Book profit computation under section 115J: accrued gratuity, turnover tax interest and doubtful debts were excluded, with loss or depreciation deduction allowed.

For computation of book profit under section 115J, an actuarially valued gratuity provision was treated as an accrued obligation and not a contingent liability, while interest on turnover tax was regarded as a statutory accrued liability and doubtful debts as a diminution in assets, so these amounts were not required to be added back. The computation also had to allow the lower of brought forward business loss or unabsorbed depreciation where reflected in the accounts and supported by the company-law framework. The adjusted book profit was therefore to be recomputed by excluding the disputed additions and allowing the permissible deduction.

---

---

Issues: (i) whether provisions for gratuity, interest on turnover tax and doubtful debts were liable to be added back while computing book profit under section 115J of the Income-tax Act, 1961; (ii) whether the assessee was entitled to deduct the lower of brought forward business loss or unabsorbed depreciation while computing adjusted book profit under section 115J of the Income-tax Act, 1961.

Issue (i): whether provisions for gratuity, interest on turnover tax and doubtful debts were liable to be added back while computing book profit under section 115J of the Income-tax Act, 1961.

Analysis: The provision for gratuity was supported by actuarial valuation and represented an accrued obligation for future employee payments, and was therefore not a contingent or unascertained liability. The provision for interest on turnover tax was treated as a statutory and ascertained liability accruing under section 10A of the Bengal Finance (Sales Tax) Act, 1941, and the liability was held to have accrued irrespective of demand. The provision for doubtful debts was held to be a diminution in assets and, following binding precedent on MAT computation, was not to be added back.

Conclusion: The additions made on account of gratuity, interest on turnover tax and doubtful debts were not sustainable and the relief granted to the assessee was upheld.

Issue (ii): whether the assessee was entitled to deduct the lower of brought forward business loss or unabsorbed depreciation while computing adjusted book profit under section 115J of the Income-tax Act, 1961.

Analysis: The computation under section 115J had to be read with section 205(1)(b) of the Companies Act, 1956, and the relevant judicial position required the assessee to be given the benefit of the lesser of business loss or unabsorbed depreciation when such figures were reflected in the accounts. On the facts, the jurisdictional precedent supported the assessee's claim, and the contrary view based on the absence of carry-forward figures after reserve adjustment was not accepted.

Conclusion: The assessee was entitled to the deduction of the lower amount and the disallowance was deleted.

Final Conclusion: The revenue's appeal failed, the assessee's appeal succeeded, and the adjusted book profit was directed to be recomputed by excluding the disputed additions and by allowing the permissible deduction for loss or depreciation.

Ratio Decidendi: For computation of book profit under section 115J, an actuarially determined gratuity liability and a statutory interest liability that have accrued cannot be treated as contingent additions, and the deduction mandated by the company-law framework for the lower of loss or depreciation must be allowed when supported by the accounts.

---