Revenue expenditure must be fully deducted from book profits for MAT calculation under section 115JB despite partial P&L treatment

ITAT Chandigarh allowed assessee's rectification application under section 154 regarding deduction of revenue expenditure from book profits under section 115JB. The court held that where assessee incurred total revenue expenditure but only partially debited it in P&L account while showing remainder in balance sheet, the entire revenue expenditure must be deducted while calculating book profits for MAT purposes. The P&L account must comply with Part II Schedule VI of Companies Act, requiring full disclosure of revenue expenditure. ITAT set aside CIT(A)'s order and directed AO to allow complete revenue expenditure deduction for MAT computation, finding the mistake apparent from records.

---

---

Issues Involved:

1. Whether the rectification application under section 154 filed by the assessee for deduction of revenue expenditure from book profits under section 115JB was valid.
2. Whether the dismissal of the Special Leave Petition (SLP) by the Supreme Court constitutes a binding precedent for rectification under section 154.
3. Whether the entire revenue expenditure should be deducted while calculating book profits under section 115JB, despite not being debited in the Profit & Loss account.

Issue-wise Detailed Analysis:

1. Validity of Rectification Application under Section 154:

The assessee filed a rectification application under section 154, claiming a mistake apparent on record regarding the non-deduction of revenue expenditure from book profits for MAT liability calculation. The application was initially rejected by the AO on the grounds that the claim was not raised in the original return of income, and considering it would amount to a fresh determination of facts. However, the Tribunal found that the facts were apparent from the records, as the revenue expenditure was reflected in the balance sheet, and thus, rectification was permissible. The Tribunal emphasized that the book profit should be determined by accounting for all expenditures incurred during the year to arrive at the correct net profit, as mandated by Part II of Schedule VI of the Companies Act.

2. Dismissal of SLP by Supreme Court as a Binding Precedent:

The Tribunal addressed whether the dismissal of the SLP by the Supreme Court in the Karnataka Soaps & Detergents case constituted a binding precedent. The CIT(A) had held that the dismissal of the SLP at the admission stage did not interpret or lay down the law and could not be considered under CBDT Circular No. 68. However, the Tribunal noted that the Karnataka High Court's decision, which allowed the deduction of deferred revenue expenditure from book profits, had attained finality with the dismissal of the SLP, making it a binding precedent. The Tribunal followed this decision, as there was no contrary decision from any other High Court.

3. Deduction of Entire Revenue Expenditure in Book Profits Calculation:

The assessee argued that the entire revenue expenditure incurred during the year, though not debited to the P&L account, should be deducted while calculating book profits under section 115JB. The Tribunal agreed, stating that the P&L account must reflect all expenses to disclose the company's true financial position. The Tribunal referred to the Karnataka High Court's judgment, which held that the entire expenditure should be deducted to arrive at the net profit for MAT liability purposes. The Tribunal found that the assessee's accounting treatment of deferring revenue expenses was for shareholder presentation and did not align with the requirements of Part II of Schedule VI of the Companies Act.

Conclusion:

The Tribunal allowed the appeals, directing the AO to recompute the book profits after allowing the deduction of the entire revenue expenditure for the relevant assessment years. The decision emphasized the importance of reflecting true financial results in the P&L account for tax computation under section 115JB and upheld the binding nature of the Karnataka High Court's decision post-SLP dismissal.

---