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 U/s. 115JA 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.