Tribunal Upholds CIT(A) Rulings: Deferred Tax and Dividend Tax Deductions Excluded from Book Profit Calculations.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on two key issues. First, it held that deferred tax should not be added back in computing book profit under section 115JB, as it is a scientifically measured liability and not a provision for income-tax. Second, it allowed the deduction of tax paid under section 115-O on distributed dividends in determining book profit, equating it to fringe benefit tax, which is not added back in the computation of book profit.

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Issues Involved:
1. Allowability of deferred tax for determining book profit under section 115JB of the Income-tax Act, 1961.
2. Allowability of tax paid under section 115-O on distributed dividend for determining book profit under section 115JB of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Deferred Tax for Determining Book Profit under Section 115JB:

The Revenue contested the decision of the CIT(A) to allow deferred tax in determining book profit under section 115JB. The Assessing Officer (AO) had added the deferred tax amount to the book profit, arguing that deferred tax is a provision for tax effect of differences between taxable income and accounting income and is reflected as a liability in the balance sheet. The AO cited that deferred tax is not deductible under Parts II & III of Schedule VI of the Companies Act, 1956.

The assessee argued that as per Accounting Standard 22 (AS-22) issued by the Institute of Chartered Accountants of India (ICAI), deferred tax is an expense that should be deducted when computing net profit. They contended that book profit under section 115JB should be determined based on net profit after deducting all expenses, including deferred tax. The assessee emphasized that the AO cannot alter the book profit by making additions not specified in the Explanation to section 115JB(2), referencing the Supreme Court decision in Apollo Tyres Ltd. v. CIT.

The CIT(A) agreed with the assessee, stating that deferred tax liability is not an unascertained liability and should not be added back to the book profit. The CIT(A) also noted that deferred tax is not equivalent to income-tax paid or payable and is not a reserve.

The Tribunal upheld the CIT(A)'s decision, emphasizing that deferred tax is a scientifically measured, ascertained liability and not a provision for income-tax paid or payable. It is distinct from reserves and is computed according to AS-22, which mandates its treatment as an expense. The Tribunal concluded that deferred tax charge is not covered by any clauses of the Explanation to section 115JB(2) and should not be added back in the computation of book profit.

2. Allowability of Tax Paid under Section 115-O on Distributed Dividend for Determining Book Profit under Section 115JB:

The Revenue challenged the CIT(A)'s decision to allow tax paid under section 115-O on distributed dividend to determine book profit. The AO had refused to entertain the assessee's claim, arguing that such tax is outside the purview of adjustments for book profit under section 115JB.

The CIT(A) allowed the assessee's claim, drawing a parallel between tax on distributed dividend and fringe benefit tax, which is deductible in computing book profit as per CBDT Circular No. 8 dated 29-8-2005. The CIT(A) reasoned that both taxes are incurred at the time of certain expenditures and should be treated similarly.

The Tribunal agreed with the CIT(A), noting that tax on distributed profit is fundamentally different from income-tax paid or payable, as it is levied at the time of distribution of profit, not on the income earned. The Tribunal also referenced the Panaji Bench decision in Salgaocar Mining India (P.) Ltd., which distinguished between income-tax and interest on income-tax. The Tribunal concluded that tax on distributed profit is similar to fringe benefit tax and should not be added back in the computation of book profit under section 115JB.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. Deferred tax was deemed not to be added back in computing book profit under section 115JB, and tax on distributed dividend under section 115-O was allowed as a deduction in determining book profit.

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