1998 (9) TMI 142 - AT - Income Tax

Tribunal upholds income tax computation, allows business expenses

The Tribunal upheld the Deputy Commissioner of Income Tax's computation of book profit under section 115J, dismissing the appeal due to correct alignment ... Computation of book profit for section 115J - Prior period / prior year expenses and their treatment in profit and loss account - Preparation of P&L in accordance with Part II and Part III of Schedule VI to the Companies Act - P&L appropriation account versus P&L account for computing book profit - Presentation of prior period items and auditor's obligation to qualify report - Disallowance of expenses not incurred for business and applicability of s.40A(5)Computation of book profit for section 115J - Prior period / prior year expenses and their treatment in profit and loss account - Preparation of P&L in accordance with Part II and Part III of Schedule VI to the Companies Act - P&L appropriation account versus P&L account for computing book profit - Presentation of prior period items and auditor's obligation to qualify report - Whether prior year (prior period) expenses charged in the P&L appropriation account can be excluded from the net profit for the purpose of computing book profit under section 115J. - HELD THAT: - The Tribunal held that s.115J(1A) requires the P&L account for the relevant previous year to be prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956, and that the net profit for book profit purposes must be taken as shown in the P&L account so prepared. The nomenclature 'prior year' denotes that such items do not relate to the period covered by the financial statements; prior period items are required to be disclosed so that their impact on current profit or loss is apparent. The Companies Act provisions (ss. 209, 211 and Part II of Sch. VI) and the Institute of Chartered Accountants' guidance indicate that prior period items, if material, should be presented so as to disclose a true and fair view of the year's profit, and auditors are expected to qualify the report where prior period expenses are inappropriately charged. The Explanation to s.115J(1A) applies only to the specific items listed therein and does not authorise treating prior period expenses shown in the appropriation account as part of current-year P&L for computing book profit. On these grounds the Assessing Officer was correct to add back the prior year expenses to align the P&L with Schedule VI requirements, and the Tribunal refused to interfere with the CIT(A)'s confirmation of that adjustment. [Paras 3]Addition of prior year expenses amounting to Rs. 1,34,509 is sustained and the deduction claimed from book profit under s.115J is disallowed.Disallowance of expenses not incurred for business and applicability of s.40A(5) - Telephone and motor car expenses and business nexus - Whether portions of telephone and motor car expenses disallowed by the Assessing Officer on the ground that they were not for the purpose of business should be sustained. - HELD THAT: - The Tribunal found merit in the assessee's submission that a company, being an artificial legal person carrying on business, may legitimately incur such expenses and that the Assessing Officer, if of the view that any portion was for personal purposes, ought to have invoked s.40A(5) rather than disallowing them outright. On the facts and submissions before it, the Tribunal directed the AO not to disallow the sums out of telephone and motor car expenses on the ground that they were not incurred for the purpose of business. [Paras 4]Disallowance of Rs. 4,000 of telephone expenses and Rs. 8,618 of motor car expenses on the ground of not being for business is set aside and the AO is directed not to make those disallowances on that basis.Final Conclusion: The appeal is partly allowed: the addition of prior year expenses to compute book profit under s.115J is upheld, while the disallowances of specified telephone and motor car expenses are set aside and directed not to be made on the ground that they were not incurred for the purpose of business. Issues:1. Computation of book profit for the purpose of s. 115J.2. Disallowance of certain expenses related to telephone and motor car expenses.Issue 1: Computation of Book Profit:The appeal concerned the computation of book profit for the purpose of s. 115J. The Dy. CIT calculated the book profit at Rs. 16,42,535, while the assessee computed it at Rs. 8,21,555. The CIT(A) directed the Dy. CIT to recompute the profit by deducting excess bonus paid, but confirmed the addition of prior year expenses. The assessee contended that the prior year expenses were incurred during the year and should be allowed as a deduction. The Tribunal noted that the prior year expenses were not related to the period under consideration and were charged to P&L Appropriation a/c, not P&L a/c. It was held that the AO correctly recomputed the P&L a/c to align with the Companies Act provisions. The Tribunal dismissed the appeal on this ground.Issue 2: Disallowance of Expenses:The second and third grounds of appeal related to the disallowance of Rs. 4,000 for telephone expenses and Rs. 8,618 for motor car expenses on the basis that they were not business-related. The assessee argued that as a company, all expenses were incurred for business purposes. The Tribunal agreed with the assessee, stating that if the expenses were not for business purposes, s. 40A(5) could have been applied. Consequently, the AO was directed not to disallow these expenses. The appeal was partly allowed on this issue.