2010 (7) TMI 969 - HC - Income Tax

MAT - Book profit determination - Whether addition on account of the provisions for gratuity, leave encashment and post retirement medical benefit could be made while computing the book profit u/s 115JB? - assessee is following mercantile system of accounting - claim of the assessee is that these provisions have been made on actuarial valuation and cannot be added for determining book profits u/s 115 JB as it is business liability in praesenti which has arisen during the accounting year and it is only the quantification and discharge of which is to take place at a future date - ITAT allowed deduction HELD THAT - Section 115 JB was inserted by the Finance Act, 2000 with effect from Ist April, 2001. Under the provisions of this Section, where an assessee is a company, it is required to pay at least 7 % of its book profits as income tax. However, where the tax liability of the company under regular provisions is more than this amount, the company shall pay income tax according to the regular scheme. Book profits has been defined by the Explanation added to this Section whereunder it provides that net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956 shall be increased by amounts specified in Clauses (a) to (g), if any amount referred therein is debited to the profit and loss account and reduced by the amount mentioned in clauses (i) to (viii) therein. The Tribunal while considering the issue in hand had specifically recorded that the provision for gratuity, leave encashment and post retirement medical benefit had been estimated on actuarial basis and was a liability which was created in praesenti though it was to be discharged at a future date. It was further recorded that the provisions which were created in respect of gratuity, leave encashment and post retirement medical benefit on actuarial basis had been estimated with reasonable certainty and, therefore, such an estimate cannot be treated to be contingent one. It was also observed that the provision made by the assessee in respect of gratuity, leave encashment and post retirement medical benefit on actuarial basis cannot be said to be provisions of unascertained liabilities so as to fall under clause (c) of the Explanation to Section 115JB (2). No substantial question arises for consideration .

Summary

Issues:
1. Whether provisions for gratuity, leave encashment, and post-retirement medical benefit can be included in computing book profit under Section 115JB of the Income Tax Act, 1961?

Analysis:
The case involved an appeal by the revenue against the Income Tax Appellate Tribunal's order regarding the inclusion of provisions for gratuity, leave encashment, and post-retirement medical benefit in the computation of book profit under Section 115JB of the Act for the assessment year 2002-03. The revenue contended that since the liabilities were not ascertained, they should not be excluded from determining the book profits. However, the Tribunal relied on various judgments to support its decision in favor of the assessee.

The High Court examined the provisions of Section 115JB of the Act, which requires a company to pay income tax based on its book profits. The court noted that the definition of "book profits" includes amounts set aside as provisions for meeting liabilities other than ascertained liabilities. The assessee argued that the provisions for gratuity, leave encashment, and post-retirement medical benefit were made on actuarial valuation and were business liabilities that had arisen during the accounting year, even though quantification and discharge would occur in the future.

Referring to the Supreme Court's decision in Bharat Earth Movers case, the court emphasized that if a business liability had arisen in the accounting year and could be estimated with reasonable certainty, it should be allowed as a deduction. The court also cited judgments from the Bombay High Court and Delhi High Court, which supported the view that provisions based on actuarial valuation constituted ascertained liabilities.

The Tribunal's findings were upheld by the High Court, which concluded that the provisions for gratuity, leave encashment, and post-retirement medical benefit were estimated on an actuarial basis, representing liabilities created in the present and not contingent liabilities. Therefore, these provisions could not be considered unascertained liabilities under Section 115JB of the Act. Consequently, the court dismissed the appeal, finding no substantial question of law to be considered.