Book profit computation must follow audited accounts, with net profit adjustable only within the statutory Explanation.

Where company accounts are prepared in accordance with Parts II and III of Schedule VI to the Companies Act and certified by statutory auditors, the Assessing Officer cannot alter the net profit for book profit computation except to the extent expressly permitted by the relevant Explanation. The Tribunal's modification of net profit was contrary to that principle, so its order could not stand; the matter was set aside and restored for further action, with liberty to remand if necessary.

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Issues: Whether the Tribunal was justified in modifying the net profit shown in the profit and loss account while computing book profit.

Analysis: The governing principle applied was that, where accounts are prepared in accordance with Parts II and III of Schedule VI to the Companies Act and are certified by statutory auditors, the Assessing Officer cannot tinker with the net profit except to the extent permitted by the relevant Explanation. The Tribunal had modified the net profit contrary to that principle, and the Supreme Court decision relied upon by the Court made the legal position clear.

Conclusion: The Tribunal's order could not stand. The matter was set aside and sent back to the Tribunal for further action, with liberty to remand to the lower authorities if necessary.

Final Conclusion: The assessee succeeded on the legality of the Tribunal's approach to book profit computation, but the matter was restored for reconsideration.

Ratio Decidendi: In computing book profit from accounts prepared in accordance with the Companies Act, the revenue authorities cannot alter the net profit except as expressly permitted by the governing statutory Explanation.

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