2021 (3) TMI 743 - HC - Income Tax

Appellant wins case, tribunal decision quashed, eligibility to adjust prior period expenses clarified

The High Court ruled in favor of the appellant, quashing the tribunal's decision and emphasizing the eligibility to adjust prior period expenses in ... MAT Computation - Addition of prior period expenses in computing book profits - HELD THAT:- If this amount was not required to be part of Profit & Loss Account prepared as per Schedule VI of the Companies Act, then undisputedly this amount not being part of any of the clauses of Explanation to Section 115JB cannot be excluded from net profit for the purposes of computing book profit u/s 115JB. Since, neither the revenue nor the assessee has furnished any record in support of their respective claims, whether this amount of prior period expenditure was required to be part of profit and loss account prepared as per provisions of Schedule VI of the Companies Act, therefore, in the facts and circumstances of the case, we set aside this issue to the record of the CIT(A) to re examine the issue light of the relevant provisions of Schedule VI of the Companies Act as well as the relevant accounting standard applicable on this item of expenditure and then give a finding whether this amount of prior period expenditure is required to be part of profit and loss account or not. It is evident that while passing the order, the tribunal has not adverted to the reasoning assigned by the Commissioner of Income Tax (Appeals). Therefore, we answer the second substantial question of law in favour of the assessee and against the revenue. In the result, the impugned order passed by the tribunal dated 29.12.2015 is quashed. We may clarify that decision of this court in CIT VS. GMR INDUSTRIES LTD [2020 (3) TMI 286 - KARNATAKA HIGH COURT] was rendered in the peculiar facts of that case. Needless to state that it will be open for the parties to raise all contentions as are admissible to them in law. Issues:1. Interpretation of provisions of Schedule VI of the Companies Act, 1956 and applicable Accounting Standard regarding prior period expenditure.2. Justification of remanding the matter to the Commissioner of Income Tax (Appeals) by the tribunal.3. Application of Section 115JB of the Income Tax Act, 1961 in computing book profits.Analysis:Issue 1:The appeal involved the interpretation of provisions of Schedule VI of the Companies Act, 1956 and the applicable Accounting Standard concerning prior period expenditure. The appellant contended that the prior period expenses were disclosed in the financial statements and were debited in the profit and loss account. The Assessing Officer disallowed the deduction under Section 115JB of the Act as the expenses were not passed through the profit and loss account. However, the Commissioner of Income Tax (Appeals) allowed the adjustment of prior period expenses while computing book profits. The tribunal remanded the matter to the Commissioner of Income Tax (Appeals) to re-examine the issue in light of relevant provisions, which the High Court found unjustified as the tribunal did not consider the reasoning of the Commissioner of Income Tax (Appeals). The High Court ruled in favor of the appellant, quashing the tribunal's order and emphasizing the eligibility to adjust prior period expenses in computing book profits.Issue 2:The second issue revolved around the justification of the tribunal's decision to remand the matter to the Commissioner of Income Tax (Appeals). The tribunal remitted the issue to the Commissioner of Income Tax (Appeals) for further examination regarding whether the prior period expenditure should be part of the profit and loss account as per Schedule VI of the Companies Act. The High Court found the tribunal's approach lacking as it did not consider the Commissioner's reasoning. Consequently, the High Court ruled in favor of the appellant, quashing the tribunal's decision and emphasizing the need for a thorough examination of the issue in light of relevant provisions.Issue 3:The third issue pertained to the application of Section 115JB of the Income Tax Act, 1961 in computing book profits. The Assessing Officer disallowed the deduction of prior period expenses under this section, leading to an appeal by the assessee. The Commissioner of Income Tax (Appeals) allowed the adjustment of prior period expenses while computing book profits, a decision that was challenged before the tribunal. The High Court's analysis primarily focused on the interpretation and application of Section 115JB in light of the prior period expenses disclosed by the appellant, ultimately ruling in favor of the appellant and quashing the tribunal's decision.In conclusion, the High Court's judgment addressed the issues of interpreting relevant provisions, justifying the tribunal's decision, and applying Section 115JB in the context of prior period expenses, ultimately ruling in favor of the appellant and providing clarity on the adjustment of such expenses in computing book profits.