Ascertained liability for earthquake repair provision excluded from book profit under section 115JB

A provision made for earthquake-related repairs to factory building, plant and machinery was treated as an ascertained liability for book-profit computation under section 115JB. Because the loss was assessed, the repairs were substantially incurred in the relevant year and the next, and the balance was reversed when no longer required, the liability was regarded as reasonably estimated and scientifically determined rather than contingent. The accounts having been prepared in accordance with Parts II and III of Schedule VI to the Companies Act, the Assessing Officer could not go behind the certified accounts except to the limited extent permitted by the Explanation to section 115JB. The impugned provision was therefore not liable to be added back.

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Issues: Whether the provision made for earthquake-related repairs to factory building, plant and machinery was an ascertained liability deductible in computing book profit under section 115JB of the Income-tax Act, or an unascertained liability liable to be added back.

Analysis: The provision was made for damage caused by a devastating earthquake and the loss was assessed by the District Industries Centre. The repair expenditure was substantially incurred during the year and the immediately succeeding year, with the balance reversed when no longer required. The accounts were prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, and the statutory framework governing company accounts required proper books, a true and fair view, and compliance with accounting standards. Under section 115JB, the Assessing Officer could not undertake a fresh inquiry into the authenticity of the accounts beyond the adjustments expressly permitted by the Explanation. The provision represented a reasonably estimated and scientifically determined liability, not a contingent or unascertained liability, and the reliance on sections 348 and 349 of the Companies Act, 1956 was held to be irrelevant to computation of book profit under section 115JB.

Conclusion: The provision for earthquake repairs was an ascertained liability and could not be added back under the Explanation to section 115JB; the disallowance was directed to be deleted, in favour of the assessee.

Final Conclusion: The book profit computation had to exclude the impugned repair provision, and the assessee's appeal succeeded.

Ratio Decidendi: For computation of book profit under section 115JB, a provision for a scientifically determined and reasonably estimated liability disclosed in accounts prepared in accordance with the Companies Act cannot be treated as an unascertained liability, and the Assessing Officer cannot go behind the certified accounts except to the limited extent expressly permitted by the provision.

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