2009 (11) TMI 20 - AAR - Income Tax

Ruling: Adjustments to Depreciation for Book Profit Calculation Disallowed under Section 115JB

The Authority ruled that the addition of prior period expenses and adjustments to depreciation for book profit calculation under section 115JB were ... Application of Accounting Standard (AS) no. 12 - Section 115JB - held that - the amount of interest paid to RRVPN Rs. 1168841/- on the amount of FDR loan raised by RRVPN from financial institutions on behalf of assessee company is allowable - amount debited under the head 'prior period expenses' can not be added back for the purpose of book profit u/s 115JB - regarding application of AS 12 When the Companies Act itself provides for departure in the case of Companies engaged in the supply of electricity, it is difficult to rule out the application of the accountancy principles contained in the statutory rules framed under the Electricity (Supply) Act. The Authority is of the considered view that the submission made by the applicant's counsel in this regard has considerable force - since the issue of application of AS 12 raised first time before authority issue left open to AO to examine. Issues Involved:1. Allowability of depreciation under section 32.2. Allowability of interest paid on FDR loans.3. Disturbance of audited accounts for MAT calculation under section 115JB.4. Addition of prior period expenses for book profit calculation under section 115JB.5. Adjustment of depreciation not debited in books for book profit calculation under section 115JB.Issue-wise Detailed Analysis:1. Allowability of Depreciation under Section 32:The applicant withdrew this question, so no further discussion was necessary.2. Allowability of Interest Paid on FDR Loans:The applicant argued that the interest paid to Rajasthan Rajya Vidyut Prasaran Nigam Ltd. (RRVPN) on FDR loans raised on behalf of the applicant should be allowed as a business expense. The applicant provided documents showing the allocation of interest costs by RRVPN to various entities, including the applicant. The Authority acknowledged that the interest expenditure was incurred for the business purpose of the applicant and deserved to be allowed under section 36(1)(iii) of the Act. However, the assessing officer was instructed to verify the factual details before making a final decision.3. Disturbance of Audited Accounts for MAT Calculation under Section 115JB:The Authority decided to delete the original question and re-cast it into two parts:- 5(a) Whether the application of MAT provision under section 115JB is justified.- 5(b) Whether depreciation not debited in the books but derived during assessment can be added back for book profit under section 115JB.4. Addition of Prior Period Expenses for Book Profit Calculation under Section 115JB:The applicant contended that the prior period expenses were bona fide adjustments of expenses pertaining to earlier years, which were accounted for upon receiving relevant communications. The Authority noted that the applicant had provided detailed explanations and supporting documents for these expenses. The Authority concluded that the addition of prior period expenses to the book profit was not sustainable if the factual position stated by the applicant was correct. The assessing officer was directed to re-examine the claim in light of the new materials provided.5. Adjustment of Depreciation Not Debited in Books for Book Profit Calculation under Section 115JB:The Authority discussed the provisions of section 115JB, which requires the preparation of profit and loss accounts as per Parts II and III of Schedule VI to the Companies Act, 1956. The applicant argued that the depreciation claim was in accordance with the Electricity (Supply) Annual Accounts Rules, 1985, which should prevail over the Companies Act due to specific provisions in the Companies Act and the Electricity Supply Act. The Authority found merit in the applicant's contention but noted that these arguments were raised for the first time before the Authority. Consequently, the Authority directed the assessing officer to re-do the assessment, considering the new points raised and the observations made.Conclusion:The Authority ruled that the addition of prior period expenses and adjustments to depreciation for book profit calculation under section 115JB were unsustainable. The assessing officer was instructed to re-examine these issues based on the new materials and observations provided by the applicant. The ruling was pronounced on November 20, 2009.