TaxTMI 
TaxTMI 
1995 (6) TMI 90
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....it is laid down in sub-section (1A) that every assessee, being a company, shall, for the purposes of section 115J, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. 3. Thereafter, an Explanation be low section 115 J of the Act lays down that " book profit " means the net profit as shown in the Profit & Loss Account for the relevant previous year prepared under sub-section (1A) as increased by items described from clauses (a) to (h). For our purpose, the material clause is clause (c), i.e., the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. 4. The Assessing Officer (A.O.) was concerned with the above provisions of law in the assessment proceeding. He noted that the assessee is a company, having business of manufacture of steel rolls, Ingots and Billets, wire rods, etc. There was also income from dividends. The return of income showed ' Nil ' income whereas the ' book profits ' were shown at Rs. 4,98,080. The A.O. first computed the income as per Income-tax Act. For this purpose, he noticed that the assess....
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....served that the assessee has already taken care of the provisions while filing the return for the next year, i.e., A.Y. 1990-91. A deduction of Rs. 21.2 lakhs had been claimed in the return for A.Y. 1990-91. For these reasons, he added the sum of Rs. 21,27,993 to the assessee-company's income. However, even after the addition, the total income was "Niron account of deduction for depreciation. 8. The A.O., thereafter, calculated the " book profits " under section 115J of the I.T. Act, 1961. Here, he added the sum of Rs. 21,27,993 again to the net profit as per Profit & Loss Account, but without any discussion. The relative part of the assessment order is reproduced below : ' Calculation u/s 115J of I.T. Act Rs. Net profit as per Profit & Loss account 16,60,269 Add : Interim relief to employees for prior period being not allowable as deduction 21,27,993 --------------------- Adjusted book profit u/s 115J 37,88,262 30% of the adjusted book profit 11,36,479 " 9. Since the total income as per Income-tax Act, which was nil, was less than 3096 of the " book profits " which was Rs. 11,36,479, the A.O. deemed the total income to be Rs. 11,36,479 under the provi....
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....eafter, our attention was invited to paragraphs 8.2 and 8.3, relevant extracts from which are reproduced below : " 8.2 Adjustments to assets and liabilities are required for significant events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. 8.3 Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date." 15. The ld. counsel, thereafter, invited our attention to the Accounting Standard 5 (AS-5) issued by the Council of the Institute of the Chartered Accounts of India on " Prior period and extraordinary items and changes in Accounting Policies ". Prior period items were defined in para 3.1 as under : "3.1 ' Prior period items ' are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods." 16. Thereafter, our attention was invited to the following Instructions in AS-5 contained in para 5 : ....
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....e eligible business or profession under the mercantile method, it will be necessary to ensure that all statutory liabilities (e.g., excise duty, sales tax, bonus, gratuity) are adequately provided. As regards contractual liabilities which are in dispute, it is necessary that adequate provision to the extent of the amount admitted by the assessee is made in the accounts and the balance amount is shown by way of a note to the accounts. Similarly, debts which have become bad and are not recoverable should be written off or adequate provision for the same should be made in the accounts. If an assessee has not made provision for known liabilities or losses and the same are indicated in the notes to accounts, it will be necessary to make appropriate adjustment while determining the figure of net profit as per audited accounts for the purpose of section 32AB(3). It is suggested that all such known liabilities and losses not provided for in the accounts should be deducted from the figure of profit when the accounts are maintained on the mercantile method of accounting. If the assessee is following a mixed (hybrid) system of accounting and any item of income/expenditure is being accounted f....
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....ears and again invited our attention to Accounting Standard-5, relevant extract of which has been reproduced above. For these reasons, he submitted that the addition of Rs. 21,27,993, made by the A.O., to the " book profits " should be deleted. 22. The ld. D.R., on the other hand, submitted before us that the liability for the interim Relief, etc., was only a contingent one during the year and came into existence and was also ascertained on 13-4-1989 when the Circular was issued by the Management. He reiterated that the assessee had claimed a deduction in the computation of income filed with the return for the next year, ie., A.Y. 1990-91 and due deduction had already been allowed in that year in the computation of total income. He relied on the following decisions to which we will revert in greater detail later on : (i) CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC) ; (ii) Laxmi Devi Sugar Mills v. CIT [1993] 200 ITR 603 (SC) ; and (iii) CIT v. Burlop Commercial (P.) Ltd. [1993] 200 ITR 605 (Cal.). 23. In reply, the ld. counsel for the assessee contended that all the three cases were distinguishable. The first two cases dealt with the special ....
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....t deal with tax implication of prior items. Relevant extract of para 2 is given below : "2. This statement does not deal with the tax implications of prior period items, extraordinary items and changes in accounting policies and estimates for which appropriate adjustments will have to be made depending on the circumstances. It also does not deal with adjustments arising out of revaluation of assets." 28. The " Compendium of Guidance Notes " Vol. II has also been relied upon in connection with " book profits ". As per Parts II and III of Schedule VI to the Companies Act, 1956, in the context of section 32AB of the Act. Relevant extract of para 5.3 has already been given above. For mercantile system of accounting it is stated that as regards contractual liabilities which are in dispute, it is necessary that adequate provision ' to the extent of the amount admitted by the assessee ' is made in the accounts and the balance amount is shown by way of a note to the accounts. Thus, it becomes a question of fact depending on the circumstances of each case whether provision to the extent of the amount admitted by the assessee has been made in the accounts for the year under considerati....
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....gth of service. Such peculiar circumstances did not exist in the present case where the payment has been made for transport subsidy, stagnation increment and interim relief. The guidelines and instructions in these two cases, therefore, do not help the assessee. 31. The next case relied upon is that of U.B.S. Publishers & Distributors' case. In this case, the assessee was importing books from foreign countries and the price was to be paid in foreign currency. The liability to foreign suppliers was converted into Indian rupees at the end of each year on the basis of then existing rate. A devaluation of the Indian rupee took place on 6-6-1966, six days after the end of the previous year. It was held that the liability to pay in foreign currency had accrued when the books were imported and did not come out as a result of the devaluation. Though the devaluation took place six days after the end of the previous year, the assessee was justified in determining its liability on the basis of the actual figure available, particularly when the accounts for the year had not been finalised. The loss on account of devaluation was held to be an allowable deduction. We find that the crux of the....
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....e Act following mercantile system of accounting. We find that the final settlement in regard to land revenue, etc., was only communicated to the assessee after the close of the accounting period, but nowhere it has been mentioned that the final settlement itself was made after the close of the accounting period. A communication of something which has occurred earlier is different from the occurrence itself. The case, therefore, does not help the assessee. 33.3 Reliance has also been placed on the decision of the Calcutta High Court in the case of Marshell Sons & Co. (I) Ltd. In this case, managerial remuneration relating to earlier years was sanctioned by the Government after the end of the accounting year. It was held that the assessee was entitled to make necessary adjustment in its books of account after the close of the accounting year and claim the expenditure as deduction under section 37(1) of the Act. We find that the decision was given on peculiar facts of this case. It was submitted on behalf of the assessee that the controversy raised by the Department whether deduction should be allowed in A.Y. 1963-64 or 1965-65 was academic, since there was no tax effect and no los....
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....lour Mills (P.) Ltd.'s case has been reiterated in the case of Luxmi Devi Sugar Mills. It is brief judgment and it will be useful to reproduce the relevant extracts as below : " The assessment year concerned is 1961-62, the relevant accounting year being the year ending on September 19, 1960. The workers had raised a dispute demanding bonus. The dispute was referred on September 7, 1960, to a Committee formed for this purpose by the Government. A tripartite conference was proposed to be held in which the said issue was to be decided. On the basis of the recommendations of the said bodies, the Government issued a notification on December 23, 1960, declaring that the workers are entitled to bonus. This notification, it is evident, was issued after the closing of the said accounting year of the assessee and it is by this notification that the liability to pay bonus was created. During the accounting year relevant to the assessment year 1961-62, the assessee had made a provision in a sum of Rs. 1,01,530 towards bonus and claimed deduction of the said amount in its assessment proceedings. Its claim was disallowed and it is this issue which was ultimately referred to the High Court. ....
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....sed to all the supervisors and workers. The introductory part thereof is reproduced below : " A considerable number of supervisors and workers have been approaching the management individually and in groups with a request for payment of interim relief arrears, stagnation increment, review of transport subsidy, etc. The management is conscious of the fact that the workers and supervisors have been contributing their might to improve production and productivity and also maintain industrial harmony. Due to financial exigencies, however, it has not been possible to immediately respond to the request because the Company is under financial strain. However, in keeping with the philosophy of the company to meet the legitimate aspirations of its employees, it has been decided to take a generous view of the matter and grant the following : " 39. A query was made from the Bench whether there was any resolution of the Board of Directors or any minutes of the meetings with the workers. However, we were informed that there was neither any such resolution nor any such minutes, though there were discussions with the workers on several occasions. The fact that there were discussions is also b....