The assessee Company had filed its return of income for the relevant AY. During assessment, the AO made disallowance of Rs. 2,55,63,755/- u/s 14A and a further sum of Rs. 3,59,40,868/- towards disallowance of pro-rata premium on FCCBs. On perusal of assessment record, the CIT, observed that an amount of Rs. 64.0 crores, being loss on sale of investments, was reduced from the total income in the statement of computation of total income and computation of book profit u/s 115JB, even though the same was not debited in the P&L account. Since the tax on the regular income was less than the book profit computed as per the provision of section 115JB of the Act, the book profit was deemed to be the taxable income of the assessee and while doing so, the book profit was computed by deducting the loss on sale of investments. However, as per the provision of section 115JB, no deduction of any amount of this nature was allowable and the action of the AO in allowing the same was contrary to law and therefore rendered assessment order erroneous and the allowance of deduction resulted in prejudice to the interests of the revenue. The CIT issued show cause notice u/s 263 of Act. The assessee submitted reply. The CIT rejecting the assessee's contentions held that an adjustment of loss on sale of investments was not in conformity with the provisions of section 115 JB and therefore by allowing the same, the AO committed an error. The assessment order was set aside. Aggrieved assessee filed appeal before Tribunal.

Tribunal held that,

++ it is clear from the fact that assessee has prepared its financial statement without following one of the accounting standard, which was relevant for the transaction during this AY. The assessee brought this issue before the AO and submitted its submission that it was legally empowered to modify the book profit for the purpose of section 115JB. After initial verification and after further submissions of assessee, he accepted the contention of the assessee without discussing in his order. The same was noticed by Pr. CIT during verification of assessment records having jurisdiction u/s 263. By invoking power u/s 263, he termed the assessment as erroneous as well as prejudicial to the interests of the revenue. After considering the submissions, as held in the case of M/s Malabar Industrial Co. Ltd., 2002-TIOL-491-SC-IT, an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the given case, AO has incorrectly interpreted the law and this is good enough reason to term the order erroneous;

++ it was noticed from the decisions quoted by AR that the book profit for the purpose of section 115JB should be arrived duly following the accounting standards. In case, it is not followed, AO can redo the book profit by making suitable adjustment to the book profit to give effect to the accounting standard. Therefore, all the case laws clearly indicate that the AO should modify the book profit if it is not drawn following the required accounting standards. In all the case laws relied on by the assessee, there are directions to AO to make necessary changes. But, in the given case, assessee himself happily declares that it had not followed AS-13 in finalizing the financial statement which was laid before the company at its annual general meeting in accordance with section 210 of the Companies Act, 1956. In the given case, assessee incurs loss on sale of investment and adjusted the above loss in the special reserve. It did not route the transaction through the profit or loss account. The same was also qualified by the statutory auditors. Even then, the company preferred to lay the same before the shareholders and the same was ratified by the company in the annual general meeting;

++ for the purpose of section 115JB, the financial statements including profit or loss statement shall be prepared duly following the required accounting standards, policies, accepted methods and the same should also laid before the company at its AGM. Therefore, it requires two conditions to be fulfilled. One, the annual accounts should be prepared duly following accounting standards and the annual account should also be laid before the AGM. Thus, the intention of the legislature is clear that the profit or loss prepared by the company as per the Companies Act duly following the accounting policies, standards and method and the P&L A/c laid before AGM are the same for the purpose of section 115JB. The next question is, whether the assessee prepares its annual account and the same was laid before the AGM which was duly ratified by the company, can alter the profit for the purpose of section 115JB or not. The provisions of section 115JB is very clear that the profit or loss should be the same as laid before AGM. The assessee cannot alter the book profit by not following an Accounting Standard. What is relevant is the profit adopted in the AGM even after the qualification by the statutory auditors in the given case. Therefore, the profit adopted by the company in the AGM overlooking the qualification of auditor is the final book profit for the purpose of section 115JB. The assessee cannot alter the same by claiming that it had not followed certain Accounting Standards. All the judicial pronouncements relied on by the assessee are the direction to the AO to go beyond and modify the book profit if the assessee not followed the Accounting Standard. The assessee has no right to modify the profit declared as per Companies Act and adopt differently for the purpose of MAT provisions. The AO can and must modify the book profit in case the company not followed the Accounting Standards as per the provisions of Companies Act. Whereas the assessee has prepared the financial statement by following accounting system, standards and methods as per the provisions of Companies Act and laid before the company in the AGM. Once the financial statements are ratified by the shareholders, the assessee cannot modify the book profit as per the first provision to section 115JB(2) of the Act. Therefore, the wrong interpretation of law empowers CIT to invoke provisions of section 263. Hence, grounds raised by the assessee on jurisdiction u/s 263 and on merit are dismissed.

(See 2019-TIOL-487-ITAT-HYD)