Prior Period and Extraordinary Items Included in Net Profit for MAT Under Section 115JB, Says ITAT

The ITAT Delhi held that prior period and extraordinary items, though shown separately in the profit and loss account under Section 115JA(2), form part of the net profit for MAT computation under Section 115JB. The assessee's approach of not adding back prior period expenses to book profits was upheld since these items are subsumed within net profit and must be disclosed separately to reflect their impact but cannot be excluded from net profit calculation. The appeal was allowed.

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1. ISSUES:

1. Whether "prior period items" and "extraordinary items" constitute components of "net profit or loss" for the purpose of computing book profit under section 115JB.

2. Whether "prior period expenses" shown separately (including when shown "below the line" or not debited to the Profit & Loss account) can be excluded from the computation of book profit under section 115JB.

2. RULINGS / HOLDINGS:

1. The court holds that "prior period items" and "extraordinary items" are components of the "net profit or loss" and "are to be included in the determination of net profit or loss" for the purposes of section 115JB; net profit must be computed after taking such items into account.

2. The court holds that the presentation of prior period items separately (including the alternative approach of showing such items "after determination of current net profit or loss") does not exclude them from computation of net profit under section 115JB, and such items are "not to be taken into account in computing net profit" only where an accounting standard requires or permits otherwise - absent that, they must be subsumed in book profit.

3. The decision of the jurisdictional High Court on this issue is binding and therefore controls the outcome where it addresses the same questions of law and accounting treatment.

3. RATIONALE:

1. The court applies the accounting framework of Accounting Standard (AS 5), noting that AS 5 (a) defines prior period items as income or expenses which arise "in the current period" due to errors or omissions in preparing prior periods' financial statements; (b) requires that items "recognised in a period" be included in determination of net profit or loss unless an accounting standard requires or permits otherwise; (c) states that the net profit or loss "inter alia, comprises of extraordinary items"; and (d) prescribes disclosure and two alternative presentation approaches (including showing prior period items after determination) to indicate their impact on current profit or loss.

2. The court reasons that the Companies Act / prescribed accounting presentation (Parts II and III of Schedule VI as then applicable) required separate disclosure of prior period and extraordinary items so their impact on the current profit or loss can be perceived, but such separate presentation does not mean those items are excluded from computing net profit for section 115JB.

3. The court rejects the view that prior period expenses shown "below the line" or not debited to the Profit & Loss account are necessarily excludable from book profit, observing that the alternative presentation permitted by AS 5 still results in those items being components of net profit and therefore to be taken into account for MAT computation under section 115JB.

4. The court acknowledges differing views of other High Courts but follows the binding ruling of the jurisdictional High Court on the point, applying it to overturn the addition made to book profit and allowing the appeal.

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