TaxTMI 
TaxTMI 
2011 (3) TMI 547
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....ion of tax under section 115JB, following issues are urged : (a) Whether the Learned CIT(A) is justified in confirming that the net profit as per Profit and Loss account is Rs. 1,12,38,786. (b) Whether the Learned CIT(A) is justified in confirming the addition made to book profits of Rs. 9,08,06,966 pertaining to the provision made for terminal benefits of employees. 3. The facts relating to the issues are stated in brief. The assessee is a State Government undertaking engaged in the business of procurement and distribution of electricity. The assessee company was incorporated on 30-03-2000 and it commenced its operations from 1-4-2000. Hence the year under consideration is the first year of operation of the company. After filing the original return of income, the assessee also filed a revised return on 31.3.2003 declaring a loss of Rs. 14,24,79,614. The Assessing Officer completed the assessment under normal provisions of the Act by reducing the loss to Rs. 4.05 crores by making following adjustments. (a) Net prior year credit/charges disallowed - Rs. 1,12,38,786 (b) Amount debited as "Pension and gratuity payable and ....
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....as stated that the assessee company did not have retail supply license, while the APTRANSCO was having both bulk supply and retail supply license. In view of the above, it was contended that the assessee should be considered as an agent of APTRANSCO and hence it had to reimburse the entire profit earned by it to APTRANSCO. Accordingly it was stated that the profit of Rs. 1,12,38,786 was transferred to APTRANSCO resulting in NIL profit for the assessee company. It was also submitted that the profit amount represents additional purchase cost of power. The said explanations did not find favour with the tax authorities. The Learned CIT(A) confirmed the said disallowance with the following observations : "4.1 Coming to the merits of the case, the first issue that needs examination is whether there was a profit of Rs. 1,12,38,786 in the previous year relevant to Assessment year 2001-02. As per pages 28 and 29 of the Annual Accounts of the appellant company the following is the summary of the revenue account: Total income Rs. 1180,76,18,405 Total expenditure Rs. 1179,63,79,619 Excess of income over exp....
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....Registrar of Companies, Andhra Pradesh, Hyderabad. Even though the company was incorporated on 30/03/2000 and allowed to commence business on 31/03/2000 there is no transaction between 30/03/2000 and 31/03/2000. Hence the first year after commencement of business is from 01/04/2000 to 31/03/2001. Thus the prior period as per accounts in the case of appellant company relates to the pre-incorporation period during which neither the appellant company was in existence nor carried out any operations. For any new company there would not be any prior period income in the year of formation itself. Under these circumstances, the argument of the appellant company that the net prior period charges had been adjusted against the profit cannot be accepted as the same is not as per ordinary accounting principles. 4.2. The appellant's argument is that the excess of income over expenditure has been treated as power purchase cost pursuant to a clarification issued by TRANSCO. The said clarification has been issued by the Director (Finance), TRANSCO vide letter dated 17/10/2002 wherein it was clarified that though the appellant company started business w.e.f. 1.4.2000, there was no retail supply l....
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.... diverted at the source by an overriding title before it started flowing into the channel which was to reach the assessee concerned that it could be excluded from his assessable income. As against the above tests which have been laid down by various judicial pronouncements the appellant's case is examined it is seen that as on 31/03/2001 the appellant had earned a profit. However, vide a communication from TRANSCO dated 17/10/2002, the said profit was directed to be treated as a part of after purchase cost and hence an expenditure. Thus, there is no overriding title for diverting the said profit of the appellant company. The said treatment of profit earned by the appellant company was the result of a mutual agreement which was reached subsequent to the closure of the account and determination of the profit. This cannot be termed as an obligation inasmuch as that the obligation to use the income in a particular manner does not remove it from the category of income. Therefore, in the case of the appellant the facts lead to the conclusion that it is nothing but an application of income which is taxable". Thus, it is noticed that the assessee has taken different types of stands in r....
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.... CIT(A) also confirmed the said disallowed with the following observations: "4.6. The next issue pertains to the claim of deduction of Rs. 9,08,06,966 towards pension and gratuity payable to the employees on their retirement. During the relevant previous year admittedly the appellant didn't have any approved gratuity/pension funds. The approval for such funds was given by the Commissioner of Income-tax-1, Visakhapatnam w.e.f. 11/09/2002 only. A perusal of section 40A(7) shows that according to clause (a) no deduction in respect of any provision for payment of gratuity is admissible. Clause (b) however, provides for two exceptions to the general rule contained in clause (a). According to clause (b), the provision for gratuity can be allowed (i) if it has been made for payment by way of contribution towards an approved gratuity fund or (ii) if the provision is for the purpose of payment of any gratuity that has become payable during the previous year. In the instant case since the gratuity fund is not approved any contribution made towards such fund is not admissible. Insofar as actual payments are concerned as clearly brought out by the Assessing Officer in Para 5.3.4 of the asse....
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....ey are applicable thereto. The proviso to the said sub-section provides that nothing contained in the sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit & loss account has been specified in or under the Act governing such class of company. In the present case, as per Note No.1 in Statement-5 (notes to accounts) and also as taken note of by the auditors in their report, the annual accounts have been prepared in the forms prescribed under the Electricity (Supply) (Annual Accounts) Rules, 1985 (ESSAR 1985), as notified by the Central Government in Electricity Supply Act, 1948. Thus, the accounts of the assessee, as presented, are in accordance with the provisions of section 211 of the Companies Act and is deemed to have complied with the provisions of Parts II and III of Schedule VI. In fact, the assessee has no business to recast its profit & loss account as per the format prescribed for formal companies i.e. other than the exceptions provided in the proviso to section 211(2). Moreover as per the first proviso to section 115JB(2) the profit & loss ac....
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....essee was not a direct licensee, there was no bulk supply tariff and tariff subsidy was received by APTRANSCO. Therefore, the gap of distribution business was transferred to APTRANSCO and the assessee was left with no profit, either actually or as per books. Therefore, it cannot be said that there was a book profit in the revenue account of the assessee. Secondly, we have held earlier that the revenue account of the assessee is the profit & loss account for the purposes of section 115JB of the Act and the same has been audited by the auditors. As held by the Supreme Court in the case of Apollo Tyres (255 ITR 273), the Assessing Officer cannot make any adjustments to the book profit shown by the audited books save as provided in the Explanation to section 115JB. At page 19 of the annual accounts, the auditors have certified that the accounts give the information as required by the Companies Act, 1956, in the manner so required and give a true and fair view insofar as it relates to the revenue account of the nil surplus/deficit of the company for the period ended 31-3-2001. Thus, the Assessing Officer cannot tinker with this book profit which is "nil" and accordingly we uphold the or....
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....r the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the AO to reassess the company's income, then it would have stated in section 115J that income of the company as accepted by the AO. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the AO while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to section 115J" A careful analysis of the decision of the Hon'ble Apex Court would show that the AO....
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....that company. However, the said company did not incorporate the effect of such waiver in its books of account, though it disclosed the details of waiver in its Annual report placed before the shareholders for the financial year 1998-99. The assessing officer noticed that the assessee would be liable to pay tax as per the provisions of section 115JA of the Act, (Minimum Alternate Tax), if the waiver benefits are incorporated in the books of account accordingly he included the waiver benefits in the book profit. The Tribunal, after considering the decision of Hon'ble Delhi High Court in the case of CIT v. Sain Processing Mills (P.) Ltd. [2010] 325 ITR 565, held that the Assessing Officer is entitled to include the waiver benefit that was disclosed in the auditor's report and also in the notes of accounts. 7.5. The Hon'ble Delhi High Court also considered an identical question in the case of CIT v. Sain Processing & Weaving Mills (P.) Ltd., (supra). In that case, the High Court considered the significance of disclosures made in the "Notes on accounts" vis-à-vis book profit for the purpose of section 115J of the Act. In that case, the assessee therein did not charge the depre....
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....ed to be given and/or allowed to be given in the form of notes or documents by the Companies Act. As already noted it is obligatory under clause 3(iv) of Part II of Schedule VI to Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears. According to us, once this information is disclosed in the notes to the account it would clearly fall within the ambit of the Explanation to section 115J of the Act which defines 'book profit' to mean 'net profit' as 'shown' in the P&L a/c for the relevant assessment year" 7.6. As per the provisions of section 211 of the Companies Act, the companies have to follow the applicable Accounting Standards. However, if the Profit and loss account and the balance sheet do not comply with the accounting standards, such companies are required to disclose about the deviation, reasons thereof and the financial impact thereon. This is provided so in sub-sections (3A) and (3B) of section 211 of the Companies Act. For the sake of convenience, we extract the said provisions below: (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standar....
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.... finds that there is deviation from the established accounting practices, then he shall be entitled to make suitable adjustments to the Profit amount disclosed in the Profit and Loss account. 7.9. Now turning to the facts of the instant case, we notice from the revenue account that the assessee company first computed the "Profit after Tax" at Rs. 1,12,38,786. Then it has debited the said revenue account with an equal amount under the head "Net Prior period credits/charges" and finally arrived at the Surplus at NIL figure. The details of "Net Prior Period credits/charges" are given in Schedule 18 as under: Income relating to previous year: Receipts prior periods Rs. 42,83,407 Excess provision of interest and Finance Charges Rs. 1,15,636 Other income prior periods (-) Rs. 1,71,289 Sub-Total Rs. 42,27,754 Prior Period Expenses Short provision for power Rs. 63,24,788 Interest and other finance charges Rs. 22,19,297 Other charges Rs. 69,22,455 Sub-Total Rs. 1,54,66,540 Net Prior Period Charges (Rs. 15466540 - Rs. 4227754) Rs. 1,12,38,786) There cannot be any dispute that it is the responsibility of the assessee to subs....
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....lso not shown that the booking of such kind of entries are permitted under the accounting principles. Now the question that would arise is whether the Assessing Officer is still debarred from making any adjustment to the net profit shown in the profit and loss account, even if any entry made therein could not be properly explained in accordance with the accounting principles/business practices. In our view, the answer should be NO only. This is in view of the fact that when the assessee could not furnish legally tenable explanation and also could not show that it is in accordance with established accounting principles, then it cannot be said that the financial statements have been prepared in accordance with the provisions of Companies Act, even if the management/auditors are silent on that point. In this kind of situations, the Assessing Officer would definitely be entitled to make suitable adjustment to the Net Profit shown by the assessee to nullify the effect of such kind of accounting entries. In view of the foregoing discussions, we are of the view that the Assessing Officer is entitled to adopt the Net Profit at Rs. 1,12,38,786 for the purpose of computing the Book Profit un....