giving report/certificate and interpretation of the provisions in a to append notes to such reports/ the basis of interpretation of the provision of returns, there is no where that any note that the chartered accountant certifying the consequence of prosecution under the Income-tax Act in addition to the punishment under the Chartered the incorrect certification comes into the the part of chartered accountant certifying Dilip N Shroff vs. JCIT 291 ITR 519 where Scope important issues concerning the Accountants/ to appraise the reader with the various issues topics:- 36 Income Tax Review

3 Special Story be the income of the previous year in which the Undertaking The word 'undertaking' has been defined in provides that : "For the purposes of this of an undertaking, or a unit or division of an undertaking or a business activity taken as a Net worth deemed to be the cost of acquisition and cost of improvement of the undertaking being transferred cost of acquisition and cost of improvement for the the profit or gain arising from such transfer assets of the undertaking were purchased a gain notwithstanding the period for which its SS-V-27 Income Tax Review 37

4 Computation of Net worth In Coromandel Fertilizers vs. DCIT, (90 ITD 344) worth of the undertaking on the date of transfer ignored for the purposes of computing the net deemed to be the cost of acquisition and the cost worth', being the cost of acquisition and cost worth' or in other words the cost of acquisition other words, net worth of an undertaking under transfer is nothing but the cost of acquisition of an asset for the purposes of payment of of the undertaking or division has been made determination of cost of acquisition and cost of improvement of the undertaking but not 38 Income Tax Review SS-V-28

5 Special Story of acquisition and cost of improvement of the of improvement of the undertaking or division, section is activated for determining the income accordance with the mode of such computation CIT vs. Artex Manufacturing Co. (227 ITR 260), in CIT vs. Electric Control Gear Mfg. Co. (227 ITR 278) IT Act and the revenue contended that gain difference between the consideration accruing in PNB Finance Ltd. vs. CIT (175 Taxman 242) CIT vs. B. C. Srinivasa Setty (128 ITR 294) that the charging section and the computation of the said assets and thus, the computation of the chartered accountant in the prescribed form indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the said net worth has Income Tax Review 39

6 Form of Audit Report chartered accountant must be furnished in Form assessee to furnish accountants report in Form Form 3CEA requires an chartered accountant worth of undertaking to be transferred and of assessees for the year in which the undertaking is transferred by way of ascertaining and computing the net worth of the undertaking transferred by way of undertaking computed in accordance with If one reads the format of report and under: Negative net worth acquisition and cost of improvement for accordance with the provisions of undertaking or division as reduced by the division as appearing in the books of computed can be in negative so as to increase by reducing the cost of acquisition and cost of Income Tax Review SS-V-30

7 Special Story There cannot be situation where amount of and cost of improvement, for the purpose as per dictionary meaning, means the price paid Zuari Industries Ltd. vs. ACIT [2007] 105 ITD 569 (Mum.) determining the cost of acquisition, as provided having opted for the second option, it was not open then for the revenue to contend that of Paperbase Co. Ltd vs. ACIT [2008] 19 SOT 163 (Delhi) Contrary view in the case of DCIT vs. Summit Securities Ltd (2012) 19 taxmann.com 102 (Mum.) (SB) has taken Income Tax Review 41

8 case, the assessee-company was engaged in the and undertaking turnkey projects in India of the PTB was ` negative 'net worth' of ` ` as per the books of accounts was in excess of ` ` ` ` worth of the assessee-company at a negative ` consideration ought to have been received of ` ` of consideration received or accruing' as a or accruing' and not what 'ought to have been consideration received by the transferor is not the Revenue to contend that the consideration of ` ` ` Net Worth of undertaking It was argued by revenue that the words 'net worth' and 'cost' have not been given any meaning for the purposes of in the context of 'undertaking' which of acquisition and cost of improvement' of the 'undertaking' as one unit which 42 Income Tax Review SS-V-32

9 Special Story be both ways, in some case the aggregate worth is not something unknown in the of auditing brought out with a purpose statements regarding the appropriateness of the going concern assumption as a or net worth can never be in negative, is too wide a proposition to be accepted in 'Undertaking', therefore, this contention It was argued by revenue that this has mandated to consider the figure of assets has been considered twice in the the asset and the cost of any improvement thereto, which is the amount of net worth words 'deducting from or adding to' in absence of any words 'adding to' in section In this regard, revenue argued and whatever way the net worth be, that However, if it is negative then deducting SS-V-33 Income Tax Review 43

10 of assets:- being an undertaking and where the consideration received or accruing of acquisition and cost of improvement has stands embedded in and has the effect of that preceding figure is higher than the It was argued by Revenue that the The very object of inserting a deeming provision is to observe a departure from the meaning and scope of the word, phrase or expression to which it is A deeming provision has to be brought being deeming provision, the 'net worth' of the undertaking or the division as undertaking or division as appearing in its provision the cost of acquisition and cost of improvement of the undertaking is further argued that if the contention of the assessees is accepted and the amount of negative net worth determined under the Income-tax Act that the Book Profit has been computed in There was no requirement for certification 44 Income Tax Review SS-V-34

11 Special Story Applicability under this Act in respect of any assessment year The phrase used is Every company to whom This is supported by the view of ICAI as per guidance given by ICAI under the guidance note it cannot be said that the company was not what one is concerned with is the comparison in accordance with the object for which section business carried on or services rendered derived from activities of tonnage tax SS-V-35 Income Tax Review 45

12 previous year in which the said company and ending with the assessment year it is important to note that the AAR in the case to foreign company which has no presence foreign companies are not required to prepare are not required to prepare its accounts in accordance with the provisions of the Companies company who has no presence or permanent companies are not suppose to make profit or distribute profit in any manner and they are Travel Agents Associations vs. ACIT-118 ITD 285 exempt under the Act, say companies enjoying Reporting in accordance with the provisions of the section; company under the section; 46 Income Tax Review

13 Special Story the computation of book profit and It is to be noted that the scope of audit or verification does not cover the certification made and submit the same to the accountant for that he has examined the accounts and records of the company to arrive at the Part-I of Report requires to examine the requirement of information & documents having regard to the facts and circumstances of each information which the accountant has to examine Income-tax Act; of various adjustments required under management regarding the adjustments; and The issue arises as to whether the accountant for requirement of prior audit under the out his audit on the basis of authenticated for his examination is neither audited under this SS-V-37 Income Tax Review 47

14 Part-II of the report requires an accountant to The accountant having examined the books and same accounting standards, accounting are required for any item and mode and definition of book profit, exempted income, additions to or deductions from book profit, adjustment of brought forward depreciation these issues keeping in mind that the provisions purpose of the report here is the verification examine the stand of the company for each item deductions under any other section from what is that the net profit as shown in the profit & is that the net profit as shown in the profit increased by any amount, as stated above, has to provision therefor 48 Income Tax Review SS-V-38

15 Special Story companies any asset account to the extent it does not exceed It can be seen that the starting point as per companies which are not required under These companies have an option under the new of the Companies Act or in accordance with the provision of the Act governing such company Income Tax Review 49

16 to companies who are not required to prepare amendment is to bring the banks, insurance and The issue, therefore, arises as to whether the contradiction with the first proviso to section accounting standards and depreciation rates and methods as used for preparing accounts suggests the object of the amendment as under- view of omission of Part-III in the revised M/s. Duke Offshore Ltd 45 SOT 399 Income Tax Review SS-V-40

17 Special Story In this regard, the accountant is duty bound standards, depreciation methods and rates are adopted in two sets of accounts so that higher standards, methods and rates of depreciation In case the company has adopted different accounting year or otherwise and prepared two sets of accounts, one under the Companies Act and another under Income-tax Act, the for preparing accounts under the Companies is supposed to specify the extent and nature of draw the attention to the important observation Sumer Builders (P) Ltd vs. DCIT 19 Taxmann.com 43 where it of the preparation of accounts, we see that with the provisions of Part II and Part III of per the second proviso it has been provided Year which is different from the previous year, different from the previous year and if the the accounts and see whether same have been prepared in accordance with the requirements In this case, the assessee had not routed the Income Tax Review 51

18 accounts of company to see as to whether same has been prepared in accordance with the Hyderabad Special Bench tribunal in Rain Commodities Ltd. vs. Dy. CIT 40 SOT 265. is prepared in accordance with the provisions to interpret the requirement in accordance with In this regard, the ICAI in the guidance note negative, the accountant is suggested to mention suggested that no adjustment is required to be made in computation of Book Profit for non- The accountant is required to compare such education cess as the same is required to be The ICAI in the guidance note suggested that the is taken then, the surcharge & education cess The accountant is required to report on Adjusted The accountant must note that the section Nilko Resources Ltd. vs. CIT 234 ITR 828 have to; 52 Income Tax Review SS-V-42

19 Special Story by the assessee in computation of book issues before taking any decision on reporting be examining the contention of the company of the thoughts on certain issues are discussed interpreted the certain terms used in Part I and context of format and content as compared to amount set apart for redemption of debenture decision in the case of Vazir Sultan Tobacco Company Ltd 132 ITR 559 wherein the apex court CIT vs. Travancore Titanium Product Ltd 114 Taxman 249 to net profit for determination of book profit SS-V-43 Income Tax Review 53

20 whether the meaning and interpretation assigned to time; time; and to be increased by the amount of deferred tax it definition of income tax and cannot be added source which cannot be recovered by the The issue arises to whether the foreign Income in respect of Foreign branch of the bank are to be added back to net profit for the purpose of There is no change in treatment of the item of to be taken in case of interest charged under 54 Income Tax Review SS-V-44

21 Special Story care to see that such interest is added back to of CIT vs. United Motors India Ltd. [1990] 181 ITR 347 (Bom) in the cases of Shri Sajjan Mills Ltd. vs. CIT [1985] 156 ITR 585 (SC) and CIT vs. Andhra Prabha Pvt. Ltd. [1986] 158 ITR 416 (SC) that were made or that it had accrued or that wages provision can be considered in view of the decision in the case of Bharat Earthmovers 245 ITR 428 (SC) the Bombay High Court in the case of CIT vs. Echjay Forgings Pvt. Ltd. 251 ITR 15 (Bom), A question may arise as to whether the provision invited to the case of ITO vs. Wanson India Ltd. [1983] 5 ITD 102 (Pune-Trib) and Jay Bee Industries vs. Dy. CIT [1998] 66 ITD 530 (Asr) where it was DCIT vs. Insotex (India) Ltd. [2005] 4 SOT 612 vide events but does not meet the recognition SS-V-45 Income Tax Review 55

22 In Rotork Controls India (P) Ltd. vs. CIT- 180 Taxman 422, the provision for product warranties is an case of DCIT vs. Metro Exporters Ltd. [2006] 10 SOT 647 (Mum). account to the extent it does not exceed the amount of depreciation on account of set aside as provision for diminution in the above amendment was carried out to overcome the supreme court decision in CIT vs. HCL Comnet systems & services Ltd.[2008] 174 Taxman 118. Susi Sea Foods (P.) Ltd. vs. ACIT had to be arrived from the books of account 56 Income Tax Review

23 Special Story does not provide for the manner of segregation provide for set off or carry forward and set The Income Tax Act nowhere prescribes the be correct on the part of assessing officer to Though the decision is rendered in the context of the Income-tax Act corporate assessees that is, a person other than a company, SS-V-47 Income Tax Review 57

24 ` discussion in this topic is more focused on to various entities which is effective from - A Firm Income or not be added back, as per the substituted In case of a non-corporate assessee, other than income of such an assessee does not exceed provided; and ` ` have been computed in accordance with the report on or before the due date of furnishing 58 Income Tax Review SS-V-48

25 Special Story tax in accordance with the provision of chapter The accountant is required to certify the accordance with the provision of chapter the Act The nature, scope & requirement of the audit require the certificate of true & fair view of assignment as per ICAI s guidance note on Form of report provisions are not stated here again for the The accountant is required to examine the deduction in respect of profit & gains assessee- accountant may put the appropriate note of the fact that the figure of deduction are not based on return of income of the assessee but on assessees written representation, reports & Income Tax Review 59

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