TaxTMI 
TaxTMI 
2018 (5) TMI 498
X X X X Extracts X X X X
X X X X Extracts X X X X
.... payable under the provisions of section 115JB was more than the tax payable under the normal provisions of the Act, the AO raised the demand of tax payable u/s 115JB of the Act. While computing the income u/s 115JB of the Act, the AO added the following to the book profit: i) Provisions for taxation which is erroneously reduced from the book profit (Fringe Benefit Tax) Rs.93,05,363 ii) Prior Period expenses as the same are not chargeable against the book profit of current year. Rs.7,69,38,745 iii) Provision for bad and doubtful debts, since it is not an ascertained liability Rs.22,89,02,937 iv) Provision for leave encashment Rs.22,02,00,000 v) Provision for non-moving and obsolete stock, since the same were not taken into account for arriving at the book profit Rs.4,32,02,259 3. Aggrieved by the above additions to the book profit disclosed by the assessee, the assessee preferred an appeal before the CIT (A). The CIT (A) granted partial relief to the assessee by deleting the addition of the provision of taxation (Fringe Benefit Tax) and provision for leave encashment and also addition of Rs. 60,90,62,390 being the sum of the income fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... addition by holding that the expenses clearly pertain to earlier A.Y by relying upon the decision of the Coordinate Bench of this Tribunal in the case of Singareni Colleries Co. Ltd vs. ACIT wherein it was held that "prior period adjustment is not allowable either while computing the income u/s 115JB nor under the provisions of the Income Tax Act". He was of the opinion that the accounting standard 5 provided for a different method of accounting of prior period items such as reflecting the same separately after arriving at the profit for the year and that the assessee's claim regarding Accounting Standard-5 is only partially correct. Against the order of the CIT (A), the assessee is in appeal before us. 5. The learned Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, has drawn our attention to the Accounting Standard-5 which clearly lays down that the extra ordinary items such as prior period expenses are to be shown after arriving at the net profit of the year. He has also drawn our attention to the computation of the income u/s 115JB of the Act wherein the net profit as per the books of account as per the P&L A/c wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the assessee to the CAG has been treated as prior period expenses. Therefore, according to him, the same is not allowable and is to be added to the book profit u/s 115JB of the Act. In support of her contention that the AO can recast the books of a/c for the purpose of computing the book profit u/s 115JB of the Act if the assessee is not following the accounting standard and is not computing the income in accordance with the Company's Act, the learned DR placed reliance upon the decision of the Coordinate Bench of the Tribunal at Ahmedabad in the case of Molex Mafatlal Micron Ltd vs. Income Tax Officer in ITA No.1083/Ahd/2007, dated 7.12.2006. 7. Having regard to the rival contentions and the material on record, we find that while computing the income u/s 115JB of the Act, the book profit as per the P&L A/c is to be considered to which the adjustments under the Explanation are to be made. From the P&L A/c placed at page 38 of the Paper Book filed by the assessee, the net profit after tax for the year is Rs. 18,67,08,728 and after reducing the prior period expenses of Rs. 7,69,38,745, the net figure of Rs. 10,97,69,983 has been arrived at. Though the assessee had contended th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ving at the net profit after tax, the assessee has charged "prior period expenses" and in their opinion, it was charged to appropriation account. We do not think such statement of facts is supported by any material. Thus, the facts as seen from the documents show that the computation of the net profit for the year under consideration was made after adjusting prior year expenses and it was not by way of appropriation account. 9. The authority of an Assessing Officer to go beyond the book profit under Section 115JA for the Officer to go beyond the book profit, in the decision in Apollo Tyres Ltd. (supra) the Apex Court pointed out to the objects of the introduction of the said provision of Section 115J with a deeming provision which makes the company liable to pay tax on at least 30 percent of its book profits as shown in its own account. The Apex Court pointed out that Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh inquiry with regard to the entries made in the books of account of the company. The said sub-section mandates the company to maintain its account in accordance with the requirements of the Companies Act for the limi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as regards the deduction of prior year expenses in the matter of computing the net profit of the company for the year under consideration. In fact, similar question came up for consideration before the Delhi High Court in the decision in Khaitan Chemicals & Fertilizers Ltd. (supra) The facts therein is that the assessee prepared its net profit as per the profit and loss account after reducing the prior period expenses/ extraordinary items and thus arrived at the resultant book profit. The Revenue contested the claim of the assessee for reducing the prior period expenses on the ground that such expenses did not find mention in any of the clauses (i) to (ix) of the Explanation to Section 115JA(2). Dealing with such contention, the Delhi High Court pointed out that to the Accounting Standard (AS-5) and stated that Accounting Standards clearly stipulates that prior period items are income or expenses which arise "in the current period" as a result of errors or omissions in the preparation of the financial statement of one or more prior periods. Referring to paragraph 7 of AS 5, the Delhi High Court pointed out that the net profit or loss comprises of extraordinary items and the same s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther pointed out that the assessee had not claimed any deduction with the net profit on the basis of any clauses given in the Explanation to Section 115JA(2). Consequently, the question was answered in favour of the assessee. We are in agreement with the view expressed by the Delhi High Court and we do not have any hesitation in applying the said decision to the case before us. 15. It is relevant to note herein that the said decision rendered by the Delhi High Court was considered by this Court in the decision in CIT v. Swamiji Mills Ltd. [2012] 342 ITR 250 (Mad.), wherein in preference to the decision of the Delhi High Court in Khaitan Chemicals & Fertilizers Ltd. (supra) , this Court applied the decision of the Kerala High Court in Sree Bhagawathy Textiles Ltd. v. Asstt. CIT [2012] 342 ITR 244 (Ker.), on the facts available that it was more about appropriation account. In considering the nature of the expenses charged on the appropriation account, this Court held that the assessee was not entitled to have the deduction of amounts debited in the profit and loss appropriation account in the computation of the net profit. As such, the decision of this Court Swamiji Mills Lt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ck to book profit u/s 115JB of the Act. 9. The learned DR however, supported the orders of the authorities below. 10. Having regard to the rival contentions and the material on record, we find that the assessee has made a provision of Rs. 22.81 crores for bad and doubtful debts during the relevant previous year. The AO added it back to the book profit holding that it is not an ascertained liability. The CIT (A) has confirmed the addition by observing that subsequent to the amendment to Explanation 1(i) to section 115JB, any provision leading to diminution in the value of any asset, has to be added to the book profit. The fact is that the assessee has debited the provision for bad and doubtful debts to the P&L A/c and therefore, it has to be added back to the book profit while making the computation of tax payable u/s 115JB of the Act. What the assessee is now seeking is to reduce the book profit by the actual bad debts written off as it has debited the said amount to the provision for bad and doubtful debts A/c and not the profit and loss account. Whether such an adjustment is permissible is to be seen. The Legislature has provided that for computing the income u/s 115JB of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the CIT (A), the assessee is in appeal before us. 12. The learned Counsel for the assessee has drawn our attention to the inventory of the stock wherein the value of the stock has been reduced by the value of non-moving and obsolete stock which has been arrived at after due verification. Therefore, according to him, the loss on non-moving and obsolete stock is an ascertained liability and cannot be added back to the book profit for computation u/s 115JB of the Act. 13. The learned DR, however, supported the orders of the authorities below. 14. Having regard to the rival contentions and the material on record, we find that the inventory of the current assets is in schedule 7 and the non-moving and obsolete stock has been reduced from the stores and spares (as valued and certified by Management). The difference between the provision as on 31.3.2008 and 31.3.2009 is the sum of Rs. 4.32 crores. However, we find that though it is mentioned as a provision, it has not been debited to the P&L A/c but is a Balance Sheet item. We find that the CIT (A) also has agreed with the contention of the assessee that it is an ascertained liability, but merely because of the nomenclature g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r every new connection, the appellant company is collecting contributions/charges from consumers towards cost of service line charges and development charges. The appellant company has submitted that "on receipt of contributions from consumers, the company is debiting to cash/bank account and crediting to consumer contributions received as they are capital receipts towards the cost of fixed assets". The appellant has submitted that its Accounting Policy, is that the assets so created/constructed, out of the contributions from consumers, will be depreciated as per rates specified under GO No.265 (FE) dt.27.3.1994. The depreciation is debited to P&L account every year and the same is recognized as income and credited to P&L Account, by reducing it from the amount of capital fund received, to reduce the depreciation charged to P&L account on the assets purchased out of consumer contribution. For easy explanation the appellant has given the details of entries passed in its books pertaining to the receipts from consumers. The appellant has stated that the contributions received from consumers are capital contributions and should not be treated as income. From the accounting ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted to a non-depreciable asset requires the fulfilment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements". The appellant has further referred to the treatment prescribed in the Income tax Act for such capital contributions. As per Sec.43(1) "Actual Cost" means the actual cost of the asset to the assessee, reduced by that portion of the cost, if any, as has been met directly or indirectly by any other person or authority. Explanation 10 states that, where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly, by the Central Government or State Government, or any authority established under any law, or by any other person, in the form of a subsidy or grant or reimbursement, then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Provided, that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e balance-sheet as contributions and subsidies towards cost of capital assets, while cost of the material/capital cost incurred for giving connections to customers was capitalized and shown as additions to fixed assets. The appellant has submitted that while computing depreciation in the books, the appellant calculated depreciation on gross value of assets which included assets purchased contributions received from customers as well as subsidy received. Since, the deprecation debited to the P&L Account included depreciation on the value of assets created out of consumers contributions, as well as out of subsidy received under RGGVY, the depreciation relating to assets credited out such contribution/subsidy was credited to the P&L account under the head 'other income'. As a result, in the books of account of the appellant, gross depreciation was debited and deprecation on assets created out of consumer contributions and RGGVY subsidy was credited to the P&L account under the head "other incomes". In the next stage the appellant while computing its taxable income under the Income tax Act has deleted both the items from the net profit as per the books, by adding gross deprecia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Ground No.3, we find that the CIT (A) has relied upon the actuarial valuation submitted by the assessee to come to the conclusion that the provision for leave encashment is an ascertained liability and therefore, cannot be added to the book profit. Further, as regards the provision for Fringe Benefit Tax, the CIT (A) has clearly brought out that it is not similar to the provision for Income Tax. The learned DR has not been able to rebut the findings of the CIT (A). Further, the CBDT Circular No.8/2008 dated 29.8.2005 has clarified that the FBT is a liability of the employer and is in the nature of the expenditure laid out and expended wholly and exclusively for the purpose of business or profession of the employer and therefore, is an allowable deduction for the computation of book profit u/s 115JB of the Act. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue also. 20. In the result, Revenue's appeal is dismissed. 21. To sum up, assessee's appeal is partly allowed and Revenue's appeal is dismissed. Order pronounced in the Open Court on 30th June, 2017. (S.Rifaur Rahman) Sd/- Accountant Member (P. Madhavi Devi) Judi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 95,54,02,937 Total 95,54,02,937 Write off doubtful debts account (GL A/c No. 79.410 (Profit & Loss A/c GL) Balance Sheet GL By provision for bad debts (transferred to provision for bad To Sundry debtors (23.000) 25,43,02,937 debts GL A/c 23.900) 25,43,02,937 Total 25,43,02,937 Total 25,43,02,937 3. The intention of the statute u/s 115JB is to determine the actual book profit of the company for that particular AY. In this regard, the Act carries an explanation to determine the actual book profit by crediting the provisions and reducing the actual loss. As per the clause "C" of explanation 1 of section 115 JB, the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. It is clear that from the book profit the unascertained liabilities should be excluded but at the same time, if there is ascertained loss, which was not charged through the profit/loss account but it has impact on the profits/liability of the company, then, it has to be adjusted in the book profit. 4. The above method can be understood by r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER Per: D. Manmohan, Vice-President (As Third Member) ORDER UNDER SECTION 255(4) OF THE I. T. ACT, 1961 1. On account of conflict of opinion expressed by the Learned Judicial Member and the Learned Accountant Member, the following question was referred to the Hon'ble President to resolve the issue by referring the matter to a Third Member and accordingly the Hon'ble President was pleased to nominate me as the Third Member. "Whether, on the facts and circumstances of the case, the A.O. was justified in adding back the provision for bad and doubtful debts to the book profit u/s 115JB of the Act and not reducing the actual bad debts written off from the book profit to arrive at the actual book profit." 2. Facts are already set out in the order passed by the Learned Judicial Member. However, a brief reference is given to appreciate the matter in the correct perspective. The assessee-company is engaged in the business of purchase and distribution of electric power. While working out the income u/s 115JB of the Act, the A.O. had taken into consideration the book profit as declared under the Companies Act and therea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ucing the same does not arise merely on the ground that the bad debts written off is more than the provision made during the relevant year. It was also noticed that the assessee has prepared its Profit & Loss Account in accordance with the provisions of Companies Act and hence net profit as per such Profit & Loss Account has to be arrived at and there is no jurisdiction to tinker with the net percentage so arrived at, in the light of the decision of the Apex Court in the case of Apollo Tyres (255 ITR 273). In the aforecited decision, the Court observed that while assessing a company under Income Tax Act the correctness of Profit & Loss Account prepared by the assessee-company (certified by the statutory auditors of the company) prepared in accordance with the requirement of Part II & III of Schedule-VI of Companies Act, cannot be questioned. The Court further observed that the Assessing Officer, while computing the income 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 Companies Act, and thereafter he has limited power of making increases / deductions as prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eated every year and charged to Profit & Loss Account. As per the computation of total income for the previous year ending on 31.03.2009, the provision for doubtful debts was added to the net profit but thereafter actual bad debts written off was deducted from the net profit which clearly depicts that the assessee has actually written off certain debts and from that perspective there cannot be any addition to the book profit since the addition to be made is less than the actual deduction that ought to have been considered by the Tax Authorities i.e., the write off of bad debts was to the tune of Rs. 25.43 Crs whereas the provision for bad and doubtful debts was to the tune of Rs. 22.89 Crs and the assessee in fact deserves reduction from the book profit the actual sum written off. 10. Before me, Learned Counsel for the Assessee submitted that the assessee maintained a separate account towards provision for bad debts which was never carried forward to Profit & Loss Account though for the Company Law purposes it was debited to the Profit & Loss Account. As and when there was an actual liability i.e., if there is an ascertained liability on account of bad debts written off, the sam....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Act was mainly meant to rope in Zero Tax companies. In other words, section 115JB applies to loss making companies and Income Tax Act provides for accounting method to be followed while computing the book profits u/s 115JB of the Act. Assessee has in fact furnished 115JB report for calculation and has also furnished Schedule 14 of the Profit & Loss Account which was maintained for Company Law purpose. He adverted my attention to pages 38 and 47 of the paper book to highlight that the assessee has actually claimed provision for bad and doubtful debts to the tune of Rs. 22,89,02,937/- and it is duly certified by the statutory auditors. The present claim of actual bad debts to the tune of above Rs. 25 Crs was not claimed anywhere in the Profit & Loss Account. It was only an accounting entry of assessee whereas the audited books do not indicate that there was a loss suffered by the assessee. 12. Provisions of section 115JB of the Act has to be understood on the basis of the language employed therein. The computation of income begins with taking into consideration the "book profit" as defined in the said section. Explanation-1 to section 115JB defined "book profits" which means ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... account of which there was a difference in claim but the fact remains that there was actual bad debt which was an ascertained liability which ought to have been reduced from the book profit or at least the net figure ought to have been taken while making addition to the book profit. 15. I have carefully considered the rival submissions and perused the record. I have also gone through the orders passed by my Learned colleague Members and also the case law referred therein. Clause 'c' to Explanation-1 of section 115JB of the Act, which is relevant in this context, is reproduced for immediate reference: "(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; A careful analysis of the said provision shows that the "book profit" means the profit as shown in the Profit & Loss Account in the relevant assessment year, prepared under the Companies Act, and the same has to be reduced by the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities. No doubt the Assessing Officer has no power to go behind the profit / loss declared for Company Law purposes, and the 'book prof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore there is no claim with regard to the allowance of Rs. 25,43,02,937/- either in the grounds of appeal or Schedule-14. As rightly pointed out by the Learned Departmental Representative the actual claim made by the assessee in the Profit & Loss Account maintained for Company Law purposes cannot be tinkered with by the Assessing Officer but at the same time further benefit cannot be given; The Tribunal cannot ask the Assessing Officer to give some more relief, in addition to the relief claimed in the Grounds of Appeal. The Learned Accountant Member was of the of the view that the entire amount of Rs. 25,43,02,937/- should be taken into consideration for recomputation. In my considered opinion the issue which arises out of the order of the Ld. CIT(A) is confined to Rs. 22.89 Crs and the ground being limited to the said addition, the Tribunal, in my humble opinion, cannot go beyond the issue as raised by the assessee and therefore the Learned Accountant Member ought to have confined the issue to the correctness of the addition made therein. 16. In the peculiar facts of the case, I am of the view that the addition made by the Assessing Officer to the tune of Rs. 22.19 Crs is not ....