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TMI Blog2018 (5) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... 5JB 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 from capital contributions credited to P&L A/c and income from RGGVY sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 was Rs. 10,97,69,983, to which, the provision for Income Tax of Rs. 1,56,36,507 and depreciation of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 that these expenses have crystallized during the relevant financial year, nothing has been brought on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged 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 limited purpose to find out whether the computation is done in accordance with the provisions of the Companies Act. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 should be disclosed on the face of the statement of profit and loss. The Delhi High Court further held as follows:- " ............... From this, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ltd. (supra) has no application to the facts of the case herein and it is totally distinguishable. 16. Thus, going by the decision of the Apex Court in Apollo Tyres Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the Act, the 'book profit' means the net profit as shown in the P&L A/c for the relevant previous year prepared under sub-section (2) and as increased by the items in clauses (a) to (k) under E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced 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 given as a provision, he had confirmed the addition. We are of the opinion that the nature of the item or of expenditure cannot be determined merely by the nomenclature but the AO and the CIT (A) ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entries passed by it, the appellant has stated that, "it can be observed that the capital contributions which has part funded the fixed assets of the company, are adjusted to the cost of fixed assets and also the depreciation originally charged on the fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant 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 depreciation and reducing the depreciation attributable to consumers contribution/subsidy. The appellant has then claimed depreciation allowable under the Income tax Act on the net value of assets. The net value of assets is the gross value as reduced by consumers contributions/subsidy as is required under. ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x, 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) Judicial Member Hyderabad, dated 30th June, 2017. Vinodan/sps ORDER PER S. RIFAUR RAHMAN, A.M.: I have carefully perused the order proposed by Ld. Judicial Member. Though I am in agreement with the findings and conclusion of Ld. Judicial Member relating to ground Nos. 1, 2, 3 & 5, I have certain reservations, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 referring to the computation sheet of the assessee on normal provisions of the IT Act. For the sake of convenience, it is reproduced below: From the above, it is clear that the assessee itself has made the addition of provision for bad & doubtful debts of Rs. 22.89 crores and claimed Rs. 25.43 crores as deduction. Hence, the actual loss to the assessee under bad debts is Rs. 25.43 crores, in case, it is charged to P&L A/c by following the actual loss method, the book profit would have come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 thereafter made certain disallowances /additions to arrive at the income taxable u/s 115 JB of the Act. One of such issues is with regard to the provision of bad and doubtful debts to the tune of Rs. 22,89,02,937/- which was added to the book profits on the ground that it is not an ascertained liability. 3. The case of the assessee was that in the computation of Profit & Loss Account, under the normal provisions, the assessee has not claimed deduction of provision for bad debts but there was a claim of deduction of bad debts actually written off, to the tun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile 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 provided in Explanation to section 115JB of the Act. In other words, the A.O. has no jurisdiction to go behind the net profit shown in the Profit & Loss Account. Learned Judicial Member was therefore of the opinion that the provision of Rs. 22.81 Crs debited to the Profit & Loss Account should automatically be added to the book profit and there is no provision u/s 115JB of the Act with regard to reduction of actual bad debts written off which is not even claimed in the Profit & Loss Account maintained under the Companies Act. 7. The Learned Accountant Member has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 same is reduced from the provision account and the balance is carried forward but the fact remains that the actual liability in the year under consideration is more than the provision and hence there was no need to add back the amount referable to provision towards unascertained liabilities. He adverted my attention to Page 269 of the paper book to highlight that in view of the consistent method followed, the assessee did not charge to its Profit & Loss Account the actual loss incurred towards unascertained liability but, the fact remains that the ascertained liability o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the profit as shown in the statement of Profit & Loss Account for the relevant previous year prepared under sub-section 2 and in turn sub-section 2 refers to the profit and loss arrived at in accordance with the provisions of Schedule-III to the Companies Act. Thereafter, certain amounts have to be reduced from the book profit and sub-clause (i) refers to 'addition' referable to reserves or provision if such amount is reflected in the Profit & Loss Account. It is not in dispute that the provision is reflected in the Profit & Loss Account and thus as per clause 'c' of Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced 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 profit' shown therein has to be taken as the base for making adjustments u/s 115JB of the Act. Both the Learned Members have expressed their views mainly based on the interpretation of sub-clause 'c' to Explanation-1 of section 115JB of the Act which merely speaks of making additions to the book profit, only in the event where the provision made for meeting liabilities is not an ascertained liability. In the instant case, the assessee has debited the expenditure to the tune of Rs. 131.93 Crs to arrive at the book profit and Schedule-14 shows that a sum of Rs. 22,89,02,937/- was provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire 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 in accordance with law since this is a part of the ascertained liability which was otherwise adjusted in the provision account separately maintained by the assessee though, while claiming write off, it was restricted to Rs. 22.89 Crs. In other words, in principle, I agree with the view taken by the Learned Accountant Member. The assessee is not entitled to further reduction to the book profit but the disallowance of Rs. 22,89,02,937/- deserves to be set aside. The question placed before me is answered accordingly. 17. The matter will now be placed before the Bench, which originally hear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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