2011 (3) TMI 547 - AT - Income Tax

Tribunal decision: Confirmed income disallowance, reversed addition to book profits under section 115JB.

Eastern Power Distribution Company of AP Limited Versus ACIT

Eastern Power Distribution Company of AP Limited Versus ACIT - [2011] 10 ITR 594 Issues Involved:1. Whether the Learned CIT(A) is justified in holding that the amount of Rs. 1,12,38,786 is the income of the assessee.2. Whether the Learned CIT(A) is justified in confirming the disallowance of Rs. 9,08,06,966 relating to the provisions made for terminal benefits of employees.3. Whether the Learned CIT(A) is justified in confirming that the net profit as per Profit and Loss account is Rs. 1,12,38,786 under section 115JB.4. Whether the Learned CIT(A) is justified in confirming the addition made to book profits of Rs. 9,08,06,966 pertaining to the provision made for terminal benefits of employees under section 115JB.Detailed Analysis:Issue 1: Rs. 1,12,38,786 as Income of the AssesseeThe assessee, a State Government undertaking, contended that Rs. 1,12,38,786 represented 'Net Prior period credits/charges' and should not be considered as income. The assessee argued that it acted as an agent for APTRANSCO and thus, the profit belonged to APTRANSCO. However, the CIT(A) and the Tribunal rejected this claim, noting that the assessee had taken inconsistent positions and failed to provide a legally tenable explanation. The Tribunal affirmed the CIT(A)'s decision, stating that the amount should be disallowed as the assessee could not substantiate its claim.Issue 2: Disallowance of Rs. 9,08,06,966 for Terminal BenefitsThe assessee's claim for Rs. 9,08,06,966 towards terminal benefits was disallowed by the Assessing Officer and confirmed by the CIT(A) under section 40A(7) of the Act, as the Gratuity fund was approved only on 11.9.2002, after the relevant assessment year. The CIT(A) noted that the provision for gratuity can only be allowed if it is made for an approved gratuity fund or for gratuity payable during the previous year. The Tribunal upheld this disallowance, agreeing with the CIT(A)'s analysis and finding no contrary decision presented by the assessee.Issue 3: Net Profit of Rs. 1,12,38,786 under Section 115JBThe assessee argued that the net profit should be NIL after adjusting Rs. 1,12,38,786 under 'Net Prior period credits/charges.' The Assessing Officer and CIT(A) rejected this, taking the net profit as Rs. 1,12,38,786 for section 115JB purposes. The Tribunal referred to the Hyderabad bench decision in the Northern Power Distribution Co. case, which held that the revenue account prepared by the assessee should be taken as the Profit and Loss account under Parts II and III of Schedule VI of the Companies Act. The Tribunal concluded that the Assessing Officer is entitled to make adjustments to the book profit if the entries made therein could not be properly explained in accordance with accounting principles.Issue 4: Addition of Rs. 9,08,06,966 to Book Profits under Section 115JBThe Tribunal disagreed with the CIT(A) on this issue. It noted that there is a difference between a 'Provision made' and a 'Reserve created.' The amount of Rs. 9.08 crores, appropriated for terminal benefits based on actuarial valuation, was considered an 'ascertained liability.' Citing cases such as CIT v. Ilpea Paramount (P.) Ltd. and CIT v. National Hydro Electric Power Corporation Ltd., the Tribunal held that such provisions are deductible while computing book profit under section 115JB. Therefore, the Tribunal reversed the CIT(A)'s order and directed the Assessing Officer to exclude the amount for terminal benefits while computing the book profits under section 115JB.Conclusion:The Tribunal partly allowed the appeal, upholding the disallowance of Rs. 1,12,38,786 as income and the disallowance of Rs. 9,08,06,966 for terminal benefits under normal provisions, but reversing the addition of Rs. 9,08,06,966 to book profits under section 115JB. The net profit for section 115JB purposes was confirmed as Rs. 1,12,38,786.