2007 (4) TMI 614 - AT - Income Tax

Summary

Issues involved:
The issues involved in this case are the determination of book profit u/s 115JA of the Income-tax Act, 1961, and the treatment of obsolescence loss and reduction in inventory value in the computation of book profit.

Determination of Book Profit u/s 115JA:
The Assessing Officer made an original assessment determining the book profit at Rs. 7,44,47,214 for the assessment year 1998-99. Subsequently, it was observed that certain mistakes had occurred in the computation of book profit, specifically related to obsolescence loss and reduction in inventory value. The Commissioner of Income-tax (Appeals) upheld the addition of obsolescence loss but deleted the addition related to the reduction in inventory value. The term "book profit" is defined in the Explanation to section 115JA of the Act, which includes various components such as amounts carried to reserves and provisions made for meeting liabilities. The Tribunal held that the provision for obsolescence loss could not be increased to arrive at the book profit as it did not fall under the provisions of section 115JA. Similarly, the reduction in inventory value due to a change in valuation method was not considered as a provision and was rightly deleted by the Commissioner of Income-tax (Appeals).

Treatment of Obsolescence Loss and Reduction in Inventory Value:
The Tribunal analyzed the definitions of "reserve" and "provision" under the Companies Act, 1956, to determine the treatment of obsolescence loss and reduction in inventory value. It was noted that the provision for diminution in the value of assets, as in the case of obsolescence loss, did not qualify as a reserve under the Companies Act. Therefore, the provision made for obsolescence loss could not be increased to compute the book profit u/s 115JA. Additionally, the reduction in inventory value due to a change in valuation method was considered a diminution in value of inventories, which would increase the book profit under section 115JA. The Tribunal emphasized that the Assessing Officer must adhere to the net profit as per the profit and loss account, except as provided in the Explanation to section 115JA, and in this case, the two items in question were not covered by the exception provided under the definition of book profit.

Conclusion:
In conclusion, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, emphasizing that the Assessing Officer must levy tax only on the book profit as per the balance-sheet, which was found to be correct under the Companies Act. The judgment highlighted the importance of adhering to the specific provisions and definitions outlined in the Income-tax Act and the Companies Act while determining the book profit for taxation purposes.