Book profit computation under Section 115JB cannot include an audited transfer to general reserve; addition deleted.

Whether a waiver of principal credited to general reserve can be added back under the book profit computation for Section 115JB turned on statutory reliance on the profit and loss account prepared under Part II and Part III of Schedule VI and the limited list of adjustments in Explanation 1. The tribunal held that audited accounts adopted by the company carry evidentiary weight and an Assessing Officer must either identify non compliance with Schedule VI or a specified Explanation 1 adjustment before altering book profit. Because the waiver was credited to general reserve in Schedule VI accounts with no finding of non compliance or applicable adjustment, the addition was invalid and the revenue appeal failed.

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Issues: Whether the Assessing Officer could adjust book profit under Section 115JB by adding waiver of principal amount arising from a one time settlement that was credited directly to general reserves in accounts prepared under Part II and Part III of Schedule VI of the Companies Act, 1956.

Analysis: The determination turns on the statutory mandate for computing book profit under Section 115JB, which directs reliance on the profit and loss account prepared in accordance with Part II and Part III of Schedule VI of the Companies Act and permits only specified adjustments as provided in Explanation 1. Accounts prepared in accordance with Schedule VI and certified by auditors and adopted by the company carry evidentiary weight for computation of book profit. The Assessing Officer must identify non-compliance with Part II/Part III of Schedule VI or applicability of a specific adjustment under Explanation 1 before altering book profit. The waiver of principal was credited to general reserve in the balance sheet, the accounting treatment was audited and approved by the board, and no specific finding was recorded that Schedule VI had not been followed or that the statutory adjustment under Explanation 1 applied.

Conclusion: The Assessing Officer could not validly make the addition to book profit for the waiver of principal amount which had been credited to general reserve in accounts prepared under Schedule VI; the revenue's appeal is dismissed and the CIT(A) order deleting the addition is upheld.

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