TMI Blog2004 (4) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... e to losses of the company. AO further proceeded to invoke the provisions of s. 115JB and worked out a taxable income as under: Book profit as declared Rs. 9,58,510 Less : Unabsorbed loss or unabsorbed depreciation whichever is less : Unabsorbed loss Rs. 8,00,459 Unabsorbed depreciation Rs. 16,765 Taxable income Rs. 9,41,545" 3. The contention of the assessee was that the amount of Rs. 12,00,000 is liable to be deducted while computing the book profit in view of cl. (i) of Explanation appended below sub-s. (2) of s. 115JB. AO, however, rejected the claim relying upon the decision of Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC). 4. In appeal, the CIT(A) upheld the action of the AO on the ground that the AO does not have jurisdiction to go behind the net profit shown in the P L a/c except to the extent as specifically provided under Explanation appended below s. 115JB(2). 5. Aggrieved with the order of CIT(A), assessee has come up in appeal before us. 6. Shri Ajay Vohra, learned counsel appearing on behalf of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet of the assessee placed at p. 20 of the paper book for asst. yr. 1999-2000 shows on the liability side, "Director s remuneration payable" Rs. 12,00,000. 8. For asst. yr. 2001-02 which is the assessment year under appeal, the aforesaid liability of Rs. 12,00,000 has been written off (sic-back) by crediting the amount of Rs. 12,00,000 to the P L a/c as already mentioned. In the backdrop of the aforesaid facts, contention of the learned counsel is that no salary was actually payable by the assessee-company in the asst. yrs. 1998-99 and 1999-2000 because of losses incurred by the company. He submitted that the amount of Rs. 6,00,000 for each assessment year has been merely provided by way of a provision which has been written back during asst. yr. 2001-02. Learned counsel referred to cl. (i) of Explanation which provides that book profit would be reduced by "the amount withdrawn from any reserves or provisions if any such amount is credited to the P L a/c: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire approach and interpretation adopted by the learned CIT(A) is contrary to the very object and purpose of introducing the provisions of s. 115J, 115JA and 115JB in the IT Act, 1961. A new Chapter XII-B containing s. 115J has been inserted by the Finance Act, 1987 which levies minimum tax on book profits of certain companies. The scope and ambit of these provisions have been elaborated in para 36.1 of the Circular No. 495, dt.22nd Sept., 1987issued by the CBDT which reads as under: "36.1 It is an accepted canon of taxation to levy tax on the basis of ability to pay. However, as a result of various tax concessions and incentives certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax." 12. We may further refer to the Budget speech of the then Finance Minister ofIndiamade in Parliament while introducing the s. 115J which reads as under: "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called zero-tax highly profitable companies deserves attention. In 1983, a new s. 80VVA was inserted in the Act so that all profitable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proposition cannot be extended beyond the intended purpose and object of the law makers and cause hardship, serious inconvenience, injustice and absurdity. 14. Having regard to the totality of the facts and circumstances of the case in hand, we have no hesitation in holding that the assessee is entitled to deduction of Rs. 12,00,000 for the purpose of computing book profit under s. 115JB. 15. We may briefly consider the factual matrix of the case. There is no denying the fact that the director was not entitled to any remuneration by virtue of cl. IV of the agreement with the company since the company was running into losses for asst. yrs. 1998-99 and 1999-2000. This factual position has been duly admitted by the assessee during assessment proceedings for asst. yrs. 1998-99 and 1999-2000. The AO has proceeded on the basis that no such liability has accrued for which deduction is to be allowed for the respective assessment year. For asst. yr. 1998-99, the amount of Rs. 6,00,000 on account of remuneration has been added back. For asst. yr. 1999-2000 even though the AO processed the return under s. 143(1)(a), the assessee has filed an application before the AO that deduction of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Apollo Tyres Ltd. The said decision does not in our opinion support the case of the Revenue. In the said decision it has been held that the AO does not have the jurisdiction to go behind the net profits shown in the P L a/c which have been prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act. The Hon ble Supreme Court has, in fact, delineated the limited scope of powers of the AO in tinkering with the book profit while applying the provisions of s. 115J. In the instant case, the case of the assessee is that remuneration has been provided for by way of creation of provision in asst. yrs. 1998-99 and 1999-2000 and such provision has been written back for the asst. yr. 2001-02. In case the Department treats the liability as an accrued liability, this would entirely be contrary to accounting principles as well as legal provisions inasmuch as no such liabilities have arisen under the agreement entered into by the company with the director. The fact that no liability has accrued, has been accepted and admitted by the Revenue authorities while making the assessment for asst. yr. 1998-99. In the circumstances, we feel that the only rational ..... X X X X Extracts X X X X X X X X Extracts X X X X
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