TMI Blog2008 (9) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Appellate Tribunal was correct in law in holding that the Assessing Officer failed to appreciate that the net profit (as referred to in Section 115 JA of the Income-tax Act, 1961) of the assessee company is to be computed only after deducting the expenses on prior period / extraordinary items which are business expenditure, but shown separately in the profit and loss account due to the specific requirement of the Accounting Standards prescribed by the Institute of Chartered Accountants of India?" 2. Consequently, we admit this appeal. The filing of paper books is dispensed with and the counsel for the parties have been heard on the above question. 3. The facts are that the assessee initially filed its return of income on 30.10.2000 declaring a loss of Rs 193.31 lakhs. Due to the merger of Khaitan Soya Limited with the assessee with effect from 01.04.1999, a revised return was filed by the assessee. The assessee calculated the taxes payable as per Section 115JA of the Income-tax Act, 1961 (hereinafter referred to as "the said Act") and for that purpose the net profit as per the profit and loss account was computed after reducing prior period expenses/extraordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Act,1956. The learned counsel then drew our attention to Section 211 of the Companies Act, 1956. Sub-section (1) of Section 211 of the Companies Act, 1956 pertains to balance sheets and it requires that the company shall draw up its balance sheet in the form set out in Part I of Schedule VI. Sub-section (2) of Section 211 of the Companies Act, 1956, which is relevant for the purposes of this appeal, stipulates that every profit and loss account of a company shall give a true and fair view of the profit and loss of the company for the financial year and shall, subject as indicated in sub-section (1), comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. Sub-section (3A) of Section 211 stipulates that every profit and loss account and balance sheet of the company shall comply with the accounting standards. Sub-section (3B) provides that where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such company shall disclose in their profit and loss accounts and balance sheets the following, namely:- (a) the deviation from the accounting standards ; (b) the reasons for such deviatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the period. This includes extraordinary items and the effects of changes in accounting estimates. 7. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss: (a) profit or loss from ordinary activities; and (b) extraordinary items." 12. Under the head "Prior Period Items", paragraphs 15 and 19 of the said Accounting Standard read as under:- "15. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived............ 19. Prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss." 13. In view of the aforesaid Accounting Standard, it was the submission of the learned counsel for the respondent/assessee that the prior period expenses/extraordinary items form part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial statements of one or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e., the period relevant for the purposes of computing the net profit or loss. Clearly, prior period items are to be included in the determination of net profit or loss. Furthermore, paragraph 7 of AS 5 stipulates that the net profit or loss, inter alia, comprises of extraordinary items and the same should be disclosed on the face of the statement of profit and loss. From this, it is clear that both, "prior period items" as well as "extraordinary items" are to be included in the determination of net profit or loss. If a prior period item is an expense, it is obvious that it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be income or expenses. The conclusion that one can arrive at from this discussion is that prior period items and extraordinary items form part of the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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