2014 (9) TMI 1011 - AT - Income Tax

MAT computation - CIT(A) deleting the disallowance made by the Assessing Officer in computing the book profit u/s 115JB in respect of provisions made for Gratuity Leave Encashment and Post- Retirement Medical Benefits - Held that - This issue is covered in favour of the assessee company by the order of the ITAT in assessee s own case in assessment year 2002-03 2010 (10) TMI 1022 - ITAT DELHI wherein held once the assessee is maintaining his accounts on mercantile system a liability accrued though to be discharged at a future date would be a proper deduction while working out the profits and gains of business regard being had to be accepted principles of commercial practice and accountancy. If the facts of the case are viewed in the light of the decisions referred to above we find that the provision made by the assessee in respect of gratuity leave encashment and post retirement medical benefit on actuarial basis cannot be said provisions for unascertained liability so as to fall in clause (c) of the Explanation to section 115-JB (2) of the Act. Accordingly the ld. CIT (Appeals) and the assessing officer erred in holding the provisions made by the assessee were on account of un-ascertained liability to be added back under clause (c) of the Explanation to section 115- JB (2) of the Act. Accordingly we set aside the order of the authorities below and direct the assessing officer to allow the claim of the assessee - Decided in favour of assessee Disallowance of provisions made for the bad and doubtful debts - Held that - The Ld. AR fairly conceded that in view of the retrospective amendment made by the Finance (No.2) Act 2009 this issue is covered against the assessee. This ground of the revenue s appeal for making addition on account of the provisions for bad and doubtful debts is allowed. - Decided in favour of revenue Addition in computing the book profit in respect of the expenditure on account of the amortization of the land on the reasoning that no depreciation is allowable on land under the Companies Act as no rate of depreciation is provided in Schedule XIV of Companies Act - CIT(A) deleted the addition - Held that - It is not the case of the Revenue here that the adjustment made by the AO is under Explanation to section 115J. The contention of the Revenue here is that land is not a depreciable asset and depreciation charged in the profit and loss account which is not in accordance with the provisions of the Companies Act read with Accounting Standard 6. As stated hereinabove the contention of the Revenue that the land in question of the assessee company is not a depreciable asset is factually incorrect and further as held by the Supreme Court no adjustment can be made to net profit as certified by the statutory auditors.Accordingly we uphold the order of CIT(A) deleting this addition - Decided in favour of assessee

Issues Involved:

1. Deletion of disallowance of Rs. 24,29,89,211/- for Gratuity, Leave Encashment, and Post-Retirement Medical Benefits.
2. Application of section 43B concerning section 115JB.
3. Treatment of disallowance under section 43B in normal computation versus book profit calculation.
4. Deletion of disallowance of Rs. 8,76,59,179/- for provisions for doubtful debts.
5. Deletion of disallowance of Rs. 6,12,00,000/- for depreciation on land after amortization.

Detailed Analysis:

1. Deletion of Disallowance for Gratuity, Leave Encashment, and Post-Retirement Medical Benefits:
The revenue contested the deletion of the disallowance of Rs. 24,29,89,211/- made by the Assessing Officer (AO) in computing the book profit under section 115JB for provisions made for Gratuity, Leave Encashment, and Post-Retirement Medical Benefits. The issue was previously decided in favor of the assessee in the assessment year 2002-03, where it was held that the provisions made on an actuarial basis are not contingent liabilities but ascertained liabilities. The Hon'ble Supreme Court in Bharat Earth Movers held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed even if the liability is to be discharged in the future. The ITAT followed this precedent, dismissing the revenue's appeal on this ground.

2. Application of Section 43B Concerning Section 115JB:
The revenue argued that section 43B, which pertains to certain deductions only on actual payment, does not relate to section 115JB, which deals with the computation of book profits. However, since the provisions for Gratuity, Leave Encashment, and Post-Retirement Medical Benefits were considered ascertained liabilities, section 43B was deemed inapplicable. The ITAT, following the earlier decision, dismissed the revenue's appeal on this ground.

3. Treatment of Disallowance under Section 43B in Normal Computation versus Book Profit Calculation:
The revenue contended that the disallowances made under section 43B in the normal computation should also apply to the book profit calculation under section 115JB. However, the ITAT held that since the liabilities were ascertained and the provisions were based on actuarial valuations, they should not be added back to the book profit. Therefore, the revenue's appeal on this ground was dismissed.

4. Deletion of Disallowance for Provisions for Doubtful Debts:
The revenue challenged the deletion of Rs. 8,76,59,179/- made by the AO for provisions for doubtful debts. The assessee conceded that due to the retrospective amendment by the Finance (No.2) Act, 2009, this issue was against them. Consequently, the ITAT allowed the revenue's appeal on this ground, making the addition of the provisions for doubtful debts to the book profit.

5. Deletion of Disallowance for Depreciation on Land after Amortization:
The revenue argued that no depreciation is allowable on land under the Companies Act, and thus, the amortization of Rs. 6,12,00,000/- should be disallowed in computing the book profit. The assessee countered that the land in question was taken for use from the State Government without transferring the title and was amortized over the project's useful life. The ITAT noted that the accounts were audited and approved by statutory auditors and the Comptroller and Auditor General (CAG), and the Supreme Court in Apollo Tyres Ltd. held that the AO cannot go behind the net profit shown in the profit and loss account except as provided in the Explanation to section 115J. Since the land was not owned by the assessee and the amortization policy was approved, the ITAT upheld the CIT(A)'s order deleting this addition, rejecting the revenue's appeal on this ground.

Conclusion:
The appeal filed by the revenue was partly allowed. The ITAT dismissed the revenue's grounds concerning the provisions for Gratuity, Leave Encashment, Post-Retirement Medical Benefits, and amortization of land but allowed the ground related to the provisions for doubtful debts. The order was pronounced in open court on September 30, 2014.

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