2011 (1) TMI 289 - AT - Income Tax

Book profit - The issue is regarding whether in the course of settlement under OTS with a bank, the reduction of liability to Bank credited to the P&L account should be taken into account in computing Book Profits, particularly when part of the same represents waiver of principal portion of loan - the issue regarding computation of Book profits consists of two part (a) whether u/s 115JB, the starting point in computing the Book Profits should be the Profits as computed above the line before extraordinary items and appropriations or below the line after the extraordinary items and appropriations the language of section 115JB is very clear to indicate that starting point of the profit and loss should be the figure after the appropriation as well as any extraordinary item made or prior year expenses which the company may for the purpose presentation show below the line - This view is supported by the decision of the Hyderabad Tribunal in the case of Gulf Oil Corporation Ltd. v. ACIT (2006 -TMI - 66815 - ITAT HYDERABAD-B) - starting point for computing the book profit is the figure of Rs. 54,168,537 appearing after appropriation and extra ordinary item and not Rs. 1,08,98,948 being the profit figure arrived at above line Cessation of liability - In the present case, the assessee did not claim nor was allowed any deduction or benefit of allowance by way of allowable expenditure and trading liability, and the same being credited to the profit and loss account had been subjected to tax as part of book profit under section 115JB of the Act - The Special bench of the Hyderbad Tribunal in the case of Rain Commodities Ltd. v. DCIT (2010 -TMI - 203366 - ITAT HYDERABAD) has held that profit on sale of capital assets credited to the profit and loss account is includible in computing Book profits, notwithstanding the fact that the same is exempted under the normal provisions of the Income tax Act on account of the investment of capital gains in an approved mode Appeal is dismissed

Issues Involved:
1. Computation of book profits under Section 115JB.
2. Treatment of cessation of liability on account of settlement loan liability.
3. Disallowance of prior period expenses.
4. Disallowance of cash expenses.
5. Disallowance under Section 40A(3).
6. Admission of additional grounds of appeal.
7. Interest charged under Sections 234A, 234B, 234C, and 234D.

Detailed Analysis:

1. Computation of Book Profits under Section 115JB:
The primary issue was whether the starting point for computing book profits under Section 115JB should be the net profit before extraordinary items and appropriations (Rs. 1,08,48,955) or the final figure after these items (Rs. 5,41,68,537). The Tribunal referenced the Hyderabad Tribunal's decision in Gulf Oil Corporation Ltd. v. ACIT and the Supreme Court's ruling in Apollo Tyres Ltd., concluding that the starting point must be the final figure after appropriations and extraordinary items. Therefore, the correct starting point was Rs. 5,41,68,537.

2. Treatment of Cessation of Liability:
The second issue was whether the waiver of principal loan amount (part of Rs. 4,45,13,406 credited to the profit and loss account) should be excluded from book profits as it constitutes capital benefit. The Tribunal held that for book profit computation under Section 115JB, there is no distinction between capital and revenue receipts. Hence, the entire amount, including the principal loan waiver, must be included in book profits.

3. Disallowance of Prior Period Expenses:
The assessee contested the disallowance of Rs. 11,93,824 as prior period expenses. The CIT(A) upheld the disallowance, citing a lack of clarity on when these expenses accrued. The Tribunal remitted the matter back to the CIT(A) for further investigation to determine if the expenses accrued during the relevant year.

4. Disallowance of Cash Expenses:
The AO disallowed Rs. 4,01,128 of cash expenses due to self-made vouchers not supported by third-party bills. The Tribunal noted that not all expenses can be supported by third-party bills and remitted the matter back to the CIT(A) to consider the allowability of these expenses based on reasonableness and circumstances.

5. Disallowance under Section 40A(3):
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

6. Admission of Additional Grounds of Appeal:
The assessee sought to raise an additional ground regarding the taxability of the loan waiver under normal provisions. The CIT(A) dismissed this ground, stating it was a factual issue and not a legal one. The Tribunal disagreed, stating that the additional ground was a legal issue and should be admitted. The matter was remitted back to the CIT(A) for consideration on merits.

7. Interest Charged under Sections 234A, 234B, 234C, and 234D:
The Tribunal allowed the appeal regarding Section 234D, citing the Special Bench decision in Ekta Promoters that interest under Section 234D can only be levied from the assessment year 2004-05. For Sections 234A, 234B, and 234C, the Tribunal remitted the matter back to the CIT(A) for determination after deciding the other issues.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remitted back to the CIT(A) for further consideration and determination in accordance with the law.

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