Deferred revenue expenses in books can adjust book profits under s.115JB; reversal of requirement against s.80HHC deductions

HC held for the assessee: deferred revenue expenditures (advertising, publicity, distribution, sales promotion) that were debited to the profit & loss account but carried as deferred items in the published balance sheet may be adjusted and claimed in the current year for computing book profits under s.115JB; the Tribunal's view allowing such modification was upheld and the appellate authority's contrary requirement (that unabsorbed loss/depreciation must first be carried forward before allowing s.80HHC deductions) was reversed. The court ruled tax is to be levied on profits shown in the books, not on window-dressed published figures.

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Issues Involved:
1. Interpretation of Section 115JA of the Income Tax Act, particularly Sub-section (2) read with the explanation.
2. Whether the Tribunal was correct in upholding the case of the assessee that deferred revenue expenditure debited to the P & L account could be modified and claimed during the current assessment year when computing book profits under Section 115JA.
3. Whether the Tribunal's finding that the assessee is entitled to prepare a profit and loss account for the purposes of Section 115JA by claiming the entire expenditure as revenue expenditure is correct.
4. Whether the Tribunal's decision to allow deferred revenue expenditure (ex-gratia payment spread over 2 years) to be claimed during the current assessment year when computing book profits under Section 115JA is correct.

Detailed Analysis:

Issue 1: Interpretation of Section 115JA of the Income Tax Act
The court examined the purpose and interpretation of Section 115JA, which deals with the computation of book profits for the purpose of levying Minimum Alternate Tax (MAT). The section mandates that the profit and loss account should be prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. The court emphasized that the net profit as shown in the profit and loss account, certified by the statutory auditors and approved by the company, is deemed to be the income for tax purposes. The court referred to the Supreme Court's judgment in Apollo Tyres Ltd. vs. Commissioner of Income Tax, which held that the Assessing Officer does not have the jurisdiction to re-scrutinize the accounts accepted by the authorities under the Companies Act.

Issue 2: Deferred Revenue Expenditure and Book Profits
The court addressed whether the deferred revenue expenditure debited to the profit and loss account and carried to the balance sheet could be modified and claimed during the current assessment year when computing book profits under Section 115JA. The Tribunal had held that the Act does not recognize deferred revenue expenditure, which is a concept from the accounting world. The court agreed with the Tribunal's view that the entire expenditure should be treated as revenue expenditure for the purposes of Section 115JA, even if it is shown as deferred in the published accounts.

Issue 3: Preparation of Profit and Loss Account for Section 115JA
The Tribunal had allowed the assessee to prepare the profit and loss account for the purposes of Section 115JA by claiming the entire expenditure as revenue expenditure. The court upheld this finding, stating that the profit and loss account prepared in accordance with the Companies Act should be the basis for computing book profits. The court reiterated that the Assessing Officer's role is limited to verifying whether the accounts are certified by the authorities under the Companies Act and does not extend to re-assessing the company's income.

Issue 4: Claiming Deferred Revenue Expenditure
The court examined whether the Tribunal was correct in allowing the deferred revenue expenditure (ex-gratia payment spread over 2 years) to be claimed during the current assessment year when computing book profits under Section 115JA. The court held that deferred revenue expenditure is not recognized under either the Companies Act or the Income Tax Act. The court emphasized that the actual expenditure incurred should be deducted to determine the net profit, and any artificial inflation of profits by deferring expenditure should not be considered for tax purposes.

Conclusion:
The court dismissed the appeals, upholding the Tribunal's decision that the assessee is entitled to claim the entire expenditure as revenue expenditure for the purposes of Section 115JA. The court emphasized that the profit and loss account prepared in accordance with the Companies Act should be the basis for computing book profits, and deferred revenue expenditure is not recognized under the Act. The substantial questions of law were answered in favor of the assessee and against the revenue.

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