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2025 (5) TMI 1318 - AT - Income TaxMAT - Determination of Book Profit u/s 115JB - inclusion of CSR amount debited in the profit and loss account as per provisions of the Companies Act 2013 - Ascertained liability or unascertained liability - HELD THAT - We find that the CBDT circular No 1/2025 dated 21/01/2015 relied upon by the AO (page 13 of assessment order) is in relation to non allowability of deduction of CSR expenditure for the purpose of computing the taxable income of the company and there is nothing contained in the said circular relating to its applicability for computation of book profits as per provisions of section 115JB of the Act. In the instant case there is nothing on record to show that the statement of profit and loss is not prepared as per the accounting standard or the assessee has not followed the accounting policies or the same is not in accordance with the provisions of the Companies Act 2013 and we are also of the same view that the AO has no power to recompute the book profits and has to rely on the statement of accounts of the company compiled as per the provisions of the Companies Act 2013. As such respectfully following the law laid down in the case of Apollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT and HCL Comnet Systems and Services Ltd 2008 (9) TMI 18 - SUPREME COURT and Sony India Pvt. Ltd. 2024 (10) TMI 872 - DELHI HIGH COURT we are of the opinion that except for adjustments as expressly set out u/s 115JB of the Act book profits are required to be determined on the basis of accounts maintained in accordance with generally accepted accounting principles and in accordance with the provisions of the Companies Act and it is not within the power of the A.O. to recompute the same. Decided against revenue.
The core legal question considered by the Tribunal was whether the amount debited as Corporate Social Responsibility (CSR) expenditure in the profit and loss account, made as a provision under the Companies Act, 2013, constitutes an "ascertained liability" or an "unascertained liability" for the purpose of computing "book profits" under clause (c) of Explanation [1] to section 115JB of the Income Tax Act, 1961, thereby affecting the computation of Minimum Alternate Tax (MAT).
The issue arose from appeals filed by the revenue challenging the deletion by the Commissioner of Income Tax (Appeals) of the addition of CSR provisions to the book profits for MAT computation for assessment years 2016-17, 2017-18, and 2018-19. Detailed analysis of the issue: Relevant legal framework and precedents: The primary statutory provision under consideration was section 115JB of the Income Tax Act, 1961, which governs the computation of book profits for MAT purposes. Explanation [1] to section 115JB, clause (c), mandates that any amount set aside as a provision for meeting liabilities other than ascertained liabilities must be added back to the book profits. Key precedents relied upon included:
Court's interpretation and reasoning: The Tribunal examined the nature of the CSR provision debited by the assessee company. The AO had treated the CSR provision as an unascertained liability, relying on CBDT Circular No. 1/2015, and added back the amount for MAT computation. The AO's rationale was that the provision was merely an estimate without any certainty regarding the timing or nature of the expenditure, thus falling within clause (c) of Explanation [1] to section 115JB. The CIT (A) deleted the addition, relying primarily on the Supreme Court's ruling in HCL Comnet Systems, which restricts the AO's power to recompute book profits beyond the accounts prepared under the Companies Act. The CIT (A) held that the CSR provision was debited in the profit and loss account as per the Companies Act, 2013, and therefore, the AO could not add it back to the book profits. The Tribunal carefully considered the submissions of both parties. The revenue argued that since the CSR provision was made on an estimated basis without any definite plan or documentary evidence specifying the end use, it was an unascertained liability and thus should be added back. The assessee contended that the accounts, including the CSR provision, were prepared in accordance with the Companies Act and accepted accounting standards, and that the AO had no authority to alter the book profits beyond the adjustments explicitly provided under section 115JB. The Tribunal noted that the CBDT Circular cited by the AO pertained to the disallowance of CSR expenditure for computing taxable income under normal provisions and did not address book profits for MAT purposes. The Tribunal emphasized that there was no evidence that the accounts were prepared contrary to accounting standards or the Companies Act. Further, the Tribunal relied on the Delhi High Court's decision in Sony India Pvt. Ltd, which held that CSR expenditure should not be excluded from book profits and that the AO's adjustment lacked legal basis. The Tribunal also observed that the Supreme Court's decisions in Apollo Tyres and HCL Comnet Systems clearly restrict the AO's power to recompute book profits beyond the accounts prepared under the Companies Act. Application of law to facts: The Tribunal applied the legal principles to the facts that the CSR provision was made in the profit and loss account as per the Companies Act, without any challenge to the accounting treatment. The absence of documentary evidence regarding the specific use or timing of the CSR expenditure did not alter the nature of the provision as reflected in the statutory accounts. Therefore, the provision could not be treated as an unascertained liability warranting addition to book profits under clause (c) of Explanation [1] to section 115JB. Treatment of competing arguments: The Tribunal rejected the revenue's contention that the provision was unascertained simply because the end use was not specified. It distinguished the Pawan Hans Ltd decision cited by the revenue on the basis that in that case, the nature and mode of expenditure were not determined, whereas here the accounts were prepared under the Companies Act and the CSR provision was recognized therein. The Tribunal gave primacy to the binding Supreme Court precedents that prohibit the AO from tinkering with book profits beyond the prescribed adjustments. Conclusions: The Tribunal concluded that the AO had no jurisdiction to add back the CSR provision to the book profits for MAT computation. The CSR amount debited in the profit and loss account as per the Companies Act 2013 could not be treated as an unascertained liability under clause (c) of Explanation [1] to section 115JB. Accordingly, the Tribunal upheld the order of the CIT (A) deleting the addition and dismissed the revenue's appeals for all three assessment years as devoid of merit. Significant holdings and legal principles established:
Final determinations:
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