2007 (9) TMI 293 - AT - Income Tax

Exclusion of notional credit from book profit calculation under IT Act sec 115JA allowed on appeal

The appeal filed by the assessee was allowed, and the notional credit on account of revaluation of deferred sales-tax liability was excluded from the book ... Book profit under section 115JA - revaluation of deferred sales-tax liability - extraordinary items in profit and loss account - treatment of notional or write-back credits - application of Companies Act, Schedule VI accounting principles - exclusion from book profit under the Explanation to section 115JABook profit under section 115JA - revaluation of deferred sales-tax liability - extraordinary items in profit and loss account - treatment of notional or write-back credits - application of Companies Act, Schedule VI accounting principles - Whether the notional credit arising from actuarial revaluation of deferred sales-tax liability could be excluded from book profit for computation under section 115JA - HELD THAT: - The Tribunal examined whether the actuarial diminution of a deferred sales-tax liability (credited to profit and loss account as 'Revaluation of deferral sales-tax') constituted realised income includible in book profit under section 115JA. While Apollo Tyres Ltd. precludes adjustments beyond those specified in the Explanation to section 115JA, the Tribunal interpreted the Explanation purposively to recognise that items not having the character of income for the relevant year are intended to be excluded. The revaluation in the present case was optional accounting treatment mandated by Schedule VI disclosure and accounting principles to reflect the present value of a future liability; it produced a notional credit and did not result in any realised accrual or reduction in the statutory liability. Consistent with earlier Tribunal decisions dealing with write-backs, capital subsidies and other extraordinary items, and by analogy with the treatment of revaluation entries in Vijay Spinning Mills Ltd., such extraordinary, notional entries created by optional revaluation of liabilities do not represent real book profit and should be excluded when computing book profit under section 115JA. Applying these principles to the facts, the Tribunal held the assessee was justified in excluding the revaluation amount from book profit. [Paras 12, 13, 17, 18]The notional revaluation credit arising from discounting the deferred sales-tax liability is an extraordinary, notional accounting item and is excluded from book profit for computation under section 115JA; appeal allowed.Final Conclusion: The Tribunal allowed the appeal and held that the actuarial revaluation credit of the deferred sales-tax liability is an extraordinary, notional item which may be excluded from book profit under section 115JA for assessment year 1998-99. Issues Involved:1. Whether the notional credit on account of revaluation of deferred sales-tax liability should be reduced for the purpose of calculating 'book profit' u/s 115JA of the IT Act, 1961.Summary:Issue 1: Notional Credit on Revaluation of Deferred Sales-Tax LiabilityThe assessee company, engaged in manufacturing, availed a sales-tax deferral scheme from the Government of Maharashtra. Under this scheme, the sales-tax collected from buyers was deferred for ten years without interest. The company valued this deferred liability at its present value using a discounting factor and credited the difference to the P&L account as 'Revaluation of deferral sales-tax'. The assessee argued that this credit entry was not actual income but a notional figure for accounting purposes and should be excluded from book profit u/s 115JA.The AO and CIT(A) disagreed, including the differential amount in the book profit, asserting it was income for the assessment year. The assessee cited various Tribunal decisions, including Hitkari Fibres Ltd. vs. Jt. CIT, which held that notional entries for accounting purposes should not be treated as real income for book profit calculations u/s 115JA.The Tribunal examined the legislative intent of s. 115JA and the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, which emphasized that adjustments to book profits should only include items enumerated in the Explanation to s. 115JA. The Tribunal noted that extraordinary items not having the character of income for the concerned year should not form part of book profits, even if credited in the P&L account.In the present case, the Tribunal found that the revaluation of future liability was an accounting exercise and not actual income. The surplus from revaluation did not form part of the P&L account by the Companies Act's dictum and should be excluded from book profit calculations u/s 115JA. The Tribunal concluded that the assessee was justified in excluding the amount of Rs. 2,84,76,657 from the computation of book profits.Conclusion: The appeal filed by the assessee was allowed, and the notional credit on account of revaluation of deferred sales-tax liability was excluded from the book profit calculation u/s 115JA.